Corporate Executive Board Company Q2 2008 Earnings Call Transcript

Jul.24.08 | About: CEB Inc. (CEB)

Corporate Executive Board Company (EXBD) Q2 2008 Earnings Call July 24, 2008 9:00 AM ET

Executives

Tom Monahan - CEO

Tim Yost - CFO

Analysts

Mark Bacurin - Robert W. Baird

Vance Edelson - Morgan Stanley

Gary Bisbee - Lehman Brothers

Scott Schneeberger - Oppenheimer

Brandon Dobell - William Blair

Brandt Sakakeeny - Deutsche Bank

Operator

Good morning and welcome to the Corporate Executive Board's second quarter 2008 conference call. Today's call is being recorded and will be available for replay beginning today and through August 1st by dialing 719-457-0820. The confirmation code for the replay is 1218468. The replay will also be available beginning later today and through August 1st at the company's website, which is executiveboard.com, and at www.earnings.com.

To the extent any non-GAAP financial measures discussed in today's call, you'll also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the homepage of the company's website for yesterday's news release.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding the Corporate Executive Board's expected quarterly and annual financial performance for fiscal 2008.

For this purpose, any statements made during this call 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 Chairman and Chief Executive Officer, Mr. Tom Monahan. Please go ahead, sir.

Tom Monahan

Good morning. Thank you all very much for calling in or logging in. I'm Tom Monahan, Chairman and CEO and with me here today is Tim Yost, our Chief Financial Officer.

Let me give you the roadmap for how we'll divide our time this morning.

First, I will provide a brief overview of our second quarter performance, a summary of the financials and a progress report on key operating priorities. Tim will then take us through a more detailed review of Q2 financials, discuss our operating and talent management metrics and outline our guidance for the remainder of 2008. Finally, I'll give you some more details on our newest product launches and close with the review of the key elements of our 2008 growth drivers. Then we will move to Q&A.

Financial highlights. For the second quarter of 2008, revenues were $141.2 million, up 8.8% over the last year. Net income was $16.6 million, in line with guidance. EPS was $0.49 a share, and Contract Value grew 4.8%. Clearly, we saw mix results from this quarter with Contract Value gains from Q1 moderating in a couple of places.

To the positive, we are making good progress on most of our strategic priorities. Our sales pipelines are up 15%, initiatives to engage new members faster are showing early promise and we continue to see solid momentum in new products and markets. Offsetting this have been slower returns than we would like from our efforts to improve cross-sell in the large corporate market.

Our progress has been further impeded by economic pressures that had slowed purchase decisions and dampened new spending. Given the tougher economic environment that our members are facing, it's more important than ever that we prove we help them produce superior outcomes. That is what the four operating priorities we outlined for 2008 are focused on accomplishing.

Let me update you on our progress against each of these priorities. As you know, our first priority has been to restore momentum to our North American sales operations. This begins with building a great team and this has been a ground up exercise. We've had to build-out our ranks with outstanding sales people, rapidly raise the productivity of a large cohort of new people and make sure that we retain the very best, all at the same time.

I am please to say that we believe we now have a team with the size and capability to drive our '08 growth objectives. We ended the quarter with 343 sales teams across our large corporate, middle market and Toolbox sales organizations, up about 20% from this time last year and roughly the same as last quarter.

We also see improved retention of new sales executives, and as a result, average tenure in the sales force improves each day. We are also seeing positive early returns from our efforts to better engage and enable our newest sales executives through new training, management and compensation structures. The result is that pipeline metrics in North America are up more than 15% year-over-year, and the average time it has taken our new to CEB class of 2008 to sell their first membership has decreased from 90 days to 58 days.

These gains do not produce quite the attraction we had expected however, as they were offset by slight degradation in pipeline yield, particularly at the end of the quarter as more members deferred purchasing decisions, while they sought better clarity on their own markets and budgets. Still, given the overall positive early indicators, we think our investments are paying off. We believe that by demonstrating how we can help our members improve their performance through these difficult times, we can convert our pipeline strength into business outcomes as the year unfolds.

Our second priority is creating a great cross-sell platform by aligning service and sales strategies around the needs of our best members. This area is one of intense focus for us, and returns from our initiatives have been slower to materialize than we might like. Client level renewals remain very strong. However, we continue to see weakness in program level renewal rates. At this point in a year we are tracking toward our full year 2007 renewal rates, a slight decline in trend from Q1. You can see this challenge reflected in our cross-sell metric.

Obviously, we take this indicator very seriously and we spend a lot of time with our largest members to understand what is driving this development. What is very clear is that when members use our products and take advantage of our insights and global network, they believe we help them work smarter and faster and deliver superior outcomes.

When that happens, they renew and they grow their relationships with us. So we need to ensure that every single member sees immediate distinct ROI from every EXBD product and that they apply our insights and resources to the very highest stakes decisions on their desk. That's true at any time, but it is especially true and has become a difficult budget environment for any of our members.

We've gone back to agendas and product plans to make sure that we are delivering 100-day payback from each investment with us. We are also integrating our service strategies much more tightly with our cross-selling efforts. As we discussed last quarter, we've reorganized our service and product teams under strong general managers and tightly aligned our sales organization to this structure. So that sales calls were informed by better insights into prospect needs.

