高德納諮詢公司 (IT) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

And welcome to Gartner's Incorporated earnings conference call for the first quarter of 2005.

Our speakers today will be Gene Hall, Gartner's Chief Executive Officer and Chris Lafond, Gartner's Chief Financial Officer.

Following their remarks, we will open the lines for Q & A.

A replay of this call will be available through May 31.

The replay can be accessed by dialing 888-286-8010 for domestic calls and 617-801-6888 for international calls by entering the pass code 14202861.

This call is being simultaneously webcast and will be archived at Gartner's website at investor.gartner.com.

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

The company would like me to remind everyone of the cautionary language about forward looking statements and projections contained in its press release and periodic filings with the SEC.

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

The company cautions you that these statements are just predictions and that actual events or results may differ materially.

The Company encourages you to read its SEC filings, including its 10-K for the period ended December 31, 2004, which discuss important factors that could cause actual results to differ from those made in any forward- looking statements.

These filings can also be found on Gartner's website and other financial information sites, including WWW.SCE.GOV.

Please note that throughout the call, the speakers will refer to financial measures including normalized EBITDA and EPS.

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

Now, I'd like to turn the call over to Mr. Hall.

Please proceed, sir.

Thank you, operator, and good morning everyone.

I'm going to begin this morning with an overview of the quarter and a discussion of our achievements executing on our strategy.

Chris is then going to follow up with a detailed review of our performance overall and by business segments as well as a review of our guidance for the rest of the year.

We'll then open the call up for questions.

As you know, we're early in the implementation of the growth strategy we described on our last call and at our investor day in February.

At that time we laid out several challenges we're facing.

We told you about the actions we would take to address that, and how those actions would affect our performance for the year.

Our first quarter results reflect those items.

At the same time, we also outlined for you a number of key metrics that will drive our growth strategy going forward.

We're pleased to report that our progress today in those areas has been positive.

In fact, we're meeting or exceeding our expectations against those measures.

In particular, the results for this quarter demonstrate the early traction we're getting to grow the research business.

We've also realized cost production sooner than expected.

As a result, we're on track to exceed the guidance we proceeded in February, and accordingly are raising our full-year 2004 guidance as Chris will detail for you.

As we described in February, our management team is keenly focused on delivery growth in our core research business.

I'm pleased that we continue to see positive signs in the research business.

Our total contract value increased to $516 million from $493 million a year ago.

This is the fifth consecutive quarter of year-over-year growth in research contract value, which is at its highest level since December of 2001.

In addition, both client and wallet retentions remain at very strong levels at 80 and 94% respectively.

Clearly those who know Gartner understand the tremendous value of our research.

Our opportunity going forward is to tap the vast market of companies that could significantly benefit from our research and advisory services and to penetrate more deeply in our largest customers.

That's the reason we're investing in increasing the capacity, coverage and training of our sales force.

The executive programs portion of our research business continues to show great growth.

Contract value has reached $121 million, which is a 26% increase from the prior year.

We now have 3,000 members, an increase of 400 over last year.

This is by far the largest membership network of senior IT executives and continues to be a valuable strategic asset partner.

We also saw positive trends in the key metrics for our consultant segment, including better utilization levels and an increase in the average engagement size.

Backlog also remains strong, which gives us confidence in our full year outlook for this business.

Our events business continues to be very strong.

We've worked to optimize our events schedules, this year we expect to deliver over 60 events as compared to 56 in 2004, with a 14 to 17% revenue growth target.

As we detailed at Investor Day in February, we kicked off a number of initiatives, focused on accelerating top line growth, particularly in our core research business.

We took a number of important steps to implement these initiatives during the quarter.

Let me begin with the sales side.

We established clear incentives to emphasize core research growth.

We invested in a sales force automation tool.

We've restructured our sales force, to turn specialist coverage into broader coverage of the full product portfolio, and we're piloting programs aimed at driving deeper penetration within our existing strategic accounts.

On the research side, we're closely monitoring the way clients read and use our research, in order to best align our analyst's resources with our client needs, and we also continue to analyze the specific products through which we deliver research with an eye toward rationalizing our offerings wherever appropriate.

In conjunction with top line growth, we're also focused on increasing the profitability of our business.

I'm pleased with the results from the cost reduction initiatives we've implemented over the past several months.

This is one of the key drivers behind the increase in our guidance for 2005.

Let's now turn to META integration, which is progressing really well.

The acquisition closed on April 1, cementing Gartner's position as the number one technology research and advisory firm in the world.

Today we're stronger than ever before within an increased capacity to reach new customers and the ability to provide current users of technology research with a broader, deeper set of product offerings.

We developed and successfully executed an aggressive integration program which enabled us from day one to achieve significant cost savings.

While at the same time, enabled us to rapidly realize the strategic benefits of the combined businesses in terms of sales coverage, research, and consulting.

On the cost side, we've already closed 23 redundant facilities and expect to close 32 of the original 39 facilities before the end of the year.

Overall, we're making excellent progress towards our goal of achieving $70 to $80 million of annualized cost savings.

Tactically, customer renewals have the highest priority in our integration efforts.

We have a dedicated team, focused on ensuring the highest rate of renewals, and early results indicate we are on track.

In terms of increased sales coverage, we added about 90 highly trained sales people who know the marketplace and the industry, who have existing client relationships, and who have already completed training on Gartner's product portfolio.

In addition, we added 60 talented research analysts.

These analysts provide us with increased coverage in several areas, including industry specialties like insurance, government and energy and utilities, as well as an organizational specialty such as enterprise architecture.

We also increased our capacity in targeting international markets, including the UK and Germany, where we see significant opportunities for growth.

We are especially pleased to announce that Dale Cutnick, the founder and former Chairman of META , has joined Gartner in as Senior Vice President.

He is one of the leading minds in technology research with a deep knowledge of the industry, our product offerings, and our clients.

We also added about 45 consultants and two key measurement solutions to our consulting portfolio.

This includes a price benchmark product and IT process for engineering.

This further solidifies our leading position in the IT benchmarking space.

In summary, I'm encouraged by the progress we're making in executing our strategy.

