The Corporate Executive Board Company (CEB)

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Corporate Executive Board Co (CEB)

Q4 2013 Results Earnings Conference Call

February 12, 2014 / 09:00 A. M. E.T.

Executives

Richard Lindahl – CFO

Tom Monahan – Chairman and CEO

Analysts

Shlomo Rosenbaum – Stifel Nicolaus

Gary Bisbee – RBC Capital Markets

David Ridley-Lane – BofA Merrill Lynch
Tim McHugh – William Blair & Company
Joseph Foresi – Janney Montgomery Scott

Tobey Summer – SunTrust Robinson Humphrey

Paul Ginocchio – Deutsche Bank

Presentation

Operator

Good morning, and welcome to see CEB's fourth-quarter 2013 conference call. Today's call is being recorded, and will be available for replay beginning today and through February 24th by dialing 719-457-0820. The replay pass code is 2718919. The replay will also be available beginning later today and through February 24th at the Company's website.

To the extent any non-GAAP financial measures discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the Company's website, and following the Investors link to yesterday's press release. You will also find a PDF of the 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 fourth-quarter 2013 earnings conference call. Please review the second page of these materials, which includes important information about any forward-looking information included in the presentation.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding CEB's expected quarterly and annual financial performance for fiscal 2014 or 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 forecast, 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, and in 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, future 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 Lindahl

Thanks, Scott. And good morning, everyone. I'm Rich Lindahl, CFO of CEB. Thank you for calling or logging into our fourth-quarter 2013 earnings report. On today's call, I will review our fourth-quarter financial results and discuss our 2014 guidance. Tom Monahan, our CEO, will then take over to share additional insight on our operations in the quarter and review our 2014 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. Overall, we are pleased with how 2014 unfolded, as we posted strong results for the year on solid outcomes across the business. Looking ahead, our momentum as we enter 2014 sets us up well for the coming year, and we expect continued progress against our multiyear organic growth and margin targets.

Let's turn to slide 4 for a summary recap of our results. Revenue was $223.4 million in the fourth quarter of 2013, an increase of 15.3% on a year-over-year basis. Adjusted EBITDA margin was 25.7% in the fourth quarter compared to 27% in the fourth quarter of 2012. Diluted earnings per share was $0.37, and non-GAAP diluted earnings per share increased 21.7% to $0.84 in the fourth quarter of 2013. For the full-year, 2013 revenue was $820.1 million, an increase of 31.7% over 2012. Adjusted EBITDA margin was 24.8% for the full year of 2013 compared to 27.2% in 2012. Diluted earnings per share was $0.94, and non-GAAP diluted earnings per share was $3.10 or 21.6% higher than in 2012.

Now let's turn to slide 5, and I'll review our key operating metrics for the quarter. CEB segment Contract Value at December 31, 2013 was $610.8 million, up 8.7% versus December 31, 2012, reflecting continued solid bookings growth over the past year. For the SHL Talent Measurement segment, adjusted revenue was $53.9 million in the fourth quarter, an increase of 15.1% compared to the prior year. On a constant currency basis, SHL Talent Measurement adjusted revenue growth was 16.1%. CEB segment wallet retention rate was 97% at December 31, 2013, compared to 102% in the prior year. SHL Talent Measurement segment wallet retention rate was 101% at December 31, 2013 versus 97% in the prior year.

These outcomes reflect both solid customer loyalty in each segment, as well as fluctuations from FX and other factors that we expect will continue within a normal range over time. Total CEB segment member institutions grew 7.2% to 6,530 in the fourth quarter, as we continue to add institutions in both our middle-market and large corporate memberships. CEB segment Contract Value per member institution was $93,500 at December 31, a 1.4% increase from December 31, 2012. This outcome reflects both healthy growth in the business and a slightly higher mix of middle-market members. To illustrate this effect, note that at December 31, CEB segment Contract Value per institution was $142,400 for large enterprise members and $28,100 in middle-market, representing annual increases of 3.9% and 5.9%, respectively.

Please turn to slide 6, and I will review key segment highlights for the quarter. CEB segment revenue was $170.6 million in the fourth quarter, a 9.6% increase from $155.7 million in the fourth quarter of 2012. Excluding PDRI from the CEB segment in both years, growth was 11.4% in the quarter. The SHL Talent Measurement segment contributed $52.8 million of revenue in the fourth quarter, net of a $1.1 million reduction to reflect the deferred revenue fair value adjustment. Revenue in both segments was higher than previously expected, as a number of our members and clients accelerated project milestones or otherwise increased premium service consumption in the fourth quarter.

Moving on to consolidated operating expenses, cost of services in the fourth quarter increased by $6.1 million versus the fourth quarter of 2012. This growth was essentially split evenly across the segments, and reflects delivery costs associated with higher services revenue and seasonal increases in meetings, conferences and travel. Member relations and marketing expense increased by $11.2 million in the fourth quarter versus the prior year. The biggest driver was additional sales headcount, including some forward hiring in the CEB segment and the cumulative impact of investments in SHL Talent Measurement sales capacity.

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