高德納諮詢公司 (IT) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Gartner, Inc.

Earnings Conference Call for the second 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 for this call will be available through August 28th.

The replay can be accessed by dialing 888-286-8010 for domestic calls, and 617-80-6888 for international calls, and by entering the pass code 54310133.

This call is being simultaneously web cast, and will be archived on Gartner’s website at investor.gartner.com.

And as a reminder, this call cannot be taped or otherwise duplicated without the company’s prior consent.

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

The same language applies to any forward-looking statements made by Gartner Management during today’s call.

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

The company encourages you to read its SEC filings, including its 10Q for the period ended March 31, 2005, which discusses important factors that could cause actual results to differ from those made at any forward-looking statements.

These filings can also be found on Gartner's website and other financial information sites, including wwww.sec.gov.

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

Please refer to -- excuse me -- please refer to the press release and the footnotes of the financial statements for full definitions of those terms.

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

You may proceed.

Thank you, operator.

Good morning, everyone.

I'm going to begin this morning with an update on the META integration and the progress we made on our strategic initiatives.

Chris is then going to follow-up with an overview of our results for the quarter, and a discussion of business segments, as well as review our guidance for the rest of the year.

We'll then open the call up for your questions.

Our results this quarter reflect continued progress in our strategy to accelerate growth and profitability in our business, including the successful integration of META.

Total revenue for the first half of 2005 was $474 million, which is up 9% from last year.

If you exclude META, it's up 4%.

As most of you are aware, we closed the META acquisition on April 1st.

Former META employees, including 60 talented research analysts, 45 consultants and 84 salespeople, are now fully integrated with their new Gartner teams.

When we evaluated the META acquisition, we knew that many META clients were also Gartner clients.

We also knew that many of these joint clients might not renew their META contracts once the two companies were combined, so we included this factor in our plans.

I'm pleased to report that our retention of META client contract value has exceeded our plan.

During the quarter, we transacted on 23% of META's total contract value, and we retained more than 60% of that transacted value.

We are optimistic this trend is going to continue, especially as we evolve our product strategy.

Our success in renewing META contracts is reflected in the strength of contract value for the quarter.

Research contract value was $565 million, representing a 16% increase over Gartner's stand-alone contract value for the second quarter of 2004, and a 3% increase over the combined Gartner/META contract value for the same period.

In addition, both wallet retention and client retention at 92% and 80% respectively remain at high levels for the quarter, further underscoring how well the integration is going.

At the same time, we continue to make excellent progress on our goal of achieving 70 to $80 million in annualized cost savings from the acquisition.

To date, we've already closed 28 redundant facilities, consolidated all back office functions, and seamlessly integrated the two websites, which serve as a primary interface to our clients.

During the quarter, we also made significant progress on the initiatives we outlined earlier this year to accelerate growth, including rationalizing our product portfolio, improving ease of use of our products, and increasing the effectiveness of our sales team, and retaining talent.

One of the benefits of acquiring META was its industry-vertical offerings.

We've leveraged this strength by developing a new research offering called Industry Advisory Services, released July 15.

These new services combined our former G2 offering, META's industry practices, and additional industry-specific research.

In addition, we recently launched the first phase of our new website to improve the accessibility of our research.

We believe these changes are going to make it easier for clients to access research with new focus areas, specifically markets, topics and industries, and also for prospective clients to better understand Gartner’s value proposition.

Our events business continues to be a key driver of growth.

Our second quarter results reflect a shift in timing of several of our recurring events that we previewed on our last call, as well as the highly successful introduction of several new events, including business process management.

The launch of this new event delivered well beyond expectations in regard to both attendance and sponsorship.

The success of this event indicates a significant rise in recent interest on this topic, and our ability to react quickly to market demand and to monetize the opportunity.

As one indicator of success for the event, 99% of the exhibitors have already re-signed for subsequent years.

Additionally, we saw an increase in both the top line and profit in our spring symposia series, demonstrating our ability to continue to grow existing events.

Executive programs continues to contribute to our overall top line and bottom line growth, as well.

The contract value for this business is up 35% year-over-year, and the membership continues to show strong growth, with 3,300 senior IT executives as members.

We've been very focused on improving the operational efficiencies of our EXP businesses, ensuring consistent delivery value across the product and regional portfolio.

This focus has resulted in increased retention rates and improvements in margin.

During our investor conference earlier this year, I highlighted the growth opportunity we have from expanding sales coverage.

The META acquisition added over 80 experienced salespeople to know our product line and have strong existing client relationships.

This additional sales capacity allowed us to assign about 600 additional billion-plus dollar size companies to our field sales organization during the second quarter.

In addition, we plan to add 35 to 45 more field salespeople during the second half of the year.

We believe this additional sales capacity and account and coverage will accelerate our sales growth.

Our ability to retain top talent is critical to our long-term success, which is why we restored employee compensation to competitive levels earlier this year.

