Corporate Executive Board Company Q4 2008 Earnings Call Transcript

| About: CEB Inc. (CEB)

Corporate Executive Board Company (EXBD) Q4 2008 Earnings Call February 5, 2009 9:00 AM ET


Thomas Monahan III - Chairman and Chief Executive Officer

Joyce Liu - Chief Financial Officer and Managing Director of Financial Planning & Analysis


Scott Schneeberger -Oppenheimer & Co.

(Matt Coladay) - Barclays Capital

Daniel Leben - Robert W. Baird & Co., Inc.

James Bradshaw - Bare’s Capital Management

Brandon Dobell - William Blair & Company

David Ridley-Lane - Bank of America

Vance Edelson - Morgan Stanley

Sam Hoffman - Lincoln Square


Good morning and welcome to the Corporate Executive Board’s fourth quarter 2008 conference call (Operator Instructions). 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.

Thomas Mohahan III

Thank you and good morning everyone. Thanks for calling and or logging into our Q4 earnings call. I’m going to review the quarter and the year, talk about what we’re doing to meet the challenges of the coming year and outline the steps we’re taking to put ourselves on the path to profitable sustainable growth as economies in the developed world stabilize.

Joyce Liu, our interim CFO will then give you details on the financials, and I will return to talk a little about our business environment and where we are headed. And then we will take your questions.

First let me talk about Q4 and year end results. It’s clear from the Q4 outcomes that we fell short of what we set out to accomplish in 2008. Let me report on each of our major metrics.

Revenue for the quarter was $136.7 million, bringing the full year total to $558.4 million. Net loss for the quarter was $2.5 million. And net income for the year was $50.8 million. EBITDA for the quarter and the year were $5.8 million and $105.4 million.

Loss per share in the quarter were $.07. Excluding the effects of the impairment loss and a restructuring charge, non-GAAP earnings per diluted share were $.50.

We ended the year with contract value of $487 million, reflecting both short falls to plan in the acceleration of some program consolidation that we began in the quarter.

In summation, I see real areas to improve how we execute in the difficult environment. And I see real progress in some areas; it was not enough to offset rapidly deteriorating economic conditions in all of our major markets geographically and by line of business.

Let me give you a little more color. Despite our team’s success in raising utilization rates among existing members and significantly increasing our new sales pipeline, our core business has experienced weakness in both new sales and program level renewals in Q4.

This was true in both North America and Europe.

Asia Pacific proved more resilient due in large part to some successful operating changes, which we are moving rapidly to transfer to the rest of the company.

In our lines of business we continue to add new customers, though at a slowing rate across the year. New products were a net contributor to results, but as the year progressed it frankly became more difficult to get people to try anything new.

Our biggest hit to CEB came from steep declines and a very small number of our large members. We lost about $20 million in contract value from companies that disappeared as a result of the current economic environment and another $12 million from a set of about 30 companies in extreme financial distress, clustered largely in financial services, transportation and building materials industries.

On average these companies cut back the support they receive from us by about 50%. If you’ve been reading the newspapers, you can probably name most of these companies off the top of your head.

So roughly 80% of our decline came from a relatively small number of extremely distressed companies. Across the rest of the portfolio, we saw the net affect of new customer ads and growth in some areas by lower program level renewal rates and cross sells as budgets became more challenging.

Never the less, the overwhelming majority of our customers made the deliberate choice to continue relying on us. Even if some did so at lower levels. Our large corporate renewal rate came in at 88% for the year. And of our largest 500 member companies only five have completely cancelled out of their membership with us.

We are also taking an impairment charge to good will from our acquisition or IT Toolbox. While we had a very strong year, in Q4 we were not immune to the rapidly deteriorating advertising climate.

Revenues up about 30% for the year beat industry norms representing strong share gains in the space. However, accounting for the impact of Q4 these revenues were below our original expectations.

We continue to be very confident in the performance of this business and believe that with continued focus on community growth and the new platforms launched in the fourth quarter that Toolbox will continue to our growth, cash flow, and strategy across time.

For 2009 we are not assuming that things are going to get better quickly. Instead we are taking aggressive action to protect our economics and most important assets during the recession to insure that the company is well positioned for sustainable and profitable future growth.

Let me take you through the actions we are taking. First we are optimizing the product portfolio. Reviewing, consolidating, and where advisable sun setting underperforming products, and investing more heavily in those that represent the highest potential returns over the long term.

Second we are restructuring our sales and service operations to better serve our largest and highest potential members, solidify relationships with key executives, and pave the way for future growth in our targeted decision centers.

Let me first talk about our product portfolio. It became increasingly clear across the course of the year that some of our products were situated poorly against member roles and workloads. And thus unlikely to deliver solid economic returns or future growth.

So over the course of 2009 we plan to review and with an eye toward consolidating our sun setting take a look at 10 of our best practice products, all targeted at the large corporate market. In most cases we’ll be refitting or consolidating products into single platforms that can be sold to a much larger audience. But in some we will need to replace or consolidate them after we have filled our commitments to existing members.

Some of these transitions began in Q4 and we are the process of suspending new sales of some of the products targeted for review. As a group these products represent just under 10% of our revenues. They have produced lower than average profitability and see substantially lower renewal and growth rates. They are disproportionately the products our members trade out when forced to reduce their spending with us.

Taken together this group of products shrank by about 16% in 2008. Largely due to program renewal rates well below the firm average.

