高德納諮詢公司 (IT) 0 Q0 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q1 2004 Gartner Earnings Results Conference Call.

My name is David, and I'll be your coordinator for today.

At this time, all participants are in a listen-only mode.

We'll be conducting a question and answer session towards the end of today's conference.

If at any time during the call, you require assistance, please key star zero, and a coordinator will be happy to assist you.

As a reminder, this conference is being recorded for replay purposes.

I would like to now turn the presentation over to your host for today's call Ms. Heather McConnell, Vice President Investor Relations.

Please go ahead ma'am.

Thank you David.

Good morning everyone, and thank you for joining us today for our conference call.

Speaking on the call today from management will be Michael Fleisher, Chairman and Chief Executive Officer;

Chris Lafond, Executive Vice President and Chief Financial Officer; and Maureen O' Connell, President and Chief Operating Officer.

Following their remarks, we'll open the line for Q&A.

A replay of this call will be available through Tuesday June 1st.

The replay can be accessed by dialing 888-286-8010 for domestic calls, and 617-801-6888 for international calls, and by entering the passcode 26217500.

This call is also being simultaneously webcast, and will be archived on our Web site at gartner.com/investors.

As a remainder, this call cannot be taped or otherwise duplicated without the company's prior consent.

I would like to remind everyone of the cautionary language about forward-looking statements and projections contained in the press release and our periodic filings with the SEC.

The same language applies to any forward-looking comments made by management during today's call.

We would like to caution you that these statements are just predictions, and that actual results may differ materially.

We encourage you to read the company's SEC filings, including our proxy filings and our 10-K ended December 31, 2003, and yesterday afternoon's press release, which discusses important factors that could cause actual results to differ from these – those made in any forward-looking statements.

These filings can also be found on our Web site, and on other financial informational sites, including www.sec.gov.

Please note that throughout the call, we'll refer to financial measures including normalized net income and normalized EPS.

Please refer to the press release and the footnotes to the financial statement for a full definition of those terms.

Now, I would like to turn the call over to Michael.

Good morning everyone.

Thanks for joining us so early this morning and with such late notice.

By now, you've all seen the news release we issued yesterday afternoon, which included our strong first-quarter results, as well as the announcement that I have decided to leave Gartner later this year.

I am sure that you've some questions both about our results and about my decision.

Let me begin today's call by assuring you that the fundamental Gartner story has not changed.

We continue to be the franchise player in our industry.

We've a teriffic opportunity for profitable growth.

We've a highly client-centered business structure headed by Maureen O' Connell, who has built a team of talented executives eminently capable of taking the company to the next level.

And as evidenced by the results we just announced, our strategy is working.

It's precisely because we're so well positioned strategically, operationally, and financially that I've come to the conclusion that the time is now right for me to move on to other opportunities and challenges.

I'll have more to say about my decision later in the call, and as always will provide some time for Q&A.

But first, I want to discuss the very strong performance Gartner delivered during the first quarter and the strategies that got us there.

Gartner's performance for the 2004 first quarter exceeded our guidance, and each of our businesses made progress against our strategic objectives.

I'll briefly review some of the highlights.

Chris Lafond will then discuss the financials in greater depth, and Maureen O'Connell will then give you an update on our business and sales strategies.

Total revenue was 209m for the first quarter, up 2% year-over-year.

Taking into account a shift of scheduled events into the second quarter, total revenue was actually up 6% year-over-year.

Normalized EPS was up dramatically to $0.09 per diluted share excluding charges.

Contribution margins in each of our businesses improved.

Most notably, consulting margins rose to 39%.

Our cash position was 263m at the end of the first quarter, nearly double our cash a year ago.

Research, which is the core of our business, continues to grow.

We delivered our third consecutive quarter of growth in research contract value, which is now at 493m, up 19m from a year ago.

This is the first year-over-year increase in contract value in three years.

The events business continues to deliver impressive results, in particular, we had an extraordinarily strong spring symposium season.

