高德納諮詢公司 (IT) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Gartner, Inc.'s Earnings Conference Call for the Second Quarter of 2006.

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

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

A replay of this call will be available through September 1st 2006.

The replay can be accessed by dialing 888-286-8010 for domestic calls and 617-801-6888 for international calls and by entering the pass code 28310911.

This call is being simultaneously webcast 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 its press release and periodic filings with the SEC.

The same language applies to any forward-looking statement 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 its SEC filings, including its 10-K for the period ending 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 that 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.

I'd like to extend a special welcome to any new shareholders joining us on this call.

We know that there are some of you joining us as a result of the secondary offering that occurred since our last call.

I'm going to begin with this morning with a quick overview of our results for the quarter and a brief update of the progress we've made against our strategic initiatives.

Chris will then follow up with a more detailed discussion of our overall results and the performance of each of our business segments.

He will also review our guidance for the rest of the year.

We'll then open the call up to you for questions.

In 2005, we introduced a client-focused strategy designed to stimulate growth and accelerate profitability, and we continue to follow that strategy.

Our second quarter revenues increased 3% over the second quarter of 2005, and our EBITDA for the quarter increased 42% from a year ago.

Our research contract value grew 4% organically from last year, and we experienced revenue growth in all of our business segments.

Our sales strategy continues to be to increase capacity and coverage and to improve effectiveness.

We are right on target to expand our sales capacity by 100 to 120 additional sales associates by the end of this year.

The additional sales associates are assigned to new clients and to clients without sufficient sales coverage.

Our investment in sales extends beyond recruiting new associates.

We want to build deeper long-term relationships with our clients and have revitalized our sales training program to stress selling value to the users of our products.

We launched three new products this quarter as a part of the continuing rollout of "Gartner for IT Leaders," a product set aimed at individual users within client organizations.

And to further improve our sales effectiveness, we've minimized changes in sales territory assignments.

This will maintain continuity in the relationship our salespeople have with their clients.

As we strengthen our client relationships, we are able to make significant progress towards three key pricing initiatives in our research segment.

Here's an overview of these changes.

First, we instituted a simplified pricing structure.

With this structure, we established standard prices and eliminated discounting on new products, such as Gartner for IT Leaders.

We eliminated discounting on new clients.

The only exception is clients can receive a 5% discount for multiyear agreements.

Second, we implemented standard price increases on existing agreements as they come up for renewal.

Third, we took a hard look at some of our legacy contracts, which provided for an unlimited number of users with unlimited usage for a fixed price within particular clients.

These are sometimes called Enterprise agreements.

The result of these contracts was a very low price per user that does not reflect the true value clients receive from our products.

A core element of our strategy is to charge prices that reflect the value of our products.

So we are not entering into new agreements with these provisions.

In addition, we are limiting these provisions in legacy agreements as they come up for renewal.

We're already seeing a positive impact on revenues from these two initiatives.

However, because these price increases are implemented as our clients' agreements come up for renewal and because many of our clients had multiyear agreements, it will take about two years to fully realize the impact of these changes.

Let me now turn to accomplishments by business segment.

Research revenues are up 3% by the same period last year, a significant step in accelerating growth in our most profitable segment.

An important contributor to this growth is the introduction and strong start of the Gartner for IT Leaders product suite that I mentioned earlier.

These offerings align an IT leader's specific job-related challenges with the appropriate Gartner analysts and insight.

They're designed to help clients spend more time applying Gartner insight to their specific business issues and less time searching for it.

Clients obtain access to role-specific content on gartner.com sites created specifically for them, creating an easier, more targeted and valuable experience, which leads to higher reliance up Gartner and a stronger relationship.

In the first half of 2006, we launched five of these products -- Infrastructure and Operations;

Security and Risk Management;

Business Intelligence and Information Management;

Sourcing and Vendor Relationships; and Enterprise Architecture.

This week, we will launch another two offerings, Application Management and Business Process Improvement.

The Application Management offering is targeted at IT leaders whose responsibilities include application management, development, analysis, enterprise resource planning and customer relationship management.

The Business Process Improvement offering is targeted for IT leaders with responsibility for business process analysis, planning, relationship management and IT planning.

There are now eight role-based offerings available, including our original role-based offering, Gartner Executive Programs.

There's strong demand for these new products, and we have succeeded both in attracting new clients and increasing sales to existing clients with these services.

The Gartner for IT Leaders products are designed to focus on the needs of our clients.

During the second quarter, we aligned our research organization to further parallel our client priorities.

