The Advisory Board Company, F1Q09 (Qtr End 06/30/08) Earnings Call Transcript

The Advisory Board Company, (ABCO)

F1Q09 (Qtr End 06/30/08) Earnings Call Transcript

August 05, 2008 6:00 pm ET

Executives

Frank Williams - Chairman, CEO

Michael Kirschbaum - CFO

Robert Musslewhite – EVP

Analysts

Brandt Sakakeeny - Deutsche Bank

Scott Schneeberger - Oppenheimer

Brandon Dobell - William Blair

Susan McGarry - Granahan

Jim Bradshaw - Bares Capital Management

Presentation

Operator

Welcome to The Advisory Board Company's First Quarter Earnings Conference Call. As a reminder, this conference call is being recorded. Your host for the call today is Mr. Frank Williams, Chairman and Chief Executive Officer of The Advisory Board Company. This call will be archived and available from 8:00 pm this evening until 8:00 pm on August 12, via webcast on the company's website in the section entitled "The Firm" found under the tab Investor Relations.

Also as a reminder, this discussion contains forward-looking statements concerning future results, performance or expectations within the meaning of the Private Securities Litigation Reform Act of 1995 and other applicable Federal security laws. These statements are based on the Company's current expectations and assumptions that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. These risks and uncertainties include, but are not limited to, economic and other conditions in the market which the Company operates, expansion of business offerings, future financial results and other factors discussed more thoroughly in the company's filings with the Securities and Exchange Commission. Consequently, actual operations or results may differ materially from the results discussed in the forward-looking statements.

The Company undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. At this time, I will turn the call over to the Company's Chairman and Chief Executive Officer, Mr. Frank Williams.

Frank Williams

Thank you and good evening. I am Frank Williams, Chairman and CEO of The Advisory Board Company, and I am joined tonight by Robert Musslewhite and Michael Kirschbaum. Let me start by giving you an overview of the agenda for this evening's call, which I have organized into three sections. First, I will give you a summary of our performance for the quarter ended June 30, 2008. I will cover both our financial results and an overview of the key drivers of our business performance. I will then turn it over to Michael, who will take us through a more detailed review of the financials. After that, Robert will comment on our strategic outlook for the remainder of this year, and then we will be happy to take questions at the end of the session.

In the quarter ended June 30, 2008, The Advisory Board revenues were $57.2 million or 12% growth over the comparable quarter of the prior year. Net income was $6.3 million compared with $7.1 million for the first quarter of fiscal year 2008, and earnings per diluted share were $0.36 versus $0.38 in the same period a year ago. Contract value grew 10.3% to $232.3 million as of June 30, 2008, up from $210.6 million as of June 30, 2007. This quarter, we continued to see very strong renewal performance across the board, as well as significant attachment to our agendas and high utilization of program services. A number of our program and service innovations are also starting to take hold as we are hearing numerous economic impact stories from our Expert Resource Center, as well as from utilization of our data benchmarking services and implementation toolkits.

In general, The Advisory Board brand and reputation continue to grow in the industry, as the breadth and depth of our knowledge base and associated services drive meaningful performance improvement across the membership. At the same time, however, we did see the effects of the tougher macroeconomic environment in our new business performance with conversion rates declining across the quarter and deceleration in contract value growth. While we would typically expect to have roughly 60% of our first half-year new business coming in during the last half of May and the month of June, we did not end the quarter as well as we would have liked. Despite robust pipelines and strong interest in individual prospect institutions, many expected decisions ultimately didn't come through within the quarter.

In total, we ended the quarter several million dollars behind our target objective with a number of decisions pushing out to later this year. This shortfall occurred primarily in our higher price point memberships, particularly in our implementation support and analytical tools based programs. The health system is facing a more uncertain financial outlook as they begin to enter their 2009 budget cycles, the larger dollar expenditures seem to be receiving greater scrutiny despite the strong value propositions in each of these programs.

As I mentioned on the last call, we had experienced a slight decline in growth from cross-sell which had come in below the mid point of our expected range in the March quarter; however, in the June quarter we saw a much larger impact of the slowing economy, as members weighed the impact of increasing economic pressure on forward budgets. The impact of the under performance on new business in May and June, as well as, a more conservative outlook for new business in the second half of the year, particularly in the September quarter, translates to a reduction of roughly $6 to $8 million in second half accrual revenues versus our original expectations. The second factor influencing our outlook for the second half is related to increasing operational complexity in two of our analytical tools programs which I described on the last call.