Voluntary turnover across the company improved during the first half as a result of this compensation change and other HR programs.

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

Chris?

Thanks, Gene, and good morning, everyone.

We are pleased with our results for the first half of 2005.

The execution of the strategic initiatives we established at Investor Day and our success with the META integration gives us confidence to confirm we’re on track to achieve our guidance for 2005, 2006, and the three-year financial roadmap we established at Investor Day.

For the second quarter, total revenue was 275 million, representing a 21% increase over the 228 million delivered last year.

As discussed during our first quarter earnings call, the shift in our events calendar would contribute to a strong second quarter revenue performance.

This is clearly the case.

The $47 million increase includes 20 million increase in events revenue, with 34 events held this year as compared to 20 in 2004, and approximately 19 million in revenue related to our acquisition of META.

For the first half of 2005, total revenue was 474 million, up 9% from 437 in 2004.

Of this $38 million increase, only 19 million is related to the addition of META.

We are pleased that our focus on growth has resulted in this top line performance.

We reported a net loss of 1.1 million for the second quarter and EPS of minus $0.01.

This includes pretax charges of 8.2 million related to the META integration, 8.2 million for a previously announced plan to previous facilities in our San Jose office, and 3.3 million of non-cash amortization of intangible assets related to the acquisition of META.

Normalized EPS excluding the above charges was $0.12 for the second quarter of 2005.

For the first half, our net loss of 15.8 million and EPS of minus $0.14 included pretax charges of 11.6 million for META integration, 3.3 million of non-cash amortization of META intangible assets, and 27.6 million in charges for a reduction in force, consolidation of facilities, restructuring of international sales agents, and non-cash impairment losses on investments.

Normalized EPS excluding the above charges was $0.15 for the first half of 2005.

As discussed in our press release, acquisition accounting guidelines impacted our ability to recognize the full value of the META deferred revenue balance we acquired.

In accordance with these guidelines, we estimated fair value of the cost to fulfill our deferred revenue obligation.

This estimate reduced the deferred revenue of META by $10 million.

Consequently, 5 million in revenue related to existing META contracts that would have been recorded this quarter if META remained as an independent entity were not recognized.

This adjustment reduced both GAAP and normalized EPS by $0.03 for the second quarter and first half.

The remaining 5 million of the deferred revenue reduction reduced revenue and earnings the next three quarters.

This is a one-time accounting impact related to the acquisition.

As these contracts renew, we will recognize the full value of the revenue over the respective contract periods.

Turning to the details of our P&L, cost of service for the quarter increased over last year related to the shift in the events schedule, the addition of the META costs, and the actions taken earlier this year to restore employee compensation to competitive levels.

Similarly, SG&A increased over last year as a result of the growth in our sales organization, including the addition of the META sales force.

Depreciation expense continues to decline, reflecting our focus on disciplined capital spending on projects that support our strategic initiatives.

This trend will continue, as capital spending for the first half of 2005 was approximately 7 million, down from 9 million in the same period last year.

The change in amortization of intangibles versus 2004 is a result of the valuation of certain intangible assets acquired through META.

These assets primarily include intellectual property, databases and customer lists.

The total value assigned to these amortizable assets was $25 million.

The majority of this non-cash amortization will be completed by the end of 2006.

Net interest expense in the second quarter was 3.3 million, reflecting the interest on the $250 million borrowed against our credit facility.

And our effective tax rate for the quarter, normalized, was 33%, and we expect that to continue for the remainder of 2005.

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

As Gene noted, we are pleased by the results of our research business this quarter, particularly with respect to the growth in contract value.

Contract valued increased to 565 million, an increase of 16% compared to the same period last year.

This represents a 3% increase from the combined Gartner/META contract value in the second quarter of 2004.

I would note that, prior to the acquisition, META contract value declined from 61 million in June '04 to 53 million in March '05.

Excluding META, Gartner contract value increased approximately 6% from June '04.

This continues our recent trend in year-over-year contract value growth.

Contract value for executive programs, which is reported as part of the research segment, increased to 133 million at the end of the second quarter, a 35% increase from June '04.

We now have 3,300 senior IT leaders as members in our various executive programs.

During the quarter, we transacted on almost a quarter of the META research contracts in force at the time of the acquisition.

Including these the META transactions, client and wallet retention remained strong.

Client retention remained at 80%, matching the first quarter of '04, and continuing to be at the highest level in more than four years.

Wallet retention of 92% remained above the--our target level of 90%, and we're particularly pleased with these retention rates, since we anticipated short-term dips as a result of the client transition.

These results indicate the initial success of our client integration efforts.

Overall research contribution margin was 60% in the second quarter.

Normalizing for the margin impact of the deferred revenue adjustment mentioned earlier, the margin is flat to the prior year.