The research organization is now structured based on distinct client constituencies, which will further enable us to improve our understanding of clients' needs and improve our ability to grow research.

Another key initiative to grow research is to deliver world-class service.

Similar to the reorganization in our research business, we have restructured our service teams to align with our clients' job functions to better service the Gartner for IT Leader offerings.

Our second quarter results in consulting reflect our efforts to improve margins and productivity.

While we've made progress on the key metrics, we remain focused on the further execution of operational improvements to take full advantage of our differentiated value proposition.

Our events business continues to leverage Gartner's industry-leading brand and research content to help drive our topline growth.

For the second quarter and through the first half of the year, events revenues increased 6% and 12% versus last year on the same number of events.

Our strategy in events is to manage our portfolio by introducing new events in hot topics or new regions.

This quarter was no exception, as we introduced the Portals, Content and Collaboration Summit in North America and added the Business Process Management Summit in EMEA.

The launch of these new events exceeded expectations with respect to revenue and profit targets.

Summarizing, our second quarter results demonstrate that our growth strategy is working across all of our businesses.

I'll now turn it over to Chris, who will take you through the details of our financials.

We'll then open the call to questions.

Chris?

Thanks, Gene, and good morning everyone.

Our financial performance during the first half of 2006 demonstrates accelerated profitable growth and the successful execution of our strategy.

And we are particularly pleased with our ability to grow all of our business segments, including research, our largest and most profitable segment.

The results we reported today reflect the progress we have made in seizing the market opportunity and executing on the initiatives that we shared with you at our investor day in March.

As I will highlight in a few moments, our performance continues to track through our three-year financial roadmap.

For the second quarter, GAAP EPS was $0.16 compared with a loss of $0.01 in the second quarter of 2005.

Normalized EPS was $0.20 versus $0.12 last year.

And for the first six months of 2006, we delivered GAAP EPS of $0.22 versus a loss of $0.14.

Normalized EPS for the first half more than doubled to $0.31 versus $0.15 in 2005.

These results and our continued confidence in the business allow us to increase full-year guidance, again.

We believe GAAP EPS will be between $0.47 and $0.51, up from our prior estimate of $0.44 to $0.48.

When contrasted with the $0.02 per share loss in 2005, our EPS results further highlight our solid financial performance.

And I'll talk more about detailed guidance in a few moments.

Let me move on to the details of our quarterly financial results.

For the second quarter, total revenue was 284 million, a 3% increase from the second quarter of 2005.

All three of our major segments grew -- research up 3%, consulting up 6%, and events up 3%.

We are on track to deliver 6 to 8% overall revenue growth in 2006, which already puts us in the range of our three-year financial roadmap.

Net income was 18.2 million, or $0.16 per share.

This included the following two pre-tax items, a $4.5-million non-cash charge related to stock-based compensation under FAS-123(R) and 3.4 million of non-cash amortization of intangible assets acquired with the purchase of META.

Normalized EBITDA for the second quarter of 2006 was 44.6 million.

This represents a 42% increase from the 31.3 million in the second quarter of 2005.

For the first six months of 2006, total revenue was up 9% over last year to 515 million.

This growth in revenue is reflected across all of our three major business segments, research up 6%, consulting up 11% and events up 12%.

Net income for the first six months of 2006 was 26 million versus a loss of 15.5 million in 2005.

Net income for the first six months included the following pre-tax items -- a $7-million non-cash charge related to stock-based compensation under FAS-123(R), 6.8 million of non-cash amortization of intangible assets acquired with the purchase of META and 1.5 million in META integration charges.

All charges related to the integration of META were completed in Q1.

Turning to the rest of our P&L for the quarter, the cost of services decreased 2% versus the same period last year, while revenues increased 3%.

We accomplished this through the operating leverage in research, utilization improvements in consulting, exiting less profitable product lines and continued focus on effective portfolio management, and the continued success of events.

The improvements more than offset the impact of FAS-123(R) and the annual Merritt increases, which took effect on April 1st.

SG&A reflects the continued investment in our sales organization.

As Gene mentioned, we increased sales capacity by adding quota-bearing sales associates during the second quarter.

From a G&A perspective, our costs declined year-over-year.

We continue to leverage our infrastructure and reduce G&A as a percent of revenue.

The impact of FAS 123(R), annual merit increases, and increased recruiting expenses were offset by improved operational effectiveness across all of our G&A functions.

Continuing down the P&L for the quarter, depreciation is down 5% from the same period last year, reflecting the reduction in capital spending over the past three years and our focus on disciplined capital spending on projects that support our strategic initiatives and improved operational effectiveness.

