Rule #1 Finance Blog

With Investor Phil Town

EXBD: MOAT & MANAGEMENT

Here’s a followup 4M exchange between me and Jason, who’s started digging into EXBD’s Moat and Management. He’s done a great job so far, but there’s still more work to do. See below.


From: Jason Moore
Date: Aug 23, 2005
To: phil town

Phil,

Some tidbits that I have come across from an independent website dedicated to providing information about companies for prospective employees. This pertains to both CEB‘s management and, more importantly, its culture (what I believe to be their largest Moat).

"There is a great deal of diversity along gender, race, and cultural lines. The only common equalizer is a fine (read: expensive) undergraduate education. Everyone studied abroad, everyone had top-name internships, and everyone keeps up with the news, current political situation, etc."

So basically, there is no discrimination that is going to get you in trouble, but much like Microsoft and Google, you will be judged when walking in the door.

"The firm’s reach is wide, serving more than 70 percent of the Fortune 500 and more than half of the top 300 financial institutions worldwide. About 30 percent of the 2,143 companies it serves are based outside the U.S….. CEO Jay McGonigle has said that the firm’s expansion plans will focus on Europe, followed by Japan."

Can we see any growth potential here?  They have already proven their capabilities of functioning worldwide.  Now it’s just a matter of expansion.  I compare this to Starbucks when it was moving from Seattle to Nationwide to Worldwide. The only problem is "Do Europeans want to pay $3 for burnt coffee?"  But that’s for another discussion.

"In 2003, the firm’s client renewal rate was 90 percent; new member companies in 2003 included Dresdner Bank, Foot Locker, Google, IKEA International, Imperial Tobacco, InterActiveCorp, and Weight Watchers  International."

Recognize any names from this pack?  90% retention of over 2,000 clients worldwide is just fun to think about.

"Washingtonian reports that on average, 25 percent of employees achieve promotion every six months."

Not much to comment here except that is extremely tempting to the best college graduates and seasoned veterans alike.

"These staffers usually have three years of experience at a consulting or law firm, an MBA or masters’ in economics, and a track record of problem-solving, love of business content, writing and leadership."

So when did this crowd become "staffers"?

Some Q&A from quarterly conference call:

Q9. (Greg Cappelli, CSFB) You talked about hiring the best problem solvers and business builders. How much harder is it to recruit, if that is having an impact on what you are having to pay them and can you pass that on in price increases going forward?

A. (Tim Yost) We have been talking about the tightening of the labor market for awhile now. As you heard in 1Q, we put in place additional investments in the recruiting function to be sure we stay ahead of that market. Not really seeing tightening transfer into higher compensation expense, above what we had budgeted, we are seeing it in the front end of the pipeline the size of the pipelines and throughput and investments were to increase activity levels in pipeline in the form of additional recruiting staff and higher budgets to go after additional talent pools. Continuing to have great success from those, comfortable on hiring plan for 2005.

A. (Tom Monahan) This is one place where our scalable model helps us a lot. We have got in any one program, 5-7 senior researchers, we don’t need to double them to double the number of members, we just need to go  and find them and get members into that program. Not highly dependent on growing staff at same rate of people to grow.

Q16. (Chris Penny, FBR) Doesn’t that hurt your middle market penetration where they might want a broader offering rather than particulars on a specific topic?

A. (Tom Monahan) Right now, the middle market is not part of our addressable revenue opportunity. There are 10,000 companies in North America and Europe, that is an interesting market, their needs will be different than our core market, it is one of those things we are doing research on and finding our how much we need to change to be effective there. In core market, companies $750m and above, senior executives with real challenges and budget who can get value from products.

Q20. (Thatcher Thompson, CIBC) Were describing target market as global 4200, those companies outside Asia, any intention to go after that market, how much do you already have there?

A. (Jay McGonigle) We don’t have much in non-English speaking Asia at all, have franchises in Australia, New Zealand, do serve English speaking parts of Asia, Singapore, Hong Kong, nothing material in China and Japan. Membership list today we serve US and European subsidiaries
of Japanese companies, that is the way we are trying to get smart about those markets and learn from the executives that we are serving in Europe and North America. Asia remains like middle market, outside $3m market definition today, 1200 above $750m so it is something we will need to get to over time.

============

That should be enough for now.  I like what I see.  Does this seem as positive to you as it does me?

Thanks for the help!

Jason Moore


From: Phil Town
Date: Aug 26, 2005
To: Jason Moore

Dear Jason,

Did you read their 2004 annual report letter to the Shareholders?  The CEO and Chairman are on record saying their achievable sales are 3 billion.  If they are growing at, say, 25% a year, it will take them about 10 years to get there.  That’s a lot of room to ride this business up from where it is right now.  If we put in $50,000 and they achieve their goals (and assuming they can continue that growth in the future), that’s three doubles for us: 50 to 100, 100 to 200 and 200 to 400.  About an 8:1 return in the next ten years.  You can get rich doing that!

One more thing I like about their business model:  It seems they’ve found a way to substantially underprice the Boston Consulting Groups of the world, which allows corporations to get the outside feedback without the huge costs.  It is very unlikely that other businesses will try to compete with them on Price.  Nice Moat because if they do a great job, Brand moat will follow.  In addition they seem to be developing a Switch Moat: their renewal rate is 91%, which indicates some sort of switching issue is in place.  A quote: "CEB continues to … develop tools and content that enable us to embed deeply into our member’s workflow."  "Member executives find content like this deeply habit forming…"  Ahhhhh Sooooo.  Switch moat indeed.

So I ran some more conservative numbers and we still have a price at the MOS.

Couple of issues for you to tell us about:  How much impact on our ownership are the stock options these guys are tossing out to their people?  And are the leaders of this business in it for the long haul, or are they getting rich and getting out?  Remember: we want a CEO with a BAG – a Big Audacious Goal – toward which he is dedicating his life.  We don’t want a CEO who is going to cut and run.

Homework:  find out for us what the BAG is and how is the CEO getting compensated.

We’re almost there.

Phil