This represents significant progress towards reversing the recent trend on year-over-year declines in research margins.

Results from our events business reflect the tremendous strength of our unmatched business model.

We held 39 events in the first half of 2005 compared with 29 in the same period last year.

This contributed to the strong year-over-year revenue growth of 17%.

As planned, we launched a number of new events this year, including Business Process Management Summit, Outsourcing Summits in Brazil and Mexico, and Wireless in Amsterdam.

We have additional new events planned for the second half of the year.

Despite these launches, which traditionally have lower margins in the first year, we increased our first half contribution margin for this segment to 46% from 43% last year.

The outlook for our events business continues to be strong.

Our attendee and exhibitor actual results and forecasts show strength across the portfolio.

Note that the third quarter typically has a light events calendar due to normal seasonal factors, and we continue to expect to hold 14 events in the third quarter, and 64 events for the full year.

In the consulting segment, we continue to make progress towards the targets we established for all of our key performance metrics.

Utilization averaged 64% during the second quarter, up from 63% in the first quarter of this year.

Billable headcount was 524, up from 467 at the end of the second quarter of '04.

Our hourly billing rates remain above $300 per hour, and our backlog grew to 125 million, an increase of 28% over last June's 98 million.

All of this contributed to our first-half performance of an 8% increase in year-over-year revenues to 143 million.

And consulting contribution margin increased to 40% in the second quarter, a gain of 3 points compared to the second quarter of '04.

Let me spend a few minutes on our capital structure.

At our annual shareholder meeting in June, the company received approval to eliminate Gartner's dual class stock structure.

We no longer have two classes of stock.

The newly combined common stock with ticker symbol IT began trading on July 7.

In addition, two proposals related to our equity compensation strategy were also approved, including an increase in the number of shares available to grant under our current long-term incentive plan.

Our objective is to continue to rationalize our use of equity incentives, and, as a result, we expect this new share authorization to be sufficient for the next three years.

We also received approval to repurchase certain out of the money stock options from our associates.

This is a cost-effective way for the company to reduce the option overhang, and we’d like to execute on this during the third quarter.

In June, we also amended our credit facility.

This new facility reflects the strong support from our bank group, as we were able to increase the revolver by 25 million to 125 million, as well an increase the term A loan to 200 million.

This refinancing allows us to take advantage of the favorable pricing, given current low interest rate environment, and secure more favorable amortization schedules.

Finally, on to our guidance for 2005.

As a result of the previously discussed $10 million reduction to META deferred revenue, we know estimate total revenue of 970 to $990 million for the full year.

Details by segment can be found in our press release.

I will note that, while we anticipated the deferred revenue adjustment, our previous forecast did not expect a reduction to be material.

With the completion of the META acquisition, let me provide you some additional guidance into our P&L.

As previously forecast, we expect total charges in 2005 of between 42 and 45 million, of which 39 million was incurred in the first half.

The META intangible assets mentioned earlier will result in approximately 10 million in amortization for the full year, and we are projecting interest expense of approximately 12 million, and depreciation expense of approximately 27 million for the full year.

We expect GAAP EPS for the full year to date between minus $0.04 and $0.03 on 113 million shares outstanding.

For the full year 2005, we continue to expect normalized EBITDA of between 95 and 105 million, and normalized EPS, excluding special charges, of $0.32 to $0.38 per share.

Excluding the impact of the previously explained deferred revenue loss, the company would have increased EBITDA guidance by 10 million for 2005.

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

Thanks, Chris.

In summary, we are implementing the growth strategy reviewed on Investment Day, and our results for the quarter position us well to meet the financial objectives for the year.

Before I open up the call for your questions, I want to welcome John Joyce to our Board of Directors.

John recently joined Silver Lake Partners as a managing director, and, prior to joining Silver Lake, held a number of senior roles at IBM, including head of IBM Global Services and Chief Financial Officer.

John brings rich experience and insight into our business, and I look forward to working with him.

John is replacing Glenn Hutchins as a Silver Lake Partners representative on our Board.

Glenn is a founder and partner of Silver Lake.

I'd like to thank Glenn for his service to the company and its shareholders over the past five years.

Glenn provided incredible insight and support to Gartner, and to me personally.

We will miss him.

We'll now be happy to take your questions.

Sure. [OPERATOR INSTRUCTIONS.]

Brandon Dobell with First Boston.

You may proceed.

Hi, guys, thanks.

Couple quick ones for you.

Chris, to start off, just to make sure I heard it correctly, 33% tax rate for the remainder of the year, is that correct?

That’s correct, Brandon.

OK, perfect.

The EXP contract value number that you gave out, 133 million or so, is that all you guys, or is there an impact from META in there, as well?

There is an impact from META of about 5, 5 to $6 million, roughly that we brought in.

Yes, perfect.

That number seemed pretty strong, but -- I know it’s been good, but 35 seems -- pretty strong number.