We continue to expect capital expenditures of between 20 and 25 million for 2006.

The amortization of intangibles includes the valuation of intangible assets acquired through META.

The total value assigned to these amortizable assets was 26 million when we acquired META on April 1st of last year.

A majority of this non-cash amortization will be completed by the third quarter of 2006.

Net interest expense in the fourth quarter was 4.5 million, reflecting the interest on the 230 million borrowed against our credit facility.

During 2005, we executed an interest rate swap, which locked our floating-rate debt at 4.9%.

Our normalized tax rate for the second quarter of 2006 was 31%.

This rate reflects the benefit our tax structure generates as research revenue and profit grows.

At Investor Day in March, we reiterated our commitment to deliver against the three-year financial road map to improve EBITDA margins to between 17 and 20%.

In the second quarter, normalized EBITDA margin increased to 15.7% from 11.4% in Q2 2005.

This was driven by improvement in each of our three major segments coupled with the G&A leverage I just mentioned.

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

Revenue from Research was 138 million for the second quarter, up 3% from the same period last year.

Our contract value ended at 574 million, an increase of 2% over last year.

Excluding the impact of foreign exchange, organic growth in contract value was 4%.

Our core Research contract value organically increased 2% from last quarter March 2006, continuing the growth trend we established in 2005.

Contract value for executive programs, which is reported as part of the Research segment, was 144 million at the end of the second quarter and is up 13% year-over-year excluding foreign exchange.

We ended the quarter with close to 3,500 members in our various executive programs, continuing our position as the largest CIO network in the industry.

Client and wallet retention were 80 and 90% respectively.

The increase in wallet retention from Q1 reflects the near completion of the META client migration, as less than 3 million of contract value remains to be transacted upon.

Overall, Research contribution margin was 61% in the first quarter compared with 60% for the same quarter last year.

As Core Research returns to steady growth, we are capitalizing on the leverage of our business model.

Turning to Events, revenue from Events was 58.6 million for the second quarter compared to 56.9 in the same period last year.

We held 33 Events with over 13,900 attendees compared to 34 Events with 13,544 attendees last year.

We've experienced revenue growth in the majority of our ongoing Events, with increases in both attendees and exhibitors.

This highlights the strength of our Events business and our effective portfolio management, which allows us to grow existing Events while also launching successful new Events.

The outlook for Events business remains strong and we are on track to deliver double-digit revenue growth for the full year.

Moving on to Consulting, revenue was 84 million in the second quarter, a 6% increase over last year.

Billable headcount ended the quarter at 513 versus 538 as of June 30, '05, and 525 in December.

Utilization averaged 67% during the quarter compared to 64% a year ago.

Annualized revenue per billable consultant is now above 400,000 and the average engagement size exceeds 165,000.

We ended the quarter with a backlog of 100 million, which represents over four months of revenue.

As discussed at Investor Day, our focus in 2006 is to more effectively leverage our Consulting resources and intellectual capital to improve margin as opposed to driving growth.

Our revenue guidance for the Consulting segment has continued to reflect that strategy, as we expect slightly slower growth in the second half.

This will result in full year growth for the segment of between 5 and 8% over 2005.

While consulting contribution margin grew to 44% in the first six months, up 6 points from 38% last year, we remain focused on executing operational improvements to deliver the margin, utilization, and revenue growth this segment should deliver.

I will now turn to our balance sheet and cash flow.

Our operating cash flow for the first half was 33 million.

As expected the growth in our business and the elimination of special charges has significantly improved our cash flow.

We continue to expect cash flow from operations of 95 to 110 million for the full year.

During the quarter we repurchased 1,390,000 shares of our stock at a cost of 19 million, including the shares repurchased from SLP during the secondary offering.

As of June 30, we have repurchased a total of 3.4 million shares at a cost of 46.6 million under the $100 million share repurchase program announced in October.

And as a result, we ended the quarter with slightly less than 116 million fully diluted shares outstanding.

We also tightly managed the impact of employee equity grants.

As a result, the outstanding options in restricted stock was essentially flat to December, despite the annual grants that occurred in March and April.

Finally, our revised guidance for 2006.

We now expect total revenue to grow by 6 to 8% over last year to approximately 1.045 billion to 1.070 billion for the full year.

Projected revenues by segment are as follows -- research revenue of approximately 553 to 560 million, a 6 to 7% increase from 2005;

Consulting revenue of 315 to 325 million, a 5 to 8% increase;

Events revenue of 167 to 172, a 10 to 14% increase; other revenue of approximately 10 to 13 million.