We're seeing improved metrics throughout our business, particularly in the research segment, which is the linchpin in our strategy to accelerate overall growth.

That said, we are still early in the implementation of our strategy, and there's a lot of work to be done to realize the tremendous potential of our research segment.

Our management team is focused on delivering improved results and we look forward to continuing to update you on our progress.

I'll now turn the call over to Chris, who will provide you more details on the financial results for the quarter and the guidance for the year.

Thanks Gene.

We told you during the last earnings call and at Investor Day, two important factors impact profit margins in 2005.

First, we restored employee compensation to competitive levels, after three years of paying our most important assets, our people, below market.

And second, we have had exceptionally strong growth in our higher touch and slightly lower margin executive programs business over the past few years.

This has led to a mix shift in our product portfolio.

As anticipated, our profit results reflect the impact of these changes.

Most importantly, we believe in the underlying strength of our business segments and our key performance metrics reflect the initial success in implementing our strategy.

We are on track to achieve the 3-year financial road map we laid out at Investor Day.

For the first quarter of 2005, total revenue was $200 million compared to $209 million in the first quarter of 2004.

As part of our planned strategy to effectively manage our events portfolio, we changed our events schedule, which moved $10 million of revenue from the first quarter to future quarters in 2005.

Research revenue increased 2% to $125 million, reflecting our growth in contract value and continuing a trend of both year-over--year and sequential increases in research revenue, which began in 2004.

Consulting revenues were $64 million in the first quarter, flat compared to the prior year period.

As previously announced, we continue to assess and exit certain nonstrategic practice areas, but are pleased with positive operational trends in our four key strategic consulting practices.

Stepping through our P&L, cost of services is flat year-over-year, and down 2% on an FX neutral basis.

This reduction in cost of service is primarily driven by the shift in our event schedule, and was partly offset by the compensation changes I discussed earlier.

SG&A for the quarter was up 4% versus the prior year, and 3% excluding the effects of foreign currency.

The increase in SG&A is attributable to our strategic commitment to invest in the sales channel.

Our cost reduction initiatives and focus yielded a reduction in G&A costs versus the same period last year.

Depreciation and amortization for the quarter was $6 million, a decrease of 25% from the prior year.

This reduction reflects the continued focus of disciplined capital spending on projects that support our strategic initiatives.

We incurred one-time pre-tax charges in the first quarter of $23 million, as previously announced.

These charges consist of $14.3 million related to workforce reductions, and the restructuring of the number of sales agreements, $5.1 million of non-cash impairment loss on investments, and $3.4 million for META integration expenses.

With debt as a component of our current capital structure, we incurred net interest expense in the first quarter of $1.3 million.

We had no debt on our balance sheet from the first quarter of 2004.

Normalized EBITDA for the first quarter was $13 million as compared to $26 million last year.

Normalized EPS was $0.03 for the first quarter of 2005 compared to $0.09 in the first quarter of last year.

These results are driven by two factors, the shift in timing over events scheduled and the impact of restoring employee compensation to competitive levels.

The compensation changes have an EBITDA impact of $20 million for the full year of 2005, or approximately $5 million per quarter.

Net loss for the quarter was $14.7 million or $0.13 per diluted share, compared with net income of $464,000 in the first quarter of 2004.

A reconciliation of normalized EBITDA to net income, and normalized EPS to GAAP EPS for the quarter is attached to our press release and is available on our website at www.gartner.com.

Our cash position as of March 31st was $159 million.

On April 1, we used $100 million of our cash balance and drew $67 million against our revolving line of credit to finance the META acquisition.

Operating cashflow for the first quarter 2005 was $15 million compared to $25 million last year.

Majority of this difference is attributable to the timing of revenue related to our events.

Now, I'll highlight the results for our business units, beginning with research.

We're encouraged by the results of our research business this quarter, particularly with respect to the growth in contract value.

As Gene noted, contract value increased to $516 million, the highest level in over three years, and this is a 5% increase above our contract value position a year ago.

New business for the full year is tracking towards our target range and we're confident that new business will contribute meaningfully to our contract value growth in 2005.

Client and wallet retention also remain strong.

Client retention was 80%, 3 points above the same period last year, and maintains its highest level in more than 4 years.

Wallet retention was 94%, compared to 92% in the first quarter of last year.

Our executive programs business continues the strong performance seen over the past few years.

Contract value for executive programs, which is reported as part of the research business, increased to $122 million at the end of the first quarter, a 26% increase from first quarter last year.

We now have over 3,000 members in our various executive programs, up from 2600 a year ago.

Overall research contribution margin was 62% in the first quarter compared to 65% last year.

As discussed, this change reflects the strong growth of our executive programs business with the higher touch delivery model and the impact of changes and employee compensation.

In our consulting segment, we have seen steady improvements in the key metrics associated with our four strategic consulting practices: IT measurement and management, strategic sourcing, market and business strategies, and the U.S. federal practice.

Utilization rates for these practices average 63% during the first quarter up, from 62% in the first quarter of last year.

Billable head count was 509 as of March 31, versus 475 at the end of the first quarter 2004.

Our hourly bill rate continues to exceed $300 per hour.

We ended the quarter with a backlog of $108 million, up 18 % from $92 million last year.

This increase is directly related to our continued focus on key strategic practice areas and strategic accounts, coupled with strong sales performance over the last two quarters.

The strength of our backlog gives us confidence in the guidance we provided in the year.

In short, the fundamentals of the consulting business are strong, and we are positioned for growth in 2005 and beyond.

Our events business continues to deliver extremely strong results.

We had over 2500 attendees at our five events this quarter, compared with 3200 at 9 events in the first quarter of last year.

Events contribution margin was 32% in the first quarter, compared with 39% last year.

We continue to be extremely pleased with the performance of the segment and continued opportunity for growth.

For the full year, we expect to deliver over 60 events, compared to 56 in 2004, and target 14 to 17% revenue growth for the segment in 2005.

Turning to our guidance for the company, including META.

We expect reported revenues for the full year 2005 will be approximately $980 million to $1 billion.

The details by segment are included in our press release.