Our executive programs business continues effects on performance.

Contract value for executive programs was up 29% from a year ago.

Consulting revenue was up 5% and utilization rose to 62%.

In summary, our business continued to benefit in the first quarter from our focus on growing research contract value improving the productivity of our events portfolio building on the success of our executive programs and driving improved utilization in consulting.

These impressive results combined with our strong finish in 2003 clearly show that the company has turned the corner and is once again on the path to grow.

Now, let me turn the call over to Chris Lafond for a review of the financial highlights.

Thanks Michael and good morning everyone.

Let me take you through the financial results for the first quarter of 2004.

As Michael indicated, total revenue was 209m for the 2004 first quarter, up 2% from 2003.

Adjusting for the shift in the events calendar, the increase was 6%.

Net income was 464,000 on a GAAP basis.

This compares with the first quarter of 2003 when we posted a net loss of 1.5m or $0.02 per diluted share on a GAAP basis.

The Q1, 2004 results included an $11m charge primarily for severance costs and 3.6m in non-cash charges to eliminate certain Latin American operations.

In the same quarter last year, we recorded a charge of 5m.

Normalized net income was 12m, up 7m from the prior-year period.

Normalized EPS excluding the charges was $0.09 per diluted share for 2004 first quarter, compared with $0.04 for the 2003 first quarter.

The impact of foreign currency is discussed in the press release and was negligible from a net income perspective.

We finished the quarter with a cash balance of 263m, generating approximately $33m in cash during the quarter.

Bonus and commission payments heavily impact cash in the first quarter, so we are clearly on track to generate 100m in cash flow for 2004.

Now, I'd like to provide some detail on our business segments.

Research revenue was 122m for Q1, a 6% increase from a year ago.

We sustained high levels of client and wallet retention.

Research client retention was 77%, up from 74% a year ago.

Wallet retention in research reached 92% versus 83 a year ago.

Executive programs contract value was $96m for Q1, a 29% increase over last year.

There are now 2600 Chief Information Officers and other Senior Executives holding memberships in our various executive programs.

This is an increase of more than 400 members in the past year and continues to represent the largest network of CIOs in the industry.

Consulting revenue was 65m for the first quarter, an increase of 5% from a year ago.

These results were delivered while reducing headcount by 93 since the first quarter of 2003.

Consulting utilization reached our target range at 62% in the quarter.

Our consulting backlog at March 31 was 92m versus 98 at March 31, 2003.

The backlog decrease reflects our strategic decision to close certain practices and to refocus consulting on the sourcing and IT management practices.

In addition, the higher utilization rates resulted in a higher conversion of backlog into revenue during the quarter.

Events revenues were 18m for Q1 compared with 24m a year ago.

The decline reflects a shift in the timing of certain events into the second quarter, most notably our North American spring symposium.

Taking into account the shift in event timing, the events revenue would have shown a 7% increase over the prior year.

Now, let me review our guidance for the second quarter of 2004.

We are targeting total revenues of approximately 218 to 228m.

Revenue guidance by business unit is provided in our press release.

GAAP and normalized EPS of $0.07 to $0.10 per share on 134m diluted shares.

Regarding full-year guidance, we continue to expect that Garntner's total revenue and normalized EPS for the full year of 2004 will approximate our 2003 results.

We have told you that our growing research contract value is a leading indicator of future revenues.

However, we also need to replace approximately $20m of consulting revenues from the practice areas we are no longer pursuing.

At the same time, each of our business units must invest in people and products to achieve their respective growth objectives.

And finally, we continue to believe that spending by IT departments will show a more significant ramp in 2005, 2006.

Overall, our recent financial performance reflects our ability to deliver on our objectives during the balance of 2004 and into the future.

With that, I will turn the call over to Maureen.

Thank you Chris.

Before I continue, I just want to say, on behalf of the entire Gartner team, how much we have appreciated the opportunity to work with Michael over the years.

