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CEB > SEC Filings for CEB > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for CORPORATE EXECUTIVE BOARD CO

Form 10-Q for CORPORATE EXECUTIVE BOARD CO


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The following discussion includes forward-looking statements that involve certain risks and uncertainties. For additional information regarding forward-looking statements and risk factors, see "Forward-looking statements" and Part II, Item IA. "Risk Factors."

Business Overview

We are the leading provider of member-based advisory services, talent measurement assessments, and management solutions. We provide essential information, actionable insights, analytical tools, and advisory support to focus the efforts of executives and their teams. Through our acquisition of SHL Group Holdings I and its subsidiaries ("SHL"), we are also the global leader in cloud-based talent measurement and management solutions.

As a result of our August 2, 2012 acquisition of SHL, a global leader in cloud-based talent measurement and management solutions headquartered in the UK, the breadth and geographic scope of our operations have increased significantly. The incurrence of substantial new indebtedness and the use of a significant amount of our cash on hand, our financial condition differs significantly from prior periods, and our operating results over the next year, beginning with the three months ended September 30, 2012, will likely not be comparable to our results for the prior year periods. Our business now includes two operating segments.

Our CEB segment, which includes our historical business operations prior to the acquisition of SHL, helps senior executives and their teams drive corporate performance by identifying and building on the proven best practices of the world's best companies. We primarily deliver our products and services to a global client base through annual, fixed-fee membership subscriptions. Billings attributable to memberships for our products and services initially are recorded as deferred revenue and then generally are recognized on a pro-rata basis over the membership contract term, which typically is 12 months. Generally, a member may request a refund of its membership fee during the membership term under our service guarantee. Refunds are provided from the date of the refund request on a pro-rata basis relative to the remaining term of the membership.


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We offer comprehensive data analysis, research, and advisory services that align to executive leadership roles and key recurring decisions. To fully support our members, our products and services focus on several key corporate functions across a wide range of industries. These corporate functions, which we consider our end markets, are the following:

Finance, Corporate Services, and Corporate Strategy;

Human Resources;

Information Technology;

Legal, Risk, and Compliance; and

Sales, Marketing, and Communications.

In addition to these corporate functions, we serve operational business leaders in the financial services industry and government agencies through insights, tools, and peer collaboration designed to drive effective executive decision making.

Our SHL segment, which includes the business operations of SHL that we acquired on August 2, 2012, is a global provider of cloud-based solutions for talent assessment and decision support, enabling client access to data, analytics and insights for assessing and managing employees and applicants. SHL primarily delivers assessments and consulting services. Assessment services are available on line through metered and unmetered arrangements. Consulting services are generally customization of assessment services delivered for a fixed fee.

Our operating costs and expenses consist of:

Cost of services, which represents the costs associated with the production and delivery of our services and products, consisting of compensation, including share-based compensation; internal and external product advisors; the organization and delivery of membership meetings, seminars, and other events; third-party consulting; ongoing product development costs; production of published materials, costs of developing and supporting our membership Web platform and digital delivery of services and products; and associated support services.

Member relations and marketing, which represents the costs of acquiring new customers and the costs of account management, consisting of compensation, including sales incentives and share-based compensation; travel and related expenses; recruiting and training of personnel; sales and marketing materials; and associated support services, as well as the costs of maintaining our customer relationship management software.

General and administrative, which represents the costs associated with the corporate and administrative functions, including human resources and recruiting, finance and accounting, legal, management information systems, facilities management, business development, integration costs and other. Costs include compensation, including share-based compensation; third-party consulting and compliance expenses; and associated support services.

Acquisition related costs, which represents costs incurred in connection with acquisitions, substantially all of which relate to the acquisition of the SHL.

Depreciation and amortization, consisting of amortization of intangible assets and depreciation of our property and equipment, including leasehold improvements, furniture, fixtures and equipment, capitalized software and website development costs.

