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Corporate Executive Board Co. (CEB)
2013 Investor Day Conference
June 14, 2013 9:00 am ET
Andrew Judt - Finance Director, EMEA
Thomas L. Monahan - Chairman and Chief Executive Officer
Stephen J. Meyer - Chief Commercial Officer and General Manager
Richard S. Lindahl - Chief Financial Officer and Principal Accounting Officer
Robert Morgan - Chief Marketing Officer
Paul Levett - Chief Product Officer
Melody L. Jones - Chief Administrative Officer
Gary E. Bisbee - Barclays Capital, Research Division
Timothy McHugh - William Blair & Company L.L.C., Research Division
David Ridley-Lane - BofA Merrill Lynch, Research Division
Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division
Steven Shui - Stifel, Nicolaus & Co., Inc., Research Division
Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division
Previous Statements by CEB
» Corporate Executive Board Management Discusses Q1 2013 Results - Earnings Call Transcript
» Corporate Executive Board Management Discusses Q4 2012 Results - Earnings Call Transcript
» Corporate Executive Board Management Discusses Q3 2012 Results - Earnings Call Transcript
Before I do so, I'll run through the agenda for the day. But first, I need to take care of one piece of business, reading through the Safe Harbor disclaimer.
To the extent that any non-GAAP financial measures are discussed in today's representation, you'll find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP, in the PDF of the supporting materials that the company will use in its prepared remarks this morning. That document can be found by going to the company's website, clicking the link to the Investors page and following the link to 2013 Investor Day. Please review the second page of these materials, which includes important information about any forward-looking information included in the presentation. This presentation webcast may also contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements among others, regarding CEB's expected quarterly and annual performance for fiscal 2013 and beyond.
For this purpose, any statements made during this presentation webcast that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, discussions of forecasts, estimates, targets, plans, beliefs, expectations and the like are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by important factors among others, set forth in CEB's filings with the Securities and Exchange Commission. Consequently, actual operations and results may differ materially from results discussed in the forward-looking statements. The company undertakes no obligations to update any forward-looking statements, whether as a result of new information, future events or otherwise.
So let me run through now the agenda for the day. Firstly, Tom Monahan, our Chairman and CEO, will run through some opening remarks and provide an overview of the business. And then Kurt Reisenberg, General Manager of the Finance, Strategy and Operations Practice and Legal and Compliance Practice, will talk about the growth potential of CEB markets. Warren Thune, General Manager Human Resources Practice, Information Technology Practice and North American Government Practice, will then talk through how we deliver business value through the provision of high-value content. Steve Meyer, Group President and Chief Commercial Officer, will represent how CEB is set up to drive predictable growth, talking about our channel structure and branding. Then Rich Lindahl, our Chief Financial Officer, will run through CEB's attractive financial model and why CEB is a compelling investment opportunity. After Rich's part, there will be a well-deserved break, around 20 minutes. And after the break, Robert Morgan, General Manager and President of our SHL Business, and Paul Levett, the Chief Product Officer of our SHL Business, will talk about talent management and measurement support. Haniel Lynn, General Manager Sales Marketing and Communications Practice and Financial Services Practice, will then take the stage, talk through new product development and the activation of assets to deepen and support key decisions. Melody Jones, our Chief Administrative Officer, will then take the mic to discuss scaling talent and technology to enable our work and to enable the growth of our business. We will then move on to Q&A, and as we have a pretty tight schedule today, I specifically ask please hold off questions until that session. Thank you so much for your cooperation in that regard.
So without further ado, I'd like to introduce Tom Monahan, our Chairman and CEO. Tom?
Thomas L. Monahan
Just check, did everyone in the room get a binder? Put your hand up if not, we'll run one over to you. Good morning to those live here in Waterview and to those logging in around the world. I think you know pretty much, everybody, I'm Tom Monahan, Chairman and CEO of the Corporate Executive Board, CEB. Along with my colleagues, I'm delighted to welcome you to our Annual Investor Day. We look forward to sharing our priorities and updating you on our progress.
Let me start were we start most conversations internally, which is with our mission. We do describe ourselves very comfortably as a mission-driven company. CEB exists to unlock the potential of organizations and leaders by advancing the science and practice of management. There's a lot of code in here that matters a lot to us. But let me call out one particular point, we're about the existing potential of the people and organizations we support. Our goal is not to take work away from the companies, but to arm them with the insights and tools to allow them to perform to their potential. This focus, which changes the client economics of traditional professional services firms, has powered not only 20 years of industry-leading growth but allowed us to thrive in some very complex operating environments.