Now, I would like to talk briefly about how we are building on the strategic initiatives we described during our investor day.

As you know, we realigned our organization at the end of last year to create three highly customer focused business units, Gartner Intelligence, which includes research and events, Gartner Executive Programs, and Gartner Consulting.

We believe that this realignment will allow each business to strengthen its relationship with customers, develop products that provide solutions to specific customer needs and define appropriate growth strategies for each business.

I am extremely proud of the senior management team that we have assembled.

Let me highlight the background of some of our new leaders.

Bill Pardue, President of Gartner Intelligence, in a very short time, Bill's innate, strategic sense of urgency and energy, has set in motion the critical changes and disciplines that are needed to focus the research and events businesses for success in the current environment.

Bob Patton, President of Gartner Consulting.

Previously Bob was the go-to leader at Cap Gemini, for capturing new market opportunities and organically growing existing businesses.

Bob has a phenomenal track record of building highly successful consulting enterprises.

Mike McCarty, Senior Vice President of Sales, a sales veteran with over 20 years of results-oriented leadership experience.

His talent, enthusiasm and passion for meeting customer needs will fuel the growing success of our worldwide sales force.

Finally, Beverly Parker, Chief Marketing Officer, a savvy marketer, Beverly joins us this week to lead strategic marketing initiatives for our three business units, in addition to developing our corporate marketing strategy and leading field marketing.

Our sales model is highly effective and has proven its ability to drive research contract value growth with our target customers.

As Michael mentioned, this quarter represents the first time we have seen year-over-year growth in contract value in the last three years.

We continue to refine our selling strategy making sales accountability, a key focus of every business unit by integrating sales specialists into each unit.

This creates a coordinated selling effort between a sales rep who owns the customer prospect and product specialist, who best demonstrates the value of our services.

Partnering a sales rep with a product champion allows us to tailor solutions to customers' needs, shorten the sales cycle and increase the productivity of our sales force.

The development of new products for specific markets will increase our penetration of both users and non-users.

We have conducted in-depth market research in order to identify position and prioritize new product concepts.

Each business is committed to a more rigorous product lifecycle discipline in order to maximize the return on new product development investment.

Several fundamentals are now in place to ensure the successful launch of new products to our target markets.

Our product development framework will ensure consistent new product planning and review across the entire organization.

This disciplined framework includes in-depth market research, prioritizing target segments, identifying gaps in our current product portfolio, defining pricing strategies, making a fully developed business case, ensuring a strong value proposition for the customer and continuing to refine and improve the process.

We expect to launch two to three new products in 2004.

Each of those launches will benefit from a more rigorous discipline.

Let me give you an example.

This quarter, the Executive Programs team announced the successful launch of our CIO Signature product, focused on companies with 3b or more in revenue.

Our consultant strategy is focused on practices such as sourcing and geographies with the highest growth potential and to exit under-performing areas.

Upon Bob Patton's arrival, he established a 100-day plan, which is committed to creating market opportunities through a clear execution plan that is supported by a balanced portfolio of long and short-term initiatives.

Delivering value to customers through enhanced processes focused on people, sales, service, and knowledge.

Enhancing our consultings ability to leverage methodology, resources, and intellectual capital throughout the entire Gartner organization.

You will hear more about our consulting plans in the next several quarters.

We're looking at growth opportunities worldwide.

Today 39% of our business comes from outside North America.

We have identified our best geographic markets based on economic growth, technology affinity, stability of government and industry concentration.

As a result, we had developed a short list of high priority countries.

You will hear more about this effort in upcoming months.

As you can see, we are executing against our strategy and continuing to lead Gartner to deliver the strong results we have announced for the first quarter.

While we are encouraged by these near-term results, our focus remains on delivering significant growth in 2005 and beyond.

Now I'd like to turn the call over to Michael.

Thank you Maureen.

Earlier I mentioned the strength of Gartner's executive leadership team.

You've just heard some two prime examples of that team.