Critical Accounting Policies

Our accounting policies require us to apply methodologies, estimates and judgments that have a significant impact on the results we report in our consolidated financial statements. In our 2011 Annual Report on Form 10-K, we discussed those material policies that we believe are critical and require the use of complex judgment in their application. The following supplements our critical accounting policies related to SHL.


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Revenue Recognition

SHL generates revenue from the sale of access to its cloud based tools through unit sale arrangements whereby units are redeemed for access or through subscription based arrangements, from the license of its tools, and from other related services. Revenue is recognized as follows:

Online product: Revenue from web-based unit sales is recognized on usage, irrespective of whether the units are billed in advance or arrears. Some clients purchase a subscription giving limited or unlimited access to use of the SHL's on-line offering. Revenue from subscription contracts is recognized on a straight line basis over the life of the contract for unlimited access and as units are delivered for limited access.

Licenses: License revenue is recognized on a straight line basis over the period of the license.

Consulting: Consulting revenue is recognized over the life of the project according to the stage of completion. In some cases, clients receive access to a defined number of consulting days when they purchase units or a subscription contract. In this situation, provided the consulting work can be unbundled from the on-line product sale, the consulting revenue is recognized when the consultant performs the work. Where it cannot be unbundled, it is recognized as part of the consumption of on-line units or the subscription contract.

Training: Training revenue is recognized upon delivery.

Outsourced assessment: Revenue from outsourced assessment projects is recognized over the life of the project.

Other products: Other products include sales of paper and pencil and PC based products. Revenue from these sales is recognized upon delivery.

Personnel Decisions Research Institutes, Inc. ("PDRI"), a 100% owned subsidiary of SHL, performs consulting services, typically on long term contracts. Revenue on fixed price projects is recognized according to the stage of completion of the contract, with reference to specific task delivery milestones built into the contracts. Revenue on time and materials contracts is recognized as PDRI staff work on the project.

Non-GAAP Financial Measures

This Quarterly Report on Form 10-Q includes include a discussion of Adjusted Revenue, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net Income, and Non-GAAP diluted earnings per share, which are non-GAAP financial measures provided as a complement to the results provided in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the third quarter of 2012, we changed our definition of these non-GAAP measures to provide enhanced insight into the financial performance of our business. Specifically, we are also now adjusting for the impact of the deferred revenue fair value adjustment, share-based compensation, and amortization of acquisition related intangibles when calculating these metrics.

We define Adjusted Revenue as revenue before impact of the deferred revenue fair value adjustment. We define Adjusted EBITDA as net income(loss) before loss from discontinued operations, net of provision for income taxes; interest expense, net; depreciation and amortization; provision for income taxes; the impact of the deferred revenue fair value adjustment; acquisition related costs; share-based compensation; costs associated with exit activities; restructuring costs; and gain on acquisition. Adjusted EBITDA margin refers to Adjusted EBITDA as a percentage of Adjusted Revenue. We define Adjusted Net Income as net income(loss) before loss from discontinued operations, net of provision for income taxes and excludes the after tax effects of the impact of the deferred revenue fair value adjustment, acquisition related costs, share-based compensation, amortization of acquisition related intangibles, costs associated with exit activities, restructuring costs, and gain on acquisition. We define Non-GAAP diluted earnings per share as diluted earnings per share before the per share effect of loss from discontinued operations, net of provision for income taxes and excludes the after tax per share effects of the impact of the deferred revenue fair value adjustment, acquisition related costs, share-based compensation, amortization of acquisition related intangibles, costs associated with exit activities, restructuring costs, and gain on acquisition.

We believe these Non-GAAP financial measures are relevant and useful supplemental information for evaluating our results of operations as compared from period to period and as compared to our competitors. We use these non-GAAP financial measures for internal budgeting and other managerial purposes, when publicly providing our business outlook and as a measurement for potential acquisitions.