This is a new way for us to engage our members and we will be working very hard and putting in place new processes enrolls for the next several quarters. We've already seen some exciting early pilots that are contributing the service impacts and pipeline growth. Early member feedback has been very positive and the indicators were on target. As you'd expect, we are targeting some near-term quick wins from these efforts, but we would expect the full benefit to materialize across next several quarters.

Our third priority is to increase renewal rates by engaging new member executives from day one. As we have said, when members make frequent and timely use of our products, we see great renewal outcomes, because members need timely help on especially urgent issues. This should be true even in tough economy because tight budgets constrain their access to other more expensive sources of advice and support.

Especially important to make sure new members tap into our resources early so they can recognize rapid returns form their investments. This is the best way to build a durable platform or strong renewals and cross sales down the road. So in the first half of the year, we've re-engineered the processes supporting technologies in key product interfaces we use to welcome and engage members.

I am pleased that we are already seeing a deeper level of engagement among our first year members. We pulse check both perception and actual utilization, and we have seen a nearly 50% rise in engagement and utilization among new members this year. Given that by definition, we are at the early stages of our relationship. We should see returns from these efforts start to flow through across the next several quarters.

Our fourth priority is accelerating growth from newer markets and from products that target additional executive workflows and budgets in member companies. Here, we continue to see strong momentum. Europe and our other key international markets continue to be areas of great opportunity for us and we are making the investments necessary to support continued growth.

In the quarter, you saw us launch the China Human Resources Executive Board, which enables us to directly support executives in the fast moving China labor market with a blend of global best practices and local market data.

We also remain pleased with the growth and performance of our new middle market platform. At mid-year, this business remains on course to roughly double across the full year. Our Toolbox division enjoyed very solid growth in the quarter as well. Meeting the needs of the user community, consistently asking to do more with less in an advertiser base that needs demonstrable ROI on their marketing spend. The team is also gearing up the three more Toolbox launches across the next several quarters.

Finally, we continue to develop programs that allow us to deepen our support to executives that we already serve, and address new budget areas. We continue to see solid growth from our first year launches, most notably the HR leadership academies which are an exciting new growth avenue for the company.

From our conversations with current members and the great receptions our new introductions have received, we are fully confident the value of our offering is very high. We provide unequaled content and insights on the most urgent decisions our clients have to make.

Our global network continues to be a unique and uniquely compelling resource for our members. It's clear that when members make full and frequent use of the assets we make available, they recognize value far in excess of the cost of their relationship with us. We are now focused on product and service strategies that help our members connect with our content faster and more easily. We are confident that we will convert these initiatives to member impact and ultimately business performance across the remaining months of the year and then the years ahead.

Let me turn it over to Tim for review of the financials and I will give you some more details on our new program launches.

Tim Yost

Thanks, Tom. I will organize today's financial and operating review around six categories. First, the income statement, then I'll move to the balance sheet, cash flow, an update on our share repurchase program, our guidance and outlook for the balance of 2008, and finally I'll close with our Q2 talent management metrics.

Starting with the income statement. Second quarter revenues increased 8.8% to $141.2 million from $129.7 million for the second quarter last year. Net income was $16.6 million and diluted earnings per share was $0.49 versus $0.46 for the second quarter of 2007. The gross profit margin increased to 67.7%, compared to 63.6% in the second quarter of 2007. This reflects a shift in the timing of expenses relative to 2007 and lower share-based compensation expense as a percentage of revenue.

For the full year, we expect the gross profit margin to be up about 50 basis point from last year's levels of approximately 66%.

Member relations and marketing expenses were flat as a percentage of revenues at 28.9% in the second quarter of 2008. This is a net result of two factors. First, lower share-based compensation expense as a percentage of revenue. This was offset by the additional investments we put in place to accelerate new sales growth in a large company North American market. With this additional investment, as a percentage of revenue, we expect marketing and member services to be between 28.7% and 29.2% for the full year. This represents 50 basis points to 100 basis points of additional expenses on this line item for 2008 compared to 2007.

General and administrative expenses were up as a percentage of revenues to 16.2% from 14.6% in the second quarter of 2007. This increase was primarily the result of three factors. First, higher search and sign expenses driven by our successful recruiting effort. Second, an increase in our liability for probable exposure to certain sales and use tax liabilities for states in which the company does business. This is a true off of the expense incurred in the fourth quarter of 2007 and is likely to be the final adjustment. And third, increased IT expenses as we accelerate the implementation of our long-term IT plan. This will enable us to gain leverage on our existing expense space and ensure that our customer facing technology products are fully servicing member needs.

With these additional expenses in the second quarter, for the full year as a percentage of revenue, we still expect to see about 50 basis points of improvement in this line item, so G&A should come in around 13% of revenues for the full year.

The operating margin for Q2 2008 was 18.9%, versus 17.6% for Q2 2007. The change is a result of the shift in expenses and timing just discussed. Other income net decreased from $5.3 million during Q2 2007 to $900,000 for the second quarter of 2008, as a result of lower cash balances and effective interest rates on those balances.

In addition, other income in Q2 2007 included approximately $700,000 from the increase in fair value of participant accounts for deferred compensation plan while Q2 2008 included $140,000 decrease. There is a corresponding offset to the salaries expense so there is no net impact to the P&L for the changes in participant account values.

Contract Value increased to 4.8% to $529 million at June 30, 2008 from $504.8 million at June 30, 2007. We define Contract Value as the aggregate annualized revenue attributed to all agreements in effect at a given time, without regard to the remaining duration of any such agreement. For the small number of contracts of more than 12 months duration, we include only 12 months in contract value.