We have made some progress in working through a large bolus of new members; however, we are still seeing some delayed start dates and extended membership terms particularly in our nursing and bad debt programs. As a result, we are expecting roughly $1 to $2 million less in calendar year 2008 revenues than we would have originally anticipated. Given the more challenging business environment and the extended implementation timelines in our analytical tools programs, we feel more comfortable with a range of $232 to $237 million for calendar year 2008 revenues.

Michael will discuss our revised guidance in a little more detail, but we feel like we have good visibility into both revenue and the cost side, and have taken into account the tougher spending environment in developing our targets for the remainder of this year.

We began 2008 with a relatively stable outlook in a tougher economy. Unfortunately, we have not been able to mute the effects on the new business side as economic conditions have dampened their perspective on 2009 financial performance for a number of our members. Accordingly, our current game plan, which we put in place over the last 30 days, focuses on driving strong sales execution, enhancing our program value propositions, and leveraging thoughtful investments in new product development to set up our forward growth objectives. Let me describe each of these initiatives in turn.

In times where we have seen a more difficult spending environment, nothing is more important than strong sales execution. Having the right sales talent in seat is, of course, one of the primary drivers of improved performance and fortunately, we are in a strong position here as we enter the second half of the year. Over the last several months, we have been focused on maintaining strong recruiting pipelines and moving aggressively to bring new talent into the sales force. We are currently fully staffed on both the new business and account management teams and have structured our recruiting team to be directly accountable for identifying star talent while keeping open positions to a minimum. We are also putting major resources behind onboarding and training efforts to ensure that our new sales teams are highly productive, and road ready within the first 60 to 90 days.

As a senior team, we have been marshalling our sales teams for strong performance, the top priority for leaders across the firm. We have implemented a whirlwind like approach that extends beyond the sales organization and involves critical individuals from all disciplines, research, member service, product delivery, et cetera, in supporting our sales efforts. Mandatory meetings, multiple times per week focus this group and create urgency as we put the best minds in the firm behind our efforts. This multi-disciplinary team is contributing in a variety of capacities including honing our message to key segments, enhancing our infrastructure for a more customized sales presentation based on specific member issues, enriching training for sales teams and refining talent allocation strategies to ensure that top talent is deployed against the best opportunities. The energy that this group is bringing to the sales effort is impressive, and is absolutely the right answer to ensure that we execute at a high standard for the remainder of the year.

From a program perspective, we are working hard to deliver cutting-edge end sites and tools to our members to drive financial impact and to ultimately set up cross-sell of additional programs. As always, our unparalleled relationships with more than 2700 members are a critical asset that guides our work in this regard. Not more than ever, we are investing in heavy member contract to get continual feedback to ensure that our agendas are on point and that we understand members up at night issues.

Across the summer and fall, we have ample opportunity to get comprehensive feedback as many of our programs run their national meeting series at this time. A highlight is always our CEO round table series across the summer and fall with approximately 700 of the nation's top health systems CEOs joining us for facilitated research presentations and candid discussions of their most strategic and operational issues. As always, we are using that feedback to develop innovative program services to address our members' most important issues and to center our service offerings on driving clear financial impact in a tougher economic climate.

Finally, of course we continue our ongoing focus on robust new product development. As we discussed in our last call, we have a number of exciting initiatives under way in this terrain and we continue to prioritize their development. Our new work in the education terrain has presented some interesting opportunities, and we are also excited about leveraging our deep knowledge of providers and physicians along with our expanding data asset to develop new offerings targeted at other sectors within healthcare.

In that regard, I am very pleased to announce our newest program launch, the decision management performance program. Rooted in research feedback from member Chief Medical Officers, this new membership enhances hospital's ability to improve quality and cost metrics by providing hospitals with unprecedented access to data and best practices on physician performance. In national surveys, nearly 90% of hospital administrators indicate that physicians are a critical driver of hospital performance on key costs and quality metrics, highlighting the importance of engaging this constituency in outcomes improvement. Growing trends towards transparency and pay for performance make it all the more critical that hospitals align physicians beyond hospital goals.

Across our membership, chief medical officers consistently describe the inadequacy of current processes in effectively managing clinical costs and quality and have identified a need for a robust, comprehensive set of tools and best practices to achieve superior physician management performance. The physician management program creates a membership of chief medical officers working together to identify best practices and key metrics critical in the quest to engage physicians in order to meaningfully impact critical quality and cost indicators. This renewable membership program is anchored by a robust web-based tool that leverages technology from Crimson to extract irrelevant data from underlying systems, assimilate the data into an actionable format and identify performance improvement opportunities from these metrics on a real-time basis. The data then becomes the platform for best practices and physician management, enhancing each member's institutions ability to measure performance, instill accountability and develop effective incentive structures across a diverse medical staff infrastructure.

