高德納諮詢公司 (IT) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Gartner Inc earnings conference call for the fourth quarter of 2005.

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

Following they're remarks, we will open the call up for QA.

A replay of this call will be available through March 3rd, 2006.

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 44267645.

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

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

The Company would like to remind everyone of the cautionary language about forward-looking statements an projections contained in its 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 actual events or results may differ materially.

The Company encourages you to read it's SEC filings, including it's 10-K for the period ended December 31st, 2005, 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.sec.gov.

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

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.

Thank you, operator.

Good morning,everyone, and thank you for joining the call.

At Investor Day last year, we outlined a strategy that build on our core competitive strength of providing real insight to technology leaders.

We believe this strategy will provide long-term value to our shareholders, our returning growth to our core researching and consulting businesses, while continuing growth in executive programs and events.

In addition, we led operational programs to improve margins and client retention.

I will begin his morning with a summary of the accomplishments we've made toward this strategy.

First, we grew contract value as 16% to $593 million.

That's the highest level since 2000 and the second highest level ever for Gartner.

We delivered over $105 million in EBITDA, exceeding our guidance for 2005.

We bought and successfully integrated META, meeting or beating our business plan targets.

We established and began implementation of a client focused growth strategy and we put in place a strong leadership team with experience in their respective roles.

The acquisition of META was the single most important initiative during 2005.

META provided us with addition skilled salespeople, additional talented analysts, project extensions and broadened geographic coverage.

The fast and successful integration has allowed us to meet the metrics we defined in our original business plan, including an $80 million reduction in costs.

We closed on April 1, on that day we had an innovative research product to offer our clients.

As we continue to enhance our product portfolio going forward, we will look to build and expand using best practices for both Companies.

Associate retention of the META employees during 2005 was over 90%, and former META associates have taking on important visible roles within Gartner.

For example, Dale Kutnick, META's co-founder, is leading the development of or new research product line, Gartner [indiscernible] Leaders.

Productivity of the former META salespeople have been on par with Gartner salespeople.

All former META associates are fully integrated into Gartner.

I am now going to discuss accomplishments by business segment, starting with Research.

Revenues for Research were $523 million.

An increase of 9% from last year.

Client and wallet retention remains strong throughout the integration of META clients during 2005.

The retention rates are another indication that the steps we took in 2005 to improve the client on-boarding process are producing positive results.

At Investor Day, we told you the key initiative for 2005 would be to rationalize the Gartner product portfolio, both are refining our existing product architecture in developing new products.

During 2005, we retired and divested several non-profitable products.

We also took steps to step up the Dataquest product offering by targeting products for specific needs and increase the flexibility of deliverables.

We also released Industry Advisory Services, which represents the best of Gartner's former G2 offering, combined with META's industry practices.

During 2006, we introducing a new series of products designed to make our research easier to use and easier to sell.

We call them Role Mix products because they are tailored to meet the needs of specific job roles, such as an architect or operations manager.

They're modeled after our very successful Executive Programs products which are fundamentally products for the CIO roll.

The value proposition for these products has expanded from our traditional research core research offering and includes five elements.

Vendor and Product Assessments, IT News and Analysis, Community, Actual Tools and How to Succeed in that Role.

The brand name for these products is Gartner for IT Leaders.

The first two roles, Security and Risk Management, and Infrastructure were launched on February 1st.

During this year, we plan to roll out an additional six role-based offerings.

I look forward to sharing more details for you in March at Investor Day.

Turn to Executive Programs.

Our Executive Programs team refined our product offerings in alignment with our research strategy to increase value to our clients while reducing the cost to provide these services.

Our plan for Executive Programs called for continued strong growth while improving client retention and margins.

Contract value for Executive Programs grew about 29% in 2005.

Membership grew 18% and we ended the year with over 3,500 members.

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

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

Turning to Events, revenue grew 9% to $151 million and we continue to drive consistent and profitable growth with margins at 50%.

Our total audience grew by 14% worldwide.

We attracted more companies and individuals through the expansions of our offerings.

We had great success in launching targeted events in both new topic areas and new geographies, including the First Annual China Outsourcing Summit.

However, the growth in Events grew less than guidance, primarily due to the effects of the hurricane season in North America and some isolated operational challenges, which have been resolved.

We continue to believe that Events Businesses can grow profitably, as you will see in our guidance.

Now, let me turn to Consulting.

During late 2004 and early 2005, we laid out a strategy for improving Consulting with three major elements.

First, focusing on fewer, more strategic accounts.

Second, selling larger deals to integrate solutions, and finally, enhancing economics to improved resource and knowledge management.

We made significant progress in implementing each of these three strategies.

In addition, we put in place a talented and experienced consultant leadership team.

This strategy and leadership team had a impact in '05.

Revenue grew 16% to $301 million and margins for the year were 42%.

Finally, our Analyst Organization is central to everything we do at Gartner.

As we mentioned at Investor Day last February, strengthening is the quality and relevance of our research is the top priority of our Research Organization.

One critical aspect is ensuring that we know how clients use and value our research.

During 2005, we implemented a Management Dashboard that tracks document production, client readership, sales calls systems, inquiries and events attendance by analysts.

This allows analysis and their managers to get client feedback as to relevance and quality of our research.

It allows us to continually improve our product.

In summary during 2005, we have put in place a strategy in operational foundation for future growth, demonstrated that this strategy will provide accelerated profitable growth and met our financial targets.

During 2006, we will continue to execute the strategy and expect to achieve growth across our businesses.

Before I turn the call over to Chris, I wanted to note that we added a new Director to our Board, Richard J. Bressler.

Rich is currently a managing director at Thomas H. Lee Partners, a private equity firm.

Prior to that, he was Senior Executive Vice President and Chief Financial Officer at Viacom.