These products are generally two or three or more years old. And as they have developed we have seen that they target too narrower set of issues or too small a constituency or both.

As an example, in Q4 we can consolidate our program for heads of sales operations into our program for heads of sales. While these are distinct executives with real budgets, we found that their responsibilities were so often intertwined that serving them well through separate service dreams and separate intellectual property portals was nearly impossible.

As we sunset less productive products we will be able to redeploy some of the sales, service, and product capabilities to those areas where we have demonstrated strength, which we believe will represent the highest potential for future growth.

In particular we will be focusing on five decision centers within the operating companies we serve. The HR Legal and Finance strains will receive continued and sustainable strength, and the IT and Sales and Marketing areas where we have made good headway and see strong promise.

Together these five product areas account for about 83% of our current sales projecting forward after sun setted products and consolidations, in our deepest, richest global network.

They also represent the most active and important decision centers of the large corporation. Taken together the executives and professionals in these functions control about $50 billion in spending on advice, information, and professional development.

We believe that by properly serving this market we can displace some of that spending with our existing product set, and earn the right to tap broader pockets of spending across time.

Putting our resources against those product areas with the highest potential is one side of our long term growth strategy. Strengthening relationships with key executives at our most valuable member companies is the other.

We saw continued evidence in the year that we need to change how we engage with our largest and highest potential members. I’ve been talking about this for several quarters, about our efforts to much more tightly integrate sales and service strategies to improve both new sales and renewals.

We spent 2008 working to much more closely integrate our sales, service and contact operations. Through this process it has also become clear that our largest and most important customers, merely aligning the existing sales and service operations isn’t enough.

Our focus here is on the executive leads and the key decision centers that we support. Say the CFO or the Chief Human Resources Officer. Here we have a single buyer and/or influencer responsible for multiple often related products, where the buyer has the capacity, interest and need to buy even more.

These members want us to help them, not just to get better use out of the individual products they already have in place. But to think strategically about which (inaudible) products can best improve their outcomes and in which combinations over time.

Multiple points of contact, each responsible for different activities and different product sets, can meet their need for comprehensive and highly customized configuration that may involve making choices among our products to best support them.

So we are accelerating our transition to integrated account management in the key segments of our market where it makes the most sense. And focusing more broadly on service and product strategies that optimize the member experience.

We will of course continue to invest tremendous energy in discovering and securing new customer relationships. We want to cover every one of the 17,000 companies that have yet to buy their first EXBD relationship.

And at those companies that are largest and have the highest potential we can imagine we are assigning some of our most elite staff to engage and develop those relationships.

But we also want to be rigorous in making sure that our potential effort here is proportional to the potential outcomes that we see.

As we change our customer management models, we will also be stepping up our investments to better match the tremendous resources with the needs of each individual member.

In particular we are funding a $10 million technology overhaul, both to update our customer management capabilities and allow us to personalize the user interfaces on our product portals.

As we plan for a narrower focus and a changed customer management model, we are adjusting our staffing levels and plans accordingly, and have announced staff cuts that will eliminate about 15% of current roles, current reductions and attrition that we don’t plan to back fill for.

While many areas of the business will see staff reductions they are not across the board cuts. They are strategically driven decisions to help us manage through this period while we put our weight on the levers of sustainable growth.

And of course we will continue to look to selectively add talent in places where we need new capabilities.

What impact will this have on our financial performance? We are projecting ’09 revenue to be down 15 to 20%, due both to our (ph)CB shortfall and the projected loss revenue due to product consolidations.

Over time of course we expect growth in our focus areas to more than make up for the lost CB from products we make, consolidate, or sunset. But there will be a timing mismatch.

Second, we are taking a very conservative approach to protecting profitability and cash flow in this environment. We are holding our own in customer budgets, but our window into their economics is not pretty.

EPS will be in a range of $1.30 to $1.60. EPS will be down by more than revenue because it will take several quarters to get to our complete new run rate for cost. And because we have higher depreciation and amortization expenses.

Cash flow will continue to run at a multiple of net income. Our balance sheet remains very strong, giving us the capability to execute on our strategies and invest against our higher potential opportunities.

Obviously these are difficult times for everyone, for our members and so consequently for us. These times have also helped us to focus on the critical changes we need to make in our business to insure that we come out of this time stronger than ever.

I’ll now turn things over to Joyce who will give us the detailed financials. And I’ll be back to comment on our business environment and where we are headed.

Joyce Liu

Thank you, Tom. I will organize today’s financial and operating review around four categories. First the income statements, including a summary of fourth quarter 2008 restructuring and internment charges. And I’ll move to the balance sheet, cash flow, and close with high level revenue and earnings guidance for 2009.

Starting with the income statement. Fourth quarter revenues decreased 3.8% to $136.7 million from $142.2 million for the fourth quarter last year.

Gross profit margin increased to 69.4% compared to 68% in the fourth quarter of 2007. This primarily reflects our reduced levels spent associated with new product launches, programs and product subject to consolidation, and more aggressive cost management across all categories in light of the difficult economy.

Gross profit margin also benefits from lower share base compensation expense as a percent of revenue, and reduction in fair value from participant accounts for the deferred compensation plan.

For the full year, gross profit margin was 68.4%, up 275 basis points from full year 2007.