This Contract Value growth was driven by the following factors, growth from cross-sell. At this point in the year, our total cross-sell growth is tracking below our expectations for 4 to 8 percentage points of growth for the year, as the average cross-sell ratio in our large company market decreased to 3.81 from 3.84 in the first quarter.

In our middle market practice, which now has four membership programs, the average cross-sell grew to 1.51 from 1.49 in Q1 of 2008. Growth from new clients is tracking in line with its annual expectations for a contribution of 2 to 4 percentage points to our full year Contract Value growth rate. Year-to-date more of this growth is coming from the newer middle market portions of our membership base.

In the large company market, as Tom indicated in his earlier remarks, we did see some hesitancy from new companies' willingness to purchase their first CEB membership and what is becoming an increasingly uncertain economic environment for them.

New products continue to perform well and are tracking in line with our expectations for 3 to 5 percentage points of Contract Value growth to come from this source across 2008.

Pricing is also in line with our expectations and we continue to realize three to five percentage points of same-store price increases across our product portfolio. The cross-sell growth rate was also slightly impacted by a shift in the timing of our renewal pool relative to 2007. With more of the renewal pool up earlier in the year than prior years, we see less net impact from new sales in the overall Contract Value growth rate in the first half.

Turning to the balance sheet and cash flow. Membership fees receivable declined 42.2% to $93.2million at June 30, 2008 from $161.3 million at December 31, 2007, a pattern in line with our historical experience. Collections remained strong and DSOs, which we calculate using average receivables, were 65 days for the second quarter of 2008, up a few days from last year, but in line with our guidance of 30 to 70 days for Q2.

Deferred revenues decreased 8.6% to $298.8million at June 30, 2008 from $323.4 million at December 31, 2007. These amounts include approximately $3 million of long-term deferred revenue from the other long-term liabilities section of the balance sheet. On a year-over-year basis, deferred revenue growth was 1.2% and I expect this growth rate to move more in line with our Contract Value growth rate going forward as our growth rate stabilizes.

Cash flow from operations increased to $71.1 million year-to-date in 2008 from $63.6 million in 2007. For the full year, driven by our negative working capital growth, we still expect cash flow from operations to run about 1.5 to 1.7 times net income.

Capital expenditures were $31.5 million in the first half, principally consisting of expenses related to the build-out of our new office facility and computer hardware and software purchases. For the full year, we expect capital expenditures of approximately $40 million, approximately $30 million related to build-out of our new facility, and approximately $10 million to support our growth.

Repurchase update. In the first six months ended June 30, 2008 we repurchased 1,035,000 shares for $41.8 million, with $4.2 million of that occurring in the second quarter. As previously discussed, $50 million of our cash balance is held as the security deposit against our lease into the beginning of August and this constraint affected our repurchase activity in the quarter, because we elected not to put in place letter of credit to free up that cash at an earlier day. At quarter end, we had $22.4 million in remaining repurchases authorization.

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 subjects to change over time. For the balance of 2008, we remain comfortable with our guidance for revenue growth of 5% to 10%, or $568 to $586 million, with a quarterly distribution approximately as follows.

Q3, $139 million to $148 million; Q4, $150 million to $165 million for a total of $568 million to $586 million. We expect this revenue to be driven by Contract Value growth for the full year of 10% to 15%. The seasonality of that contract value growth rate by quarter will look different than prior years, as we continue to work off the overhang from Q4 2007 and build activity levels to support a strong Q4 2008 close.

We would expect to see the Contract Value growth in Q3 stabilize and then achieve our 10% to 15% target in Q4, as our higher activity levels are converted into sales. We expect an EBITDA margin of approximately 24% for the full year.

As outlined in the press release, we are maintaining our annual diluted EPS guidance of $2.09 to $2.22. We expect the shift and our EPS will be distributed as we focused on controlling cost against lower revenue growth rate and making sure our spending is in line across the year to deliver the best possible outcomes. We expect the quarterly distribution on EPS to be approximately as follows. Q3, $0.51 to $0.61; Q4, $0.64 to $0.72 for a total of $2.09 to $2.22 for the full year.

For the 2008, the company expects other income of approximately $4 million and effective income tax rate of approximately 40% and diluted weighted shares outstanding of approximately 34.25 million to 34.75 million. The earnings per diluted share, interest income and weighted shares outstanding guidance includes only share repurchases made as of June 30, 2008.

Finally, talent metrics. CEB total headcount reached 2,459 in the second quarter, up from 2,439 at year-end and 2,320 this time last year. This lower than historical headcount growth reflects a very focused investment strategy to make sure that we are aligning our spending increases to adequately resources our key priorities. Our career staff retention rate remains high and is tracking in line with our plan for the year.

This concludes the financial summary. I will now turn the call over to Tom.

Tom Monahan

Thanks, Tim. Now, I'd like to take a moment to give you some further details on the key element of our plan. New product launches, the HR Leadership Academy launched early in Q1 continues its very strong start. You recall that this program is our first foray into the $14 billion professional development market and allows us to engage and cultivate key future subscribers of our HR product set. We've already seen tremendous feedback from the nearly 1,000 people who have been through the experience.

One participating business partners said, "The topics hit dead on to what my business unit is trying to implement. The content will help me put together a better proposal and deliver a quality finished product."