Maureen has made invaluable contributions to our financial management as CFO and more recently to our overall business execution and growth as President and Chief Operating Officer, and Chris is a solid financial leader with deep experience in our company.

I want to take this opportunity to recognize their efforts and point out that Gartner is in very capable hands.

Now, as I promised, let me give you some additional perspectives on my decision.

As many of you know, I've been at Gartner for over 11 years.

In that time, I've held roles in numerous areas of the company including business development events and finance.

In 1999 I became CEO, it's been a time of tremendous change for the IT sector for the technology research and advisory business for Gartner and for me personally.

During the past four years my chief responsibility has been to reshape Gartner to respond to the upheaval in the tech sector and then to ensure that we were well positioned to maximize our opportunities in the next cycle.

Having seen the company through this industry's turmoil, with a clear line of sight to future opportunities and with leaders like Maureen, Chris, and others in place.

Now, is simply the right time for me to seek out new and different challenges.

I am extremely proud of everything that we've accomplished during my time at Gartner.

I took over a company with $250m in debt and close to no cash.

Today, we are debt free and have over 260m in cash.

During the past four years we've delivered 450m of operating cash flow.

Most important we reestablished the company's position as the franchise brand in technology research and advisory services.

We reinforced Gartner's reputation as the preeminent source of credible independent insight into the IT market place.

We continue to make the right calls on developments in our industry distinguishing hard realities from lots of hype.

At the expense of our competitors we have dramatically grown our market share and are now six times the size of our nearest competitor.

When the technology sector hit a wall in 2000, we instituted tough cost management controls, allowing us to grow earnings in both 2001 and 2002.

In early '03, believing that the economic environment would significantly improve we told you what we needed to do in order to stabilize and then grow our core research business and then we did it.

The results that we discussed a few minutes ago clearly demonstrate that we have delivered on that promise.

Great companies never stop evolving and so the work of reinventing Gartner will never be completely finished.

But with the company's sharp focus on growth, great leadership, and fiscal discipline, solidly in place and the technology market poised for remarkable expansion by the middle of this decade, I feel this is the right time to pursue my next opportunity both for me and for the company.

In closing, I want to express my great confidence in Maureen, Chris, and the Gartner executive team.

As I've indicated I will remain here for a reasonable period to ensure that the transition to my successor is smooth and seamless.

And finally, I want to take this opportunity to say how much I've appreciated the incredible efforts of our many employees all around the world, the support of our clients, and the interest of the investment community over the past 11 years.

Operator, now we will open the call up for questions.

Thank you, sir.

Ladies and gentlemen, if you have a question or comment at this time, please key star one on your touchtone phone.

To withdraw your question or if your question has been answered, please key star two.

Once again, that's star one for questions.

And we will pause just a moment for questions to queue up.

Thank you.

And our first question comes from Fred McCrea from Thomas Weisel Partners.

Please go ahead.

Good morning, everybody.

Good morning, Fred.

A quick question with regards to the guidance and a couple of follow-ups.

It would clearly look from certainly on the consulting side, given this quarter's results, guidance for the next quarter that we should expect.

We are looking for a flat sort of revenues for the organization, that we should see a substantial fall off year-over-year in the third and fourth quarter.

Is that the way I should be looking at it?

Hi Fred, it's Chris.

How are you?

Good.

Yes, I think what you need to understand is that what we are doing in the first part of the year is running off the backlog that we had built for some of the practice that we are no longer in.

So you are seeing us working pretty hard on working that stuff off and exiting those, including in some of the regions that we are exiting like Latin America.

So I think what you will see is a little bit of a tail off and then as Maureen and we have mentioned in the past, start to rebuild some of the headcount in the practice areas that we are focused on.

But that's going to take time to bring that back in.

So I think that's the way you should look at it.

Okay.

And then in regards to, on the EPS line, even if we're at lower volumes in the consulting side, we've seen some nice push-ups here in the contribution margin coming out of that business and would probably expect that to continue.