Member relations and marketing expenses decreased as a percent of revenue to 27.7% in the fourth quarter of 2008, compared to 28.3% in the fourth quarter of 2007. This is driven by reduced level spent on additional hires and forward hires than a year ago,

reduced commission spent, lower share based compensation expense, and reduction in fair value from participant accounts of the deferred compensation program.

On the full year basis, investments were made earlier in the year combined with lower sales productivity, drove MMS expense as a percent of revenue to 28.7%, up 54 basis points from full year 2007.

General rate of expenses were down as a percent of revenue to 11.7% from 13.4% in the fourth quarter of 2007. We have been managing GNA spent aggressively throughout the second half of 2008 while realizing some of our earlier investments through higher productivity.

The reduction year over year has also helped by lower share based compensation, market to market adjustments of the deferred compensation program value, and a $2 million accrual recorded in the fourth quarter 2007 for potential sales tax exposure.

For the full year GNA as a percent of revenue came in at 13.5%, flat to full year 2007. Operating margin for fourth quarter 2008 before impairment and restructuring charge was 25.5% versus 22.5% for fourth quarter 2007.

The impairment loss of $23.2 million is primarily related to the goodwill from the IT Toolbox acquisition. As Tom indicated in his remarks, despite plus 30% revenue growth year over year, recent trends with allying advertising spent at total sector level and comparable public company valuation deterioration has called for a write down in value.

But we remain very confident in the long term success of this group.

The $8 million restructuring charge is primarily comprised of severance charges and termination benefits resulting from the risk plan finalized during Q4.

Between layoffs that we have already executed, positions we outsourced, and positions we choose not to fill when people (inaudible), we expect total positions eliminated to be around 15% of global workforce.

As part of the overall restructuring plan we anticipate incurring another $1.3 million of restructuring costs during the first two quarters of 2009, from actions we’ve already taken at this point.

Other income and expense was decreased by $4.8 million from $1.6 million of income during fourth quarter of 2007 to $3.2 million expense for the fourth quarter 2008.

This change was driven by the following factors: First as a result of lower cash balances and effective interest rates on those balances, interest income was reduced by $1 million to $750,000.

Second, a decrease in the fair value of participant accounts for the deferred compensation plan in the fourth quarter ’08 drove a $2 million expense, whereas no material amount was recorded in the fourth quarter 2007.

There is a corresponding effect to salaries expense as I just indicated in our offering expense category. So there is no net impact to the PNL for the changes in participant account value.

Third, given precipitous drop in the value of the British pound sterling at the end of the quarter, we incurred a $1.8 million foreign currency translation loss, primarily related to the translation of the net monetary assets of our UK subsidiary.

Fourth quarter EBITDA was $5.8 million or 4.3% of revenue. Adjusted EBITDA, which excludes the impairment loss and restructuring charge but includes foreign currency translation loss, was $37.1 million for the quarter or 27.1% of revenue, compared to 26.2% for the fourth quarter 2007.

On a full year basis, adjusted EBITDA was 24.5%, compared to 24.2% for 2007. Fourth quarter loss per share was $.07, against alluded earnings per share of $.63 in the fourth quarter of 2007.

Excluding the impact of impairment loss and restructuring cost, but including the foreign currency translation loss of $3.4 million, which is entirely non tax deductible; EPS was $.50 for the quarter and $2.05 for the year.

Turning to the balance sheet and cash flow, membership fees receivables declined 21.3% to $127 million at December 31, 2008 from $161.3 million at December 31, 2007, reflecting weaker volume close of the year.

Collections remain consistent with historical seasonality, and DSO with we calculate using average receivables were 70 days for the fourth quarter 2008, comparing to 78 days for the same time last year.

Deferred revenues decreased 17.8% to $265.9 million at December 31, 2008, from $323.4 million at December 31, 2007. Again, reflecting a weaker than 2007 business close in the fourth quarter.

The 2008 amount does not include approximately $1.7 million of long term deferred revenue and other long term liabilities.

Cash flow from operations was $85.2 million for the year versus $110 million in 2007, a reduction of $24.8 million. This reduction is driven by approximately $7 million of cash operating profit reduction, and $18 million of working capital reduction year over year.

Capital expenditure were $42.3 million for full year 2008, roughly $30 million of which related to the build out of our new office facility and the remaining on computer hardware and software purchases.

During the fourth quarter, we spent approximately $10 million acquiring two small companies, each of which gives us access to a proprietary data set that supports on of our five core functional domain areas.

At the end of 2008 our cash, cash equivalent, and marketable securities balance was $76.1 million.

Outlook: The following comments are intended to fall under the safe harbor provisions outlined at the beginning of the call, and are based on preliminary assumptions which are subject to change over time.

Based upon our year end contract value and deferred revenue balance, our decision to sunset and consolidate a group of subscale programs over the course of the next 12 months, higher degree of uncertainty around the number of our existing members and prospects, subject to severe financial distress as evidenced in our fourth quarter 2008 results, and the anticipated short term impact to productivity while we transition into the more integrated account management structure.

Our guideline for full year 2009 revenue is $445 to $475 million, fairly evenly distributed across the year.

Our guidance for annual diluted earnings per share in 2009 is $1.30 to $1.60, before restructuring charges. Our strong operating margin from continuing businesses will be upset by short term transitioning investments during the early part of 2009, resulting an EPS projected to be more heavily weighted toward the second half of the year.

For 2009 we expect appreciate and amortization expense of $24 to $25 million as we start to amortize lease hold improvements made for our DC office building on a full year basis.