As always, this launch has had a great set of charter members including BJC Healthcare, Fairview Hospital, Covenant Medical Center, Clinical Health System and Huntsville Memorial Hospital. With this group of charter members, we have the opportunity to build a strong membership and a vibrant network of leading health systems focused on enhancing physician alignment to achieve critical objectives. The Physician Management Performance Program brings our total number of Senior Executive membership programs to 38.

Before I turn the call over to Michael, I would like to provide an update on our organization. We continue to scale our direct sales force in line with our plans for the year with 111 teams currently in place, up from 95 at this time last year. Total Advisory Board headcount now stands at more than 960 people and our research staff is now more than 550 strong. We are having great success in recruiting top talent, as we continue to see rich, high-quality pipelines for each job opening, as well as, exceptional new offer acceptance rates. Our career staff retention rate continues to be in line with our past experience, in the high 80s.

Let me now turn it over to Michael to review our financial results in more detail and then Robert to discuss his priorities across the next few quarters.

Michael Kirschbaum

Thanks, Frank. I have organized today's financial review around five categories: income statement, balance sheet, cash flow, contract value and outlook for the remainder of calendar year 2008. First, the income statement. A quick reminder that we are on a March 31 fiscal year end, which means we just finished the first quarter of fiscal year 2009. For the quarter just ended, our revenue increased 12% to $57. 2 million, up from $51.1 million in the same period last year. Income from operations, net income and earnings per diluted share were $8.3 million, $6.3 million and $0.36 respectively for the quarter ending June 30, 2008, compared to $9.1 million, $7.1 million and $0.38 respectively for the same quarter last year.

Cost of services increased to 49.9% of revenue compared to 47.5% of revenue in the same period of the prior year. The increase in percentage is largely a result of additional costs from our Crimson acquisition, as well as, increased consultant and licensing fees associated with some of our newer analytic tool programs. Member relations and marketing expense was 21.7% of revenue, compared to 20.8% of revenue in the same quarter the prior year. The increase in expense is attributable mainly to our continued investment in expanding our number of sales teams. We currently have a 111 sales teams in place compared to 95 in June of 2007.

G&A expense in the quarter decreased to 12.1% of revenue compared to 12.4% of revenue in the same quarter of the prior year, due to the scaling of our administrative cost over a larger revenue base. Depreciation and amortization expense in the quarter increased to 1.9% of revenue compared to 1.5% of revenue the same quarter the prior year. The increase is primarily from the amortization of capitalized cost related to the development of analytic tools from some of our newer programs, as well as, the amortization of intangibles from the Crimson acquisition.

Turning to the balance sheet, membership fees receivable, which exclude long-term receivables increased to $98.1 million as of June 30, 2007, versus $67.6 million as of June 30, 2007. DSO, which we calculate using average receivables were 143 days in the quarter ended June 2008, up from 137 days last quarter, and up from 112 days in June 2007.

Excluding receivables associated with revenue from multi-year contracts that will be recognized beyond 12 months, and excluding receivables acquired from Crimson, DSOs were 119 days in the quarter ended June 30, 2008 compared to 107 in the prior year. The increase in DSOs due to continued increase of the mix towards a higher price point programs, which includes more product selling.

Deferred revenue, net of amounts that we have billed after 12 months, increased 25.7% to $150.5 million as of June 30, 2008, up from $119.7 million as of June 30, 2007. Excluding prepaid contracts and long-term deferred, deferred revenue balance as of June 30, 2008 was $132 million, up 16.6 % over the prior year.

Looking at cash flow, during the three months ended June 30, 2008, we generated $92,000 of cash from operating activities compared to $183,000 used in the same quarter last year. For fiscal 2009, we continue to expect cash flow from operations to be approximately 1.5 to two times net income for the full fiscal year. Capital Expenditures for the three months ending June 30, 2008 were approximately $5.8 million of which $3.6 of million is related to capitalized development of hardware associated with analytic tools associated with some of our newer programs and $1.6 million related to the build-out of a new headquarters.

