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The Corporate Executive Board Company’ Legacy Operations Remain Strong in Quarter

Corporate Executive Board reported solid third‐quarter results this morning. The results are somewhat complicated because of a number of charges related to the company’s acquisition of SHL that was completed this quarter. As we described later, management also changed its adjusted EPS and adjusted EBITDA format to be comparable to the cash EPS presentation that we provided last week. Overall though, adjusted EPS of $0.78 were $0.09 higher than our estimate on a comparable basis.

The partial‐quarter contribution from SHL was a little less than we had expected, which could signal that Europe continued to weigh on that business in the third quarter. However, the legacy CEB operations were much better than expected. For the legacy CEB operations, revenue growth of 14% was better than our 13% projection, contract value growth of 11% was better than our 10% projection, and adjusted EBITDA of $38 million were $6 million better than we had expected.

Management also provided guidance for 2014 that for the first time included SHL. CEB changed its adjusted EPS and adjusted EBITDA presentations to reflect the impact of the SHL acquisition and to be more comparable to other information services companies. The new format excludes the impact of deferred revenue write‐offs related to the acquisition, intangible amortization, transaction expenses, and stock‐based compensation. It is consistent with the cash EPS presentation that we rolled out for our estimates last week.

However, while we used the term cash EPS for the way we presented our earnings, this presentation still does not account for the negative working capital characteristics of the business model. Therefore, free cash flow will still be substantially higher than the company’s adjusted EPS. With all of that said, management’s new 2012 revenue guidance of $610 million‐$620 million is in line with our previous estimate of $619 million and its adjusted EPS guidance of $2.45‐$2.55 is in line with our previous estimate of $2.53.

Based on our prior projection for adjusted EPS of $3.15 in 2013 (which is under review pending the conference call), shares of Corporate Executive Board trade at a P/E of 14 times. The comparable metric for the other information services companies that we cover is 21‐22 times right now. Many of the other information services companies do not enjoy the same level of negative working capital as CEB, so the gap in the valuation based on free cash flow is even wider. In addition, the stock is trading at roughly the same price as it was before the company announced the acquisition of SHL, which even if it is growing slower than we had initially expected, will be meaningfully accretive. We believe some investors were hesitant to take advantage of the stock weakness last week to build positions because they did not want to step in front of the quarter, particularly given how many corporations are missing numbers lately.

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