Prior to joining Viacom, Rich spent 13 years at Time Warner, and a variety of senior management positions, including Chief Executive Officer of AOL Time Warner Investments.

Rich is a member of our Audit Committee.

He's a talented executive with a wealth of relative experience will be a excellent addition to our board.

I hope to see many of you in our Investor day in New York City on March 9th.

I will new turn the call over to Chris, who will provide more detail on our financial results for the quarter and the year, as well as, provide guidance for 2006.

Thank you Gene.

And good morning, everyone.

Our focussed execution on the initiatives discussed at Investor Day last February provided the platform to deliver the fourth quarter and full-year results announced today.

We are pleased with these results.

The actions taken to implement our strategy during 2005 allowed us to grow the Research business, delivery earnings at the high-end of guidance and most importantly, position Gartner for continued improvement in 2006 and beyond.

For the fourth quarter, total revenue was a 289 million, a 13% increase from the fourth quarter of 2004.

Our three major segments delivered solid top line growth with Research up 9%.

Consulting up 27% and Events up 7%.

Excluding the impact of META acquisition and foreign currency, total revenue grew by approximately 9%, from the fourth quarter of last year, including 3% organic growth in Research, 22% organic growth in Consulting and 8% organic in Events.

For the fiscal year 2005 total revenue was 989 million, an increase of 11% over last year.

Excluding the impact of META and foreign currency, total revenue for the year grew by approximately 5%.

Our revenue performance reflects organic growth across all of our segments and the benefits of the acquisition of META.

Excluding the impact of META and foreign currency, revenue was up over 3% in Research, 11% in Consulting, and 8% in Events for the full-year.

For the first quarter of 2005, net income was 14.8 million or $0.13 per share.

This included the following pre-tax items. 3.4 million of non-cash amortization of intangible assets acquired with the purchase of META. 1.3 million of charges related to the integration of META, and $700,000 charge related to a reduction in workforce.

Normalized EPS for the fourth quarter, excluding the above charges, was $0.16 compared to $0.14 last year.

For the fiscal year 2005, we reported a net loss of 2.4 million, GAAP EPS of minus $0.02 and normalized EPS of $0.36.

GAAP EPS earnings included the following pre-tax items. 28.6 million of charges related to a reduction in force, consolidation of facilities, restructuring of international sales agents and non-cash impairment losses on investments.

Six million of cost related to the employee stock option buyback program. 15 million of META integration cost, 10 million of non-cash amortization of META intangible assets.

All of the above charges for the full-year and fourth quarter were included in the previously announced guidance.

Now turning to the details of our P&L for the full fiscal year.

The change in cost of service versus 2004 relates to a number of factors.

The addition of over 140 META associates.

The actions taken earlier this year to restore employee compensation to competitive levels and the incremental delivery costs associated with the revenue growth in our Consulting, Events, and Executive Programs businesses.

SG&A increased with the continued investment in our sales organization.

During 2005, we added over 110 associates to the sales organization, including the addition of over 80 sales associates from META.

We now have over 700 sales associates, an increase of 17% from last December.

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

Capital spending was 2005 was $22 million, a decrease of three million from 2004.

This 11% reduction from last year highlights our focus on delivering strong cash flow and the result is also well below the 30 to 35 million included in our financial road map.

The change in amortization of intangibles versus 2004 relates to the the valuation of intangible assets acquired through META, which included intellectual property, databases and customer lists.

The total value assigned to these amort taxable assets was 26 million.

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

Net interest expense in the fourth quarter was three million reflecting the interest on the 246 million borrowed against our credit facility.

Our normalized tax rate for 2005 was 37%.

The rate for the year was slightly higher than expected due to the acquisition of META which impacted the mix of our earnings in the U.S. and overseas.

We are completing the integration of META indoor tax structure and expect our effective tax rate for 2006 to be 35%.

Now, I will highlight the results for each of our business units, beginning with Research.

As Gene noted, our Research business performed well this quarter, particularly, with respect to contract value.

Contract value grew to 593 million an increase of 84 million or 16% over last year.

This is the highest contract value since its peak of 599 million in September 2000.

On a sequential basis, contract value grew 26 million, or 5%.

Contract value for core research, which excludes Executive Programs, grew 1% year-over-year, and 4% sequentially, excluding META and the impact of foreign exchange.

This is a significant improvement in the trend of the past few years, and continued proof that we have achieved stability and have begun to grow our Research business.

The growth for the year shows increases across all regions,sectors, as well as, across the entire product portfolio.

We have also seen growth from both new clients and existing clients with average spend for clients increasing year-over-year as a result of our focus to improve the value proposition, and increase effective selling prices.

Contract value for Executive Programs, which is reported as part of the Research segment, increased to $148 million at the end of the fourth quarter, and is up 8% sequentially and 29% year-over-year.

Since the end of 2002, contract value for Executive Programs has more than doubled, reflecting an annualized growth rate of over 25%.

We ended to year with over 3500 members in our various Executive Programs strengthening our position as the largest CIO network in the industry.

Client and wallet retention also remains strong at 81 and 93% respectively.

These key metrics remained at historically high levels, even as we transitioned the META client base during 2005.

We have now transacted on almost all of the META contract value and we have met the retention targets we originally established.

Overall Research contribution margin ended the year at 59%.

This reflects the change in mix between our higher margin core research business, and the slightly lower margin higher touch executive programs businesses and the compensation increases discussed earlier.

Turning to Events.

Revenue from Events were 69 million for the first quarter compared to 64 million in the same period last year, a 7% increase.

In the fourth quarter this year, we held 19 events compared to 12 events last year.

We had over 14,210 attendees at our events this quarter, compared with 13,500 in the fourth quarter last year.

For the full-year 2005, Events revenue was 151 million compared to 138 million in 2004.