We are pleased by our early success year and as you'd imagine, working hard to see how this model might work for other functional areas. Our second launch of the year, the Corporate Legal Exchange also continues its strong start. This program supports the legal team in middle market companies with insights and tools that enable them to more effectively address the range of issues, including legal affairs, compliance, board activities and FX with small teams and limited use of external council.

In difficult economic times, these executives face real challenges. Legal problems multiply even as budget shrink. Our resources help them handle growing areas of concern, such as contracting problems, FCPA enforcement and employments conduct at a fraction of the cost of external counsel.

In the quarter, we launched several new cost displacing tools to help them. One example is our online contracts' database. [Silex] benchmarking now shows that the majority of our membership spends more than 50% of their time drafting and reviewing contracts. Using the online contracts database, members can now access and search more than 1,000 edible examples of legal department contracts allowing them to save time and money.

Today I am delighted to announce the launch of our 51st research program, the China Human Resources Executive Board. This program extends our strong human resources practice area to the world's most dynamic labor market through a blend of our existing HR intellectual property and some markets specific data that we collect and report.

The product targets the senior executive responsible for hiring and development of personnel in the Chinese operations of both Chinese companies and multinationals with a significant presence in the country. We estimated there are more than 700 multinationals, with more than 1,000 employees in China and at least 470 Chinese firms with more than 1 billion in annual revenues. Success in this talent market is a critical objective versus the substantial majority of our member companies.

Our existing HR members identified this as an area where our support could help them address some critical challenges, such as curtailing turnover and hot labor markets, quickly cultivating local leadership to manage key talent categories in designing appropriate value propositions for target employee basis.

To address this opportunity, we have amassed and constantly refresh a data set of detailed preference data for more than 100,000 employees in the region, which members can slice and dice to understand key target populations. We marry the insights from this data with the best practices in pure exchange forms to enable executives in the region to act quickly on key insights.

We've already held the member meeting focused on one of the biggest challenges in this talent market building, compelling career paths. As one member said about the meeting in program, "I was very impressed by the richness of the research materials, and by the way, we were learning about how HR solutions are presenting themselves at different member organizations. The networking of the meeting was especially critical to me because of the fast changing nature of the economy in China".

This is the first EXBD product to exclusively target the Chinese market and we're thrilled with the early response. Our early success year gives us great confidence that other key elements of our products set can be adapted for this fast growing market.

As always, the programs launch was greatly aided by the active participation of a great group of early members, including FedEx Corporation, Novo Nordisk, Royal Dutch Shell and Wal-Mart Stores. Our overall strategic goal continues to be penetrating our $5 billion, immediately addressable growth opportunity as fast as we can. We remain committed to our goal of 10% to 15% CV growth this year, driven by great execution on our three key business drivers.

First, we have to continue our success with adding new companies to the EXBD network. At mid-year, we are tracking toward our objectives for the year. We have added some great new names to the CEB network, including Dollar Thrifty Automotive Group, Dr. Pepper Snapple Group, Porsche AG, and (inaudible).

Second, we will need to add between 10 and 15 new products over the coming years to address the needs of these members. Our track record in developing and rolling out new products has been consistently strong and this year's class continues its solid start.

Third, we must be able to cross sell our full array of products into that expanded customer base. Here, we are falling short of my expectations. We have traditionally been very successful at cross-selling into existing members. Now that our base is a critical mass of large members who subscribed to the 10 products or more, we are developing the product, service and relationship management processes to ensure that we continue to grow within our largest customers.

During these things, the EXBD's standard and pace is always challenging. The difficult economy now facing our member companies requires that we be especially effective at creating outstanding, relevant insights and resources and personally engaging executives to enable them to act.

The four priorities I outlined are the ones that will enable us to add new members bringing on the highest value new products and cross sell those products into our members. For 2008 and for the foreseeable future, these priorities will continue to guide every step we take as a company.

Let me remind you what they are. While restoring momentum to our North American sales operations, we are aligning service and sales strategies around the needs of our best members who are putting in place the technology and processes to engage member executives from day one of their membership with us, and we are accelerating growth from newer markets and from products that target additional executive workforce and budgets.

We expect both quick wins and multi-year benefits from these efforts and we are tracking our benchmarks closely so we can keep ourselves on track. I am confident that focus on these priorities will enable us to achieve the objectives we have set forth for this year and beyond.

Let's now turn to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). We will take our first question from Mark Bacurin with Robert W. Baird.

Mark Bacurin - Robert W. Baird

Good morning, Tim. Good morning, Tom.

Tim Yost

Good morning, Mark.

Mark Bacurin - Robert W. Baird

Couple of questions. I guess, first, on the nature of the expense timing issues. Can you talk about particularly what shift there into the back of the year and kind of where that shows up in the P&L?

Tim Yost

Sure, Mark. As we talked about over the past couple of quarters, this year, in particular, against lower revenue growth rate, our product general mangers are very focused on making sure that there are aligning their spending to drive the optimal 2008 outcome. So if you look at from a shift, from our cost perspective, the shift is largely on the cost of service line. We expect some of the expenses that we originally planned in Q2 will show up in Q3 and that will drive the difference in the change in the EPS guidance in Q3.

Mark Bacurin - Robert W. Baird

Is there specifically a delay in hiring new individuals, or are there sales and marketing dollars and things like that as well?

Tim Yost

Less around the hiring of new individuals, more around the timing of meetings deliverables and other products that they are developing for the membership base.

