On Tuesday, February 11, Corporate Executive Board reported what we consider mixed fourth-quarter results. Adjusted EPS of $0.84 were $0.01 higher than our estimate but $0.01 below the consensus. We note that adjusted EPS were $0.845 (we actually calculate $0.846), so it depends on which way you round the results if the company even technically missed the consensus.
The company’s tax rate was also higher than expected for the quarter. Revenue was better than expected in both SHL and the legacy business, and profit margins in the legacy business were better than expected, but profit margins were lower than expected in the SHL segment. Overall, adjusted EBITDA were about $1 million higher than we expected. Management also announced a 17% increase in its dividend (now a 1.6% dividend yield) and the acquisition of Talent Neuron, a SaaS-based provider of workforce data and analytics.
On the positive side, we are quite encouraged by the revenue growth delivered by SHL. Pro forma revenue for SHL grew 15% year-over-year, suggesting that more favorable demand in Europe and the company’s salesforce expansion are beginning to have an effect. We see substantial room for revenue growth and particularly margin improvement if SHL’s salesforce investment in 2013 starts to bear fruit, so we are encouraged by these results. On the negative side, in what is the seasonally most important period for bookings activity, CEB’s legacy business generated slightly weaker-than-expected contract value (CV) growth. CV growth of 9% was below our 10% projection and is the first single-digit growth in CV in late 2010.
Deferred revenue growth was a little better at 10%, but the bookings growth for the quarter still appears to be a little weaker than we expected. Client growth was strong, but the wallet retention rate (which is calculated based on CV growth) was weaker than expected. We suspect that management will attribute much of the weakness to foreignexchange trends, headwinds in the government sector, and faster-than-normal conversion of new contracts into revenue (which perhaps is partly why revenue was better than expected in the fourth quarter). Therefore, we do not believe that management’s view of the underlying growth for the legacy business will change much. The CV growth rate is a little disappointing nonetheless.
In addition to the mixed trends, there are a few moving pieces that cause some noise in management’s guidance. First, guidance assumes that the EBITDA margin will be up 20-70 basis points in 2014. This guidance is roughly in line with management’s commentary on last quarter’s conference call that it expects margin expansion in 2014 to be in line with its long-term target for 25 basis points of annual improvement.
Foreign-exchange losses were a drag of 40 basis points on the company’s EBITDA margin in 2013, so the absence of those expenses alone should drive the company toward the middle of the range. However, we believe there is probably a drag on EBITDA margins from the acquisition of Talent Neuron (we expect minimal revenue from the acquisition, but probably 20 basis points or so of a margin drag) and foreign-exchange rates that we had not counted on.
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