CEB : Reports Fourth Quarter Results and Provides 2016 Guidance

CEB Inc. (“CEB” or the “Company”) (NYSE: CEB) today announced financial results for the fourth quarter and year ended December 31, 2015. Revenue increased 1.2% to $242.9 million in the fourth quarter of 2015 from $240.1 million in the fourth quarter of 2014. Net income in the fourth quarter of 2015 was $18.3 million, or $0.55 per diluted share, compared to net income of $28.6 million, or $0.84 per diluted share, in the same period of 2014. Included in net income for the fourth quarter of 2015 was an additional $8.0 million of accelerated amortization expense associated with a change in the estimated useful life of the SHL trade name, $5.1 million in restructuring costs, and a $0.9 million pre-tax net non-operating foreign currency loss. Included in net income for the fourth quarter of 2014 was a $5.5 million pre-tax net non-operating foreign currency gain and $1.8 million in restructuring costs. Adjusted net income was $36.6 million and Non-GAAP diluted earnings per share were $1.10 in the fourth quarter of 2015 compared to $37.8 million and $1.11 in the same period of 2014, respectively.

In 2015, revenue increased 2.1% to $928.4 million from $909.0 million in 2014. Net income in 2015 was $92.5 million, or $2.75 per diluted share, compared to $51.2 million, or $1.50 per diluted share, in the same period of 2014. Included in net income in 2015 was an additional $8.0 million of accelerated amortization expense associated with a change in the estimated useful life of the SHL trade name, $6.4 million in restructuring costs, $4.8 million of pre-tax debt extinguishment costs associated with the June 2015 refinancing of the Company’s senior secured credit facility and issuance of senior notes, and a $5.6 million pre-tax net non-operating foreign currency gain. Included in net income in 2014 was a $39.7 million pre-tax impairment loss associated with PDRI, a $6.6 million pre-tax gain related to a cost method investment, an $8.6 million pre-tax net non-operating foreign currency gain, and $1.8 million in restructuring costs. Adjusted net income was $126.9 million and Non-GAAP diluted earnings per share were $3.77 in 2015 compared to $113.1 million and $3.32 in 2014, respectively.

“We continue to position the business for attractive top and bottom-line growth, even though gaps in our new sales pipeline ultimately caused full-year 2015 bookings to fall beneath our target range” said Tom Monahan, CEB Chairman and CEO. “As a result of our work in 2015, we enter 2016 with a world-class team, a massive, loyal installed base of the world’s best companies, and a broad array of insights, tools, and data to help clients manage talent, customers, and operations.

“Even against the backdrop of a suddenly volatile economic environment, the CEB formula for value creation remains intact – EPS growth through recurring revenue and margin expansion, combined with return of capital to shareholders. By staying laser focused on solving the range of high-dollar problems on clients’ desks, we’ll position the business to deliver on this formula in 2016 and for years to come.”

OUTLOOK FOR 2016

The Company’s 2016 annual guidance is as follows: Revenue of $945 to $975 million, Adjusted revenue of $947 to $977 million, capital expenditures of $33 to $35 million, Non-GAAP diluted earnings per share of $3.80 to $4.10, Adjusted EBITDA margin of at least 26%, and depreciation and amortization expense of $99 to $101 million. Adjusted revenue refers to revenue before the impact of the reduction of acquisition-related deferred revenue to fair value recognized in the post-acquisition period (“deferred revenue fair value adjustment”). The estimated reduction in 2016 revenue to reflect the impact of the deferred revenue fair value adjustment is approximately $2 million. In 2016, we expect to incur costs associated with our business transformation initiative that will consolidate and standardize our sales force automation and financial systems and we will exclude these costs from our non-GAAP results of operations. This guidance is based on the following foreign currency exchange rates: 1.48 USD to the British Pound, 1.09 USD to the Euro, and 0.73 USD to the Australian Dollar.

For the first quarter of 2016, the Company expects revenue of at least $227 million, Adjusted EBITDA margin of at least 23%, and Non-GAAP diluted earnings per share of at least $0.75.