We expect adjusted EBITDA margin to be between 22.5% and 24.5%. The above guidance represents our best estimate at this point. One thing we can count on for a year like 2009 is the economic turbulence. We will keep you updated on our progress and revised forecast as the year unfolds.

We remain committed to maintain and protect our strong financial position. The last two quarter’s operating performance demonstrates our ability to respond rapidly to a changing external environment.

In the meantime we are particularly intent on maintaining the necessary investments in servicing and field presence, to insure that we emerge from this down cycle with a strong network across the key decision centers.

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

Thomas Monahan III

Thanks Joyce. Let me close with a review of our current priorities in this environment.

First we are maintaining our strong financial position. We’re planning for an environment that assumes there is no sudden recovery and that at least a few more companies will splash onto the front page of the Wall Street Journal.

So we are managing our cost structure to give us the maximability to respond quickly to changing conditions and to free up dollars for necessary investments.

Second we are focusing our energy and resources on building enduring relationships with the critical decision makers at our largest members and in our target decision centers. We are confident that by over delivering for them now when they need it most we will see real benefits when spending levels return.

To accomplish this we will need to enhance the member experience through new relationship management and product management approaches. You’ll see investments on the face of the P&L that reflect an investment in relationship management in technologies to support these aims.

Unless we make these investments now we won’t secure the growth we need and can expect from these tremendous buying centers in the future.

Third we’ll adapt our strategy for future growth to better reflect the needs of our member base. Our view of how we’re going to grow has certainly changed across the past two years, but contains some similar elements.

Job number one continues to be working with our installed base of corporate customers who identify the next products they need for personal and corporate success. Recurrent contract value per institution in our large corporate market is about $125,000.

This is a fraction of the addressable opportunity in each of these companies, which spend about a million dollars in each of our five core decision centers on identifiable products in our five functional domain areas.

And while our contract value per large institution has trended down as a small number or large members have endured financial distress, I’ve got two reasons for confidence as conditions and budgets normalize.

First our very strong renewal rate provides powerful testimony to the strength of our value and gives us an unparalleled platform for future growth.

Second the early pilots of targeted account management strategies particularly in Australia and New Zealand and the broader Asia Pacific region have shown real progress on this metric.

Job number two is to continue to implement product strategies that better leverage our strongest intellectual property and brands into offerings for the markets. You’ve seen us do this to great affect in both key international markets and the global middle market over the past several years. And we continue to see tremendous opportunity in both market areas. More than 1,000 large companies and more than 16,000 middle market companies have yet to buy their first product from us.

And we also see considerably more opportunity within the existing decision centers that we serve. Our current product configurations tend to serve a narrow group of headquarters staff, even as important decisions cross leader’s desks at the divisional and regional level.

Our divisional finance form launched earlier this year is a very good example of how we can version our IP for new constituencies inside the companies and functions that we already serve.

Job number three is to add new products that support key decisions and decision makers in the five centers we target. Here the mix and focus of our efforts will change.

First our efforts will be concentrated on building up the five key domains we target. Second rather than continuing to roll out best practices programs that address new domain areas, we’ll seek to capture a larger share of decisions and decision makers through renewable and scalable products.

We’ve already seen success here with the launch of our leadership academies platform in HR and with data products in HR and Finance.

To this end you may see us make a few small selective acquisitions that bring us unique capabilities and intellectual properties that address clear gaps in member’s needs and workloads.

As an example, we did two small acquisitions in Q4, each of which gives us access to a proprietary data asset that supports one of our five core functional domains.

Genesee Survey Services brings world class data on employee engagement and performance and world class customer lists to our HR practice. (ph)Wirlo and Company has assembled a powerful network and great data about small and medium sized business, data vital to the success of the sales and marketing organization that no other organization has.

Finally we’re going to be aggressive about talent. We’re making sure that even as we’re taking costs out, we will provide a rewarding and exciting career for top (inaudible) talent.

And we will take advantage of the job environment to selectively add people with demonstrated skills where we need them most.

The challenging economic environment illuminated both strengths and weaknesses in our current business. Our greatest asset is the quality and strength of our member network. It gives us a strong base from which to build.

We are aggressively attacking weaknesses in our product and client management processes, investing all our energy and resources toward strengthening that network and building enduring relationships with corporate professionals in our key target domains across their careers.

We have also demonstrated the will and capability to manage our business portfolio and cost structure in a way that protects the economics of our business and enhances our ability to make the right investments and do the right things across time.

We believe that these steps we are taking will set the company up for success in the very near and difficult term and also build a platform for sustainable, profitable growth, as the economies recover and our member buying centers have more opportunity to grow with us.

We’re now ready for your questions.

Question-and-Answer Session


Thank you, sir (Operator Instructions). We go to Gary Bisbee from Barclays Capital.

Matt Colady - Barclays Capital

Good morning, this is Matt Colady (ph) on behalf of Gary Bisbee.

I guess within the 15% of employees that are now being laid off, could you provide an approximate range or target within the sales force. And also in terms of the opportunity to improve the sales force, is there the opportunity to selectively hire within that group as well? Thank you.

Thomas Monahan III

Sure, let me start at the philosophical level so you get a sense of how the reductions in force played out. First and foremost we started with G&A. That’s the place where we want to be very aggressive in managing and controlling our cost structure.

Second then we looked at product areas first with an eye toward those things that are supposed to vary with member size. Think here about member meetings, if you have fewer members in a particular program you need to rent fewer hotel rooms, ball rooms, etc.