Mark Bacurin - Robert W. Baird

Okay. Shifting to the contract value growth, you said you are still comfortable with 10% to 15% growth. You talked about a 15% increase in the pipeline. Can you help me understand how the pipeline is measured and how that pipeline provides visibility into Contract Value growth number?

Tim Yost

Sure. In this regard, we're benefited by the fact that the business is relatively formula at its core. So when we look at the value of the sales pipeline, it's based on what our historical yield rates look like driven by factors like the size of the company, the industry, other CEB memberships they have etcetera. Across time this methodology is very stable and becomes a very valuable sales planning tool. In the short term, we are seeing something very ancient relative to these historical rates, but relative to 2007, when our challenge was more one of building the pipeline, having consistently built that sales pipeline to healthy levels across the first half of 2008.

We are in a substantially better place entering the second half, getting to that Contract Value growth number. For the full year, we will certainly require solid execution to close out those sales pipelines. But I'm much more confident in doing that looking at the debt of those pipelines today relative to where we were at this point in 2007.

Mark Bacurin - Robert W. Baird

As you look at the pipeline as it related to what you are expecting in terms of the yield from cross-sell versus new products, and it seems like the area that's coming in short of expectations obviously on the cross-sell and that seems like it's largely function the economic environment. So just curious what you factored in, in terms of that 10% to 15% Contract Value growth by the end of the year as it relates to lowering expected renewals, any kind of churn related to budgetary constraints etcetera?

Tim Yost

Sure. When we laid out the original guidance at the beginning of the year and updated guidance across the interim quarters, we didn't assume that in order to get through our full year 10% to 15% number that we have to get back to historical productivity levels. We did assume that we need to make some progress against that, but we did factor in things like the economy and the fact that our sales force was tenured on average entering the year. So we factored those things and still feel comfortable that we can get to that 10% to 15% number for the full year.

Mark Bacurin - Robert W. Baird

Okay. Just finally to drill down little bit on the cross-sell issue and then large customer base. Have you stratified or looked at average customer life and the cross sell rates maybe at different years say, customers over five years versus customers and maybe that 2 to 5 year range and then customers that are coming up for maybe their one-year renewal rate to see if there is a material difference in the cross-sell activity, can you show any insights there?

Tom Monahan

Sure, Mark. I think you can look at it through the lens of the priorities we set up for this year. We talked about couple of things. We're working very aggressively on, one was, if you look at cross-sell, we saw particular opportunity to improve our performance among our most heavily cross sold members, those with 8-10 memberships and above was clear. When you get to that level of membership with somebody, the dynamics change and you need first and foremost to approve the value of each and every individual product everyday and then better align sales and service strategies to make sure you're using those service opportunities as avenues for growth. So we talked about that and that's the place where we still have work to do. We've got some very promising early indicators. But we still got real work to do and first proving the product and then changing how we engage these customers. It's a new way of working for us.

Secondly, year one subscribers, either new customers or people subscribing to a product for the first time, that have always renewed at a lower rate than the rest of the membership and we identify that as an opportunity to get after this year just by engaging people from day one of their relationship with us. Obviously, if you're not engaging them and getting them to use the product, you're putting the renewal in jeopardy and harming your chance for cross-sell. So we see that as an opportunity. As I said, we've seen 50% increase in the key engagement metrics across the first couple of quarters that year, as we work very hard to get out upon those members in a very tight economy and deliver immediate ROI.

Mark Bacurin - Robert W. Baird

Great. Thank you.

Operator

We will take our next question from Vance Edelson with Morgan Stanley..

Vance Edelson - Morgan Stanley

Hi, thanks a lot. Could you comment further on the sales force hiring and retention trends, the overall headcount was up. Are there any specifics you can share on the number of new hires and the attrition rates, or may be just discuss the ease with which you can attract and retain talents in this market? Thanks.

Tom Monahan

Sure. In terms of the overall number, the 343 includes our global sales force including the IT Toolbox. If you look at the core CEB subscription business, the sales force headcount is about flat and we are continuing to see positive indications on the attrition. We are seeing attrition year-to-date trending lower than it was, at this point in 2007. Obviously, if we were able to continue to hold those gains of pace, substantial dividends not only in the back half of 2008 but 2009 and beyond.

Vance Edelson - Morgan Stanley

Okay. That's helpful. And could you also elaborate on any counter cyclical trends that you are seeing on the front lines in terms of customers looking for your help and reducing expense or becoming more efficient in this difficult environment. Is that a clear scene that you are seeing?

Tom Monahan

Yes. But we tend to see economy, yeah changes hit us in really two ways. The first is, early on when members tried to sort out impact on their business, they often adopt what we call a wait and see posture, deferring expenditures, deferring project kind of holding steady as they sort out their budgets and their priorities. This has pretty clearly been the mood that our members have been in recently. These environments can be challenging for us to navigate since the operative noun is caution, don't do anything new. As economic challenges become sharper, member needs actually become more clear.

They boiled their list of priorities down to a finite list of things, they just have to accomplish and they have got to substantially reduce budget to go accomplish them. If our agendas and messages are on point, we can position ourselves as a very compelling low cost resource for accomplishing critical tasks. So in this sort of environment, our priorities become ensuring, really compelling to fast ROI from membership investments and making sure we have an upbeat on the street to sell to serve and engage members in the difficult environment.