Based on our progress against key metrics for the first quarter, the early realization of cost saving initiatives, and the integration of META 's operations, we are increasing our 2005 normalized EBITDA and EPS guidance.

We now expect normalized EBITDA for the full year 2005 of between $95 and $105 million, an increase of $10 million from our previously announced guidance.

We also expect GAAP EPS of 5 to 14 cents and normalized EPS excluding special charges of $0.32 - $0.38 per share.

We are maintaining our previously announced EBITDA outlook for 2006.

Now, let me provide some further detail around our one-time charges for 2005.

We previously announced total charges pre-tax in 2005 of up to $26 million.

We expect the integration of META will result in additional pre-tax charges of $13 to $19 million.

This brings our estimate for total charges in 2005 to $39 to $45 million, of which $23 million was incurred in the first quarter.

Finally, I want to briefly mention two items we submitted to stockholders at our annual meeting in June.

We filed our preliminary proxy with the SEC on April 22.

To simplify our capital structure, and to adopt best practices for our corporate governance, we are recommending our shareholders approve the combination of our A&B shares and the elimination of our classified board structure.

With that, I'll turn the call back to Gene.

Thanks, Chris.

Our results for the quarter show we're headed in the right direction, but we clearly have much more work before us.

As I detailed in February, we will take the steps necessary to drive growth and realize Gartner's full potential.

I want to thank you for joining us today and we'll now be happy to take your questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Rob Skloff of Sidoti.

I have a couple of questions, the first has to do with -- I'm not sure if you're going to break down for revenue what was the FX and what was core, if you could, that would be great.

That's the first thing I want to touch on.

Hi, Rob, it's Chris, how are you?

Good, how are you?

Good.

We normally have not broken that out.

Our indicators of those two businesses are that we break out the contract value for executive programs and that is $122 million of the 516.

And we think that's a good view of what the combination of the future revenue performance for those two businesses will be as well as the continued growth in the executive programs business.

Okay, I've done some back-of-the-envelope calculations, is it fair to say that the core research contract value is essentially flat year-over-year.

Yeah, that's exactly right.

Okay.

Great.

The second question is, you talked a little about head count reduction.

I think Gene said there were 60 analysts now from META that you acquired.

Have there been any changes in that number?

Is that down from 80?

Is that down?

You know, that's what I'm trying to get a sense of.

You're saying from what META had originally or what our plan was?

Both, how about that?

Well, basically, yeah -- we kept about 60% of the META analysts that they had before the acquisition, that's what the 60 is.

Okay.

And then I have two more.

Back to the contract value.

That is not including META, is that correct?

That's correct.

All of the results, just for clarity for everybody, all the of the results reflect Gartner only, every metric and all the results I shared, we closed the deal on April 1, and the first time we reflect those numbers will be at the next earnings call.

Great.

And then the last question, you gave guidance of $0.32 to $0.38 cents in normalized EPS.

That includes META.

The previous guidance of $0.30 to $0.35 cents did not include META, am I correct on that?

That is correct.

All right.

Thank you all very much.

Thanks, Rob.

Thank you, Rob.

Our next question comes from Brandon Dobell of Credit Suisse First Boston.

A couple quick ones.

Chris, if you could give us the FX impact on contract value and revenue for the research category?

Sure.

FX, the FX impact on contract value was, I think up 5% year-over-year and it would be up about 2 to 2 1/2%, I think FX-neutral.

That's the impact from foreign exchange.

Okay.

The revenue line, I believe we showed a 4% decline, I think it would have been a 6% decline in revenues without the impact of foreign exchange.

Okay.

That would be total revenue, Brandon, sorry.

Research revenue still would have been up slightly to maybe flat without FX.

So research revenue was partly driven there as well.

Got it.

Okay.

And then maybe Gene, the investor data on the Q4 call.

You guys talked a lot about some of the plans in terms of getting the sales force or half the sales force up to speed, more so, you know, driving more of the inside sales force or certain parts of your potential customer base.

I want to get a better feel for where you have stand now, how the META deal is going to impact some of those plans, do you feel that you're still on track there?

Are you getting a better feel for what I think is the primary issue for the next couple of quarters?

We've implemented a number of changes in sales to improve our sales force effectiveness.

We've changed the way that the management processes, to have a bit more intense management process.

We've put specific incentives in place for research, and made several other changes, those changes have gone on with the META acquisition.

One other change we've made that's really been helpful that is a part of the acquisition, is that we've really enhanced our training programs to incorporate some of the stuff we talked about on Investor Day.

You mentioned this, half the sales force was doing really well, and half the sales force wasn't doing as well.

We took the best practices among the guys that are doing really well, built them into the training programs that we've taken all the META people through, and we'll be taking the Gartner people through them as well.

So the -- we're feeling very good about the -- both the metrics and the performance of the sales force as we sit here.

As I mentioned on the call earlier too, the META sales force, they're completely on board.

They've been out selling during the month of April.

They've been completely throughout the training -- it was pretty intensive training -- and again, our sense is that's going very well.

Okay.

And then in the same line there, how do you look at either attrition, voluntary, involuntary, as you work through that -- we'll call it the underperforming half of the sales force, kind of time parameters for figuring you have the right people, as the training rolls through if they're not hitting their marks, how do you guys think about rolling with that bottom part of the sales force or replacing them or those kinds of things?

That's the right question, Brandon.

Basically, we are -- as a part of this, more intensive sales management process, we are having detailed reviews down to the individual E level, to know just as your point, whose performing well, whose not going to get there, and who is, you know, taking advantage of the increased training and support to do better.

And we're doing that, you know, there's no sort of magic date that we're doing anything by, it's really an ongoing process.

We're assessing literally week by week how people are doing and where they stand.

It's not -- it will be an ongoing process to make sure that we have a top group of sales people.

Okay.

And then shifting to guidance for a second.

As you think about the increase in EBITDA and EPS guidance.

Maybe in the qualitative perspective or quantitative, if you can provide it, how we should split the impact of the core business, hitting or exceeding expectations versus the impact from META.

I guess, primarily on the EBITDA line.

Brandon, it's Chris.

Two things, let me just clarify what I just told you on research.