On this page, you can see just how well we performed across our run as a public company. Growing revenues and profits nearly tenfold in 14 years and generating TSR across the period of 523%. Even with this track record of performance, we believe that our best years are still ahead of us, you can see why, actually, on this page, where big trends that our businesses built to take advantage of. If you're in the business of helping people wrestle with complex problems that make it difficult for them to set direction and execute, this is a great time to be alive. Four of these vectors really stand out. First, the sheer size and complexity of even mid-market enterprises and certainly the world's largest companies continues to expand. One data point not on the slide, about 20 years ago, the smallest member of the Fortune 500 had just under $900 million annualized revenue. Today, the smallest member of the Fortune 500 has about $5 billion in annualized revenue. Even adjusting for modest inflation, that gives you some sense of the scale, reach and complexity that your average leadership team has to manage to execute its mission.
Second, the very nature of work itself is changing. Going down the page, most jobs are now knowledge jobs. This changes the calculus around selecting, measuring, deploying and motivating employees to get your company's work done.
Third, these knowledge workers now confront an overabundance of information. In simple terms, the amount of information coming at the average corporate employee doubles every 2.5 years, and yet knowledge where they're expected to be able to make sound decisions to do their jobs.
And finally, social and mobile technology connect people and organizations in new ways that have both huge promise but also a huge potential risk, they radically amplify either the benefit or cost of any decision you make.
Our ability to help leading enterprises manage this challenge not only give us the ability to go out and drive productivity on a global scale, but to create tremendous returns and outcomes for our people and our owners.
It's worth noting that while the foundational opportunity in front of our business has always been very attractive. Our business itself has not always been perfectly positioned to take advantage of some of these trends. To place our recent success and future strategy in full context, let me spend a minute just talking about the steps we've taken to position the business for the road ahead.
The recession of 2008, 2009 was obviously difficult for businesses of all stripes, and CEB was no exception. Our largest end market, financial services, was under severe distress, and corporate budgets everywhere were shrinking, sometimes very quickly. As a leadership team, we were determined not to explain away any difficulties in the business as a mere derivative of economic outcomes. We took a hard look at the business, looking for vulnerabilities and/or opportunities, which the challenging environment had laid bare. You'll see a quick census of what we saw on this page. To the left, our strength was self-evident, an unmatched installed base of large corporate CXOs, rich data, IP and strong content in target domains and a very strong deep bench of research and sales talent. To the right you'll see some weaknesses that were becoming evident to us. We didn't support core workflows as reliably as we might have liked. Our ability to launch additional classic subscription memberships was quite limited. And our brand messages were, at best, mixed and, at worst, sometimes conflicting.
Armed with this clarity, we took a series of steps not just to weather the downturn but to foundationally strengthen the business. You'll see these on the next page. It began with assembling the tremendous team we've got over here on the left side of the room. Gathering a leadership team that was committed to and capable of building a great business. Some folks came from within the business, some from the outside. Together, we then committed to 4 important objectives, going on the right-hand side of the page. The first and most painful, I remember the meeting where Haniel, Melody and I decided that the really important thing to do was truncate the product set. Warren missed the meeting so he got assigned the task of sunsetting about 20% of our product portfolio, allowing the revenue to run off over the next 5 quarters. It's not an easy thing to do, certainly, in a public company context, but it freed our team to focus people, market capacity and product development energy on our strongest areas, deepening our commitment and reaching our workflow support to our strongest potential opportunities.
To support this focus, we restructured our channels globally, organizing our people against great service and to understanding deeply the work going on in our core buying centers. Our goal, not surprisingly, was first to help members realize great outcomes from our work and then to use these strengthened relationships as a platform for future growth.
Moving down the page. We buttressed this channel restructuring with additional investment in technology and advisory layers in our business, creating more than 300 new tools that linked our insight to member work and incorporating senior advisers to activate our engagement in key member decisions.
And finally, with all that in place, we resumed both product development and selective M&A to create richer, more powerful bundles to support key member executives. We'll talk more about what we got built across the course of the day. But that inflection of the business had its grounding in the realistic assessment of what we needed to be to succeed.
Key to this new strategy was an intensive focus on 5 core domains, corporate functions that service our key buying centers and key decision centers for the larger organizations, you see them listed here on the page, to the left, on Page 10: HR, finance, legal regulatory and compliance, marketing and sales and IT. We call these the corporate core. We believe that this focus creates a platform for us to create unusual value, first for our customers and then for you, our owners. We talked a lot about -- we've talked, over the years, a lot about our commitment to these buying centers, "Why can't we talk as much about why we see the world through this lens? Why do we kind of tilt the world on its side and not see it through an industry lens, which are functional lens?" It's a pretty distinctive strategy in a world where most information and technology and business services companies see the world through an industry lens first. Let me talk a little bit more about why we see such an opportunity in a functional view of the world, to the right-hand side of the page. First and maybe most obviously, these roles are present in every leading enterprise globally, which allowed us to build scale businesses, rich data sets and powerful resources.