Our current revenue expectations are in line with the three-year financial road map that we've established.

We're also increasing our EBITDA estimate to between 149 to 154 million, an increase of between 42 and 46% over last year.

This excludes the non-cash expense associated the adoption of FAS 123(R).

We're expecting fully diluted shares outstanding of between 115 and 117 million for the year.

And we have again raised GAAP EPS guidance for 2006 to between $0.47 and $0.51 as compared to a loss of $0.02 in 2005.

Normalized EPS is expected to be between $0.62 and $0.66 per share, a $0.26 to $0.30 increase over 2005.

For consistency purposes, normalized EPS excludes three items -- the amortization of intangibles related to the acquisition of META; integration charges associated with the acquisition of META; and the impact of FAS 123(R).

These three items impact earnings by approximately $0.15 per share in 2006.

As a reminder, we do not normally provide quarterly guidance, and did so for 2Q06 only because of our secondary offering.

However, as you think about the third quarter, I would like to highlight the seasonality, our Events and Consulting businesses.

You should expect a similar Q2 to Q3 trend in the revenue and contribution in those segments as you have seen historically in prior years.

We are pleased with the progress we have made towards the achievement of our three-year financial roadmap for the first half of 2006.

Thank you for the continued interest in Gartner.

And with that we'll open the call up for your questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Peter Appert with Goldman Sachs.

Hi.

Good morning, Gene.

Can you help me better understand how to connect the migration in pricing to the performance and contract value specifically?

And how do we interpret relatively modest increases in the contract value in the context of your fairly aggressive pricing actions?

Hi, Peter, it's Gene.

So basically when you're looking at -- there are two things going on.

One is, when you look at the year-over-year comparisons, we had purchased META, as you know, at the second quarter.

And because we defer the revenue, there were a number of contracts where we recognized revenue and had CV, but the clients because they had overlapping seats between META and Gartner, had already decided to leave us.

So if you -- and that was about 40% of the contract value when we closed the deal.

And so when you look at a year-over-year comparison, we actually showed that as contract value even though the clients had already decided not to renew.

And so sort of a fairer way to look at it, or a more equivalent way to look at it would be if you took 40% of META's contract value -- there was - that had about $60 million of contract value, you exclude that 40% and then use that as the year-over-year comparison.

So there's another sort of $24 million of -- and the same thing applies to revenues, because - it applies to revenue and contract value, because we were recognizing those, so sort of a manifestation of the accounting.

Got it.

So the numbers will look much cleaner than getting into the third and fourth quarters, specifically which is why you also have confidence in this sequential acceleration in the revenue growth rate?

That's exactly right.

And then - so that's the first piece.

And then the second piece, as I mentioned in my note -- in my comments was that it takes time for these things to flow through.

So we implemented a price increase last fall, for example.

I mentioned on a -- as contracts came up for renewal, roughly half our contracts are multi-year agreements.

The others is our one year.

And so it will take a period of time for those -- that price increase to flow through all of the clients.

And similarly, while our new client and new product pricing is higher, it is not the majority of our business.

So what we see basically over time is an acceleration from those two effects taking place.

And Chris, you may want to comment.

Yes.

Hi, Peter.

I think Gene hit on it.

I think if you did the math and separated out the impact of both foreign exchange and, as Gene mentioned, the META, you'd be closer to 9%-10%-ish year-over-year growth on the contract value side.

So I think it's -- hopefully our guidance continues to show you we are very confident in the health of the business, very confident in the growth we're seeing.

And as we get through the kind of unusual abnormalities of comparing -- when you do an acquisition like this, I think you'll see the continued strong growth in the business.

Great.

That's very helpful.

Thanks.

And, Chris, how far along are we in resetting the G&A expense?

Are you feeling fairly comfortable that's pretty much done at this point?

Peter, I wouldn't say done.

I think as we think about our G&A operations, I think we still believe that there are opportunities for us to improve operationally from effectiveness point of view.

We have continued to execute some things.

Did we take a lot of the big low hanging fruit already?

Probably.

But there are still opportunities we have.

We expect to continue to see the trend of absolutely seeing a decline in G&A as a percent of revenue.

We think that will continue to come down over the last of this year and into next year, and in fact continue to think there is opportunities to actually see an absolute dollar decline in the G&A cost as well.

So I still think we're a ways to go in terms of the opportunity we have there.

Right.

Very good.

Thanks.

Thanks, Peter.