In general, as we think about defining retention for you guys, wallet or client retention, with the transition kind of period here where you’re talking to META clients and kind of getting them on board or not on board, how does that change the definition for us?

How do we think about the impact of that if we’re trying to model kind of the next -- kind of two, three, four quarters?

How should we think about that, what META might do to that metric, and why?

No, that’s a great question.

I’ll start, and, obviously, Gene can add some commentary, as well.

We -- as I said, very excited that, as we looked at the META transactions that we worked through this quarter -- and as I said, we transacted on almost a quarter of the CV we brought over, the research CV -- we maintained all of our retention rates at the levels we’d seen in the past.

So, wallet -- client retention still at 80, wallet at 92, so we feel really good that, in this first period of time, we’re still holding in there at the levels that we would like to see.

So, as Gene mentioned, we’re at or exceeding across the board our expectations that we had put in place for these clients.

And just a little more color on that, Brandon.

The one thing that I would -- I would say two things.

First, that there are clients at META that would have had out clauses, and so a number of people were exercising those during this quarter, so we think that, hopefully, some of that fleshed itself out, and maybe we don’t see some of that in the back half.

But then, I would also comment that the fourth quarter is a pretty big renewal quarter for META.

That happened to be their biggest renewal quarter.

So, I think that’s all the background you should kind of think through in terms of how you think about where it is now and where it might be heading.

There is, as I mentioned, a possibility for the numbers to dip a bit as we get through this.

Certainly, as we shared with you at the last earnings call, there is client overlap.

We did make expectations of some of that business going away, and so, you could see these dip, but I don’t expect it to -- see dramatic dips, especially based on what we’re seeing in the quarter here.

And so, we feel pretty good that you shouldn’t be expecting any dramatic dip in the numbers.

And I don’t know, Gene, if you want to add any other comments based on what you’ve seen, but I think that’s what we’re seeing in the client base right now.

Does that help, Brandon?

Yes.

I guess a follow-on question there would be, from a behavioral perspective, are you seeing those META clients just kind of roll into the same kind of a revenue run rate?

Are they picking up more stuff from Gartner?

I’m trying to get a feel for -- you’ve talked a quarter of them.

What’s been the average kind of next step for these guys?

Yes, it’s mixed, and Gene, I don’t know if you want to comment.

Yes, Brandon, it’s Gene.

Basically, there’s no kind of average behavior.

We have some clients who have outright canceled their service because they used -- maybe the same individual user used both Gartner and META, and so it didn’t make sense to have that one person have two seats from us.

We have a group that has renewed, but down, dollar-wise, and then we have a group that’s actually renewed up.

They’ve -- as they’ve looked at what was going on, they’ve actually renewed up.

And so, when you average all that stuff out, it comes out to the greater than 60% that I talked about before.

And again, that exceeds what we had planned on, so it’s actually exceeding our economic case.

Yes, OK, that makes sense.

And I guess -- but Gene, as you think about the back half of the year and the sales force additions, infrastructure-wise to support those people coming on, you’re getting them ramped up, adding them in, you’ve gone from -- you’ve added a lot of people -- or will add a lot of people in a pretty short amount of time.

How do you get comfortable with kind of minimizing the disruptions, or minimizing the time for these guys to get up to speed, I guess?

That’s a great question, Brandon.

I mean, first, as we added the 84 META people April 1st, and so they’re going to have kind of -- and they also had existing client relationships, know the product, and so we think they’ll get up to speed pretty quickly, maybe by -- probably by the beginning of the fourth quarter, they’ll really be up to speed.

In terms of the new people we’re adding, as you know, about 80% of the market is not covered today because we don’t have enough salespeople.

And so, we’re on this long-term strategy to add more salespeople, which is why we -- in fact, that’s why we added the 600 accounts to the field sales force.

And the way that we’re approaching it is let’s get them on board this year for a few months so that we get them trained and ready to go, but actually not in a territory, and then put them in an actual new territory beginning January 1st.

So, we’re really counting on this part of the year being recruiting/training, and then we’ll put them in an existing territory, helping an existing AE, then, on January 1st, make -- give them a real territory.

So, we’re trying to use basically the next six months or so to get them on board, get them trained and ready, so they can really be productive next year.

And, in fact, assuming that works as we’ve planned, we’d probably like to do that next year, as well, to keep -- so that we continue to grow our sales capacity in an orderly fashion.

The other thing you’ve got to think about is we have about 600 AEs, and so the number we’re adding is not like we’re going up by 50%.

So, we think it’s -- we think it’s in the range of what we can assimilate without having any kind of digestion problems, or whatever.

And we’ve built -- the numbers that we gave, as Chris said, in terms of our forecast, do anticipate the cost of having these guys on board this year, as well as our forecast for next year that we talked about earlier.

Got it.

And one last one and I’ll jump out of here.