Wouldn't we expect some greater earnings out of that business during those times allowing a life here on the EPS line?

I think, what we have told you is we certainly have spent the bulk of the work here to drive the margin in consulting up to the target levels of around 40%.

You see, I think, our contribution margins this quarter are 39%.

I think what you are seeing is the effect of a couple of things.

The full impact of the reduction in force that we have done is really starting to hit, pushing the utilization up because we are trying to work off the remaining backlog as I mentioned.

So I think, you are seeing a pretty good lift this quarter, may see a little bit of dip as you move in to the kind of second, third and then we think it's going to continue to rise and be at those levels.

So yes, we are expecting as we said to have some pretty significant improvement there.

And as Chris said, we came into the year with a strong backlog and so we drove utilization worth on the backlog, specifically in the Practices that we exited.

We exited about 20m of Practices.

As you go through the year, we are going to start building some of the backlog back up.

And so you are going to see that that will have an impact on utilization and margin and so we are still comfortable with our guidance.

And when you say impact utilization margin, it's a positive I would assume?

There is a trade off between utilization and backlog as you are building, you know as you are selling.

That does not increase utilization, so we are at this point driving strong utilization because we are working through the backlog that was there at year-end.

And we are working through the practices that we exited.

As we go through the year we are going to balance those two measures as we try to build backlog so that we have a strong backlog in place and do some selling as well as driving execution against the different jobs that we are working.

Okay.

In terms of the balance sheet, with 263m in cash and free cash flow generation by my estimation is somewhere north of 100m this year and also the capacity to borrow additional funds now.

What are your thoughts about aggressive share re-purchases with that cash?

I think it's certainly getting a lot of questions there.

Yes, I think it's a fair question, Fred and it's one that everyone is critically aware that we need to get out to our shareholder base and answer and so I would say it's high on the agenda for the Board of Directors to look at that.

As we said in the past, we don't have a whole lot of uses for that cash in our business and that what we will do is continue to look for ways to appropriately and efficiently return that capital to shareholders and to create leverage returns for shareholders and so I would expect you to continue to see us, A, be buying in the market.

But more importantly, come back out and tell our shareholder base what we intend to do there.

Okay.

Thanks.

Thanks, Fred.

Thank you.

And our next question comes from Brian Posner (ph) from HighGrove Partners.

Please go ahead.

Hi.

Good morning, everyone.

Michael, you've successfully transformed Gartner into an enterprise that is operationally and financially positioned to take advantage of the opportunities before today and tomorrow and you've always clearly articulated a business model whose key components include its significant operating leverage, the limited capital requirements as you just addressed and significant free cash flow generation.

In any way do you envision that those priorities that you have articulated in the past may change or evolve?

Thanks for the question Brian.

I don't know.

The answer is no.

The Board and the management team are clearly focused on a strategy that we have all agreed to in terms of how we are going to grow and execute our business.

Everyone understands our priorities both during a transition period and as someone new comes on board as a leader and so, I wouldn't expect there to be any changes at this point going forward in the priorities that we've laid out, and actually at this point, you've got 3800 people around the world who understand what their strategy is.

They understand what their execution plan is, they understand who their boss is, and they are hammering away to deliver value to our clients, deliver profit to our -- and return to our shareholders and create a great company for our employees.

Thank you Michael.

All the best.

Thank you Brian.

Thank you.

And our next question comes from Steve Lidberg from Pacific Crest Securities.

Please go ahead.

Good morning guys.

First of all, I was wondering if you could provide us with some insight as to spring symposium obviously had -- a few comments on how well the event went, but was wondering what you saw in terms of attendance as well as renewals for next year.

This is Michael, then I will turn it over to Chris.

At a high level, it was a great series of events, including some really powerful keynote speakers, I think clearly showing our market preeminence having Bill Gates back on our stage was I think a coup (ph) and also provided some great value-add for our clients who were there.

And I will let Chris give you some of the perspective on attendance and renewal rates.