Research would be up 1% year-over-year FX-neutral.

Okay, great.

Just wanted to clarify that.

From a guidance perspective, it's going to be harder and harder to break out the two as we kind of bring these businesses together.

Because we're clearly doing an incredibly good job of quickly integrating the two and bringing our product portfolio together, bringing our delivery organization together.

At a high level, as we thought about our guidance and looked at the performance we saw in the first quarter and looked at what we're seeing for the year, we originally mentioned at Investor Day that we felt that META would be earnings-neutral in 2005.

And generally believe that that is still the case as we looked at our guidance, so the bulk of our performance is driven on the base.

And having said that, it's a combination of the Gartner core and all the activity we're seeing that we're able to drive out of META.

It's getting a little difficult and challenging to break those out.

That would be the high level view of how we're seeing that.

We absolutely believe there's strength in our core business, that that is a big contributor to why we increased our guidance, and we're very comfortable with what we're seeing with META and the contribution is going to add to the company.

Fair enough.

As you think about the events business this year.

Seasonality-wise and adding in the impact of META, how should we look at it relative to '04 the distribution of events across the quarter?

The events, just to clarify the statements we've made both in the press release and in my talk tract -- one of the things that we tell you we've done, and we continue to do , the management team there does an incredible job of reviewing the portfolio of our events each and every year.

And very quickly eliminating events where we're seeing interest decline, so we don't have a drag on the margins and also very quickly launching new events where our research team is saying there's hot interest and coverage areas.

That's what we continue to do and that's what we've done in the first quarter.

We have discontinued some events, launched some new events, and just in normal shifting of calendar and working with our various providers and logistics, some of those events changed.

The big one that changed this quarter was spring symposium season.

We had a number of those in the first quarter of last year, all of which are in the second quarter.

So, from a full year perspective, we expect to have a slightly larger number of events, so 60 plus events versus 56.

Still expect to be in the 14 to 17% growth range in the top line for that business.

And from a quarter perspective, again, you know, we're going to continue to do what we did in the first quarter and watch and manage effectively.

Our expectation is, we're going to get a little closer to kind of a year-to-date apples-to-apples view on number of events held, but it won't really see itself materializing all the way until we get into the 3rd and 4th quarter where you're back flat year-over-year.

Thanks a lot.

Sure.

Our next question comes from Laura Lederman of William Blair.

Please proceed.

Good morning, this is Jeff Houston for Laura.

I have a few questions for you guys, first, one of your competitors on their call last week mentioned that you have raised your prices.

Can you give us some detail about how your prices have changed, maybe on average?

Hi, Jeff, it's Gene.

I guess what I'd say, is we have not raised our prices in any sort of systematic fashion at this point.

And I -- so -- I'm not sure that was -- we're not seeing things in the exact same way.

Again, we price every deal based on the particular customer circumstances, so for example, larger clients may get a little better pricing than someone that is a very small client, things like that.

It may vary by geography, we have not had any specific price increase that we have made.

On average it hasn't really changed?

We have not seen any -- we've not made a specific change, and we've not seen a specific pricing change to date.

Okay.

Just to add a little more to that.

If you recall what we said at Investor Day, we said we're going to put a real focus on our sales force effectiveness work.

Part of that is helping working with our sales force to reduce our discounting.

And so having said that, we hope to over time have a more positive effect on our effective price rates that we're getting, but in terms of Gene's point any systematic increase in our list prices has not occurred.

So it's more maybe in the future on discounting.

Correct.

We clearly want to maximize pricing we can get.

You know, with market price.

Okay.

Now, the next question, how have you seen the business demand change since the end of the quarter?

If any?

I wouldn't say we've seen a dramatic change.

Basically, I think we're seeing pretty much what we expected.

So no big shift up or down.

Next question.

You mentioned on the call that stopping some unprofitable services, can you talk about specifically which services you have shut down during the quarter.

Sure.

Jeff, when you look at, we previously announced we were going to take some action to exit certain businesses.

They're very small practice areas within the consulting business.

As we mentioned in the past few quarters, our new head of consulting who's been with us for around a year now has really focussed his business on four strategic practice areas that I mentioned earlier.

And so we've exited a couple areas that probably drive under $20 million dollars of revenue in total on an aggregate basis per year.

And were and are less profitable than the rest of our business and are not strategic in terms of the focus we have.

Of the things that are really tightly linked into our research organization.

And so a couple areas that we focused on, we had a primary -- what we called a primary research organization which is really market research, very low margin business, hard to differentiate, very commoditized.

And that is one of the areas that we've exited as well as a human capital management business that we had some consulting practices in that also have not been able to drive the margins that we felt were appropriate.

So those are the two kind of major components that are impacting the revenue line as we exit those this quarter.

That makes sense, now, switching gears to acquisitions, are you actively pursuing any more acquisitions?

If so, what are the criteria?

I know you are probably still digesting the META acquisition, kind of the outlook for your acquisitions?

Yeah, Jeff, we're very interested in acquisitions that support the strategy that we laid out in February.

So where we see -- we are looking at potential opportunities all the time.

We don't have anything that we're going to be imminently announcing.

But we're looking for opportunities that -- just for that strategy.

For example, if we saw logical product extensions, we'd be interested in that.

Things that expand our distribution in priority markets, we'd be interested in that.

We're looking at those on an ongoing basis.

Then the last question on the cash from operations, can you provide us with any insight for guidance for '05 and '06 and then that's it for me?

Yeah, a couple things, what we said at Investor Day, and I will continue to reiterate it, our expectation at the beginning of the year was that we would have an approximately a -- the same cashflow results that we had in '04 in '05.

And for '06 -- what we've really said is it we kind of target over the next three years that we would get our free cashflow back into the $80 to $100 million range.

We still believe we're well on track, that as we get through this year, with the cash outflow related to META and the special charges, that that goes away, and that we get the growth which we're continuing to see in our contract value which drives significant up-front billing, that we'll start to return to where we think is a normal cashflow pattern in that $80 to $100 million range.

So we absolutely still believe that as we look to '06 and beyond that that is where we will be beginning to move the Company to.