A 9% increase.

We held 70 events with 35,500 attendees, compared to 56 events with 31,200 attendees in 2004.

The Symposium/IT Expo series remains the premier event for IT professionals attracting more than 1200 CIO level attendees in Orlando and CON alone and almost 15,000 total delegates worldwide.

We had great success with the execution of our plan to launch targeted events in both new topic areas and new geographies.

Our ambitious launch calender delivered successful new events, including our First Annual China Outsourcing Summit, the Data Center Summit in EMEA, the Business Process Management Summit and the Financial Services and IT Summit in North America.

At the same time, we rationalized the existing portfolio and exited events where interest was waning and that could no longer be our profit targets.

As a result, while new events typically have lower margins in their first year, this effective portfolio management allowed us to deliver strong 50% contribution margins in 2005.

We are attracting more exhibiting companies and individual attendees through the expansion of our offerings, the quality of our content, and ability to create a high-value environment for IT professionals.

While this lead to the 9% growth in Events revenue for the year that I mentioned earlier, it was less than expected for two reasons.

Hurricane's Katrina and Rita had a negative effect on registration in prior -- in the weeks prior to the Orlando Symposium.

Operational challenges in our vision of that business did not allow us to fully capitalize on the market opportunity in that segment.

We move quickly to correct this through a realignment of the organization at the end of December.

The outlook for our Events business remains strong, as you will see, when I discuss 2006 guidance.

Moving onto our Consulting business, revenue was 85 million in the fourth quarter, a 27% increase over last year.

For the full-year, Consulting revenue was 301 million, compared to 259 million in 2004, a 16% increase.

During 2005, we continued to execute on our strategy, which included increasing productivity through more effective resource and knowledge management, pursuing engagements of larger size and scale, with a focus on fewer strategic accounts, and exiting nonstrategic international markets.

With these efforts, we made progress towards the target for our key performance metrics discussed at our last Investor Day.

Utilization averaged 62% for 2005.

Billable headcount was 525 on December 31st, up 11% from 475 at the end of 2004.

The annualized revenue for billable consultant is well above $375,000 per year.

The average engagement size for our Consulting business now exceeds $150,000.

And we ended the quarter with a back log of $120 million, an increase of 7% over 112 million in 2004.

Consulting contribution margin increased to 48% in the fourth quarter, up from 33% in the fourth quarter of last year.

The success for the quarter is attributable to two major factors.

First, we had projected a normal seasonal decline in utilization for the quarter, and our engagement based business related to the normal holiday and vacation season.

This decline was not as pronounced as expected.

And second, our performance fee-based portion of the business exceeded our expectations, with a number of significant engagements previously projected to close in first quarter of 2006, actually closing in December.

All of this drove the contribution margin up to 42% in 2005, from 36% in 2004.

Let me now spend a few minutes on our capital structure.

We will continue to drive shareholder values through the continued evolution of our capital structure.

In 2005, we took a number of steps in this regard.

In June, we amended our credit facility.

This new facility increased our debt capacity and provided for a more favorable amortization schedule.

In October, we reduced our exposure to rising interest rates on the term portion of the loan facility by entering into an interest rate swap agreement.

We have now locked the floating rate of our term loan to a fixed interest rate below 5%.

In July, we eliminated our dual class stock structure with the consolidation of the A and B shares, we now trade under a single class of stock, which has increased liquidity for our shareholders.

In September, we completed an employee stock option buy back program.

We repurchased 6.4 million options which represented approximately 80% of the options eligible for tender.

This was a cost effective way for us to reduce the option overhang.

At the high in December 2002, the Company had 36.5 million options outstanding.

As of December 2005, that number is 17.6 million, a reduction of over 50%.

Finally, at the end of the third quarter our Board of Directors authorized a $100 million share repurchase program.

In the fourth quarter, we repurchased 838,000 shares at a cost of $11.1 million.

Now, let me turn toward our business outlook for 2006.

In 2006, we expect total revenues will grow by 3 to 7% to approximately 1.022 to 1.055 million.

On a foreign exchange neutral basis revenues would increase 5 to 8%.

Projected revenues by segment are as follows.

Research revenue approximately 550 to $560 million. 5 to 7% growth rate.

Consulting revenue of approximately 300 to 315 million a 0 to 5% growth rate.

Events revenue of approximately 167 to 172 million a 10 to 14% growth rate and other revenue of 5 to 8 million.

This decline in this segment from 2005, is due to our decisions to exist and rationalize a number of low margin or unprofitable product lines.

We expect a significant increase in EBITDA for 2006.

Normalized EBITDA for the full year 2006 is expected to be 135 to 142 million.

An increase between 28 and 35% over 2005.

In 2006, we will adopt FAS 123R, which requires the extension of stock options.

This non-cash expense will be excluded for normalized EBITDA for purposes of consistency and is expected to be approximately 12 to $14 million for the year.

The remaining non-cash amortization of intangible assets related to the acquisition of META is approximately 10 million for 2006 with over 90% of that expense to be recognized in the first three quarters.

We expect depreciation of 26 million, other expense of three million, and interest extension of approximately 15 million in 2006.

We currently do not anticipate any special charges in 2006.

We are projecting an effective tax rate of 35% and an average fully diluted outstanding share count of 118 million shares for the year.

GAAP EPS for 2006, is expected to be $0.36 to $0.40, as compared with a loss of $0.02 in 2005.

Normalized EPS is expected to be $0.49 to $0.53 a 36 to 47% increase over 2005.

For consistency purposes, normalized EPS excludes two items.

The amortization of intangibles related to the acquisition of META and the impact of FAS 123R.

These two excluded items impact earnings by approximately $0.13 per share in 2006.

We expect the cash generation of the Company to improve sharply as we drive growth in our Research business.