Where are you finding these people, and what kind of people are you looking for, and what kind of people are you getting any kind of return calls from, I guess, if that’s the right way to put it?

[Inaudible] salespeople?

Yes.

Basically, we want salespeople that know the IT industry, and so we’re looking for people that are -- we’re not hiring people right out of college.

We’re hiring experienced salespeople who know the IT industry, in many cases have existing client relationships, but are not selling our research and advisory product.

Laura Lederman with William Blair.

Morning.

Can you talk a little bit pricing?

Forrester raised their pricing about 10% this year.

What type of pricing are you seeing in terms of your business, up, down, sideways?

And also, can you give us an update on cash generation for ’05 and ’06 on a free cash flow basis as well as an operating cash flow basis?

Thank you.

Hey, Laura, it’s Gene.

Basically, pricing is a great question.

What we’ve found is that pricing actually is pretty strong, and that as we -- we’ve been, as I talked about in my remarks, we’re enhancing our product line, and we found that clients really see a lot of value to that.

And so, we are seeing good strength in pricing, and we’re very optimistic about pricing on a go-forward basis.

Chris, you want to talk about the cash flow?

Sure.

Laura, on cash flow, let me just give you a quick kind of view of our thoughts on cash flow, a couple of things.

First, if you look at our first half cash flow from a kind of free cash flow perspective, if you add back the charges -- and this will get to kind of how we are thinking about the future -- I think what we said at Investor Day is we clearly believe that we can get back to an 80 to $100 million kind of free cash flow company.

If you take our kind of free cash flow for the first half and add back the charges, we had about -- almost $35 million worth of cash charges hit us, plus our $8 million free cash flow that we have reported with that in it.

You can clearly see us getting right back into that middle of the range, right?

So, we feel very comfortable that, as you start to extract the charges -- and I think we just talked about on the call that we expected 42 to 45 for the year.

We’ve already done 39 -- so, we’re really starting to put those behind us.

As we get through the back half of this year, the payments that are being made to people who have left the business will be exited, and a lot of the one-time charges will be behind us.

The only thing that will continue to run out would be longer-term facility lease charges, but that number drops off pretty dramatically.

So, we feel very comfortable that, when we still look out into ’06, that that 80 to $100 million target we’ve given is reasonable, appropriate, and we can see that pretty clearly.

And so, that’s kind of, I think, where we’re at now.

I think, as you look at the rest of this year, our view was that, excluding the impact of the incremental META charges, we still are looking at doing roughly what we saw in ’04 in ’05, and we still think that is a reasonable way to look at our cash flow for the rest of this year.

So, hopefully, that’s clear.

Final question, and then I’ll pass the baton, following up on Brandon’s question.

The salespeople you’re hiring, when they get their territories next year, do you think they’ll be at full court?

In other words, how long will it take these people before they generate [inaudible] quota?

Laura, that’s a great question.

We basically have looked at what salesperson’s performance is when they joined, and in their first three or four years.

And so, what we’ve done is assumed that their selling performance is going to be typical of a first-year salesperson that we’ve experienced in the past, and that means that their productivity is going to be substantially lower than someone that’s an experienced salesperson.

That happens because, when you assign them a new territory, they make their first sales calls, and it takes time to actually make those sales calls, get a relationship established and so forth, and get a proposal out and then close the deal.

And so, we’ve sort of anticipated that in our planning for next year, but we are -- they will definitely lower productivity than the average productivity of our sales force.

Thank you so much.

Robert Squall (ph) with Sidoti & Company.

Good morning.

Actually, a couple of my questions have already been answered.

I just wanted to delve a little deeper into the revenue.

You talked about -- I think, if I heard you correctly, META accounted for 19 million of the first half revenue.

What is the core research, if you can break it out?

How did that perform during the quarter?

That would be the first question.

And then the second relates to CapEx, and I believe you said 7 million during the first half.

It may have been during quarter.

I’m not sure.

Will -- is the plan for CapEx to approximate depreciation and amortization?

Let me answer that first.

That’s quick.

It’s 7 million for the quarter.

We would expect for the rest of this year to be -- we’ve been saying around 25 million.

My guess is we’ll come in less than that, probably closer to 20, which will be less than the depreciation and amortization we’re expecting for this year.

So, that’s kind of roughly probably the ballpark that you should expect on CapEx and depreciation.

And then on revenues, let me just go back and clarify -- excuse me, whoever has their phone not on mute, could you put it on mute, please?

So, Rob, your question on revenues.

I did say during my comments that it was 19 million.

Let me just clarify that.

It would have been 19 million if we didn’t have a deferred revenue reduction.

That actually impacted us by 5 million, so, on the META piece, you should correct my comment and say it was about a $14 million impact to the quarter, so -- for the year-to-date and the quarter.

So, if you look at our year-to-date revenue results and you see that we’re up about $42 million, or up about 10% I think on the full year on revenues.