Fiscal year 2009, we expect capital expenditures to be approximately $12 to $15 million. For the three months ended June 30, 2008, we repurchased $8.8 million of stock or approximately 108,000 shares. This brings our total share repurchase to date to $251.4 million or approximately 5.3 million shares. As of June 30, 2008, the remaining authorized repurchase amount was $98.6 million. During the three months ended June 30, 2008, we spent approximately $19 million in cash from the acquisition of Crimson, provider of data and analytic tools to hospitals, health systems and physician clinics.

As of June 30, 2008 our cash, cash equivalents and marketable securities balances were approximately $114.9 million. As the contract value, contract value increased 10.3% to $232.3 million as of June 30, 2008, up from $210.6 million as of June 30, 2007. We define contract value as the aggregate annualized revenue attributable to all agreements in effect at any given point in time, without regard to initial term or remaining duration of any such agreements. For contracts more than 12-months duration, we may include only 12 months of contract value.

Now, with respect to the remainder of calendar year 2008, the following comments are intended to fall under the Safe Harbor Provisions outlined in the beginning of the call, and are based on preliminary assumptions which are subject to change over time. For calendar year 2008, based on factors that Frank mentioned earlier we are revising our full-year revenue guidance to range from approximately from $232 million to $237 million.

With a change in revenue guidance, we are also updating our earnings per diluted share guidance to a range of approximately $1.50 to $1.57 for the full calendar year 2008. Included in this calendar year 2008, earnings per diluted share was approximately $0.47 to $0.49 of share based compensation related expense and approximately $0.10 from the acquisition of Crimson. For the remainder of the fiscal year ending March 31, 2009, we expect an effective income tax rate of approximately 32.3%. For the quarter ending September 30, 2008, we expect revenue of approximately $57.5 million to $59 million, and earnings per diluted share of approximately $0.30 to $0.33.

This concludes the financial summary. I will now turn things over to Robert.

Robert Musslewhite

Thanks, Michael. As Frank emphasized, our clear focus is on driving member value and strong renewal performance, enhancing conversion rates through sales force execution, and improved program merchandising, and introducing strong new product launches which set up the business for the long term. While we have a lot of work to do to respond rapidly and effectively, we remain optimistic about our ability to get back on track for a few important reasons. First of all, as Frank discussed in detail, we have an aggressive plan in place for enhancing sales strategy and execution. The entire leadership team across the organization is engaged and accountable in this effort and the energy and drive I see them bringing to bear should have an impact on performance over the coming months assuming the overall economy trends in a positive direction.

The second reason for optimism is our confidence in our new product development strategy and our ability to continue to expand and diversify our addressable market. We remain convinced that our analytical tools programs address an extremely important need for improved data and transparency in the hospital industry, and open up a significant market opportunity where we can have a leadership position. Because of the high ROI associated with these programs, we believe that by more directly merchandising early member success stories, and demonstrated financial impact, we can overcome some of the budget conservatism in the current economic climate. Furthermore, our recent success internationally and in launching a new vertical in education opens up a number of high growth markets which have the opportunity to be significant contributors to our future growth. The fact that we are still less than 12% penetrated in our $2 billion current cross-sell opportunity should allow us with strong execution to drive a successful long-term growth plan.

Third, I have confidence in our ability to execute at a very high standard in a tougher economic climate. We have an extremely strong leadership team in place with our tenure across our top 100 managers approaching 10 years on average. This group has managed at a high standard in the face of a number of difficult economic headwinds in the past, and therefore has a proven game plan for getting the business back on track. Furthermore, in a favorable labor market, we have continued to attract strong talent into the organization across the board. While there are a number of factors that will influence our ultimate performance, I am convinced that we have the right level of focus, accountability and proven experience across the organization to ensure that we are executing at a very high standard.

My fourth reason for optimism involves our members. While our members are behaving more cautiously in the current environment, we have not seen a major focus on cost reduction in our member surveys and members do not appear to be in crisis mode from a budget perspective. Although new sales have been impacted by the microeconomic climate, at the same time we have seen strong member attachment to our programs and very good renewal rate performance. In that light, we remain hopeful that some good news on the macroeconomic front will lead to some positive changes in the spending environment for advisory board programs.

Overall, as I consider where we are today, I feel good about the fundamentals of the underlying business, and where we are headed from a strategic perspective. In the near term, the dynamics are obviously more difficult when we are facing the headwinds of a tighter spending environment, but we believe the right course is to redouble our efforts on the strategies that have served us well in the past. On that front, we have a comprehensive plan in place and throughout the organization the team is demonstrating incredible drive, dedication and energy. Our unwavering focus on execution should allow us to continue to strengthen our member relationships, expand the business, and enhance our impact on the industries we serve.