SEGMENT HIGHLIGHTS

The CEB segment includes comprehensive data analysis, research, and advisory services that align to executive leadership roles and key recurring decisions and enable members to focus efforts to address emerging and recurring business challenges efficiently and effectively.

To unify the CEB brand across the globe, the SHL Talent Measurement segment is now the CEB Talent Assessment segment. The CEB Talent Assessment segment includes the SHL products and services of cloud-based solutions for talent assessment and talent development, and talent strategy and analytics, as well as professional services that support those solutions enabling client access to data, analytics, and insights for assessing and managing employees and applicants.

CEB Segment

Revenue increased in the fourth quarter of 2015 to $192.7 million from $186.4 million in the same period of 2014, an increase of 3.4%. Adjusted revenue increased 3.5% (5.1% increase on a constant currency basis) in the fourth quarter of 2015 to $193.6 million from $187.0 million in the same period of 2014. Adjusted EBITDA in the fourth quarter of 2015 was $55.5 million compared to $60.0 million in the same period of 2014, a decrease of 7.5% (6.8% decrease on a constant currency basis). Adjusted EBITDA margin in the fourth quarter of 2015 was 28.7% of segment Adjusted revenue compared to 32.1% in the fourth quarter of 2014.

Revenue increased in 2015 to $731.8 million from $701.6 million in 2014, an increase of 4.3%. Adjusted revenue increased 4.0% (5.8% increase on a constant currency basis) in 2015 to $733.0 million from $705.1 million in 2014. Adjusted EBITDA in 2015 was $203.1 million compared to $194.6 million in 2014, an increase of 4.4% (5.2% increase on a constant currency basis). Adjusted EBITDA margin in 2015 was 27.7% of segment Adjusted revenue compared to 27.6% in 2014.

Contract Value at December 31, 2015 increased 3.6% (4.9% increase on a constant currency basis) to $708.3 million compared to $683.5 million at December 31, 2014. Wallet retention rate at December 31, 2015 was 92% (93% on a constant currency basis) compared to 99% at December 31, 2014. Contract Value per member institution was $96 thousand ($95 thousand on a constant currency basis) at December 31, 2015 compared to $97 thousand at December 31, 2014.

CEB Talent Assessment Segment

Revenue decreased in the fourth quarter of 2015 to $50.2 million from $53.7 million in the same period of 2014, a decrease of 6.6%. Adjusted revenue decreased 5.3% (2.6% increase on a constant currency basis) in the fourth quarter of 2015 to $51.2 million from $54.1 million in the same period of 2014. Adjusted EBITDA in the fourth quarter of 2015 was $11.7 million compared to $10.6 million in the same period of 2014, an increase of 10.2% (26.4% increase on a constant currency basis). Adjusted EBITDA margin in the fourth quarter of 2015 was 22.8% of segment Adjusted revenue compared to 19.6% in the fourth quarter of 2014.

Revenue decreased in 2015 to $196.6 million from $207.4 million in 2014, a decrease of 5.2%. Adjusted revenue decreased 5.2% (4.0% increase on a constant currency basis) in 2015 to $199.0 million from $209.9 million in 2014. Adjusted EBITDA in 2015 was $40.0 million compared to $34.5 million in 2014, an increase of 15.8% (34.3% increase on a constant currency basis). Adjusted EBITDA margin in 2015 was 20.1% of segment Adjusted revenue compared to 16.4% in 2014.

Contract Value at December 31, 2015 was $109.8 million. This is a new operating statistic the Company is providing for this segment. The Company defines Contract Value, at the end of the quarter, as the aggregate annualized revenue in effect on such date, without regard to the remaining duration of any such agreement, attributed to all subscription agreements for online product access plus the aggregate annual revenue attributed to all advanced purchases of online testing units. Wallet retention rate at December 31, 2015 was 98% compared to 103% at December 31, 2014.

QUARTERLY DIVIDEND

The Company announces that its Board of Directors has approved a cash dividend on its common stock for the first quarter of 2016 of $0.4125 per share, an increase of 10.0% compared to the dividend paid in the fourth quarter of 2015. The dividend is payable on March 31, 2016 to stockholders of record on March 15, 2016. The Company will fund its dividend payments with cash on hand and cash generated from operations.