And then obviously across the year you’ll expect to see the cost to goods sold to come down, where and when we sunset programs or consolidate them into single platforms, so that number will come down.

The marketing and members services line item is the one we paid the most attention to investing in across the year. Obviously it will come down since we’re taking some products off line across the year.

But that is a place we plan to over invest, because we realize that having great professionals out there engaging the market place, solving member and prospect needs in this difficult environment is the surest way to secure relationships that pave the foundation for future growth.

So you will see that line item come down but it is the place we are protecting across time.

Matt Colady - Barclays Capital

Great, thank you.


We go next to Scott Schneeberger with Oppenheimer.

Scott Schneeberger - Oppenheimer & Co.

Thanks, good morning. I guess Tom could you speak a bit to – I think you mentioned a $10 million spend in an IT overhaul on impersonalizing the offering. Could you just confirm that I’m getting that right and elaborate a little bit more please?

Thomas Monahan III

Sure Scott. Yeah, we are making a major investment in technology with two real aims. One is it is time for us to update the technologies that support people who are engaging members and prospects on a day-to-day basis, as part of our desire and need to more closely tie what we do to the needs and workflows of our members.

We’re not only making some shifts to the account management philosophy, but putting taking technology in place that underpins and supports those people so they can better target their conversations, keep track of individuals, and make sure that we’re delivering customized personal service to those people that really tightly links our tremendous resources to their individual needs.

As part of the technology spent, we’ll also – as we always do in this business, going back and looking one more time at the web technologies that support our members day-to-day, making sure that the platform itself and the user interface is really support and integrate in what they do. So you’ll continue to see that network and platform get better and better and better.

Those two things together we decided they are obviously are related; we decided this year was the time to put those in place, as we transition to ever tighter linkages to our members and their workflow.

Scott Schneeberger - Oppenheimer & Co.

Okay, thanks. Shifting gears, could you talk a little bit about what you expect to see in the size of the sales force, perhaps the number of sales team at the end of ’09? And also on how you do or will be going forward compensating the sales force, is it a mix of salary or I guess fixed versus variable, just some thoughts on that? Thanks.

Joyce Liu

I can probably address the first part of your question. We actually ended the year of 2008 with 341 sales executives, and we were very pleased with the quality of the people and activity levels that we sustained.

Our success in rebuilding the sales organization gives us a great platform for our transitioning to a multi-segment selling and servicing model. And we look forward to actually sharing some new operating measures with you as we transition into the model that takes (inaudible) of this current measure. Because the current headcount reflects only the sales forces that are responsible for selling new memberships. It does not take into account those that are managing the existing membership.

Thomas Monahan III

Okay Scott, let me take on the second part of your question which is how if at all comp philosophy will change. I think you know historically we’ve always had a very performance oriented sales and account management philosophy. And I don’t expect that to change radically.

We’re moving to a model where you’re going to see the different sales models for different segments of the market place, places where we’ve got a great relationship, let’s say, with the head of human resources, we’re going to put someone in who’s responsible both for engaging that relationship and identifying the next thing that the HR department needs to be successful.

They’re going to get the right products in the right order in that group, rather than having multiple people be successful. And that’s one model.

And then there are places where we don’t have any relationship at all with the HR department, and we’ll have a different person responsible for creating that relationship.

I think in both cases you’re going to see us orient our people toward first engaging the existing customer base and then growing it. One of the things we are very careful to make sure we protect is the great energy and growth focus that our people in the field have.

And we always want to disproportionately reward those people who do a disproportionately good job at engaging and growing our customer base. So I don’t think you’ll see any broad philosophical shifts. We’ll keep that focus on growth, and we’ll keep that focus on disproportionate rewards for top performers.

Scott Schneeberger - Oppenheimer & Co.

Okay, one final question, on use of cash going forward, obviously your cash balance has been coming down over the past few years, and you do pay out about $60 million a year in dividend, and it looks like we’re going to come into some tough cash flow year or years, what is the thinking on share repurchase? Obviously you said you’re going to make a few small acquisitions going forward, just some general thoughts on the uses there, thanks.

Thomas Monahan III

One of the great things about this business, as I said, is that even in this environment cash flow runs a multiple of net income, so our board has always been and will always be very engaged in how best to deploy that access capital.

You saw us affirm the Q1 dividends, so we’ve obviously signaled that dividend is part of the story. And we have authorization right now to do additional share repurchases.

I think our board in this environment is going to be both for operating environment reasons and as new administration rethinks tax policy, etc, we’re going to stay very engaged in how best we deploy that access capital that our business generates. But beyond that I don’t think we’ve talked about any particular change in philosophy.

Scott Schneeberger - Oppenheimer & Co.

Thank you.


We go next to Dan Leben with RW Baird.

Daniel Leben - Robert W. Baird & Co., Inc.

Great, thanks, just looking at the revenue guidance for down 15% and thinking about contract value probably in the same range, could you talk about the impact of that from the consolidation of products, if you could kind of break out the components and just – weak economy, clients have disappeared, and then the third piece being products that are being rationalized?

Thomas Monahan III

For ’09 revenue, Dan, I’d say that relatively more of the effect is contract value shortfalls and as I said 80% of those contract value shortfalls were concentrated in a very narrow and pretty namable set of customers that either disappeared or substantially consolidated. My guess is if we sat down you could name most of those off the top of your head.