Your next question is from [Robert Riggs] with Credit Suisse.

Hey, it's actually Brandon Dobell filling in for Rob Riggs.

I got a couple of questions for you.

As you think about the sales management structure organization now with these role based products, anything that's different there and maybe get some color on kind of how you're going to market or foreseeing, different ways to sell those products and versus how you have done historically that's kind of changed how you've thought about going out after these new clients?

Hey, Brandon, it's Gene.

Great question.

Basically as with new products, they are designed to be sold to individuals.

And so there is a change in our selling approach, which is instead of going to centralized buying center and negotiating a deal for -- a steeply discounted deal for 10 individual users, we're actually focusing on selling to the individual users those products at an undiscounted rate, as we talked about earlier.

And so that changes the kind of selling approach we have to have.

And so we have been retraining our sales force and focusing our sales management on this shift to selling to the individual.

And so far, it's working quite well.

The -- that's sort of the primary change that we are doing.

Actually, there is one other change as well, which is we're thinking about our clients in four different high level segments.

One is in end-users of IT technology.

So that would be companies that could be a steel company or an airline or someone like that that uses it.

Second segment are people that are vendors of the technology, and they have very different needs as you can imagine.

If you're selling computers or selling software, then someone who is actually an end-user.

The third segment is investors.

And the fourth segment is consultants.

And so we're basically aligning our products with those segments.

And in addition to that, we are aligning our sales people with those segments as well.

So where it is geographically logical to do so, where specializing people by the kind of clients they serve, because there is a learning curve there.

And so those are the two kinds of changes we are making in the structure to -- as you asked.

Okay.

And then, Chris, you mentioned G&A on a year-to-year basis, it was actually down.

Any kind of color on if it was down by $30 or if it was down by 15% [inaudible - cross talk] just trying to get a sense of scale there?

Yes, it was certainly not down by 15%, as you can imagine from looking at the numbers.

It was down slightly.

Okay.

So right now, I think our focus has really been to continue to find opportunities to leverage as we grow, as we think we can grow without adding to that cost, and then as I said, continue to find the other opportunities to drive G&A down.

And -- so for example, doing things like consolidating some of our operations, financial operations in my organization from various parts of the world into a shared Service Center in the US, it's something we did this quarter in that saved around $1 million a year annually.

Those kind of things that we're going and looking and finding.

So -- and so that's -- those are the kinds of examples.

There is others that will continue to do so.

So I think, again, as I talked about, I think what you'll find is us continuing to find ways to reduce the absolute dollars.

Certainly not big chunks so that I think we took the big low hanging group, but certainly we will continue to see the performers on revenue per cost basis.

Okay.

And then maybe if we could turn to consulting for a second, mostly good numbers on utilization and billable headcount and average engagement size, and we've got a decent downtick year-over-year in terms of backlog.

How do we reconcile all those metrics?

You guys obviously given guidance for forward revenues, but how do we think about how the business grows when the backlog number comes down like that is or something else we need to think about there?

Yes.

I think, Brandon, I guess the first thing I would say is this is exactly the expectation that we set when we announced earnings back last -- back in February.

Yes.

It's the guidance we set when we were talking at Investor Day.

What we were focused on during 2006 is really driving the operational improvement to improve utilization, to leverage our resources and therefore to drive the margin enhancement.

And as we went through that, in addition to some of the sales, changes we're going through, so really focusing our sales organization on the research business, having more of our consulting organization focused on selling and building relationships and having longer term relationships with our clients, all of those things as we felt as we're going through this year would allow us to have significant impact on the margin in profitability, which you are seeing.

But we felt it would hinder our ability at the same time to have significant growth in the business.

What you actually saw in the first half of the year was our ability to kind of do both at the same time.

So you saw significant increase in utilization.

As a result, we started to really work down some of the backlog.

And what we're seeing right now, for the back half of the year is we feel fairly comfortable with what we're seeing in terms of our sales organization's pipeline and the sales organization forecast.

And so we feel comfortable we can kind of deliver the -- that kind of 5 to 8% revenue growth for the year.

And hopefully, set ourselves up again for next year to be in a much better position operationally, have some of these changes both on the sales side and operational side implemented and then really begin to return to growth back into that kind of double digit range on the consulting side.

Okay.

And then one final one, and I'll jump out here.

I think you mentioned earlier in your comments about the intangible amortization from the META deal.

Just to make sure I got that square in my head here I think you said that would be mostly complete here by Q3 of this year.

Correct.

And then what else is going to be left then?