As we said in the call, we think we have set ourselves off this environment well and have a high degree of confidence in the value of our resources as our members get to their finite list of priorities and confront to the substantially reduced budget to get after them.

Vance Edelson - Morgan Stanley

Okay, that makes sense. Thanks a lot.

Operator

We will take our next question from Gary Bisbee with Lehman Brothers.

Gary Bisbee - Lehman Brothers

Hi, guys, good morning. I want to probe that caught your expectation for the Contract Value reaccelerating in the fourth quarter a bit more and I know that this is sort of mathematical calculation with the 12-month subscription length. Is this more the fact that the fourth quarter of '07 was so poor that, as that fall out of this calculation and you have sort of more normalized fourth quarter of '08, it's just going to have a much faster year-over-year growth rate? Or are you expecting sort of sequential improvement in the absolute number of subscription sales of a meaningful amount as we get later this year?

Tom Monahan

Hi, Gary, it's Tom. We laid out our plan for getting to 10% to 15%. I think you saw that, maybe you were tracking toward our annual goals in new sales and new products and we'll push even harder on these in the back half of the year. We know we're going to have to execute well on those to get there. Cross-sell is the place where we have our work cut out for us and we see improvement in several key leading indicators.

So that improvement gives us confidence as we look at that back half metrics. We can set ourselves up well for the opportunity to get to 10% to 15%. The indicators we're tracking correlates strongly with really important outcomes, in particular sales pipeline and new member engagement. Over time we are certain those drive higher sales in order. The challenging economy environment doesn't make it easier but given the strength of their team and our strong start, I am confident that against the back half objectives we set for ourselves were set up well.

Gary Bisbee - Lehman Brothers

I guess, maybe let me ask it in a different way because I'm not sure you understood what I was getting out at or maybe you are just unwilling to answer it. But is this going to be an issue of the comps being much easier because the fourth quarter of last year was very poor, or is that going to be that you expect to actually accelerate dramatically on a sequential basis the number of subscriptions you are selling, as we move into the end of this year?

Tim Yost

Gary, there are two pieces to it, certainly having the easier comps relative to Q4 does help Contract Value growth rate comparisons in the forth quarter of 2008. But there is a piece of growth rate expectation for us in our guidance this year that assumes that we are able to monetize the sales pipelines that we built across the year-end. As Tom said, we are setting up and watching their early indicators on that very carefully. We are confident that with a more seasoned sales force bench, strong pipelines and crisp ROI on the product that we will be able to execute against that pipeline and deliver that 10% to 15% outcome for full year.

Gary Bisbee - Lehman Brothers

Okay. So it sounds like it's a combination of the two then?

Tim Yost

Yeah.

Gary Bisbee - Lehman Brothers

Second question. You said the North American pipeline is up 15%. Do you want to give us a sense as to how that looks? How much of that is driven by the mid-market versus the large company market as the large company improving as well as they are largely member actually?

Tim Yost

Large company is improving as well. If you look at from a dollars perspective, as Tom said, it's on pace to roughly double across the year. But it's doubling from a relative small base. So the large company market will still drive significant portion of the overall growth for the year.

Gary Bisbee - Lehman Brothers

Okay. You talked a lot over the last year about the very largest customers having the ability to continue some more and then having stalled a little bit. What about the folks who have three, four, five programs in driving them to four, five, six. Has the process there changed much? Is that something you're focused on? Or do you just see a lot more bank for the bucks so to speak at the very largest customers?

Tim Yost

Certainly in this environment, the trend I talked about in terms of spending decisions, stretching out a little bit longer and people being cautious, is something we see up and down across the board. So that's the area we were -- I would say from a localized perspective, we see a substantial opportunity to improve our performance at those members with the larger number of program sold into us, particularly those with the large number, few opportunities in a specific functional areas.

When we talk about aligning our sales and service engines around key customers, we're talking not only about company level that was specifically into the finance organization, but the HR organization, so at all our key buying centers. So the short-term economy stuff is, yeah, we're hearing the budget issue across the board but we see the real opportunity for focus in our energy as we talked about, on year one subscribers, getting them engaged earlier and on those who have a pretty heavy membership investment with us already and need us to work with them in a different way to grow.

Gary Bisbee - Lehman Brothers

Okay. And then, I guess, one more business question, you talked for a couple quarter about this HR Leadership Academy. Can you review with us what the business model looks like? What do you charge? What are these people actually get? How adaptable would this model be for some of your other vertical areas?

Tom Monahan

We remain very excited about this first foray into a new platform for CV and other. The need we identified was working with our senior HR contacts. They were looking for ways to accelerate the development of their emerging leaders. They felt their HR staff lacks some of the analytic framework necessary to support and drive strategic change.

So, the way to think about is a program that brings the emerging HR leaders from a wide variety of companies so it has that EXBD, get together with other companies' model. It's a 12-month program that blends classroom training, project-based activities, peer review, interactive supports to the same scalable staff. Given that they have always got a couple of people, they need to get up-skilled. It has the renewability component as well.

So, it has all the hallmarks of a great CEB business, renewability, scalability, attractive margins and as you asked, has the ability to stamp out the formula to other key functions in the large corporations. Certainly, HR executives aren't the only ones telling us that their emerging staff needs some help accelerating their development. Anyway what we like about this business is it strengthens our core business because the people who were engaging in this program are the next generation of senior executives who are the primary sponsors of our programs. It allows us to tap a budget. We don't already tap and engage some people earlier in their careers than we would have had with just our memberships business. So we like this business and we do see its applicability to other of our executive areas.