In 2006, we expect cash flow from operations of 95 to 110 million up from 27 million in 2005.

With capital expenditures of 20 to 25 million, we expect to generate free cash flow of 70 to 90 million.

We expect to continue to use our strong cash position to reduce our shares outstanding through the Share Repurchase Program.

While our policy is to provide annual, not quarterly earnings guidance, we want to provide enough information to allow for a understanding of the seasonality and other factors that will impact our revenues and earnings on a quarterly basis.

I would like to remind everyone that revenues from our Events business are based on the timing of our events.

In 2006, you can expect similar quarterly phasing to what was reported in 2005, with close to 80% of the revenues from events coming in the second and fourth quarters.

Our fourth quarter remains the most significant with the annual fall Symposium/IT Expo series occurring in October and November.

Our key performance metrics for consulting our annual targets and utilization in particular, fluctuates from quarter to quarter, primarily due to seasonal factors.

As I mentioned earlier, a portion of our performance in 2005 related to the acceleration of engagements in our performance fee-based business from the first quarter 2006 into the fourth quarter 2005.

This is reflected in the revenue guidance for 2006 and as a result, we do not expect the margin for the first quarter 2006 to remain at the 48% seen in Q4.

We anticipate the timing of revenue for the Consulting segment in 2006 to approximate the pattern seen in 2005.

Now let me spend a moment on the impact of foreign exchange in the 2006 estimates.

Approximately 30% of our revenues are denominated in non-U.S. dollar currencies and are subject to fluctuations in the foreign currency market.

Our guidance for 2006 reflects the unfavorable impact to revenue and earnings in the strengthening U.S. dollar.

Roughly an equivalent portion of our expenses are demoninated for in foreign currency as our revenue and as a result, foreign exchange has a minimal impact on bottom line earnings.

With regard to contract value, we report the results for this key metric at a constant foreign exchange rate during each fiscal year to provide visibility into the true performance of our business.

Approximately 30% of our contract values denominated in non-U.S. dollar currency and due to the significant strengthening of the dollar over the past year, we expect contract value to decrease by approximately 3% in the first quarter as a result of this revaluation.

This change is solely related to the revaluation of contract value and is not a reflection of the business performance.

To be clear, the impact of foreign exchange on contract value is included in the revenue and earnings guidance that I have already discussed above.

Last February, we provided a three-year financial road map.

We included our expectations for contract value growth and remain confident with that guidance and are on track to accelerate growth in our Research business on an FX neutral basis.

This growth, will continue to drive earnings towards the targets we have established.

As I mentioned earlier, we expect the impact of foreign exchange to our earnings to be minimal.

Before we finish and begin the question and answer session, I want to remind you, again, about our Annual Investor Day in New York City on March 9th.

Please call Germane Scott at 203-316-3411 to register, or if you have any questions about the event.

With that, I will turn the call open for questions.

Operator.

Thank you. [OPERATOR INSTRUCTIONS] Your first question comes from the line of Brandon Dobell from Credit Suisse First Boston.

Please proceed.

Thanks.

Good morning, guys.

Hi Brandon.

Maybe we could dig into some of the strategic things over in Research for a second.

I apologize I had to jump off for a couple of minutes.

Maybe get some background color on -- I know it's early dates, but how the traction looks with some of the push back on discountings and the price increases, initial feedback from the role base products.

Then, I guess, from a broader perspective, where do you think you are -- how happy are you with getting the full breadth of the product suite squared away between the META products, the Gartner products?

Do you think there is areas of overlaps that you need to work on or holes you need to fill?

It's Gene.

Basically, with regard to discounting, we have changed our strategy from what it was before I joined.

In particular, what we're doing, we're focusing on selling this value of the products to the clients.

The pricing -- the cost of our product is very small relative to any of the clients budget that we're selling to.

It's making sure they understand the value.

That's been very successful.

If you look year-over-year, the kind of pricing increases we have realized.

It's on the order of 5%.

And that includes the fact that we have multi-year contracts there as well, which weren't effected directly.

We also did a sort of a across the Board -- we don't have list prices as subject as such, but our internal pricing, we did a 3 to 4% price increase in November.

Between all of those actions, we really -- because we have focussed on selling the value had, I think, very little concerns with it.

It worked quiet well I think.

So I think on discounting things are going as we would have hoped they would have go.

And clients are seeing the value, and we are not getting a lot of push back on the pricing.

Second thing, as you mentioned, we mentioned that we introduced these role-based products.

They just went on sale February 1st.

It's way to early to say what the market reaction is.

We did do a bunch of market tests.

Focus groups and so forth in the fourth quarter.

Those were well received.

In addition, we introduced them to our sales force at our Sales Kick Off in January.

The sales force was very enthusiastic about it.

In fact, one ironic piece of it is, that we sort of see it as -- we wanted to [indiscernible] our products for four customer segments.

IT users, IT vendors, investors and consultants and we're only initially because you can only do a certain, you can only do as much at a time.

We're starting with the IT users, and the people that sell the other segments were impressed with the product and disappointed they were going to have theirs as early as the user products.

That has a very good indication.

The other thing is, as I mentioned in my script, is we have really modeled these things after our CIO World Product Executive Programs.

If you think of any IT organization, they have got a CIO.

They have got six or seven or eight times as many just direct reports to the CIO.

So we expect over time, we'll get the same kind of success with each of these product that is we've had with the CIO level product.

We're talking about eight additional roles.

So we see that as a lot of growth potential.

It's too early to say, but the sales force really likes them and the customer feedback, we did market test and was very positive.

And lastly, you asked about the full breadth of our products between META and Gartner.

The META acquisition is done.

Meaning that, we're fully integrated .

There is a couple of tax issues but from an operational basis, we're completely integrated.