In the current year, the META integration as you can see from what we announced has obviously some cashflow implications, and that will put a little bit of pressure on the free cashflow, and so we're going to continue to monitor that and see how quickly we see contract value grow that helps offset, mitigate that.

That's our current thinking on free cashflow.

Thanks a lot.

Our next question comes from Daniel O'Sullivan of Utendahl Capital Partners. please proceed.

Good morning.

Thanks for taking my call.

Just wanted a follow-up question on pricing.

Can you give us a sense of how the pricing structure may change as you integrate META Group going-forward?

In other words, I know the traditional way was a seat-based pricing, is there any type of shift in how you see that going forward?

Daniel, basically, we see the pricing basic structure remaining similar, although we're looking at alternatives to change it.

We've not made any financial decisions on that.

But I think you -- as a predominant model, we're going to keep with the seat-based pricing.

Any early feedback on the pricing as -- in particular for META group clients, any push back on the price points they were paying prior to the acquisition?

Any sense of what's going on there?

Again, we've -- I'd say what we've seen is no change in pricing to date.

But again, we closed the deal April 1st, so it hasn't been a long time for that.

I mean, I'm kind of under the assumption that they were sort of, you know, the low -- the low pricer in the industry.

So in other words, how are the efforts in trying to get them to a higher price point if you will.

In other words, Gartner's obviously the premium on price point, and then you have someone with competing on price and undercutting you, kind of how that's playing out.

I guess -- two thoughts on that.

One is that as a part of our META business case, we didn't assume that there would be any pricing improvements.

So if we do get pricing improvement, it will be above and beyond what we, the conservative view that we took in doing our business case with it.

Okay.

So again, the META acquisition is a good financial deal for us if pricing doesn't improve at all.

Having said that, on a go-forward basis we clearly, as we integrate the two companies, are going to focus on Gartner pricing, and we're not planning to -- our go-forward pricing levels are going to be based on our traditional Gartner pricing.

There's some upside there we have not built in until we actually see what happens in the marketplace.

Right, so if kind of sounds like, you let that play a little bit?

Yeah, again, we're negotiating deals one at a time, but our intention is to merge the product lines so there won't be META products on a go-forward basis.

There will be Gartner projects and we intend to price them as we've traditionally priced them.

Or if we can get better prices, we're certainly do that as well.

A question for Chris -- going back to the guidance, I was kind of getting the sense that what you were giving in the first quarter for META impact is staying the same.

It sounds like you're a little more positive on your outlook for Gartner stand-alone.

Is that true?

That's exactly right.

As I mentioned, we assessed the current state of our business and the performance we've seen in the first quarter toward the strategy we laid out.

We looked at more detail at META as we've closed the deal now and started to get deeper into that, and we feel very confident that the core business pre-META is performing extremely well, and hopefully you'll see from the metrics that we've laid out and shared with you that we do see strength and do see good indications, particularly in the research business, which has been the area we've been focused on.

So, yeah, I think the core business is performing extremely well, we're very pleased with that and we continue to manage as we thought we would with the META acquisition so I haven't seen anything there that would indicate any different perspectives.

And the combination of those are why we increased our guidance.

Great.

For the fall symposium, is that all -- what quarter will that all fall in?

Will we have anything different like we have going on with the spring right now?

No, all of them are in the 4th quarter, and that will be consistent with last year, so 4th quarter, 4th quarter compares will be consistent.

And obviously spring this year is in the 2nd quarter, it's normally -- does that normally fall in the 1st or normally in the 2nd?

It's moved back and forth over the last couple years, just for a number of reasons from a timing perspective, and with some of the logistics with the folks we work with.

I think you had one day last year that actually fell in the first quarter, right?

Yeah, it actually straddled a quarter in fact.

And the exposition event ended prior to the quarter and the rest of the event ended after the quarter so we had kind of a straddle there.

Can you give us a little more thoughts on the consulting business -- what you're seeing there, what's driving the business, any challenges you're seeing in the marketplace.

It would be great if you could give us more insight there.

Our consulting business is doing very well.

Sales are going very well; the backlogs going very well.

All of the core metrics that you saw there in terms of utilization, price that we're getting, everything is going very well in the business.

It's not to the performance we want it to be at eventually, for sure, but all the metrics are moving in the right direction.

We're very pleased with it.

Do you have the exact dollar amount for the billable rate?

We've been reporting and sharing our target is $300 dollars an hour plus and we're above that.

Would you say it's -- is it below 315?

It's above $300 an hour it has not, it has not decreased at all over the last few quarters, in fact, it has slightly increased from last year.

It continues to be very strong.

No degradation at all in the effective billing rate for the business.

With META, and the discussion we were talking about, strengthening the business, was not including the impact of META.

We think META strengthens it even further, because there were complimentary products as I mentioned earlier, that we think will just further differentiate the offerings and make them stronger in the marketplace.

That's a great point.

Can you give us a sense -- I think we've talked about this before, META was kind of bundling, you know, the advisory, the FAS type stuff, with research.

Can you give us a sense, just on a complete top-line basis for last year, what percentage of their revenue was consulting/advisory?

It would make it a lot easier for to us model going forward what you're going to look like combined.

Let me see if we can look it up real quick.

There's one thing you ought to know, and that is that we've changed.

In keeping with the strategy of focusing the products, we haven't carried over all of their product offerings.

We brought over the ones that were in the same area that we had, and then we added a couple of extra categories as well.

So the -- give us a minute, we'll look up the share of consulting.

Great.

Just one last question there as well too.

I think one of the key things you talked about a year ago in changing the strategy for the consulting business was trying to increase the engagements as far as the time that was being allotted to those and creating more recurring revenue streams from the engagements.

How are those two fronts working out?

If you look at a couple of the key metrics that we look at, the average size of our engagement continues to increase, so as we mentioned, focusing on the strategic accounts and focusing on strategic practice areas has let us really begin to drive us into the bigger practices.

So our average engagement size continues to increase and is now over $130,000 in engagement.

But if you look at the new engagement for signing, still probably coming in much higher than that, as we're still running off some of the older engagements.

We're feeling very good about that.