Tim Yost

Gary, to pick up the only other points in your question on that business model. The average price for a participant in the program is about $10,000 and we find that companies send typically between 2 and 3 people in the first year they are in programs. You got to somewhere $20,000 and $30,000 contribution for each company in the program.

Gary Bisbee - Lehman Brothers

Okay. Any reason I think that the margin profile as you scale that over time is going to be widely different from what you have done with other programs, or should we think of it similar ballpark area?

Tim Yost

Still pretty early days from a margin perspective but as Tom said, there are some pretty significant scalable portions of it and in particular the content that is developed to roll out to those folks. So we think they will get a very attractive margins over time, but we'll obviously continue to refine the business model as we get a deeper understanding of the needs and what the natural price points look like and what the renewability of the product look like down the road.

Gary Bisbee - Lehman Brothers

Okay. Thank you.

Operator

We will take our next question from Scott Schneeberger with Oppenheimer.

Scott Schneeberger - Oppenheimer

Thanks very much. First question, just kind of following up on Gary's with regard to, I'm curious on the Contract Value outlook for the third quarter. Obviously, you're still pushing for 10% plus for the fourth quarter. You mentioned I think in the commentary, you're looking for to stabilize. Would that be with the current level, or are we looking for a bit of an increase? Then taking that level deeper, is it fourth quarter where we really see the impact of the either comps and the pickup in sales as people meet the year-end deadline or where we start to see the benefit in the third quarter? Thanks.

Tom Monahan

Sure. There are couple of parts to that. So first from a Contract Value perspective, my commentary in my prepared remarks was to stabilize around level where we are currently and then see the increase in the fourth quarter, and obviously the faster worry about moving in some of our strategic priorities, the faster we're able to inflect that Contract Value growth. From a comps perspective, the comps are substantially easier in the fourth quarter than they are in the third quarter. So the comps play out more from a fourth quarter perspective than it does from the third quarter perspective.

Scott Schneeberger - Oppenheimer

Thanks. With regard to sales staff, are you guys comfortable sharing what type of year-end goal you have for sales team level?

Tom Monahan

Sure. From a full year sales perspective, we said that we'd expect the sales teams to grow by about 15% for the full year, which would put us around our 270, 275 sales team at the end of the year. Thanks.

Scott Schneeberger - Oppenheimer

Then just focusing on something that Tom you talked in the past about relationship managers with your larger accounts. Could you talk on how that's progressing with regard to the interaction between the sales staff and relationship managers and the relationship manager and the customers? Thanks.

Tom Monahan

Sure, Scott. As I said, this is a new way of working for us. Historically, we had a very separate sales and service strategies. In Q1, first we organized the product and service organizations closely together, both physically and under general managers with responsible for making sure we created the right product and delivered immediate ROI for the service strategies. Then we tightly aligned our sales organization to that new structure. So that we were taking advantage of opportunities gleaned through service to identify next sales opportunities.

It's early days for us on that front. I think we are not only piloting a structural, we are piloting some new roles that combined in some places our selling and service responsibilities, in other places combined responsibility for scheduling sales activities in the servicing organization. So we've got a few different pilots underway which show promising early indicators but is a new way of working more broadly. I'm confident that we are head in the right direction because it's in direct response to customer feedback from those customers we mostly do engage, and growth and we are seeing promising early indicators that our activities are driving the right times about stream indicators.

Scott Schneeberger - Oppenheimer

Thanks. It sounds like you are getting good bit of pushback on, I guess, it is having customer budget in terms associated with the economy. Are you seeing any impact on renewal rate or the essential renewal rates with any turnover and relationship mangers sells, that find more sales staff of customers saying, we were comfortable working with this person, they are no longer there. Is there a lot of that occurring or would you say that's a minimal and the majority is more of the macro picture?

Tom Monahan

I think actually ironically they right now can stick up the other way which is the guy we were working with, isn't there any more. That is the number one reason we still suffer renewal shortfalls. Anytime a contracted member turns over, that's a challenge for us to reengage the next new person in a more difficult economy.

So I don’t think we're seeing a lot of feedback. We do hear as we said program level renewals attracting at this point towards the 2007 full year number. What we tend to hear, certainly we hear economy but I don't think that's the big issue. Simply put on, I think we are doing a good enough job, proving our value everyday for every member. When we do connect members to our uniquely valuable resources, we see great renewal outcomes. We are successful doing this in a vast majority of cases. We still have very high renewal rates, but we're not doing it in every case and then really difficult economic times, it makes a lot of sense that we have to do that everyday for every member.

Certainly, we see opportunities to improve how we handle our largest members and we see opportunities to continue to just get out there and engage our existing membership base. So I don't think the root cause there is a turnover on our end, I think it's making sure that we really, really engage and ring the bell for these guys and what's turning out to be a pretty complicated year for them.

Scott Schneeberger - Oppenheimer

Thank you. And finally, Tim, on just thinking about share repurchase, I missed it in the prepared remarks, you mentioned somewhat of the financial stream with regard to rent secured deposit. Could you just rehash the timing and what type of restriction that puts on you as well as what the remainder of the authorization puts on you, just what we will get now here is a kind of bottom line, what we should think about for repurchases going forward and what you are able to do and what they are?