The associates that were formally with META are not referred to as META associates.

Internally, everybody thinks of them as though they were -- think of them as if they've always been here.

The product lines are completely integrated.

The salespeople are fully integrated and their performing at roughly the level of Gartner salespeople, which is up substantially from what it was when they were with META.

So I would say that in terms of both the META integration.

We're done.

In fact,I don't plan to talk about it next year at all because I think we're done with it.

And in terms of our products, we are really happy, particularly with these role based products.

We feel like we have got across our portfolio a good product line.

Okay.

I appreciate that, and one kind of related question, if you think about forward -- looking forward on the sales side, and Chris, you mentioned the number of associates that you guys have picked up last year.

How should we think about what the adds might look like?

Would those be direct sales, international, inside sales?

How should we think about the numbers or percentages that you guys are looking at?

I'm assuming your guidance.

Basically, that's a great question because as you know, I think that we believe we have a very large untapped market opportunity.

There are companies that are not assigned to any salesperson today.

Like I have used an example of Kansas City, where there is 12 companies over a billion dollars, and we only call on five of them.

The other seven are unassigned and there is divisions of large companies.

We will have one person assigned to an $80 billion bank with 15 CIOs, as well as, remote locations of companies that are not covered today.

So we think there is a huge opportunity there.

We grew our sales force last year, and we're very happy with the productivity results we got.

During '06, we're planning to continue to add territories.

We'll limited only by operationally how much we can effectively absorb.

We're planning to add something like 80 to 100 territories during '06.

And maybe as many as 120, if things go really well.

I think more likely, it will be 80 to 100.

We won't have a lot of sales productivity in '06 but it will give us great sales productivity in '07.

So that is what we are planning to do on sales.

So, Brandon, just to provide a little more clarity on that.

As you think about guidance, just think about those coming in relatively even throughout the year.

So kind of maybe 10 a month or so.

So think about modeling the cost and expense, so that's how I think you should think about it.

Just to be clear, it's really going to be primarily in the direct field sales forces, as posed to any other portions of the sales organization.

Great.

Thanks a lot.

Your next question comes from the line of Laura Lederman of William Blair.

Good quarter.

A few questions.

One, can you break out what CV value grew in the fourth quarter without META but with the Executive Program?

Hi, Laura, it's Chris.

How are you?

I'm good, Chris, good morning.

Good, if you look at total contract value growth in the fourth quarter, excluding META, it was up 5%.

So we went from -- well I don't have the exact without META in it, but it's a 5% increase excluding META.

Excluding META and excluding currency -- or including currency impact.

The currency impact I think in the quarter was pretty minimal.

So really, 5%, sequentially up.

And also 5% year-over-year up excluding foreign exchange in META.

Great that's very helpful.

Can you also -- while I'm asking the questions, Chris, give us a sense for cash flow and CapEx for Q1?

I know you gave full-year but can you give us a feel on how to spread that out?

Laura, let me talk about cash flow for everybody's clarity.

If you look at 2005, we delivered 27 million of operating cash flow, had 22 million of CapEx to get us five million in free cash flow.

Inside of that was about 62 million of charges.

So simply, the charges which as we talked about not having charges in 2006, can easily see cash flow getting, adding that back, you would be at 67 million for '05.

As we talked, about providing guidance in the range that we just talked about.

From a pattern and askew point of view, you probably shouldn't expect dramatic difference to what we had.

It's probably going to ramp up throughout the year as we really the grow contract value.

Remember part of the leverage in our model is as we continue to ramp up contract value, our billing practice is to bill that up front.

So the big jump you're going to get is coming out of the working capital as you start to drive that.

So third and fourth quarter you're going to see the biggest pop there.

Although, you will start to see some benefits early on, as you see a quick ramp down in the other charges and the META related charges.

So that is kind of how you should think about pattern of cash flow.

And this question is for you Gene.

When you talk about adding 80 to 100 territories in '06, or 120 things go out, can you just map sales people?

Does that mean 100?

Or 80 to 100 sales people?

Is there one-to-one correlation to that or more?

It's a one-to-one correlation.

When I say territories, what I mean is sales people.

The only reason I distinguish it is because you get turn over in your sales first during the year.

Any given point in time some portions of the territories are empty.

We think about it in both metric, meaning that I have X territories and now 2% of them are open today because of turnover.

So I was just being clear on the territories that we are establishing.

Those are going to be spread by the way, geographically around the world.

In every market, we have these opportunities.

Another question for either of you.

If you look at competition, who do you see besides Forester, in your businesses, particularly in Research and also the Consulting side?

Who do you think you're really competing against there?

Laura, It's Gene.

I will answer this.

Basically, I will answer it in two ways.

One is that we don't have anyone that does exactly what we do.

You know in terms of competition.

We're highly differentiated.

If you look at the number of analysts we have, the breadth of scope, and so forth.

However, in each of our markets, we do have a lot of people that compete that we're highly differentiated from.

So if you look for example, if you look at IT users, that can go to consulting firms and get information on different kinds of IT products, or they can go to Google and get stuff over the web.

There is a wide variety of competition.

We are all highly differentiated from it.

Again, if you go to each of our businesses, we're the same way.

That's Research.

If I take Events, for example, our Events -- there are loads of IT events.

Our Events are highly differentiated in the fact that we have content-driven events, and so our analysts go the presentations and that's the primary draw as opposed many other events that are often like trade shows.

So I think in each of our businesses, we have lots of competition but we're highly differentiated.

Thank you so much good quarter.

Thank you.

And your next question comes from the line of Robert Skloff from Sidoti Company.

Good morning.

The first question relates to the Consulting division for the guidance you give it's roughly low to mid-single digits top line growth.

Why was the fourth quarter so strong?