SHARE REPURCHASE

In the fourth quarter of 2015, the Company repurchased approximately 225,000 shares of its common stock at a total cost of $15.6 million. These purchases were made pursuant to the Company’s $100 million stock repurchase program approved by the Company’s Board of Directors on February 2, 2015, which is authorized through December 31, 2016. The Company had $39.6 million of repurchase authorization unused and remaining under this program at December 31, 2015.

On February 1, 2016, the Company’s Board of Directors approved a new $150 million stock repurchase program, which is authorized through December 31, 2017. Repurchases may be made through open market purchases or privately negotiated transactions. The timing of repurchases and the exact number of shares of common stock to be repurchased will be determined by CEB’s management, at its discretion, and will depend upon market conditions and other factors. The program will be in addition to the program authorized in February 2015 and will be funded using the Company’s cash on hand and cash generated from operations.

NON-GAAP FINANCIAL MEASURES

This press release and the accompanying tables, as well as earnings discussions, include a discussion of Adjusted revenue, Adjusted effective tax rate, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted net income, Non-GAAP diluted earnings per share, and constant currency financial information, all of 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”). A reconciliation of these non-GAAP measures to the most directly comparable GAAP measure for the three months and years ended December 31, 2015 and 2014 is included in the accompanying tables.

We believe that 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, including comparison against our competitors, when publicly providing our business outlook, and as a measurement for potential acquisitions. These non-GAAP financial measures are not defined in the same manner by all companies and therefore may not be comparable to other similarly titled measures used by other companies.

Our non-GAAP financial measures reflect adjustments based on the following items, as well as the related income tax effects:

• Certain business combination accounting entries and expenses related to acquisitions: We have adjusted for the impact of the deferred revenue fair value adjustment, amortization of acquisition related intangibles, and acquisition related costs. We incurred transaction and certain other operating expenses in connection with our acquisitions, which we generally would not have otherwise incurred in the periods presented as a part of our continuing operations. We believe that excluding these acquisition related items from our non-GAAP financial measures provides useful supplemental information to our investors and is important in illustrating what our core operating results would have been had we not incurred these acquisition related items since the nature, size, and number of acquisitions can vary from period to period.
• Net non-operating foreign currency gain (loss): Beginning in the first quarter of 2015, we adjusted for the impact of the net non-operating foreign currency gain (loss) included in other (expense) income. These items primarily result from the remeasurement of foreign currency cash balances held by CEB US and subsidiaries with the USD as their functional currency, USD cash balances held by subsidiaries with a functional currency other than the USD, certain intercompany notes, and the balance sheets of non-US subsidiaries whose functional currency is the USD. We believe this information is useful to investors to facilitate comparison of operating results and better identify trends in our businesses.
• Debt extinguishment costs, equity method investment loss, restructuring costs, impairment loss, and gain on cost method investment: We believe that excluding these items from our non-GAAP financial measures provides useful supplemental information to our investors and is important in illustrating what our core operating results would have been had we not incurred these items. We exclude these items because management does not believe they correlate to the ongoing operating results of the business.
• Share-based compensation: Although share-based compensation is a key incentive offered to our employees, we evaluate our operating results excluding such expense. Accordingly, we exclude share-based compensation from our non-GAAP financial measures because we believe it provides valuable supplemental information that helps investors have a more complete understanding of our operating results. In addition, we believe the exclusion of this expense facilitates the ability of our investors to compare our operating results with those of other peer companies, many of which also exclude such expense in determining their non-GAAP measures, given varying valuation methodologies, subjective assumptions, and the variety and amount of award types that may be utilized.
• Adjusted effective tax rate: Beginning in the third quarter of 2015, we adjusted for the impact of certain discrete items included in the effective tax rate that relate to prior year periods such as government provided tax incentives that were claimed in the current year, the change in our election to claim foreign tax credits that were previously taken as deductions, changes in tax planning strategies and changes in valuation allowances in certain jurisdictions. We exclude these items because management believes it will facilitate the comparison of the annual effective rate over time. The Adjusted effective tax rate is calculated by dividing the adjusted provision for income taxes, that excludes discrete items and the tax effects of the other non-GAAP adjustments (using statutory rates), by the adjusted income before the provision for income taxes.