With that, let me turn it back over to Frank.

Frank Williams

Thanks, Robert. I believe that concludes the formal part of the call and we appreciate everyone participating and why don't we take the time now to answer your questions.

Question-and- Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Brandt Sakakeeny of Deutsche Bank. Please proceed.

Brandt Sakakeeny - Deutsche Bank

Thanks. It is Brandt Sakakeeny. Let’s say, just relative to the last slowdown in, I think it was fall of '04, how is this behaving differently than perhaps the prior one? Did you feel like you have the adequate feet on the street in terms of sales force and also, I guess to that end, how do you think the international sales and the new markets could buttress a US slowdown? Thanks.

Frank Williams

Sure. I think relative to what we saw back in September 2003, if you will go back to that time, we really did start hearing a lot of budget pressure in conversations with members. There was a lot of uncertainty about the broader economy, but our agenda has really started to shift to a more cost-oriented topics. We also saw a lot of strain on the renewal side. I think here, at least on the good news side, I think our members have performed reasonably well from a financial perspective. We have seen strong renewal rates and a lot of the concern is really on a forward basis due to uncertainty that had been created by a deteriorating macroeconomic picture across the year. So I do think it is different.

I do think we have seen most of the slowdown in our higher price point programs on analytical tools and on the implementation support side. International market, I think, has been quite strong and we are quite encouraged. So we haven't seen the broader economic impact on the international market. So I do think that is a very positive place for growth in the second half of the year, and I think we also saw pretty good performance on the education side. Again, that is still a relatively small part of our business, but not the same economic impact there as well. So there is some good news here, more than anything we need to get conversion rates on the new business side on track and we have a plan in place, and hopefully with a few things going better in the broader economy we will start to see an uptick as we head into the second half of the year.

Brandt Sakakeeny - Deutsche Bank

Great. Thanks, Frank. And do you think in terms of the incremental headcount in the salesforce, will you be adding disproportionately overseas or to the US?

Frank Williams

Well, I think we are going to add to both. The US obviously is a huge part of our growth strategy and we have a large number of members, over 2500 or at least 2200 members to take our current programs to. So I think we want to continue to focus there and to make sure we are executing at a very high standard.

Internationally, we have increased staffing and again, are very encouraged by the potential growth rate there, and higher education, and that is another area where we are putting increased sales staff and obviously have a lot of running room in that part of the market as well. So, I think you are going to see us obviously continuing to focus domestically and that is a big part of our market. We are hoping for some economic improvements, and if so, hopefully we will see an uptick in conversion rates and then we are obviously piling on to areas where we continue to see strong performance that is international education and a few other segments.

Brandt Sakakeeny - Deutsche Bank

Right. And finally, any color with respect to the types of institutions that delayed purchasing decisions? Was there anything that they have in common either size, geography, non-profit, profit? Any color there?

Frank Williams

I really don't think I could segment it any way. Conversion rates were generally down across the board. I don't think we saw in one particular segment, in general, delayed decisions really across the board.

Brandt Sakakeeny - Deutsche Bank

Okay, thanks.

Operator

Our next question comes from the line of Scott Schneeberger of Oppenheimer. Please proceed.

Scott Schneeberger - Oppenheimer

Thanks. Good evening. I guess first question, could we obviously cross-sell, you said, was below the mid point of what you had expected in the last quarter, and this quarter it had deteriorated. Is that the only place where you saw pressure, was it uniform, across, I guess how are you performing in each of your key areas?

Frank Williams

Well, I think, we are obviously below our expected ranges on cross-sell and new programs. Again, new programs in some ways are cross-sell because we are largely taking those to the existing membership days. Pricing environment, I would say was relatively stable, so we were within the range of three to four points and new member institutions. I am guessing I haven't looked at it recently, but I am going to guess based on last years’ performance was in the mid point of a range, probably in that range there. So really we saw the impact on cross-sell and on new programs.

Scott Schneeberger – Oppenheimer

Okay, thanks. And then your customers, what, I mean you just addressed you couldn't categorize it as any one particular group, but what are you getting from your sales force as far as the feedback from customers? It is just a -- I am uncertain about the environment, hold off, you know, things are better next quarter, I will buy or is it hold on, give me a few quarters, we got to see if this blows over, just trying to gauge how concerned are they and when you think they will come back, how much they will need to see in the economic environment to get comfortable again?