From a timing point of view, our engagements have traditionally taken 7 or 8 months to deliver.

We're probably still in that range, and the reason for that is more effective resource management.

And so, as we've done in our consulting practices, done a better job of managing our resources, we're better able to complete the engagements even as they get larger in a reasonable period of time and not see a change there.

So that's not an indication that we're not successful, I think we're doing exactly what we want to do, and it actually is leading to the performance you're seeing in the business.

One last thought on that.

Do you have a target where you'd like to see the average engagement size and maybe even the length of the engagement be?

Internally, we absolutely do.

We haven't shared those externally, as we get prepared and get comfortable, as we get progress in the strategy, we'll decide how much more of that we want to share.

We absolutely have an internal strategy based on the focus of the strategic accounts and our practice there is to grow that significantly from where it is today.

And that 130 K you gave, is that something you're seeing in the last few years, a downturn in the economy, or is that -- you know, historical average including the late 1990s.

It's up pretty significantly over the last year, actually, you know, in the past we were below 100,000, I think even in the late 90s and early 2000s, we were probably, you know, just in 2002, was the first time we broke the 100,000 dollar average, so it's something we've seen more recently.

Okay.

Great, and I just -- if you can give out that percentage on the consulting.

I'll look it up after the call.

Thanks, guys.

Consulting for META in '04 -- reported as we reported, which is our consulting business, it doesn't include the consulting the analysts do.

If would be -- it would not include [inaudible] stuff.

Right.

It was about $45 million or 32% in '04 for META.

Okay.

I think you -- I just want to follow up on the point for the -- the engagement size.

We're really focussed on it, because the longer the engagement is, the lower your sales cost is per engagement and the higher utilization is because there's less friction between engagement.

We're very focused on it.

Good question to ask.

Thanks.

Also with that, it seems like the government business was kind of the hot area there, is that still true, is that where you're seeing a lot of growth coming from?

We're seeing growth in a number of areas.

Our government practice is very successful.

We've got?

In fact, -- I think one of the directions we talked about that we're moving more broadly in the business is more industry-oriented offerings, and I think that government practice in consulting is a good example of how that can be successful.

Thanks a lot, guys, have a great day.

Thanks.

Appreciate it.

Our next question comes from [Eric Wineman] of SchwerinBoyle Capital Management -- please proceed.

As you look back over the last 5 or 10 years, could you review the historical pricing trends in your various operating segments, and then after this year, do you anticipate any significant charges?

Thanks.

First, let me start with the charges, because that's easy, we have laid out what we believe are the charges for the remainder of the year.

Our current expectation is it for the charges, we will have integrated the META acquisition.

We will have finished the restructuring work we laid out, both on the international side as well as within our business units, and so we don't expect to be giving you any additional charges moving forward.

On the pricing trends, I guess it's an interesting questions and I'll try to go through each of the businesses briefly because there has been a lot changes in each of those businesses.

On the research side, the challenge in looking at historics, is that we've changed our delivery model from a service-based model to a seat-based so to try to compare pricing trends on that is extremely challenging.

Over the last couple years I'd say, the last few years that we've had seat-based pricing, we've held a pretty consistent price point.

We haven't seen any dramatic change up or down, and still feel like there's really no significant price changes there or pressure there either way.

On the consulting side, we certainly have over the past few years been able to drive up our average bill rate.

We've been able to do that as we really have refocused that business.

I think as we talk about the $300 an hour target, we've seen that over the last few years with our focus.

And as we continue that focus, that bill rate continues to slightly increase.

We feel very confident there that our efforts are paying off in terms of the value clients see in that part of the business.

On the events part of the business, continue on the exhibitors side, to have very strong demand for our space, and for the ability for them to participate in our conferences.

And so we've been able to leverage that and over time increase prices over the last few years, and we continue to see our ability to hold or slightly increase prices for that part of our business.

Additionally, on the event attendee side, because of the quality of our content, we're able to charge a pretty significant price for people to attend our theme events and/or our symposiums.

We feel very comfortable that the value is there for clients and we continue to hold pricing.

I don't think we're doing any dramatic price changing there, but have had no real price pressure in that business over the last few years.

Hopefully that's a bit of a picture of how that looks on the pricing side.

Thank you.

Our next question comes from [Jeff Helm] of [Porter Orland].

I think you touched on some of this, but I just wanted to ask the question, given some of the sales force effectiveness that you've tried to instill and given the fact that META was not part of the first quarter so we can take that out, are there some 50,000 things that you think are adding to the growth in contract value and wallet retention?

Is there anyway to maybe pie chart them, you know, some internal measures, some the better environment, some less players in the field or your name recognition, is there a way to kind of slice and dice the first quarter experience?

I think basically what I'd say is actually both 4th quarter and 4th quarter of last year and the 1st quarter of this year.

We saw very good sales results, much better than they had been for several years, and I think the reason is that we've had this focus on growing research, and on very good execution in sales.

We have a new sales leader that came in and started about a year ago.

He put in a new management approach for that, where we're much more aggressively managing how we take sales in.

Up until the fall, we didn't have a product manager in charge of our core resource business -- we put someone in charge of that.

We have told the sales people that it's important to sell core research.

Prior to that, because of the absence of product management, there really wasn't much focus on it.

I think it's really just the strategy I laid out in February really coming to fruition, which again in short is good sales force management, good tools in support with it, best practices from the guys that are doing really well to the guys that aren't doing so well.

And then, putting both an incentive and a management focus on selling research which has the highest incremental margins for us.

Okay.

Great, thank you.

Our next question comes from Kian Gazi of Hawkshaw.

A couple quick questions.

Do you have an estimate of how much contract value is coming from META starting on April 1?

Yeah, we do.

It's approximately 60 million based on where they ended their March quarter.

Great.

Thanks.

And I believe each year you guys true up the contract value for FX.

Can you give us a sense on January 1 when you trued up for FX where you restated your contract value too?

It's -- gosh, I don't have it in front of me, Ken, hang on a second.

If you have another question, we'll get that for you.

The next question was, with regard to contract value signing in the first quarter, can you give us a ballpark on how much new business you guys signed?