Second, most of the challenges that functional leaders face are shared broadly across industry. I mean, whether we're talking about succession management for heads of HR, information security for CIOs, law firm costs for general counsels. This commonality of challenges creates rich fodder for performance improvement and innovation. People can look across at someone else in their job and take ideas, data and tools and apply them immediately.
Third, really important, functions are where talent lives. CEOs like myself talk all the time about lying awake at night worried about talent. We don't worry about people, generically. We worry about specific skill gaps that are located in our core corporate functions. It might be types of engineering talent we care about. It might be sales people in certain markets or in certain capability areas. It might be patent attorneys. It might be marketing skills in certain market segments. We worry specifically about talent that has specific professional skills and is located and lives its career inside these core functional areas.
Fourth, functions are where the buck stops in terms of big-dollar decisions. Think about the CapEx budget coming from the CIO or heads of HR and their massive recruiting budgets they control.
And the last point is actually really important, most workflows and hence most of the most important technology platforms are organized by function, not by industry. Think about ERP systems for finance, CRM for sales and marketing, performance management systems in applicant tracking systems for HR, et cetera. What this means is that the most widely used data elements and the most common workflows are more common by function than by industry. That creates a huge opportunity for us because we're able to norm data and support common workflows through this functional and technology-based view of the world. The good news for us is this has become even more pronounced, as more and more large companies adopt cloud-based solutions and hence operate with more common operating models, creating more common data elements.
Let me just double-click for 1 second on the big-dollar decisions portion of the conversation. Just 2 examples of how our work helps people make and execute important decisions. To the top of the page, the cost of a bad hire. Your average Fortune 500 company will hire, give or take, 3,000 people this year, and that's in the professional roles alone. The difference between doing this well and poorly is worth almost $5 million, if you triple the data at the top of the page, which is organized by 1,000-employee chunks. And this doesn't include the cost of diffusion, chaos and cultural degradation, if you make that decision wrong repeatedly.
Certainly, the cost of a failed leadership transition, which occurs every 3 or so years at the CXO level, is huge. A successful leadership transition is worth more than 3% of revenue, about half of them fail. These decisions are just a few of the opportunities we target, big-dollar decisions made regularly by the people we support, where getting it right matters hugely.
Flip on Page 12, you can see what happened in the subsequent 3 years since we got through the bulk of the change effort we drove. To the left, CEB segment contract value, which is a good proxy for organic growth, growing at the high end of our 8% to 13% target range. To the middle of the page, revenue run rate, augmented by some selective acquisitions, growing even faster at about 25% CAGR. And even with some onetime step up investment in SHL segment flowing through, our run rate EBITDA growing at about 21%. We have a lot of work to do, but we're encouraged by the early returns from our repositioning of the business.
Jump to the next page, Page 13. About a year ago, a long-time investor, a really long-time investor, I think, has been in the stock since the IPO and has maintained their stake since then, interrupted our conversation to remark, "You guys are going to be the only company that went public in 1999 that still have some of the same slides from the roadshow." And then he remarked, "I can't decide whether this makes you brilliant or lazy." Hopefully, a little of both. It is one of the slide -- this is one of the slides that hasn't changed all that much over the years. 476 companies went public in 1999, only about 20% actually bothered to include anything about profit in their roadshow. Guess how that worked out for those of us who watched that unfold across the next few years. We're the only ones not talking eyeballs in 1999 and it turns out that was a good idea. We talked pretty clearly about doing 4 things to build the business: one, retaining and growing existing customers. If you think about this, this is a business predominated by subscriptions, recurring revenue and an unmatched, large-company, large-cap customer base. Job 1 and probably jobs 2, 3, 4 and 5 is to retain and grow revenue from our existing customers. Our average customer, across all our market, pays us between $75,000 and $95,000. Our largest 200 customers pay us an average of $800,000, a number of which has been growing rapidly across the past several years. And our largest customers pay us north of $2 million annually. Not a single customer, globally, buys half of what they could from us today. Kurt will take you into the math in more detail here, but job 1, every day, at CEB is ensuring that every member realizes immediate tangible value from their relationship with us. Nothing else in the business that's interesting to us happens until this does. This paves the way for growth across all our product line and creates a great economic platform for good returns.
This is important work and, thankfully, a good news story. Through Q1, you saw contract value per member company increase at a 6% annualized rate, always something we can prove, but we're pleased with the impact we're having on clients and we're pleased with the opportunity that creates for us.
Job 2, to the middle of the page, is adding great new customers and great new logos to the member and client rosters. We do this through our growing middle market team, targeted international operations and an increased marketing investment. Over the last few years, we've consistently added several hundred new logos a year, each one creating both immediate revenue and becoming a foundation for future cross-sell opportunity.