How should we think about that line trending over time for the next for or six quarters or so?

Yes.

It will drop off significantly into the fourth quarter, you probably be less than a couple million dollars a quarter.

Probably over the next -- it's probably kind of a 1.5ish million range, something like that, over the next kind of three, four, five quarters.

Okay.

And that's about what it will be.

So then by then it'll be essentially gone, I think.

Okay.

All right.

Thanks a lot.

Sure.

Your next question is from Laura Lederman with William Blair.

Good morning.

Just a few questions.

One, can you tell us where the sales headcount is year-over-year when you entered Q2, just so a feel for how much of the sales headcount was up in the quarter that ended and how much benefit that might have or might not have had?

Sure.

Let me give you the numbers, Laura.

If you -- where we were -- I'll give you a bunch of numbers.

In Q2 '05 -- at the end of Q2 '05, we were at 508.

At the end of December of last year we had 550, at the end of Q1 we had 572, and at the end of Q2 we are now sitting at 612.

Yes.

What I was trying to get at is what this quarter that just ended benefited from sales headcount, so if you could give me beginning of Q2, this year versus beginning of Q2 last year -- or end of Q1 versus end of Q2 from last year?

End of -- hang on -- the only number I didn't give you was the end of Q1 of '05.

I think I gave you every other number.

I think the end of Q1 '05 we had 434, that was pre-META.

So then we added a significant number and went from 434 to 508 between Q1 and Q2 of '05, and we did 572 to 612 between Q1 and Q2 of '06.

So on a year-over-year basis netting all that out you did benefit from an increase in sales headcount on a year-over-year basis that would have help the CV number on the year-over-year basis?

Oh, absolutely.

I mean certainly some of the headcount we've added this year, right, probably or not fully obviously stuff we added this quarter would not have added significantly.

But on a year-over-year basis, all of the META folks are pretty much fully operational and carrying quotas as if they were long-term Gartner associates.

And so yes, we are getting the benefits out of that sales expansion.

So there was about a 13% increase in sales headcount year-over-year going into Q2, which would helped the quarter.

Sure.

Okay.

Absolutely.

Shifting gears just a little bit, can you talk about long-term where you think the contribution margin could go in consulting if you did 44% this quarter, what are the factors obviously besides utilization that drive that higher and where do you think it can go long-term so we can get just kind of sense for the profitability of that business long-term?

Yes.

We had set a target for ourselves to get kind of in the mid to upper 40's, and you're starting to see us kind of get there now.

I think what we've also told you it is certainly one of the key drivers is utilization.

We absolutely believe that we should be able to drive our business into the '70s.

We're still not there yet.

So we have parts of our business that are in the '70s today.

So for example, our federal sector business has been in the mid-70s for a bit of time now -- it's been a very successful part of the consulting business.

As we have been executing on the strategy that we're on, hopefully to drive the rest of the business to have the right types of engagements, the right size and scale, on the right resources in place, we can drive the whole business to that kind of 70%-plus utilization level.

So that's you know the goal that we have on the utilization side.

The key drivers, so let's see how many billable headcount we have.

As you've see from the numbers I talked about during the call, we have not added significantly to the consulting headcount this year.

In fact it's down slightly from where we ended last year, again, the focus being improving our operational effectiveness over driving growth.

So headcount will have a big impact.

Billing rate, which continues to hold nicely above the $350 our level.

So we are not seeing any degradation in our ability to price for the value we deliver.

Those are going to be the things that I think is going to drive the biggest impact.

And as I said earlier, certainly continuing to execute on our sales strategy of having our consultants and the organization began to develop and build longer-term relationships as well.

So should we be able to drive it up into that -- squarely into the upper '40s?

That's exactly where we hope we can drive the business, and then from there after we execute the three year road map as we are going to do at all the businesses we establish where we think we can take the entire business from that point.

Because that's just the stepping down from our perspective.

Another question on the consulting side is you said you'd hoped to get double-digit revenue growth there.

Can we talk a little bit about up the past and what it has grown at that rate and what gives you the comfort to be able to grow at that rate?

Because it's funny it just seems that logically you should be able to do well in the consulting place, given the brand franchise that Gartner has and the group has never quite lived up to expectations.

So can you talk a little bit about your ability to achieve double-digit growth and how you do it versus what you have been able to achieve in the past?

Hey, Laura.

It's Gene.

Good morning.

Good morning.

Basically in consulting we're sort of looking that as a two-phased approach to it.

The first phase is to get the operational improvement so the profitability is up to the level that we think we can achieve, which is more typical of the major consulting firms.