We are a global company that reports financial information in USD. Foreign currency exchange rate fluctuations affect the amounts reported from translating foreign revenues and expenses into USD. These rate fluctuations can have a significant effect on our reported operating results. As a supplement to our reported operating results, we present constant currency financial information. We use constant currency financial information to provide a framework to assess how our business performed excluding the effects of changes in foreign currency translation rates. Management believes this information is useful to investors to facilitate comparison of operating results and better identify trends in our businesses. To calculate financial information on a constant currency basis, financial information in the current period for amounts recorded in currencies other than the USD is translated into USD at the average exchange rates in effect during the comparable period of the prior year (rather than the actual exchange rates in effect during the current year period).

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.

With respect to our 2016 annual and first quarter guidance, reconciliations of net income to Adjusted EBITDA, net income to Adjusted net income, and GAAP diluted earnings per share to Non-GAAP diluted earnings per share as projected for 2016 are not provided because we cannot, without unreasonable effort, determine the components of net income and GAAP diluted earnings per share to provide reconciliations with certainty.

FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements using words such as “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” and variations of such words or similar expressions are intended to identify forward-looking statements. In addition, all statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to our 2016 annual and first quarter guidance. You are hereby cautioned that these statements are based upon our expectations at the time we make them and may be affected by important factors including, among others, the factors set forth below and in our filings with the US Securities and Exchange Commission (“SEC”), and consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. Factors that could cause actual results to differ materially from those indicated by forward-looking statements include, among others, our dependence on renewals of our membership-based services, the sale of additional programs to existing members and our ability to attract new members, our potential failure to adapt to changing member needs and demands, our potential failure to develop and sell, or expand sales markets for our CEB Talent Assessment tools and services, our potential inability to attract and retain a significant number of highly skilled employees or successfully manage succession planning issues, fluctuations in operating results, the implementation of our business transformation initiative may be disruptive to our operations, potential cost overruns could have material adverse effects on our results of operations, and once it is completed we may not realize anticipated savings or operational benefits, our potential inability to protect our intellectual property rights, our potential inability to adequately maintain and protect our information technology infrastructure and our member and client data, potential confusion about our rebranding (including the roll-out of the CEB Talent Assessment brand for what has been known previously as the SHL Talent Measurement brand), our potential exposure to loss of revenue resulting from our unconditional service guarantee, exposure to litigation related to our content, various factors that could affect our estimated income tax rate or our ability to use our existing deferred tax assets, changes in estimates, assumptions or revenue recognition policies used to prepare our consolidated financial statements, including those related to testing for potential goodwill impairment, our potential inability to make, integrate and maintain acquisitions and investments, the amount and timing of the benefits expected from acquisitions and investments, the risk that we will be required to recognize additional impairments to the carrying value of the significant goodwill and amortizable intangible asset amounts included in our balance sheet as a result of our acquisitions, which would require us to record charges that would reduce our reported results, our potential inability to effectively manage the risks associated with the indebtedness we incurred and the senior secured credit facilities we entered into in connection with our acquisition of SHL or any additional indebtedness we may incur in the future, our potential inability to effectively manage the risks associated with our international operations, including the risk of foreign currency exchange fluctuations, our potential inability to effectively anticipate, plan for and respond to changing economic and financial market conditions, especially in light of ongoing uncertainty in the worldwide economy, the US economy, and possible volatility of our stock price. Various important factors that could cause our actual results to differ from our expected or historical results are discussed more fully in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” sections of our filings with the SEC, including, but not limited to, our 2014 Annual Report on Form 10-K filed on February 27, 2015. The forward-looking statements in this press release are made as of February 3, 2016, and we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

ABOUT CEB

CEB is a best practice insight and technology company. In partnership with leading organizations around the globe, we develop innovative solutions to drive corporate performance. CEB equips leaders at more than 10,000 companies with the intelligence to effectively manage talent, customers, and operations. CEB is a trusted partner to nearly 90% of the Fortune 500, 72% of the Dow Jones Asian Titans, and more than 85% of the FTSE 100. More at cebglobal.com.

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