If you could detail that, that would be helpful.

Then, I have a question regarding your expected level of debt for the end of '06 for Chris.

Thanks, Rob.

It's Chris.

How are you?

Good, thank you.

Just a couple of things.

I think as I commented on during my talk earlier, we did have some really strong performance in the fourth quarter for a couple reasons.

Number one, historic seasonality in our Consulting business suggests you get a dip in utilization in the fourth quarter, as a result of holidays and that type of thing around the world.

So our normal seasonal pattern would see a dip there.

We didn't see as much of a dip.

Our consulting guys were working extremely hard during the fourth quarter and exceeded what our normal expectation would have been on that utilization for the quarter.

That's one piece of it.

So our core consulting practice had a strong quarter.

Second, as we do have some components of our Consulting business that are success based so, while they don't necessarily fall into a utilization calculation because they're based on sharing of some performance that we deliver with our clients.

So as a result, there is some seasonality and variability in terms of how that business comes in.

So as I mentioned, we had a number of deals that we had originally expected would be closed in the first quarter, actually closed in the fourth quarter, and that drove a pretty significant improvement to our fourth quarter results .In fact, that contributed to the year performance that you saw.

So, again, that business also contributed nicely to the results.

So as we think forward into 2006 from a guidance perspective, two things.

Number one, is we had expected that business to be part of our 2006 plans originally.

So you would have seen a bigger growth number in '06 than you saw in our guidance.

As we pulled that into '04, we're not convinced that that level of performance is going to -- excuse me, into '05 -- that level of performance, we're not convinced it's going to continue.

For a couple of reasons, number one, as we talked about many times in Consulting, we're continuing to drive towards a much higher margin contribution number and we're continuing to drive to a much higher utilization number.

While we're pleased with the progress we made, at a 62% utilization number, we still think there is room to profitably grow that business by improving utilization and improving productivity through effective resource and knowledge management without having to grow as much on the top line.

We're focussed on growing profitability, versus growing the top line quickly in that part of the business.

That's kind of some flavor around the consulting view into 2006 and what happened in the fourth quarter.

And your other question on debt levels.

As we get to the end of 2006, let me get to the number real quick.

Our expectation, I think we'll pay down somewhere between 10 to $20 million of debt at the high end.

You think we'll be?

Okay, sorry, we'll be down a little more than that.

We'll be down to 180 in terms of total debt by the end of 2006.

Is where we're projecting at this point.

Based on the amortorization schedule of our debt.

Okay, great.

The very last question just relates to the events.

You mentioned the hurricane had some effect.

It looks like the average attendees per event was down, and I just wanted to see if you could address that a little.

Well, what I would say there, Rob, is we had an incredibly strong performance in the Events business this year.

This was probably historically the most ambitious launched schedule we ever had as an organization.

So we launched 15 new events I think during the year.

And so what you see there is that whether you launch new events, you certainly have the first year ramp up effect, right.

We were very successful in terms of exceeding our plan and almost every case on some of the new events we launched.

Again, highlighting our ability to most effectively pick the right events in the right geographies and the right topic area.

The first year is normally the first year of building an event.

Then you will see the growth in the event attendees from there.

With that kind of launch you would naturally see a little bit of a decline in the average attended per event.

But as I said before, our focus on driving these events profitably, allowed us to continue to deliver those events at a 50% contribution margin consistent with what we have seen and consistent with the guidance that we have given.

So we feel good about how we delivered that year.

The other thing that I add, Rob, is that there has been a shift in mix in events too that is purposeful.

So we're growing.

We have these large flagship events that are called Symposium.

The part of the business that has the biggest growth potential -- Symposium will grow, but the business that has really been growing much faster are Summit Events and those events basically tend to be -- their not going to be at the same scale of several thousand people as the Symposium Events.

So there is also a mix shift going, and these new events that Chris talked about are mostly in the summit area, which are focused events and that segment is growing very rapidly and is very successful.

Great .Thank you very much.

And your next question comes from the line of Lavon Von Redden from Hockey Capital.

Good morning guys.

Good morning.

Quick question.

With the CIO product that's embedded in the research piece.

I'm trying to get some feel for how Research grew ex the CIO product?

I can give you those numbers.

When we talk about core research, that is the growth of our CV, excluding Executive Programs.

So for the year, we grew our core research CV by 4%, excluding foreign exchange in META and sequentially it's up 4%, excluding foreign exchange in META.

So our core business actually saw accelerated growth in the fourth quarter.

Real organic growth for the full-year.

That is a significant change in the trend that we have seen in the last few years.

As we talk about and think about these multi-year contracts, could you talk a little bit about how much of the percentage of the contracts came up this year that I guess was subject to some of your higher pricing and what is yet to come?

We have between 40 to 45% of our businesses is multi-year contracts.

So the rest of those contracts would have come up for renewal during the year.

So you probably saw 60%ish percent of our contracts come up for renewal during the year.

And the next -- the other 40 would have been on a multi-year.

Okay.

I guess the final question is, based on your free cash flow guidance, I guess, I think you said somewhere around 70 to 90 million.

It looks like you're indicating about a $70 million decline in debt.

Are we not looking at major share repurchases in '06?

Is that the correct way of putting it altogether?

What I would tell you is that we just gave you guidance on operating cash flow.

And free cash flow which would be does not include any of our financing activities.

As I mentioned during my talk that the Board has approved $100 million share repurchase program of which we spent $11 million.

So we will continue to be in the market as appropriate when we feel it's an appropriate price and appropriate opportunity for the Company during 2006.

And final question, Chris, is there a quarterly share creep that we should be looking at from options?

You know, our goal and objective is to try to minimize any change in our share count.

As you saw, we're projecting a slight increase.

The main reason for that is that we've had a lot of options exercised as the price has gone up over the last couple of quarters.