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These non-GAAP measures may be considered in addition to results prepared in accordance with GAAP, but they should not be considered a substitute for, or superior to, GAAP results. We intend to continue to provide these non-GAAP financial measures as part of our future earnings discussions and, therefore, the inclusion of these non-GAAP financial measures will provide consistency in our financial reporting.

A reconciliation of each of the non-GAAP measures to the most directly comparable GAAP measure is provided below (in thousands):

Adjusted Revenue



                                        Three Months Ended September 30,             Nine Months Ended September 30,
                                           2012                   2011                 2012                   2011
Revenue                              $        164,749       $        121,607     $        428,934       $        352,712
Impact of the deferred revenue
fair value adjustment                           8,386                     -                 8,386                     -

Adjusted Revenue                     $        173,135       $        121,607     $        437,320       $        352,712

Adjusted EBITDA



                                         Three Months Ended September 30,               Nine Months Ended September 30,
                                           2012                    2011                   2012                    2011
Net (loss) income                     $          (456 )       $        14,006       $         29,869         $       35,704
Loss from discontinued operations,
net of provision for income taxes                  -                      552                     -                   1,870

(Loss) income from continuing
operations                                       (456 )                14,558                 29,869                 37,574
Interest expense, net                           4,423                    (146 )                4,288                   (609 )
Depreciation and amortization                  11,296                   3,789                 22,261                 12,226
Provision for income taxes                      5,759                   8,408                 26,746                 24,805
Impact of the deferred revenue
fair value adjustment                           8,386                      -                   8,386                     -
Acquisition related costs                      18,557                      -                  21,286                     -
Share-based compensation                        2,493                   1,982                  6,717                  6,144

Adjusted EBITDA                       $        50,458         $        28,591       $        119,553         $       80,140

Adjusted EBITDA Margin                           29.1 %                  23.5 %                 27.3 %                 22.7 %

Adjusted Net Income



                                        Three Months Ended September 30,             Nine Months Ended September 30,
                                          2012                    2011                 2012                  2011
Net (loss) income                    $          (456 )       $        14,006      $        29,869       $        35,704
Loss from discontinued
operations, net of provision for
income taxes                                      -                      552                   -                  1,870

(Loss) income from continuing
operations                                      (456 )                14,558               29,869                37,574
Impact of the deferred revenue
fair value adjustment (1)                      6,105                      -                 6,105                    -
Acquisition related costs (1)                 14,604                      -                16,227                    -
Share-based compensation (1)                   1,521                   1,189                4,064                 3,685
Amortization of acquisition
related intangibles (1)                        4,588                     466                6,326                 1,397

Adjusted net income                  $        26,362         $        16,213      $        62,591       $        42,656


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Non-GAAP Earnings per Diluted Share



                                                     Three Months  Ended           Nine Months  Ended
                                                        September 30,                 September 30,
                                                      2012            2011         2012           2011
(Loss) earnings per diluted share                  $    (0.01 )      $ 0.41      $    0.88       $  1.03
Loss from discontinued operations, net of
provision for income taxes                                 -           0.02             -           0.05

(Loss) earnings per diluted share from
continuing operations (2)                               (0.01 )        0.42           0.88          1.08
Impact of the deferred revenue fair value
adjustment (1)                                           0.18            -            0.18            -
Acquisition related costs (1)                            0.43            -            0.48            -
Share-based compensation (1)                             0.04          0.04           0.12          0.11
Amortization of acquisition related intangibles
(1)                                                      0.14          0.01           0.19          0.04

Non-GAAP earnings per diluted share                $     0.78        $ 0.47      $    1.85       $  1.23

(1) Adjustments are net of the estimated tax effect using statutory rates based on the relative amounts allocated to each jurisdiction in the applicable period.

(2) Amounts may not add due to rounding.