Frank Williams

Yes, I think it is always hard to get really a precise feedback as to timing. I think what you would hear from the sales force is we have very strong pipelines heading into the second half of the quarter, actually pretty optimistic across most of our programs and then at the end of the day, when we would have expected a lot of that business to close, towards the back half of the quarter, it just didn't come through. A lot of times we are hearing that, look we are actually going to have to delay the decision here because there are some concerns about forward budgets. We are feeling some pressure in certain parts of the business. We did get some "no"s for now as well, but I wouldn't say we heard that we are not going to be able to get back on track until next year. Anything in terms of that language.

It is always hard to read into timing with numbers, but I would really delayed decisions and people needing to see some improvement to get confidence in forward budgets.

Scott Schneeberger - Oppenheimer

Sure. And with regard to kind of your view on long-term growth, obviously for the short-term now, we are going to be taking a break from the 15% that you have been enjoying the last few years. Is that a target that you are going to try to return to, or do you think that this is going to be a stepdown that may persist for some time?

Frank Williams

No. I think we still feel very confident in mid-teens growth rate for the Company, and that is obviously based on the fact that we have performed pretty consistently, even in a tougher economy over the last several quarters. We have a very strong asset base, again, you could see that in the high renewal rates. We have talked a lot about the breadth of our growth strategy. Obviously we need to execute at a high standard and clearly, by the fourth quarter where again we have 40% of our renewals and new business coming in during that time, you really need to get on track by then to set up the forward year. So hopefully, we will see some improvement in the macroeconomic picture, and again some of the things that we are working on from an execution perspective will take hold. That will really determine the set up for next year, but in terms of our overall confidence in the growth plan we still remain very confident and again, believe that has been grounded in our recent performance.

Scott Schneeberger - Oppenheimer

Okay, and then the vast majority, I guess, of the slowdown here is on the customer concern and the economic environment. Obviously, you have had some issues with a few of the more recent analytical tools. Do you think that any customers of those have said no, until that issue that we have had is corrected, we are going to hold off, is that a small piece of it and it is really more the macro environment?

Robert Musslewhite

Scott, this is Robert. Conversion rates were really down across the board, so from that perspective, they were certainly broader factors at play. There were a few situations where members who were experiencing some issues with the tools, one program postponed some sales decisions on another, but it wasn't really the primary driver of what we saw.

Scott Schneeberger - Oppenheimer

Okay, thanks. And then finally just if you could update us a little bit on Crimson, obviously, part of the new program that you have unveiled, but we are a little bit of the way along there. Just your feelings with that acquisition?

Robert Musslewhite

Yes, I think so far so good. The nice thing here is I think we are immediately incorporating sort of know-how and technology in a program launch that we are very excited about. I do think this is a very hot topic across the membership. Early results feel very good in terms of this particular launch. We also feel very good about the management team that we have brought on Board and feel like they are going to enhance our broader strategy and execution over the next several years. So I would say right now we are feeling pretty bullish and optimistic about the impact of that business on our future growth and performance.

Scott Schneeberger - Oppenheimer

Okay. Thanks very much.

Robert Musslewhite

Thanks.

Operator

(Operator Instructions) Our next question comes from the line of Brandon Dobell of William Blair. Please proceed.

Brandon Dobell - William Blair

Hi, guys. Thanks. It is kind of a follow-up to Brandt's question about headcount. Should we assume that will continue to add to your sales teams kind of in line with a historical let's call it in the last 12 months or last year and a half growth rates, or are you going to take a breather from the headcount additions as you are going to work for the next two or three quarters and see what plays out?

Frank Williams

Yes, I think, in general we believe in continually investing in the sales force and new program development. I think you will see us be aggressive in making sure that we are adding to our headcount consistent with what we have done historically. I think that will help set us up when we do see some improvements in the overall economy. So one area we do want to continue to invest in is the sales force, making sure we are well set up; the account management side as well which really drives renewal performance. These are areas where we don't want to be penny wise and pound foolish, and where we think it will set up our growth for the future.

Brandon Dobell - William Blair

Okay, and any concern from a retention and morale perspective? I know when times get tough, oftentimes attrition kicks up or just frustration levels kick up. Anything you can see from there or at least in the early days of what kind of June showed you?

Frank Williams

Well, I think we are always concerned about retention rates and you want to be very mindful when the sales force has a poor run, as they have over the last quarter. I think we are feeling very good about retention rates. We have done a lot to get ahead of that issue in July. I feel like we are entering the second half of the year fully staffed and are in a very good position. We thought a lot about how do we make sure that people have robust incentive plans heading into the second half of the year and right now, I am feeling very good about sales talent. We see a lot of energy across the organization and I feel like we are going to execute at a very high standard.