And if you’ll go underneath that, about 14 million of that is META.

And if you take out foreign exchange, you roughly have about a 5% organic growth increase in our business.

If you go to research, we don’t break out on the revenue line the research versus the executive programs revenue, but that research line is, again, up, excluding META , FX, everything else, just true, pure organic growth about 5% on the top line.

As we mentioned -- and you can get a surrogate for that in our performance of our EXP business -- EXP continues to be pretty strong, but we’re really encouraged that we’re starting to see the flattening in the -- in our core business, as well.

So, hopefully that helps you kind of get a better picture of the contributions and the true underlying performance.

No, thank you.

I appreciate it.

Jim Lane (ph) with Northstar.

Hi, yes, good morning.

I just wanted to understand, on your comment that, without this accounting adjustment for the META transaction, that you would have increased EBITDA guidance for this year by $10 million.

So, does that mean, as we look out to ’06, once that normalizes, if we look back to your prior guidance about ’06, we could extrapolate that 10 million EBITDA increase to come in to that prior ’06 guidance -- sorry, it’s a little convoluted question, but so is the release.

Yes.

No, we understand that we -- that, unfortunately, this accounting regulation is a little bit complex, and we’re trying to make sure people understand the true kind of health of the business, and understand how revenue performance ties to contract value, because, right now it doesn’t because of that accounting change.

And so, yes, we felt very comfortable with our performance to date.

We feel that, as Gene mentioned, our META performance has been at or above our expectations, and so we felt that, if that 10 million of revenue was going to be recognized, we would have continued to provide upside guidance.

And so, we feel very comfortable being able to hold our guidance despite that revenue not coming in this year.

So, for this year, that’s what we’ve clearly guided.

Going into ’06, I think we clearly noted that we were leaving our guidance unchanged for ’06.

So, as we look forward at this point, we have not provided any additional guidance to change that.

We still believe that we have the insight into seeing exactly what we’ve given the Street guidance on, which is in the $130 million range of EBITDA.

And as we continue to give you these results, and as we get closer to the end of the year, we will give better guidance as we look forward.

Yes, just to clarify that, Jim.

So, we’re basically not updating our guidance for next year, so just sort of -- we -- I’d leave it like that.

OK, but just economically, cash dollars to the company, has anything changed?

Economically, no.

This is purely an accounting entry on the -- on that $10 million, if that’s what you’re asking about.

Well, one thing -- yes, it’s Gene.

One thing has changed, which is, if we -- when we did our forecast for this year last quarter, we had -- we believed that this accounting adjustment would not be material, so we did our forecast.

If the -- and as we’ve been finalizing the purchase accounting, we determined it, in fact, was going to be material.

If it had stayed not material, the conditions same as last forecast, we would have raised our forecast by 10 million.

So, the way to look at it, getting through -- surfing through the accounting is the underlying performance of our business is 10 million better for ’05 in EBITDA performance than we had forecasted last quarter.

So, we’re -- we think that’s a pretty strong -- so, last quarter it was better than we expected, and this quarter again it’s better than we expected in EBITDA performance.

That’s the sort of underlying.

Enron economics are we’re doing better than we expected by 10 million for the year relative to a quarter ago.

OK.

And then, I just had a follow-on -- well, it’s not a follow-on question.

It’s a separate question.

One of your competitors reported yesterday, and, in their conference call, announced a pretty aggressive program, or -- called Get META, and so I was wondering if you could address the META account client attrition rate that you’ve seen so far relative to your expectations going into that transaction.

I thought it was somewhat unusual for such a bold statement by a competitor on a conference call, but maybe this would be your opportunity to sort of address performance relative to expectations.

Thanks.

Basically, we have not seen any -- again, as I said earlier, our performance against plan with META is better than we expected.

What we found is that, for the clients that canceled their contract, they typically were not picking up a competitor.

It’s typically a situation where one person had both Gartner and META seats, and they chose to, instead, just stick with Gartner or the combined entity as opposed to buy two.

We’ve seen very few instances where that -- where they’re dropping META and picking up someone else.

So, that’s not been a -- at least for this quarter, it’s not been a significant impact on our business.

Dave (ph) [inaudible] Porter.

Yes.

If I’m listening to the numbers correctly, you said the contract value up 16% excluding META in 2005 to up 6 percent, and if you include META in 2004, it’s up 3%.

So, you can kind of sort of derive the imputed META growth rate, which is actually down quite a bit.

Can you sort of shed some light on that?

Sure.

I think I commented during my initial comments that, if you look at META reported -- I’m going to try to give you a little color here because it’s somewhat complicated, and so we recognize that.

So, in June of ’04, if you look back at what META reported, they reported $71.5 million in contract value.

In March ’05, they reported $62.5 million in contract value.

So, prior to our acquisition, they had lost close to $10 million in contract value.