What we talked about in Investor Day that we would on a full-year basis have approximately -- our target is to do 20 to 25% of the new contract in business each year.

We believe that at that level we would be able to grow the business in the range that we had, which is in the high single to 10% range on the contract value side.

And so, what we're seeing, certainly there's seasonality in that, as we talked about over time, you see a significant increase in 4th quarter and new business, and early in the year you see focus on retention, particularly this year, with META, we've seen a pretty significant focus on a lot of renewal activity.

What we're seeing now in the forecasts we have laid out with our sales forces, we believe we're on track to be toward the low end of that range.

And feel comfortable we're going to drive that on a full-tear basis and really begin to see growth in contract value as driven by the new business.

Just so I understand that 20, 25%, if I take year-end contract value times 20 to 25% and that's how you're targeting the business for the full year '05?

You got it.

With the current retention rates that we have and expect to have, that would drive the kind of growth numbers that we've laid out.

So that's kind of the way we're going to target and help people understand how we're doing on a full-year basis.

When you set that target was that including META?

And if we add the [inaudible] from META to the year-end contract value, it would actually raise the number and the 20 to 25% would be higher on that, so how should we think about META and that 20, 25% number?

It actually wouldn't change the 20 to 25% number.

It would change the base you're doing the 20, 25% number off of.

Our thinking is, our view is, that we will ultimately maintain our current level of client and wallet retention rates as we integrate META into our business.

At those levels of retention, that kind of new business number would drive the growth that we have, so we haven't seen any indication that we need to change that, that target for us for this year.

Clearly, as Gene mentioned, our focus right now is of that $60 million in contract value, working through each one of those client by client to maintain as much of that revenue as possible, well above any break-even business cases that we've developed as a worst case scenario.

So I'm clear, I take 509 that you're in, plus the 60 and we take 20 to 25% of that as a target?

Yep.

That would exactly be where we're trying to drive from a new business perspective for the company.

Fantastic, will you anticipate that renewal rates will be on a blended basis including META's business pull down a little bit.

Is there a lower renewal rate assumed for the META business that will over the next three quarters as you try to renew that business, we're going to see a slight reduction in the renewal rate?

That's a great question.

Basically, we're -- we had a very conservative view of the amount of renewals for META.

As we look at the clients, there are technology providers, and there are users, and then within each of those, in those companies there are people that within those companies you may have had a single individual that bought Gartner and META.

They wouldn't buy two of the same thing on a go-forward basis.

So we would lose some of that business.

We've gone through detailed views of exactly what's going to happen with each of those segments, and we've made a very conservative case, kind of assumed that a worst case in terms of retention there.

And so -- I do believe it will be worse than our traditional retention that we have reported because again, we're going to have some clients that have individual users that bought both products and they won't need that on a go-forward basis.

One mitigating thing we've seen is that some clients basically have asked us where they had overlapping products for Gartner and META to the same individual, have said, look, we'd like to keep spending the same, but just spend it in different areas.

Buy an industry-specific package for example, instead of just a general research package or add that on to it.

Nevertheless, overall, we expect to see that as we integrate META during the first round there will be a lower retention rate than we've had traditionally.

And that will pull the overall reported number down as well.

When we think about that 60 million that you're starting with, after you've had a chance to -- every contract of that 60 comes up for renewal, what's the reasonable range to assume you're going to retain after everyone has had a chance to renew?

We think our kind of most conservative assumption is that we'll keep 55%.

We expect to do better than 55% or better.

And we built our business case really assuming more like 55.

So that it's -- to the extent we do better, that's the upside for us.

It's Chris, one other comment on that from a -- to round that out financially, as I think we mentioned we're in the process of executing on $70 to $80 million of cost takeout.

So we're aggressively taking out cost as Gene mentioned some of the items during his script, so to his point, we've built a conservative I think assumption there, and built our financial cost plan on that, and as we drive each of those contracts and hopefully overachieved that, it has significant financial benefits both to potentially to '05 and absolutely to '06.

Just to summarize, we've built our business case assuming that we retained 55% of the contract value from META, but we've cut our costs more than that so it has a very good return to us even if we have only 55%.

Anything above that is just incremental profitability for us.

Okay.

And then of the -- a similar kind of question on the consulting business, of the business that you intend to do with the META consultants that you're keeping on board for the full year.

Are those all practice areas, meaning all the contracts today that you will be doing going forward that was theoretically META business?

Are those all practice areas you will continue to practice in after you've finished current engagements?

Yeah, there's really two categories of contracts, one is that there are contracts that META had that we're not going to continue that product line on a go-forward basis.

We're working it with clients on running those that happen to be in midstream.

The rest of them are going to be -- just any new contracts are going to be in the priority areas that we've laid out.

You know, as our strategic, as the four strategic areas that Chris mentioned earlier.

Of the 42 million, I think you mentioned on an earlier question of a consulting business from META, how much of that is business lines that you will continue to operate going-forward?

Approximately?

We have to -- give us a second to get the math on that.

Yeah.

Ken, it's Chris, I think the other way to look at this as well as -- we looked at the consulting business in two ways.

We looked at the practice areas that fit and added to our practice areas, and that's one approach to looking at what they were offering.

And second is they certainly have some outstanding consultants, so even consultants who may be in practice areas that we're discontinuing, we may actually bring those, and have brought some of those folks on to our practice, because they are highly talented and highly skilled.

The answer to your question is a little difficult, because we're going to keep some people that maybe weren't in the right practice but are going to drive revenue for us that's going to be incremental to the Company.

It gets a little mixed, as I said before, when you really get to integrate these two, the lines blur very quickly.

Sure.

Okay.

To give you a flavor for it.

We're anticipating keeping something like $20 to $25 million dollars of revenue from the consultants that formally were at META.

On an annual basis.

Let me just understand that.

Of the 42 million that you anticipate -- let me make sure I understand the 42 million.

Was that how much consulting work META had been doing before you acquired them or is that how much you anticipate you're going to do with META as part of your organization?

Hello?

Sorry, Ken, we're just looking that up to make sure we answer you properly.

Okay.

So basically, last year they did $45 million, right?