Tim Yost

Sure. It's just a rehash. We have a $50 million security deposits on our lease and that security deposit goes away at the beginning of August, so across the third quarter that free cash becomes available to us. We will have $22.4 million remaining in every repurchase authorization and we are very pleased with what we have been able to accomplish today and without giving any specific comments on the timing of repurchases moving forward, I think we put in place to repurchase to execute against it.

Scott Schneeberger - Oppenheimer

Thanks.

Operator

We will take our next question from Brandon Dobell with William Blair.

Brandon Dobell - William Blair

Hi, guys. Maybe some more color on the international markets for you in terms of contribution to Contract Value growth, the trends you are seeing there, are you seeing it mere with what the US is going through? Then maybe from a new program perspective, how are you seeing those customers react to your new offerings?

Tom Monahan

Brandon, this is Thomas. As I said on the call, we continue to see solid momentum in our international markets, particularly Europe and we saw the opportunity. Our members are pretty clear that they needed help sorting out the complicated China labor market in new products specifically to support that objective. It's exciting not only to support their need but also to use our flagship HR practice to penetrate an exciting and dynamic new labor market. So on the international front, we continue to see solid momentum and good receptivity to the new products that we are creating.

Brandon Dobell - William Blair

If you look at the three drivers for growth, cross-sell, new clients and new products, the contribution from all those, would the commentary be the same for what's happening with those three growth drivers in Europe versus North America?

Tom Monahan

The commentary would not be in terms of the mix objective for the year. It would be similar but the performance against cross-sell in the international markets is not a problem for us. So we continue to see growth in the international markets well in excess of our Contract Value growth rate.

Brandon Dobell - William Blair

Okay. As you look a the changes you're making in the organizational side with sales and support and services and things like that, any reason that we should think over the long period of time that that would change the margin leverage characteristics of the business. In the near-term, things are little bit difficult to read through. But over the long period of time, do you think there is more leverage because you've got consolidation of roles and responsibilities or it's just different allocation of the same kind of people growth over time?

Tom Monahan

I don't think we have the perfect answer for that, yet. But I would say that our assumption is over the long term, it doesn't change our overall margin structure. I think it will be much more the case of shifting around the roles and responsibilities. As you get deeper relationships with those customers concentrating more of that relationship with a smaller set of individuals, which leaves you down to more the path of shifting around responsibilities and across business cycles. I wouldn't expect our total sales cost marketing member services line to go up as a percent of revenue across that.

Brandon Dobell - William Blair

Okay. And then final question. I think, you touched on this a little bit in your prepared remarks and then I think in one of previous calls, you touched on it. The shift in timing on renewals in '08 versus '07, how should we think about the magnitude of that shift in the back half of the year and particularly in Q4? Is it really skew how many customers are up for renewable, the dollars that are up for renewal or was just a minor shift that we should look at?

Tom Monahan

Pretty significant, so about just to give you the headline numbers about 5% more of the renewal pool came up for renewal in the first half of 2008 relative to 2007.

Brandon Dobell - William Blair

Okay.

Tom Monahan

But what didn't shift was the ramp on new sales, so with the slight decline that we saw in program level, renewal rates in the second quarter has a disproportionate impact on the overall Contract Value growth rate. Those renewal rates stay constant across the back half of the year. Some of that seasonalities smooth out. So that's the overall magnitude and how it will impact the year.

Brandon Dobell - William Blair

Okay, great. Thanks, guys.

Operator

Our final question today comes from Brandt Sakakeeny with Deutsche Bank.

Brandt Sakakeeny - Deutsche Bank

Thanks. Hi, Tom and Tim. Just want to follow up again on the CV number, I know you have been asked it much time around the figure as it relates to Q4. But I guess just typically to put the numbers around, what type of improvements would we have to see in sort of the yields conversion sequentially say from 2Q to 4Q or the sales force productivity to hit that 10% goal number?

Tom Monahan

In terms of the what the yields will look like off of the sales pipeline?

Brandt Sakakeeny - Deutsche Bank

Yeah, exactly, because, I mean, I think, if the pipelines are up 15%, the sales forces is up 15% but the CV is running at 5. Do we have to see sales force productivity improved by 50%, 60%? Do you we have to see yield conversion improved by 30%, 40% to hit the target numbers? I am trying to put just a quantitative numbers around the achievability of the attractive for the fourth quarter?

Tom Monahan

Sure. If you look at from a new sales perspective, what kind of inflection do you need to see in productivity from the current run rate at the end of the second quarter across the back half of the year, the productivity improvement would be much smaller and would be much more in the neighborhood of kind of the 10% range, which we think is very achievable given the depth of those strong pipelines today and the fact that we've got a sales force that is coming up the 10-year curve much faster than it was at this point last year given the higher turnover rate. So we think that that type of productivity is absolutely achievable and get us toward to 10% to 15% number for the year.

Brandt Sakakeeny - Deutsche Bank

Okay. And in that numbers baked in, a yield conversion assumption, correct?

Tom Monahan

Correct.

Brandt Sakakeeny - Deutsche Bank

Okay, great. That's all have. Thanks.

Tom Monahan

Okay.

Operator

And at this time, there are no further questions. I'll turn the call back over to Mr. Monahan.

Tom Monahan

Thanks everyone for calling in or logging in this morning. We appreciate your time and we look forward to keeping you updated on each of these initiatives as we continue to grow CEB in the years and months ahead.

Operator

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.

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