That contract value, as they report, does not conform to the way Gartner reports contract value.

They would include in their contract value tickets bundled with their research with SASS (ph), their equivalent of SASS days.

So, as we begin to report META, we take that out, and we will be reporting META contract value equivalent to Gartner contract value.

So, their 71.5 million in June ’04 was actually about $10.5 million less, so about 10 -- 61.1 million.

And in March ’05, they reported 62.5 conformed to Gartner would be 53.4.

So, the net of that is that, prior to us acquiring, they have come down significantly.

But yet, if we do a year-over-year compare, the Gartner piece is doing significantly well underneath that to make up for that point.

So, to your point that you just made, you’re looking at it exactly right, which is, if you extrapolate the underlying META business, it was down significantly, and the Gartner piece was up nicely underneath that.

So, hopefully that helps give a little color around kind of the starting points and what that looks like, but let me know if you need more clarity.

Yes.

Can you also talk -- META hasn’t been very profitable historically.

Can you maybe talk a little bit about sort of how they’re operating?

You don’t necessarily have to say operating margin, but have they -- are they making money, or how they’re doing?

Actually, the point that’s important here -- and I think Gene commented on it earlier in his comments -- is that we have fully integrated META into the Gartner business.

There is no stand-alone META.

The numbers, by the way, that I’m giving everybody will become increasingly difficult for us to continue to report out.

I think in the first quarter call, we commented that, as we fully integrate META, both on the expense side, in the product portfolio, and as we begin to renew joint clients, it becomes increasingly difficult to separate out the stand-alone entity because it doesn’t exist.

We’re able to do that in the first quarter, and we’ll begin to tell you, as we move out, estimated numbers where it makes sense, and we’ll tell you where it’s hard to do that.

So, to your point, is, yes, you were absolutely right.

They were not even breaking even, I think barely, when we acquired them.

Gene mentioned that we had taken action to take out $70 million plus of cost out of their cost line, so we feel very comfortable that we’ve got the right business plan in place to turn that into a profitable business as we bring it into the Gartner portfolio.

So, hopefully that’s clear, and again, so to be able to give you stand-alone META, it doesn’t make sense.

We don’t have that as a stand-alone entity anymore.

Yes, just to add a little color to that.

So, the META salespeople are now just a part of our normal sales organization.

They’re not separate in any way.

The researchers have been completely integrated into our research organization.

They’re not separate in any way.

The -- yes, the consultants are integrated in their consulting organization.

So, in each of the areas, there is really no META stand-alone.

And in fact, if you have a client that was a -- and the one thing we’ve kept separate so far is, if a client had an existing META contract, we’re obviously honoring that contract, and we’ve set up a separate delivery vehicle to deliver that subset of our services that META delivered in the past.

But when they renew, then, basically, they’re renewing as a Gartner contract, and we’re just tracking it as Gartner.

And so, when we do a renewal, it’s -- you can’t separate it from then on out in any way.

That’s the first piece.

And the second piece, in terms of the economics, again, the -- we believe the deal -- we planned the deal to be economically very attractive to us at the pricing we paid and the terms, and we are exceeding those metrics at this point.

On the cost side, we’re doing as well or better, and on the revenue side and sales side, doing as well or better than we had planned.

So, I think that the sort of inferred answer to the economics is it’s going very well.

Great.

One last question.

Sorry about that.

Can you just -- on the consulting business, how that’s been doing, how you’re differentiating there versus your competitors?

Thanks.

Yes.

Our consulting business -- we actually have some very attractive segments in the consulting business, and we try to be differentiated from everyone else in consulting.

So, for example, the biggest single element of our consulting business is a measurement and benchmarking practice.

That’s a business that we have we think the best data in the industry on.

It’s a very good business for us.

As there’s been a lot of -- there’s a lot of demand for that business from two fronts.

One is where people do outsourcing deals, those outsourcing contracts typically require someone to -- a third party to come in and do an assessment of the costs in those outsourcing deals, and we have, by far, the best information, we believe, on -- for those things, and that’s a big piece of it.

Second piece is, even if you don’t do an outsource, there’s a lot of pressure to run your operations more effectively.

And again, we have the best information from all the people who do that.

So, that’s the single biggest piece, and it’s a very attractive business.

The second piece is we have a piece where we help people make better procurement decisions, and again, that business, people are very focused on buying more effectively, and that business is doing very well, has great margins.

The third piece, which is also very attractive piece, is we have a government practice that focuses on serving governments in particular, and that’s a very successful business for us because government find it very, either legislatively or because of their own strategy, want to have a truly independent source of consulting advice.

And when it comes to IT, we re the -- widely recognized as being a very independent and authoritative and knowledgeable, and so that’s another big and highly profitable practice for us.

And so, if you -- and those things really constitute the majority of our consulting business.

So, we think -- and then, one of the things we also report as a part of it is our consulting that our analysts do.