Contract Value and Other Operating Data



                                         Three Months Ended            Nine Months Ended
                                           September 30,                 September 30,
                                        2012           2011           2012           2011
Revenue                               $ 164,749      $ 121,607      $ 428,934      $ 352,712
Adjusted revenue                      $ 173,135      $ 121,607      $ 437,320      $ 352,712
Net (loss) income                     $    (456 )    $  14,006      $  29,869      $  35,704
Adjusted net income                   $  26,362      $  16,213      $  62,591      $  42,656
Diluted (loss) earnings per share     $   (0.01 )    $    0.41      $    0.88      $    1.03
Non-GAAP earnings per diluted share   $    0.78      $    0.47      $    1.85      $    1.23
Adjusted EBITDA                       $  50,458      $  28,591      $ 119,553      $  80,140
Adjusted EBITDA margin                     29.1 %         23.5 %         27.3 %         22.7 %




                                                            At September 30,
                                                          2012           2011
    Other Operating Statistics
    CEB segment Contract Value (in thousands) (1)       $ 522,397      $ 472,245
    CEB segment Member institutions                         5,944          5,504
    CEB segment Contract Value per member institution   $  87,884      $  85,804
    CEB segment Wallet retention rate (2)                      99 %          102 %
    SHL segment Wallet retention rate (3)                     101 %           -

(1) We define "CEB segment Contract Value," at the end of the quarter, as the aggregate annualized revenue attributed to all agreements in effect on such date, without regard to the remaining duration of any such agreement.

(2) We define "CEB segment Wallet retention rate," at the end of the quarter, as the total current year CEB segment Contract Value from prior year members as a percentage of the total prior year CEB segment Contract Value.

(3) We define "SHL segment Wallet retention rate," at the end of the quarter on a constant currency basis, as the last current 12 months of total SHL segment Adjusted Revenue from prior year customers as a percentage of the prior 12 months of total SHL segment Adjusted Revenue. The SHL segment Wallet retention rate does not include the impact of Personnel Decisions Research Institutes, Inc., a 100% owned subsidiary of SHL, which performs services primarily for various agencies of the US Government.

In the nine months ended September 30, 2012, our teams established a solid foundation and delivered solid returns. The 10.6% increase in CEB segment Contract Value was the result of double-digit bookings growth as continued strong performance by our North America and Asia Pacific teams offset reduced growth in the EMEA region. The acquisitions of Valtera and Baumgartner accounted for approximately $6.8 million and $0.7 million of the increase in Contract Value, respectively. Contract Value per member institution increased 2.4% at September 30, 2012 from September 30, 2011.

The growth in revenue of $43.1 million and $76.2 million in the three and nine months ended September 30, 2012, respectively, includes the impact of the SHL, Baumgartner and Valtera acquisitions. Total costs and expenses were $156.1 million in the three months ended September 30, 2012, an increase of $60.0 million from the three months ended September 30, 2011. Higher operating costs are attributed to the acquisitions of SHL, Baumgartner and Valtera and additional investments in new products and market extensions to further enhance organic growth. Total costs and expenses were $369.6 million in the nine months ended September 30, 2012, an increase of $80.0 million from the nine months ended September 30, 2011. Costs and expenses also include $18.6 million and $21.3 million in the three and nine months ended September 30, 2012, primarily relating to our acquisition of SHL


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Net loss and loss from continuing operations was $(0.5) million, or $(0.01) per diluted share, in the three months ended September 30, 2012 compared to net income of $14.0 million, or $0.41 per diluted share and income from continuing operations of $14.6 million, or $0.42 per diluted share, in the three months ended September 30, 2011. Adjusted EBITDA increased $21.9 million, or 76.5%, and $39.4 million, or 49.2%, in the three and nine months ended September 30, 2012, compared to the same periods of 2011. The increase in Adjusted EBITDA is the result of revenue growth that has outpaced the growth in operating expenses. Adjusted Net Income increased $10.1 million, or 62.6%, and $19.9 million, or 46.7%, in the three and nine months ended September 30, 2012, compared to the same periods of 2011. The increase in Adjusted Net Income is the result of strong revenue growth that has outpaced the growth in operating expenses and is offset by increases in depreciation and the effective tax rate for the periods.

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