And we have a ways to go before that.

And then after we get it to it's operationally running well, then we would look to accelerate the growth rate.

What we're finding basically is we're not constrained by demand.

I mean, if we want to sell more consulting work.

We could sell more consulting.

There is a lot of demand out there for our services on there.

But we don't want to grow it that fast until we get operationally to the point where we can really make sure that is very profitable.

So longer-term we think we can grow the business in the 10 to 20% range, but we don't want to do that until we get the profitability really there.

And, so as Chris said, the first part of the roadmap we laid out for you guys last year was to get the profitability up.

So you shouldn't expect that kind of growth until we get the margins where we want it to be.

All right.

One final question and I guess this is another Chris question.

If you look at the 4% growth in CV for the quarter on a currency adjusted basis, how much of that Chris came from the price increases because the price increase has been in effect for the quarter so it's had some impact.

Is it half of that, a fourth of that, can you give us a rough feel of how much of that's price increase versus new business versus whatever?

Just more granularity in that 4% increase in CV?

Thank you.

Let me just talk for a couple of seconds about contract value and some components of that.

Certainly the addition of the sales people we've added has had a pretty big impact on our contract value.

Obviously, as you all know, one of our key metrics is new business growth which we established at kind of doing 20 to 25% of our opening contract value in new business every year.

We're seeing a significant increase in new business on a year-over-year basis.

And so that's the first indication that the sales people are adding, it's having impact.

Because clearly the new sales folks to come on don't have an existing CV base to grow from.

They simply have to go and sell new business.

And so what we've seen on a year-over-year basis is a dramatic, almost a doubling in fact of our new business in the first half of this year versus the first half of last year.

So a pretty significant increase in the new business piece.

All of that new business, I think as Gene mentioned, is really coming in at essentially list prices, because on the new business side, if it's new clients, we are selling at the new list price for our new products.

We are essentially not discounting.

As Gene mentioned, there are discounts but we're not discounting.

So that new business is coming in at significantly higher average price points than the business that we've had on the books prior to that.

So that is kind of the first piece of it.

On the renewals from our existing clients, we are seeing -- we are seeing the ability of our sales folks to actually go in and get our annual price increase.

Last year as we said we put depending on the product, a 3 to 5% increase across our entire research portfolio.

We haven't had any significant issues in working with our clients on that.

We've had discussions with them on -- we've not done that for quite some time.

We've made enhancements to our products and enhanced it with the acquisition of META, the analysts and the methodologies there.

So we've seen success from that point as well.

So what we're really seeing is strength in growth both from existing clients and new clients and again the price -- both the price increase and our discounting policies having an impact on all of that.

So there are lots of components driving the growth we're starting to see in contract value.

Thank you.

Your next question is from Dom LaCava with Canaccord Adams.

Hi guys.

Good quarter.

Thank you.

Just to kind a revisit pricing, now from what I can tell last fall was the last time you instituted a pricing increase?

We did a price increase in the fourth quarter of last year.

That's correct.

Okay.

And so as Gene mentioned, just to kind of comment on that, since we put it into effect in the fourth quarter of last year, we haven't even had a full cycle of all the contracts come up for renewal yet.

So we have close to 40%-plus of our contracts multi-year.

So those wouldn't have come up yet.

And then even the ones that are on single-year contracts haven't yet.

So that's part of what you should think about.

Okay.

But there's been no price increases since that one that you just referred to?

Just to clarify.

So basically we increased our list prices last fall and in January.

But the clients don't actually see that until their client comes up for renewal.

So when we raise our list price, it doesn't change the existing agreements until they come up for renewal.

Got you.

Okay.

And so far you've been seeing -- it sounds like you haven't been seeing any pushback on these pricing policies or the discount policy that you've modified?

No.

We basically implemented the discounting policy in January, and what we found is that clients really do see the value in our product.

And we were just really underpricing it previously.

Okay.

And then I guess kind of looking at a macro viewpoint, there's a lot of talk out there about tech spend slowing down in 2007.

I know you take some of these trends forecast with a grain of salt but what are you seeing on that front and do you see kind of a slowdown ahead?

I guess there's two answers to that question; one is in terms of our business, we're not expecting any kind of a slowdown as a result of any small decreases in technology spending.

And so the - we're seeing in terms of how it affects our business, basically that there's - there's so much untapped opportunity out there, combined with the value from the product and the fact that these things are very inexpensive for our clients that we don't see that as being a real problem -- as any kind of problem for us in 2007.