And again, the consulting that our analysts do, we -- that’s a very profitable business.

Clients get a lot of value from it.

So, you think about all those -- those four pieces constitute the majority of the business, and they’re all very attractive, and we’re highly differentiated in each of those pieces.

And we don’t plan to go into things that we’re not highly differentiated in.

We’re going to stick to things that are -- things that we really stand out with, and that’s why we think -- you saw the growth in backlog.

We think that the -- again, we’re not limited by demand.

We’re limited by our ability to actually deliver it in the quality kind of fashion we want to deliver it, and we’re working to make sure that we can do that.

Dave.

Great, thank you very much.

Congratulations on the quarter.

[OPERATOR INSTRUCTIONS.]

Jim Lane with Northstar.

Hi, just a follow-on question.

Given the strength in demand that you’re talking about, I was wondering if you could just give us a little bit of color on sort of why that’s accelerated, it seems like, in the last six or nine months. and then, secondly, is that -- what impact is that having on pricing? thanks.

I apologize if you already went over this.

Jim, it’s a great question.

I mean, basically, if you look over the last few years -- and we covered this on Investor Day -- Gartner’s been reducing our sales force.

So, if you look, like, the last few years, the average reduction per year, compound reduction has been about 7% per year.

And the -- that in the face of a market where 80% of the buying centers don’t buy a research and advisory service from us or our competitors.

And the reason they don’t buy is because the -- they are not aware of the -- what the services can provide.

And so, we’ve been reducing our -- prior to this year, we were reducing our sales capacity in light of market that is really under-covered by us and our competitors.

And so, one of the things we’ve done, again, is focused on building that sales capacity both organically and with META, and we think, basically if we call on clients, they’ll buy from us because we have great products.

And that’s really what you’re seeing is going on.

And we think we have a long way to go there before we tap out the kind -- the right kind of sales.

If we just put it in perspective, I think we could easily double the size of our sales force over time, and still wouldn’t be covering the market adequately.

Give you an anecdotal example.

There are large financial institutions that have tens of thousands of IT employees, multi-billion-dollar IT budgets, and 15 CIOs, and we have half a salesperson assigned, and we never even get around to calling on a lot of the organization with that kind of sales coverage.

And so, what we suffer from really is incredibly low sales coverage today.

I think I mentioned this at Investor Day.

When I was responsible for technology at ADP for six years, and ADP is one of the top 50 technology buyers in the world, I never once got a sales call from Gartner.

And that’s kind of typical because of the poor coverage.

So, one foundation of our strategy is to increase our sales coverage so that we get to these clients, these prospects that, in fact, when we call on them will buy from us.

But we just haven’t called on them.

And then, as a complement to that, we’re going to continue enhancing our product line so that our products continue to be compelling, and are even more compelling in the future.

And any comments on pricing for your services?

Well, yes.

I think, basically -- I’ll make two comments on pricing. one is I think we’re seeing strong pricing in the marketplace today.

And secondly, over the second half of the year, we’re planning to make some pricing structure changes that we think will better match what clients want.

We’re making product and pricing changes to better match what clients want, and clients are telling us they will pay more if we make these changes, because it doesn’t match their needs.

Just as an example, there are -- we sell to technology -- at a high level, we sell to technology providers.

We sell to IT end users.

We sell to investors.

We sell to service firms like the consulting firms, and they all have different kinds of needs and pricing programs.

Today, we have a one-size-fits-all.

And as we looked at -- as we’ve talked to clients in each of those segments, we’ve actually identified pricing programs where, if we change the product a little bit, the pricing structure a little bit, they’re happy to pay more because it meets their needs much better, and we get more revenue and more leverage in our business.

And so, we think that we’re seeing strength now, and, as we make those changes that are really very customer oriented, that, in fact, there’s a lot of upside there, as well.

And just one last question, which is would you care to comment on what Microsoft’s launch of their new operating system might mean to an organization like yours in terms of driving incremental demand for the consulting services?

Yes.

We haven’t looked at any particular individual product having an impact.

I think you’re -- that’s a very interesting area.

But there’s a continuing stream of products, and we have a very broad set of things that we cover, that being one of them, and I’m sure that will drive some demand.

But there are equally big things -- if you’re a big IT buyer, there are big changes in storage systems, in networking, that are equally as impactful that sort of are going on an ongoing basis.

So, we’re not seeing a big -- I don’t think we are expecting a big surge in demand because of the introduction of that.

I think it’s part of why people buy us anyway.

And again, it’s part of why we think the other 80% that don’t buy from us or our competitors should and will buy from us if we call on them.

And you have no other questions at this time.

No more questions now, so I’d like to thank everybody for participating in this call, and look forward to talking with you again next quarter.

Thank you for your participation in today’s conference.

This concludes the presentation.

You may now disconnect.

Good day.