And beyond that the rest of the portfolio our areas of growth didn’t offset our areas of slight weakness. So the bulk of the revenue shortfall is coming from shortfall in CV at the end of ’08.

As the year unfolds, as we sunset and consolidate products, that becomes a contributor as well. And we obviously are planning for growth in our focus core domain areas. There will just be a little bit of a time mismatch across the year.

Does that give you enough color?

Daniel Leben - Robert W. Baird & Co., Inc.

Yeah, that’s helpful. When you look at ’09, the other piece obviously that’s moving the other way is foreign exchange. Could you talk about any impact for foreign exchange in the guidance?

Joyce Liu

Sure, certainly, as I indicated at the end of the third quarter I think the exchange rate was around $1.80 versus the British pound. And at the end of the fourth quarter it ended at around $1.40. And we have a balance sheet with our (inaudible) with a net asset position. And that asset position causes to lose about across over the course of the year about $3.5 million.

This is one area that is largely outside of our control at this point. Though the guidance does not reflect, does not anticipate a dramatic change in this magnitude in our guidance.

Daniel Leben - Robert W. Baird & Co., Inc.

Okay, great. And then just finally, how should we think about CapEx in 2009?

Joyce Liu

We anticipate CapEx to be running at a historical level, about 2 to 3% of revenue. As I said this year we had about $30 to $35 million of spend related to this new office build, which should not be repeating itself in 2009.

Daniel Leben - Robert W. Baird & Co., Inc.

Okay, great, thanks.


We go next to Jim Bradshaw with Bare’s Capital Management.

James Bradshaw - Bare's Capital Management

Good morning and thanks for taking my call. Could you go into a little bit more detail about the impairment, considering you sound so positive still about the IT Toolbox acquisition?

Thomas Monahan III

I can. Let me give you a little bit more detail there. As I said we continue to be very pleased with the performance of the Toolbox group.

In 2008 revenues were up nearly 30%, and the team launched two new communities for HR and Finance professionals. But like all advertising related businesses, the team saw weakening demand profile in Q4.

As a result we pushed back our realization of our original plan by three to four quarters. This adjustment of our expectations when you combine it with a general compression of valuations in the market as a whole resulted in impairment of good will.

We continue to see great promise for the Toolbox platform as a stand alone business, and also begun to find ways to leverage their technology and networks in our core professional product areas.

So overall I continue to be very enthused about the fit with our strategy, certainly very impressed with the quality of our team, and have great admiration for the assets they’re building.

James Bradshaw - Bare's Capital Management

Okay, and you still think the model there, the revenue model, you’re going to continue to go through that way?

Thomas Monahan III

Yeah, right now the bulk of revenues in that business are advertising based, and we continue to bring to advertisers a very unique and valuable product. But we’re always looking for new ways to monetize the terrific asset that they’ve built in the community activities, nothing new to report on. Right now our job is growing the existing IT community and getting the Finance and HR communities ramping very quickly. And we’re very excited with what we see there.

James Bradshaw - Bare's Capital Management

Okay, thanks. And lastly, what do you think the effect on your average price per program will be as you consolidate those programs?

Thomas L. Monahan III

Yeah, at this point it is too soon to say, I think what we saw in 2008 was, we were able to maintain pricing power to just north of two and a half percent in programs that we kept in place.

There will probably be a couple opportunities where the right way to structure the product is you combine two content assets and price it up, there may be some places where the right idea is build a product that gets sold at a divisional level for a cheaper price point. So at this point it would be hard to handicap how those puts and takes play out on the price scenario. I think on balance, pricing remains a steady-as-she-goes element of our strategy, and I don't see these consolidations affecting it all that much.

James Bradshaw - Bare's Capital Management

Okay thanks for your time Tom.


We go next to Brandon Dobell with William Blair.

Brandon Dobell - William Blair & Company

Thanks. Any sense of how big the contribution to '09 revenues will be from the acquisitions?

Joyce Liu

Yeah we had built in very conservative assumptions as we head for 2009, it will be immaterial at this point.

Brandon Dobell - William Blair & Company

Okay, and then going back to late last year when you signed the agreement with a Adecko (ph), change their recruiting and hiring part of the process.

How does that fit in with what you think you might be doing on a near-term basis to kind of get the sales force strategy squared away, are you still comfortable with that outsourcing agreement, or do you think it needs some changes, how should we think about that?

Thomas L. Monahan III

Yeah I think the way to think about it Brendon is that the Adecko agreement was a recognition that, as we became a global organization having the reach of a global organization that could cap different labor markets better than we could from a historically centralized organization was one way to think about it, and we are very happy in the early going. It also allows us to variabilize our recruiting expense, which is a good thing in an environment that we are operating in right now.

I think that we are very pleased with the investments and recruiting we did into the sales force in 2008, both with the people we brought on board, the speed with which we got them ready to face the market, and their activity levels—obviously economic headwinds made it difficult for us to turn that tremendous asset as quickly as a the contract value as we would like.

But I think the progress we made in 2008 gives us a great platform to transition into our multi-segmented account management model that we are starting to roll out across this year. So we are feeling we are operating from acquisition of human capital strength there right now.

Brandon Dobell - William Blair & Company

Okay. Final question, any cover on trends in January and early February, in particular relative to customers that may have pushed out decisions just based on the uncertainty in November, December, have they come back to you, and more broadly, how things started off the year relative to and how they finished out '08.