Brandon Dobell - William Blair

Okay. And then I missed some of your opening remarks, Frank so forgive me if I am repeating something here, but I want to make sure I understood the cross-sell versus new business, how it impacts flow there. Was it a particular set of programs, older programs, newer programs, do you feel like there was any customer behavior that would tell you that some of our old programs in this environment just aren't going to get it done or was it not that specific in terms of customer acceptance?

Frank Williams

Well, I would say, as Robert mentioned, conversion rates were generally down across the board. I think we saw the most significant impact in our higher price point programs that tends to be definitional in a tougher economy, so in our implementation support programs, specifically analytical tools programs, I think we saw a larger dip in conversion rates. Again, I think these programs renew at very high rates. They obviously add a tremendous amount of financial benefit for our members which we intend to emphasize in the second half of the year. So, I do think there is a reason why we have launched them and why we are still very bullish on them, but at times, in a tougher economy you do see an impact on the higher price point programs.

Brandon Dobell - William Blair

Okay. And then finally, as you think about the forward guidance you have laid out, it sounds like some of the key assumptions that you are making are things are tough but you are not hearing that things will be tough for a year, maybe it is more of a shorter time frame than that. Do you think you have got some incentives in place to get the sales force going the right direction? Maybe if you could lay out some of those broader assumptions and could kind of rank order in terms of how critical are they to hitting your numbers, I guess, I am just trying to gauge your level of confidence with a different variable that go into that top line for you guys?

Michael Kirschbaum

Sure. In terms of guidance, we have obviously only given guidance for the remainder of the calendar year. I think we have tried to look very carefully at where we are from a renewal perspective. We expect with the decrease in conversion rates that we saw in the June quarter in terms of new business for the remainder of the year, and we tried to factor that into our guidance on revenues and EPS. Right now, based on where we stand we have confidence we are going to hit that guidance.

In terms of next year, we haven't set a specific target for our revenue growth or for EPS. I think a lot of that will be dependent on how well we execute from a sales perspective in the second half of the year. Hopefully, we will see an uptick in the macroeconomic environment. I think that would help a lot in terms of members’ forward outlook, and then more than anything, we are really hoping that we see continued strong performance on the renewal side because that really will take off some of the burden on the new business side and setting up a pretty reasonable growth rate for next year.

So, again, it is going to be very dependent on where things head over the next several months. We are not expecting a major change this quarter. What is really important is that we do see an uptick in the fourth quarter of the calendar year where over 40% of the renewals and new business come in that quarter, and again, if we see the improvement, obviously that will help our outlook as we are heading into the year, and we are just again going to have to see where we get as we get into October and November and December.

Brandon Dobell - William Blair

Okay. And then the final question, sorry for Michael, does the current situation that the guidance revision changed, how you think about the allocation of capital between acquisitions, share repurchase, those kind of things or is it just more of a business as usual from your end of the spectrum?

Michael Kirschbaum

Yes, I think it is something we always evaluate, but we are committed to returning capital to shareholders. I think we still are pretty happy with the share repurchase program, but we will continue to evaluate, but I would expect we would probably be similar to what we have done last couple of years.

Brandon Dobell - William Blair

Okay. Thanks, guys.

Frank Williams

Thanks.

Operator

Our next question comes from the line of Susan McGarry of Granahan. Please proceed.

Susan McGarry - Granahan

Hi. I have a couple questions. The first question is just in terms of correlation. Did the number of programs per client have any bearing on their decisions, their buying decisions?

Frank Williams

No. I don't think we saw that issue. We were not hearing language of, we need to trade out a program or we are uncomfortable with the current contract value per member. We didn't hear any issues there. I think what we saw, Susan, was again a very strong renewal environment, a very strong utilization of program services, good general buzz across the membership, but when it came down to finalizing new business decisions, we got a lot of "no"s for now. We did hear a lot about uncertainty about forward budgets and needing to get a better sense of where things were going to come out for the forward year, but we did not hear any language around Advisory Board’s spend or specific concerns there. There is a lot we have done over the last several years to hopefully stay away from that topic, and that is mainly in delivering strong economic value in our existing programs, and I do think we are doing that. We feel good about how we have executed there and again, we would just like to see some positive things in the macroeconomic outlook of our members and again, I think we will start to see the new business side pick up.

