The Corporate Executive Board Company (CEB)

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Corporate Executive Board (CEB)

Q3 2013 Earnings Call

October 29, 2013 9:00 am ET

Executives

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

Thomas L. Monahan - Chairman and Chief Executive Officer

Analysts

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

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Paul Ginocchio - Deutsche Bank AG, Research Division

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

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

David Ridley-Lane - BofA Merrill Lynch, Research Division

Gary E. Bisbee - RBC Capital Markets, LLC, Research Division

Presentation

Operator

Good morning, and welcome to the CEB Third Quarter 2013 Conference Call. Today's call is being recorded and will be available for replay beginning today and through November 9 by dialing (719) 457-0820. The replay passcode is 8269577. The replay will also be available beginning later today through November 9 at the company's website. To extent -- to the extent any non-GAAP financial measures are discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to the GAAP by going to the company's website and following the Investors link to yesterday's news release.

You will also find a PDF of supporting materials that the company will use in its prepared remarks this morning by going to the Investors page and following the link to the first quarter 2013 earnings conference call. Please review the second page of these materials, which include important information about any forward-looking information included in the presentation.

This conference call may also contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding the CEB expected quarterly and annual financial performance for fiscal 2013 and beyond.

For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, discussions of forecasts, estimates, targets, plans, beliefs and 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 by the Corporate Executive Board's filings with the Securities and Exchange Commission and its fourth quarter news release.

Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, further events or otherwise.

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

Richard S. Lindahl

Thank you very much, and good morning, everyone. I'm Rich Lindahl, Chief Financial Officer of CEB. Thank you for calling or logging in to our third quarter 2013 earnings report.

On today's call, I will review our third quarter financial results, discuss our 2013 guidance and share some early thoughts on 2014. Tom Monahan, our Chief Executive Officer, will then take over to share additional insight on our operations in the quarter and review progress against our 2013 priorities. Then, we will take your questions.

Please turn to Slide 3 of our presentation, where we lay out the key takeaways from today's report. First, as evidenced by constant currency adjusted revenue growth rates, the bookings momentum in most parts of our business is solid, and our strategic thesis remains very much intact.

Second, revenue and margin through the third quarter were negatively impacted by persistent headwinds in our U.S. federal government business, as well as exchange rates. These factors also drive updates to our full year outlook.

Third, we remain confident in the future potential of our PDRI asset, but have recognized a goodwill impairment loss in light of the environment for the U.S. federal government.

Fourth, the PDRI impairment creates noise in our tax rate because the goodwill is not deductible for tax purposes, although this factor will be normalized for the full year on a non-GAAP basis.

And finally, our recent credit facility refinancing and the impact of discrete tax items, primarily the U.K. tax rate change enacted in the quarter, provide support to full year non-GAAP EPS.

Let's turn to Slide 4 for a summary recap of our results. Revenue was $201.7 million in the third quarter of 2013, an increase of 22.4% on a year-over-year basis. Adjusted EBITDA margin was 24.7% in the third quarter compared to 29.1% in the third quarter of 2012. Diluted loss per share was $0.16, and non-GAAP diluted earnings per share increased 10.3% to $0.86 for the third quarter of 2013.

Results this quarter include 2 noncash items that merit further explanation. First, we recorded a $22.6 million goodwill impairment loss on PDRI. As we indicated in our last 10-Q filing, we have been monitoring how U.S. federal government budgeting challenges might impact potential operating results for PDRI over the next several years. Upon completion of the federal fiscal year that ended on September 30, we updated our PDRI forecasts, determined that an impairment indicator existed and conducted the prescribed valuation analysis. This is a thorough process that is based on estimates of future financial performance and an appropriate discount rate, which, among other things, reflects a higher interest rate environment.

While we remain confident in the potential of our PDRI business, the resulting valuation did not exceed the reporting unit's carrying value, and we have written it down accordingly.

You'll also note when we file our 10-Q, that we've performed an impairment analysis on the SHL Talent Measurement Solutions reporting unit. The resulting valuation exceeded the carrying value of the segment, albeit by a modest amount, and we therefore determined that the carrying value of the reporting unit was not impaired at September 30.

As we have previously discussed and as you've seen in our constant currency adjusted revenue growth rates, we continue to gather momentum in the SHL Talent Measurement Solutions business and are pursuing an investment plan for the segment, which we expect to drive improved annual revenue growth in the years ahead.

While we remain committed to that strategy, it likely also leads to a near-term margin profile that, while improving, stays below the historical margin profile for this business. This performance expectation is consistent with our previous discussions. However, in a higher interest rate environment, it does increase the risk of a potential noncash impairment loss in the future for accounting purposes, even as the segment's fundamentals and operations continue to strengthen.

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