Yes, Steve it's Chris.

Across the board I think we are seeing the spring symposium seizing all of the, kind of attendance levels at or above prior-year levels, both for attendees as well as exhibitors.

So, we feel very strong about that performance.

I think we are seeing also in kind of pricing levels holding or improving across the board as well.

So really very, very strong, I think performance from our perspective from a financial view.

Okay.

And in terms of headcount, where did headcount end at the quarter?

Headcount ended at 3576 worldwide.

Okay.

And Michael just in terms of your decision, does it reflect any difference in vision between where you see the company going versus where the Board of Directors and I think some of the changes that we are seeing on the Board wants the company to go?

I actually think there is really clear alignment about where everyone wants the company to go and there is a very clear view that we have the right strategy in place, we have the right management team with the real capability to execute in place, and that the company is going to deliver great performance not only this year but in the years going forward.

So, I think there is a real like-mind in the strategy and direction of where we are driving the business.

Very good.

Best wishes, Michael, thanks.

Thank you Steve.

Thank you.

And our next question comes from Laura Lederman from William Blair, please go ahead.

Yes.

Hello.

Just a few quick questions.

Can you talk a little bit about competition in the market?

Obviously things are improving for you that are forthcoming [Inaudible] Have you seen them any more, any less, what type of pricing are you seeing from that, and any other just comments (inaudible) the competition?

Thanks Laura.

I think on the competitive side, I would say it's exactly the same as it has been.

Obviously, we watch our competition very closely.

I think that we are seeing the same thing we have seen over the last several quarters, our scale, our market breadth and depth, the power and integrity behind our brand, not only helped us win in a dramatic way and gain market share in dramatic way in the downturn, but is now really sort of powering up in the upturn.

And so, we used the downturn to take share, now as we are starting to build the size of the market again by going after new prospects.

We are winning in a fairly dramatic way and I think that's showing, if you look at the comparative, our growth in contract value there, declines in contract value, things of that nature, you are starting to really see that differentiation open up.

But you are not seeing any or beginning to see any desperate act or, for the like, if you will, given how well you are doing and others are not doing so well?

No more so than the desperate act we've seen over the last couple of years.

Good to hear.

Since you (indiscernible) a little bit, you've refocused consulting on three target areas.

Can you talk a little bit about what type of feedback you are getting from customers and the interest levels in those three new areas to give us a sense of the contract value building for the consulting or the backlog, excuse me, over time and how we should expect that to look?

We are seeing strong interest from customers in the areas we are focusing on which is sourcing, IT management, and government.

These areas are all double-digit growth for us and we are starting to do more integrated products across the areas.

Our Measurement product is being more integrated with our sourcing products to offer a more robust offering to our clients and customers and so we are doing very well in the practice areas that we've chosen to focus in and at the same time we are running of the backlog in the areas we've chosen not to focus in.

So, when would you expect consulting just rough feeling or timeframe to start growing again on the revenue line, I mean how many quarters just a rough guess or maybe even give us the range of kinds of the periods of time you would – (multiple speakers)?

Well, we entered this year with --.

I'm sorry, I didn't hear that.

We took down $20m of consulting practices this year which is roughly 10% of our business, and so our goal this year is to remain flat despite the fact that we exited $20m of consulting practices and that's really by achieving double-digit growth in the practices that we are focusing on which we are sourcing, IT management, and measurement, as well as the government practice.

We are executing against that strategy, and making progress in all three areas.

Thank you so much, and Michael my best wishes.

Thanks Laura.

Thank you.

And there are no further questions at this time.

I'd like to now turn it back to the speakers for some remarks.

Thank you all for your -- for being on the call early today.

Look forward to talking to everybody over the sort of coming weeks and months and having an opportunity to connect with everybody personally as we work through our transition here at Gartner.

Thank you.

Thank you, sir.

Thank you ladies and gentlemen today for your participation on the call.

This concludes your conference, you may now disconnect.

Good day.