Thomas L. Monahan III

We are not going to give intra-quarter updates.

I think it is safe to say we planned for a challenging 2009. As I said in my script, we live pretty close to the things we do for these customers are pretty close to their budgets and their spending priorities, and even some of their capital structures, given our depth in finance, and nothing we saw in Q4 of their internal operations performance and balance sheets caused us to be overly optimistic about our 2009 plans.

We took the appropriate steps to put ourselves in a good position. I will say I think we have got our company well aligned around the strategies we need to put in place and our teams are executing very well and it is a challenging period for our members which puts stress on our people. And it's obviously a challenging period for us, but I am very pleased with the performance of our teams, our people, in this difficult operating environment. We haven't planned for any sudden rebound or any spate of good news to be rolling across our screens any time soon.

Brandon Dobell - William Blair & Company

Great. Thanks Tom.


We go next to David Ridley-Lane with Bank of America.

David Ridley-Lane - Bank of America

Yes. Was there any pricing pressure in your large membership base during the quarter?

Joyce Liu

Well we have always had in place a fairly robust discounting program and that is very much volume-based, and it targets only the very top tier of our customers.

And beyond that, you know, we are in the membership business, so we have to definitely maintain pricing integrity across memberships, and the price point that we operate, we continue to find it more effecting by demonstrating our values solutions that we make in our business offering that really drives the commercial outcome.

David Ridley-Lane - Bank of America

And just to be clear that two and a half percent pricing is on new sales, right, that is not the pricing that you received on the average book of business, and your contract volume.

Joyce Liu

That is actually on a same-store basis, a same-program basis that includes---

David Ridley-Lane - Bank of America


Joyce Liu

Sale and (inaudible).

David Ridley-Lane - Bank of America

So that obviously can be net-out by product mix, because not all products are priced the exact same way, obviously middle market being—the one that target middle marketing executives come at a lower price when, as do some of the products that target executives lower on the org chart. So average pricing is a blend of two effects, one is the same-store sales price increases that we get, and then second the mix effects in the portfolio across time.

David Ridley-Lane - Bank of America

And would you be inclined if, you get push back from clients during this process of consolidating programs, you are taking away a program, can't you give me a break on the new program? Or are you trying to shift me to a program that is not as targeted to what I want, can I get a break? Is that sort of part of your (inaudible) to your thinking there?

Thomas Monahan III

I think the broader philosophical ideas that we have taken a very conservative approach to modeling the impacts of consolidation. I don't think we have put in incredibly optimistic projection against the benefits of that, so we are really going to be working hard to make sure that we have the right products at the right price points that really match to what people in these roles and functions do and what they need.

So we have got ten products slated for those reviews, accounting for just under, just under 10% of our revenues, so more broadly our goal is to get the right intellectual property, the right servicing strategy and the right product architecture in front of these people, and obviously price for what we come up with will be part of that but I don't think we've made aggressive assumptions on any feature of the migration path.

David Ridley-Lane - Bank of America

Okay, thank you very much.


Next we will go to Sam Hoffman with Lincoln Square

Sam Hoffman - Lincoln Square

Good morning, I just wanted to ask a few questions about cash. First thing is, how should we calculate excess cash on the balance sheet? It looks like you have about $75 million of cash and marketable securities, but how much of that is needed, and how much of that can you re-deploy?

Joyce Liu

In our 2009 fairly conservative projections, we explicitly expect operating cash flow continuing to be at a multiple net income, and the EBIDTA guidance between 22.5% and 24.5% gives you boundaries as to what we think the operating cash flow should be coming in at. So there, due to seasonalities from quarter to quarter of our business, the cash flow will not be evenly distributed, but we continue to think that we will come out of 2009 with a positive add to our balance sheet.

Sam Hoffman - Lincoln Square

Okay I guess I was asking about the balance sheet. What portion of the cash and marketable securities can you use to deploy or how much is needed in the business?

Joyce Liu

Our entire marketable securities is invested in bear liquid assets such as the treasury and municipal bonds. I think the point I am trying to make is that the operating cash flow is more than sufficient to support the on-going operations of the business as long as investment is needed, because our CapEx tend to run only about 2 to 3% of revenue, and beyond that there is really no—

Sam Hoffman - Lincoln Square

There is no other news, okay.

Next question, I just wanted to follow up on the buy back. Can you just update what the authorization is that is left, and then also whether you would consider borrowing to buy back stock in this environment, and if you decided to do so, whether you would have access to debt capacity.

Joyce Liu

We have about $22 million remaining authorization for share buyback. In terms of leverage in this environment, Tom may give us more color about that.

Thomas L. Monahan III

Sam, as I said, our board continues, at the board level, the great thing about this business is we generate more cash than we need to grow, even in this constrained environment, so you can imagine that at our board level that we continually revisit what the right way to play that excess capital is. I think philosophically, we put in place a dividend, we have authorization for a buyback, philosophically, the board has a very conservative posture especially in this environment, so you know I don't...

Beyond the plans we put in place and have articulated, I do not want to comment on that dialog, but I think you've seen us across when debt was very fashionable, avoided putting it in the balance sheet, and I think we are at the end of a highly conservative philosophy and approach to managing our balance sheet especially in these constrained environments.

Sam Hoffman - Lincoln Square

Okay ay, and my last question on compensation. Given the high percentage of compensation in stock versus in cash, do you plan to change that and do you plan to make any changes to the stock option plan in terms of strike price, of numbered shares that should be the total amount of the stock comp, or anything related to that.