And so that's been the main reason for the increase in the share count.

But our goal is to leverage and use our balance sheet and cash flow to minimize that and maintain our share count at the levels you're seeing today.

Actually, I have one other question that I just thought of.

The CIO program has been very successful.

You talked about mimicking but looking at ways of creating other products like that.

Could you elaborate that a little further?

That sounds like a pretty interesting growth opportunity for you all.

Hi, Lavon, this is Gene.

Basically, what we have done is these role-based products which the name brand is Gartner for IT Leaders, are designed to be analogous to the CIO program.

The CIO program -- the reason we have been so successful is that it is designed for a CEO and it is sold for a CIO.

What we have done is identified eight additional IT user roles, for these role-based products, and we're going to be introducing two or three each quarter.

We have already introduced the first couple.

And they're analogous in that they're designed to be used by and sold to each specific role.

Like a architect or operation person or security person or procurement and so forth.

We think that basically in our research, the reason that the CIO program has been so successful is that it is easier to use for the CIO because it's designed for them and easier to sell for the salesperson because you can sit down with the CIO and say, "Here is how you use it to better earn your job."

These new role based products are designed -- the other eight are designed to be the exactly the same way.

Where a salesperson can sit with the architect and say, 'Here is the product.

Let me show you how to help use architect in your job every day''.

That is different than our traditional research product , which is more like a search engine that gives us access to a wide range of research.

We think it will be much easier to sell.

Clients will see the value better and it will increase our retention.

We're excited about it.

It will take time to kick in but we think over time, it will be -- it is our inspiration certainly over time for each of these roles to be as successful as the CIO program is today.

Excellent thanks.

Your next question comes from the line of Steve Cole of Matadore Capital.

Thank you, good morning.

Good morning.

Just a couple of quick questions.

One is, Gene you mentioned, and I guess, I'm trying to get a little more color on this.

Where when you look at the scope of the market opportunity for Gartner looking over the next few years, how much of that do you see and, I think, you're telling me part of it by the boost of sales people coming from greater penetration of existing clients, versus going after clients that might not be getting touched at all.

I don't know if you look at it that way, but I'm just curious if we look at over a period of time, how do you see that playing out?

That is a great question.

As we look at it, we think we have a surprisingly large market.

It's a simple measure is, we think there are about 10 million IT people in the world and about the top 10%.

So a million are clients and today in that segment, you can think about it as having like 30,000.

That gives a wide range for growth.

As we look at the next level of it, where those people are, so some of them are in existing clients and there are two categories of those.

One is, like I mentioned, they are very large institutions where we will have half the sales [indiscernible] one salesperson, even though they have 40,000 IT people and even 10's or even a 100 locations and 15 CIOs.

We don't even call them.

Even though we have a salesperson assigned to a large financial institution, they won't call on most of the people there just because they don't have the bandwidth to do that.

So one is clearly applying more salespeople to existing clients.

In fact during '05, we introduced a program, we call the Sales Associate Program, which is designed basically to add more people to a large client accounting.

Today we might have one person on that big financial institution.

The idea of the sales associate is we'll add some more salespeople to that to work as a team.

We had a number of those sales associates in a pile of [indiscernible].

They all exceeded their quotas and our exceeded our expectations, which demonstrates there is a good opportunity there.

So in '06 part of the growth is expanding the sales associates.

In addition to that, there are whole areas in the markets where we don't have the companies assigned to sales people at all.

We just call them, period.

And these are very big companies.

They are $80 billion banks that we don't call upon today.

So we are also setting you new territories to call on those people.

And lastly, in the category of existing clients, going back to existing clients for a second.

There are also remote locations.

The way we worked up to recently through '05, we're changes in '06 is that if you were the salesperson for the headquarters location, you had responsibility and credit for sales that were geographically dispersed.

Most all of our salespeople didn't actually go there.

To give you a specific example I would meet with a client in California that had a major office in Houston.

He said, "Look, if you guys want to grow with us, you ought to call on my people in Houston because I have a thousand developers there.

They'll buy lots of stuff."

Our salesperson in LA -- or San Francisco -- I'm sorry, and never went to Houston.

Our Houston salespeople didn't know and weren't allowed to call on that location.

So that is another whole dimension where we are taking the remote locations of large companies and we're assigning them to local sales coverage.

When we look at the number of opportunities there, we think we can continue to add salespeople to at least quadruple our current size and still not cover the market fully.

So we're not lacking for -- if I add all of the opportunities I just set up, we could at least quadruple the size of our current sales force.

And two quick follow-ups.

One is, I think you mentioned, and I wasn't entirely prepared, but on the success fee type of business that you do on the consulting practice, how important is that if you look at '05 versus '04?

Is it -- how volatile is that stream?

Is that something you're trying to get more into?

That kind of a line or interest with a client and get paid for it?

How does that work?

That business actually is a very popular business with our clients because it's a performance-base, they don't pay unless we deliver.

So they like that a lot.

It's been a business that has grown quiet well, but because it's performance-based and it depends on the clients actually getting the improvements that we -- we're actually realize the improvements.

We are kind of at their mercy as to whether-- when they actually realize that.

So it is a great business for us and our clients.

Provides a lot of value.

But it is difficult to predict.

We would like to continue growing that business but it is relatively difficult to predict.

Especially across a boundary like this.

We had a number of deals in the process that we thought were going to be.

They would meet the performance criteria in the first quarter and actually did it in the fourth quarter.

So there was a big swing there.

Chris, you want to comment as well?

The only other comment I would add to that is it's under 10% in our business in the Consulting segment.

We don't break it out separately.

It is relatively a small portion but as you can see from the performance, that relatively small portion can create some variance in our results from a quarterly perspective.

So, I think that's probably going to clarify that.