Susan McGarry – Granahan

And then in terms of the guidance, now, are you assuming that the economy doesn't deteriorate further?

Frank Williams

I think we are assuming, again, at this point in the year, we have pretty reasonable visibility on our revenue performance for the remainder of the year. If you think about the new business side, again, for new business that we bring in to the fourth quarter, it is going to have very little impact on accrual revenues for the year, so right now we are assuming relatively similar performance to the second half of the June quarter, so what we would describe as down performance continuing into the third quarter, and then again we obviously have some visibility simply because of renewals and the deferred revenue account on the balance sheet.

Susan McGarry - Granahan

And then Michael, just a couple of questions, I was wondering if you could give some sense of the impact of the acquisition and then the fees on the cost of services increase? And then, also what impact the increased focus on the tools program might have had on the P & L?

Michael Kirschbaum

Sure. On the, just start with Crimson, the acquisition as we mentioned last quarter, for the year we spent about $0.10 of impact on EPS, a lot of that is non-cash based because that is the amortization of intangible assets. So I think where we are now is similar to where we were last quarter. We expect to have $0.10 of impact as we take those costs and don't have a lot of revenue on it because of the deferred revenue write-down associated with assuming service contracts.

On the licensing fees, again, as we have seen in prior quarters, we have several programs that where we licensed technology from a partner, as those programs have grown, that fee becomes a larger percentage of our cost of services. We have got coming off the end of last year and roughly strong performance in several of those programs that we incorporate partner, and so therefore, those are higher portion of our overall cost of services.

And then lastly, your question on the analytic tools, again, I think a lot of the questions are related to, we have a largely fixed cost business so as we saw conversion rates decline in the first half of the year, in some of those programs in analytic tools, and then other programs as well, when that revenue for the second half of the year gets pushed out, obviously with a largely fixed cost business today, cost doesn't move as quickly, so the remaining costs are the higher percentage of the total revenue.

Susan McGarry – Granahan

Okay. Thanks.

Operator

Our next question comes from the line of Jim Bradshaw of Bares Capital Management. Please proceed.

Jim Bradshaw - Bares Capital Management

Thank you, and good afternoon. I wonder, as you are adding to the sales force, how long does it specifically takes them to get up to speed and how would you say that most recent hires are doing against that standard?

Frank Williams

Great question. I think it is something we really do try to focus on, at one level we want to get people out in the market very quickly. At the same time, we want them to be at a very high standard because that is missed opportunity if they are not performing well in the market, but we have a dedicated team to on-boarding. We have a process where for the first 30 days, they are largely focused in the office learning the research, learning about the specific program. We have specific scripts and materials that they need to master. We then have them double travel with experienced marketers so that they can actually see someone performing well out in the field and to get a sense of what the process is like. A lot of times they will pitch in and actually help bring in other first member with a more senior marketer that is involved with them, and then ideally, we would love to have them out in the marketplace after the 60-day point, where they can really begin contributing and making a big difference. At times, in some of our more complex programs, that process can take roughly 90 days, but ideally, we are getting them fully productive within four to six months of joining the firm.

Jim Bradshaw - Bares Capital Management

Okay, and how have the newest hires you have had this past quarter or so, are they seeming to -- in the past year I guess?

Frank Williams

Well I think we're feeling very good about the talent base that we are bringing in. So if you look at the strength of our pipelines on the sales side, we have had very large pipelines, very high offer conversion rates, and if you look at the talent base relative to historical, I would say we are feeling very good. We also do a lot of internal transfers, so where we really know someone internally, they are very good from a relationship perspective. We will tend to move them to the sales force; those people tend to do incredibly well, and so right now as an example, we are looking internally for people that we can move over to the sales force who we know will hit the ground running even more quickly than an external hire would.

So, I would say right now, feeling pretty good. The sales force has grown incredibly large, and we do want to make sure we have the right management, layers that we have the right infrastructure to support them in being successful on the road and that is always an ongoing challenge as we are doubling the size of the sales force every couple of years, and that has been again focus of ours over the last several quarters and right now I feel pretty good about where we are.

Jim Bradshaw - Bares Capital Management

Okay. That is helpful. Thanks for your time.

Frank Williams

Thank you.

Operator

This concludes our Q & A session for today. I will now turn the call back to management for closing remarks.

Frank Williams

Thank you. We appreciate everyone participating in the call. We will obviously have an opportunity to see a number of you out on the road over the next several weeks, and we will look forward to the opportunity to see you in person. So thanks again.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may disconnect at this time. Have a great day.

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