And this year, again, you take the number of people and what we expect to generate from them, we're saying we're expecting to keep $20 to $25 million f it.

So you're consulting division guidance going forward includes about 25 million is what you're saying of consulting from META..

That would be on a full-year basis so it's 9 months of that roughly, if that would be -- the 25 is a full-year view, obviously we only have 9 months of all of these revenue streams in our actuals, and, you know, we're going to expect it to ramp up in 2005 because they are -- their model was a little different than ours, shorter, smaller engagements where you can't drive the same utilization so it -- in an '05 it's not quite that much.

Got you.

Last question for you, and I appreciate the time.

If I take the guidance you guys issued for overall revenues from the analysts today, which was 916 to 942, if I remember correctly, and I think you guys discussed that 9 months of revenues of META being approximately 70 to 80 million.

Adding those two numbers up, I get 986 to a billion 22.

It seems to me that the guidance for revenues has been pulled in a little bit.

Am I misreading that?

It's as we've looked at the META amounts in more detail, we have gotten more clarity around what we think the revenue impact in the current year will be.

And so that's primarily where you're seeing us look at the guidance a little bit differently than we first saw.

Overall, as I mentioned, we're still very comfortable on the core business, we're not taking our guidance or changing our guidance on that.

It really related to the META piece, and as I said at the beginning, as we start to move through this, it becomes difficult to break that out as we merge the two product lines.

That's what the initial thinking was as we really honed in on some of the numbers and the decisions we're making on what practices to keep, what product lines to continue, and the implications to our business.

So is the original assumption of 70 do 80 million of 9-month revenues from META, that's what's been lowered?

Yeah, it's down slightly.

Is there a new range you guys can talk about?

No, we're merging it together because it becomes close to impossible when we bring the two businesses together when we continue to report on those.

We're now going to report total, our total businesses, a combined entity and begin to eliminate any indication of the two.

And Gene, to the point you made earlier, about the business case you guys developed, which sounds pretty conservative, was the original case what you described?

It sounds like the revenues you assumed from that are lower, did you guys increase the amounts of cost production you think you're going to achieve as a result of lower revenues because you cut some practices?

Or maybe it's not [base case] -- it's slightly below what was previously [base case]?

Yeah, just to clarify a point, the revenues are not lower than our business case on there, so we're pretty much on our business -- the -- we have built in this conservative business case, and again, we think there's potential upside to it, we want to be conservative in terms of what we built in, until we saw results that are better, until and unless.

Does that answer your question?

So in your mind, originally, the 70 to 80, that has not changed?

The guidance for 70 to 80 million or is that not the base case that you were originally talking about?

It doesn't --

Yeah, as I said, the -- as we looked at the deal and talked about it at Investor Day, we had made certain assumptions around how much of certain revenue streams we were going to maintain, how much of certain product lines we're going to maintain, as we have now brought those businesses in, assessed the people and businesses we have, now made our conclusions on what's going to continue and how quickly we're going to be able to ramp some of those revenues from the organization that we're bringing together.

And so, yes, we talked about Investor Day of 70 to 80.

And if you look at our current guidance, that's been impacted by the fact that we're bringing that down slightly on the META side.

From a profit point of view, we're being extremely aggressive on the cost side.

Right now I see no change from an overall profit impact either to '05 or '06 on what we think the META deal brings to us, and think there's upside there as we truly integrate the sales organization and start to see them working to sell our products and services and bring that uplift in the back half of the year, which really drives profitability in 2006.

Thanks a lot, guys, that's great clarification.

I appreciate it.

Sure.

Our next question comes from [Jeff Brontik] of RBC Investment Management.

Good morning, gentlemen.

I think my last question -- my question was answered on the last answer.

But let's just go back again for the big picture here.

Looking out, you came in, you've restructured, you've made a transforming acquisition, the business environment is arguably bottomed and better from the last 3 or 4 years, let's look at 2008, okay?

That's four years of work, of things okay, where should the operating or EBITDA margins of your current mix of business be if you think you're doing a good job?

What does this business model look like?

That's a great question, Jeff.

Our objective is to get to an EBITDA margin in the 17 to 20% range by 2008.

And we have basically if you look at -- we are obviously focused on the taxable stuff now.

We're looking at longer term plans and we have a, you know, rough cut plan in terms of how we're going to get there from where we are now.

And unless I'm missing something, because obviously there's some cost-cutting post-META, but you're in an environment where your pricing is limited, it's going to take revenue growth to achieve that.

Is that a fair statement?

That's the key variable?

No, basically, we believe that we can get to those kind of margins even if we didn't grow our revenue.

I mean, basically, we think that the -- there are -- there are opportunities in our cost structure to make improvements.

We're doing it this year, as we said, we put in place -- we started in the fall some cost reduction efforts that are achieving a little ahead of the plan we expected, which is part of the reason we raised our outlook for this year.

As we look forward, we're not going to stop there, we think there are ongoing improvements in our cost structure we can make.

We're not planning to not grow, but we're not hinging our margin improvement only on growth.

We're going to be working, just as we are now, we're going to continue working on the cost side to get our costs down, so we can have that kind of a margin while also getting our growth rate up.

We don't think it's predicated on that.

So let me just see if I can ask it another way.

Over the next three years, you think you can achieve a $0.17 to $0.20 EBITDA margin on roughly this $1.1 billion of revenue just through making Gartner an efficiently run operation?

What we are planning to do over the next 3 to 4 years is accelerate our growth rate.

Gartner's had a flat to negative growth rate over the past few years, so we plan to accelerate our growth rate over the next few years, and we think we're starting to see the beginning of that now.

In addition, we're planning to look for opportunities to cut costs and we think there are still sizable opportunities even with our existing cost structure.

So we're not planning to do just flat revenues and cut costs, we're planning to do both, but it's not -- it's not driven by the fact that we're going to just have higher revenues.

Okay.

Great, thank you.

[OPERATOR INSTRUCTIONS] This concludes your question and answer portion of today's conference.

I will turn it back to Mr. Hall for closing remarks.

I'd like to thank everybody for participating on the call today, and we look forward to talking with you in the next quarter.

Good-bye.