That is fine, Chris.

And one last one for you.

I know you did allude to the outstanding overhang in options.

I guess, could you maybe speak one minute on how you guys view compensation going forward?

Are there things you can do increasing matches on 401-K's, the restricted stock option mix and does the buyback designed to mitigate whatever growth and share base we have from some of these other things?

How do you view them?

I will give a couple things.

I'm sure Gene has a couple of thoughts to add to that.

First, during the year as we begin to expense equity programs as part of FAS 123R, we will be making a shift between options and restricted stops.

That is absolutely something that the Company is planning to do to continue to mitigate any impact any impact to our share count.

So that's number one.

That's the plan we have.

Number two, as I mentioned, we dramatically reduced the option overhang.

We're very focussed on making sure that we continue on that path.

So part of our objective with the Share Repurchase Program is to continue to utilize our cash flow, to offset any impacts which by the way, we expect will be significantly lower.

So our goal is to significantly reduce the number of shares compared to what has been issued in the past years.

So my assumption would be that we'll probably be issuing shares that would be kind of under $3 million per -- under three million shares per year in total in these programs.

So that would be the upper end of the range.

We'll probably come in below that.

So what that does, as I mentioned for 2006, is create about a 12 to $14 million pre-tax cost of our equity programs, as we projected it in the guidance we have provided.

Very good.

Thank you very much.

And your next question comes from the line of James Pemm from CPE Partners.

Just some general questions regarding your financial targets that you put out last year.

I guess at your Investor's Day.

Given your projections for this year, what needs to happen for 2007 for you to hit your 18% EBITDA margins in terms of revenue growth or backlog growth?

Can you just -- it seems like -- how much more work do we need to do and how many pieces are in place?

It's a good question.

Thanks for asking that, James.

A couple of things.

First is, clearly as we have said both in Investor Day and continued to reiterate, the key to kind of really driving the margins to the levels we talked about is seeing significant growth and continued growth in our core research business.

I think, what we have seen now is our view is that we have reached kind of the trough.

I think our goal really was to kind of stabilize and then begin to start to see growth in contract value in 2006 and hopefully, the results we have seen here and what we talk through show you that we are actually seeing growth in the core research part of our business.

As we get into 2007, hopefully continue to accelerate that.

So our objective is to see continued growth, accelerated growth.

When we gave you the guidance in Investor Day, we said that our long-term view of core research, CV growth was in the 5 to 10% range, as we get out into the three-year view.

We saw 4% sequential growth, organically in Research.

We're getting towards the low end of that target as we speak.

As we get into '06 - through '06 and start to see growth in that range and then start to accelerate that further in '07.

We clearly think that is one of the key levers that will drive that.

The other parts of the business as I think, as we have talked about, continue to be exactly what we expected.

Executive Programs continues to grow at the 25% annualized growth rate perspective.

So that business is doing what we need to do to get to those numbers.

The Consulting business is beginning to drive the margin.

We don't necessarily need the top line growth there, at significantly high levels.

We need to continue to execute on the strategies we have to drive that to a higher margin which will continue to add to our ability to get to the margins we have highlighted.

On the Event side, we are still seeing growth on the 10 to 15% range as we look forward.

At the margin levels we talked about, so we feel good that's in place.

And finally on the SG&A side, we talked about continuing to increase our investment on the sales side.

You will expect us to continue to do that as we talked about earlier.

But on the G&A side continue to look for opportunities, actually not only to be more efficient there but actually reduce the absolute dollar cost of the G&A spend, which will also contribute to that.

I think the answer your question, do you think lots of the pieces are in place with the key one that we need to continue to see improvement and continued acceleration on is the core research piece and with that we can get to the kinds of levels we have talked about at Investor Day.

And 7% growth from that in 2007ish. 2007 we need about 7% to hit the margins that we were talking about in 2004.

Is that correct?

We certainly, we haven't given clear specific.

I know but just in general.

We certainly believe that in the guidance we gave in Investor Day, growing the core piece 5 to 7% and even seeing a slightly decline in growth in Executive Programs.

I think we took it to the high end of 20%.

We still think we can get there.

So, you are in the relevant range of what we talked about in Investor Day.

Okay thanks.

And your last question, comes from the line of David Lee of Porter.

Yes, just quickly on the research revenue growth, for the last three quarters, since the close of META acquisition, I think the growth rate was 13%, 11%, 9%.

Can you just, talk about what the effects -- were the effects -- where the organic towards the acquisition?

Let me get to those numbers on the revenue side.

If you look at research growth, the organic growth of research, if you exclude foreign exchange and exclude META, research growth for the year was 3%.

So organic research growth was 3% excluding those factors.

Excluding currency and META.

Correct.

We did see pure organic growth in the Research business of 3% and for the quarter, it's about the same.

About 3% as well for the quarter on the Research side.

Without foreign exchange and META.

And how have they been trending since the acquisition.

Those growth rates been stable in the last two or three quarters?

It's started to accelerate a bit.

Yes.

It is starting to accelerate a bit.

You're talking about 3%, but again, from past history, we had had declining over the past few years, declining core research revenues.

We had begun to see that stabilize to flatten them out this year.

We're starting to see it return to growth.

Fairly consistent and maybe up just a bit as you get what you will see because of the lag with CV to revenue.

You will see a 4% increase in Research.

Contract values start to see that lag and start to see it materialize, a little bit faster as we get into 2006.

Great.

Thanks.

Sure.

And now, I will turn the call back to Mr. Hall for any closing remarks.

Well I would like to thank you for joining us today on this call.

I hope to see many of you in our Investor Day in New York City on March 9th.

Thank you again for joining us.

Thank you for your participation in today's conference.

This concludes the presentation.

You may disconnect your lines.

Have a great day.