Thomas L. Monahan III

Sam, one of the—as you know it's a talent business, so as we go through a difficult environment and a difficult equity environment, we certainly have our eye on things we need to to do to attract, obtain and engage the best talent necessary to create tons of value for our senior executives of the companies we serve. So managing our compensation profile has been a priority of ours for some time.

I think you have heard us talk about the fact that we were putting more variable pay systems in place across time over the past several years, and we worked that into the P&L such that as a complement to not only a competitive based structures and equity packages, we have bonus plans especially at senior and mid-levels that have gotten richer across time and give people the opportunity to earn more if they really ring the bell. So we have comp philosophy that says we have to balance equity comp with attractive bonus plans across time and we put that one into place and we have worked it into P&L across time.

Beyond that we are going to take a very careful look at how we use equity in this environment to make sure our best and most senior people are properly engaged, and motivated to create value across these difficult times. We have given the target that we expect the annual volition to come in around 3% across time and we haven't changed that broader target across time. There are some years it is a little under, some years is a little over, we have not yet finalized the plan for this year, but that remains our broad philosophical target, and we complement that with strong-bases, strong bonuses.

As you remember, we also don't distribute equity very deep in the organization, it's really only a top 5% plan, so there's your people who are running chunks of the business and are deeply invested in the growth of the company, these are people who properly value and can see the long-term value that they can create.

Sam Hoffman - Lincoln Square

Okay thank you.


Our final question will come from Vance Edelson - Morgan Stanley with Morgan Stanley.

Vance Edelson - Morgan Stanley

Thanks, just digging a little deeper on the competitive pay structure, can you comment on employee morale in general, which is obviously important given your goals for the new year. It is a tough selling environment, layoffs are planned, how would you say the morale is, what are you doing to maintain it, you did mention disproportionate rewards for top performers, I just wonder about the rest of the work force. Thanks.

Thomas L. Monahan III

We are focused on employee morale in this environment. In the end it is a difficult environment for our people. First and foremost they are facing member customers who are growing though a lot of turmoil on their end, so the conversations they are having day to day, week to week, either to grow the business or just support the people who are relying on us for help can be a dispiriting conversations, we are helping people through a real period of turmoil. So it is tough on our teams and we are having to make some adjustments in our business and that also is tough on teams.

Now that said I think a couple things give us confidence that we can keep our people engaged and therefore keep our connections with our critical buying centers from this market place, one is our people are seeing tremendous levels of impact from what they are doing.

We saw very high legalization of our products in the fourth quarter I think our teams pulled together some fantastic piece of intellectual property that supported members in making some very difficult decisions that I think that opportunity to make a difference is something that really compels people to work here.

I think secondly, we some of the things we've outlines particularly having changed in our relationship management model are very consistent with what our best people want to be doing and how they want to be engaging the customer, so this is something that has a lot of staff support.

And then finally we are paying attention to compensation, career opportunities more broadly, we still think this needs to be a place where top desk style talent comes, engages and grows across time, so we are paying a lot of attention to senior leadership pay, to communications to talking about the long-term growth potential of the company and making sure that we are staying out on the floors and engaged.

There are no two ways about it, it is a difficult environment, particularly because of what we do, we are engaged with pretty much every company that is making the front page of the Wall Street Journal asking us for help as we move toward that and we are pretty deep into some of the problems that they are bringing us. So we stayed very focused on this, we measured very carefully, and it's a key priority for us as we move through the year.

Vance Edelson - Morgan Stanley

Okay thanks. And are there are any regional strengths or weaknesses that you can speak to different trends at the margin, any regions that are deteriorating quickly or any that perhaps have bottomed out in your view?

Thomas Monahan III

Yeah, you know, I am not ready to call the term 'anywhere' globally. Some of the IMF data came out this morning so this continues to be a challenging operating environment and that our 2009 plan is anchored on a very sober look of what we think is going to happen and the position we are doing for the company is to move as aggressively as we can, do a platform as quickly as we can, with platforms that allows us to provide in a difficult operating environment, and grow sustainable and profitably as conditions return.

I don't have any particular hot spots that I can point to, I would say international markets as a whole were essentially flat for the year. This was a combination of Europe being down slightly, and our smaller Asia-Pacific operations being up slightly for the year. What you did see was our international results were robust for more of the year than North America.

Certainly the challenges hit here first, but eventually succumb to economic difficulties as the year unfolded.

Asia-Pac is an important story for us, because their strong result is due at least in part to our early roll out of segmented integrated account management model in that region. Their learnings and their success give me confidence that we are pushing our North American roll out in the right way.

So from a regional standpoint, Asia-Pac looked good, it is mostly Australia and New Zealand for us and that seems to be the result of both great leadership from the team on the ground, and some changes we made to the operating structure there that we are now rolling out more broadly.

Vance Edelson - Morgan Stanley

Great, thanks for the caller.


At this time I wold like to turn the call back to Mr. Monahan for any additional or closing comments.

Thomas L. Monahan III

Thanks everyone for calling in or logging in today, Joyce and I will be out on the road this month, we are down at Deutsch Bank next week, we're at Credit Suisse, and we are at Bear as the month unfolds. We look forward to keeping you up to date on our company's progress and our core priorities as we execute in this difficult operating environment.


And that concludes our conference today, thank you for your participation, have a good day.

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