Okay.

So it's not tightly tied to the overall tech spends trend?

No.

And the tech spending trends, we don't see like it falling in half or anything like that.

So it's small changes.

And so the -- with those kind of, with that kind of change we don't see it affecting our business.

Okay.

And then just circling back on META, I know you'd mentioned that initially it was up 40% of contract value that kind of left.

Now what about from a client total point of view?

Do you have any color around - I mean, that wouldn't just translate to 40% of clients leaving, obviously.

How does that -- directionally how does that, how -- could you add any color to that?

Yes.

It is Chris.

I guess I would say a couple of things.

Obviously the 40% we lost was primarily due to overlapping clients, right?

So the main reason that you would lose client base, particularly on the vendor side, is that they were ascribing to two providers with two points of view, if there's one point of view, they're not going to spend the same amount of money, right.

So a lot of that overlap came from the tech provider side.

Certainly there was some on the user side as well, where people again had multiple opinions.

So from a client point of view, I don't have it right in front of me but it certainly is no one where near the same kind of 40% number from an overall client, enterprise client perspective.

So I would guess it significantly less than that.

And you would always imagine that there are some clients who would just were working with a particular vendor either because of price or because they like certain things and have decided not to work with Gartner now, but that was a much smaller reason for loss of contract value than the other two pieces.

Okay.

And then last question, I guess of 2006 you're looking at 6% to 8% revenue growth, can you just remind me what your long-term growth potential and overall revenue, how you view that?

When we put our three year road map out, which means when we get to by 2008, we expected to see all of the business segments growing at least double-digit, so we were looking to get research in kind of the 8 to 10% range, consulting in the 10 to 15% range.

Events in the, I think it was 10 to 12 or 13% range.

So what you're seeing there is we believe we can get all the businesses really growing double, get the entire business growing in that kind of 10% range, what you're actually seeing now is the range we had given was starting to be at the low end of our guidance.

So I think that the road map said 8 to 11 overall, so we can get the double-digit by the high end of that we're actually starting to see, if we deliver at the high-end of our guidance this year, really getting up against the low-end of that range already.

Okay.

Thank you.

Sure.

Your next question is from Sandra Notardonato from Robert Baird.

Hi, thank you.

One of your smaller competitors in Q2 noticed that there was a lengthening of the sales cycle, some of their larger size engagements in the consulting business.

Can you comment on whether you're seeing that as well or not?

Yes.

Hi, Sandra.

It's Gene.

Basically, we are not seeing that.

We're not seeing that the contract -- the time to negotiate is extending.

Okay.

Is there anything on the margin that's happening in the consulting business that you might want to comment on in terms of the sales cycle?

Again, I doesn't -- I don't think there is anything going on the sales cycle.

Basically this -- the sales cycles remain the same, we've had sort of a consistent strategy of aiming to negotiate larger agreements for some time.

And those agreements have been increasing in size.

So we've sort of been on that track for some time already.

Okay.

And the conversion of bookings to revenue to consulting has that changed at all in terms of timing for when that happens?

Nothing is really changing from our perspective in terms of conversion from pipeline, conversion as we get it booked and converting into revenue.

We're still running roughly the same on all of those.

I mean, certainly there are - there's seasonality to our revenue streams, so when one of the things that I commented during my comments was that people need to think about the seasonality aspects of the summertime and other things where we just have low availability.

But that's not a function of client or any changes at our perspective in the marketplace.

It's more just normal seasonality in our delivery of the business.

Okay.

And then one of the other comments that you made at your Analyst Day was the focus that you would have in converting event attendees to research clients or to clients.

Can you give an update on where you're tracking their and some of these initiatives you're taking to convert some of those potential attendees into clients?

Sure.

No. that's a great question Sandra.

Basically, the -- at our advance now, we've set up a demonstration area for our new products, this Gartner for IT leaders set of products.

And what we're doing basically is when attendees go there we are - for example, we may have one on ones with our analyst.

We actually link that into a -- when it's appropriate link into demonstration of the products and we see a lot of people obviously there's - just there having interest in these things as we demonstrated.

And so first thing we're doing is actually leveraging the actual presence of people there to show them new products.

And then we have sales people there that follow up on those leads, and obviously they're very qualified leads.

We just started that and so those things are sort of in the sales cycle as we speak today.

In addition to that now - so that's the primary thing we've done.

We're also investigating using them for direct mail as well, and we have not yet implemented that.

Okay.

So we'd start to see maybe some of the conversion accelerate in the second half of '07, would you say?

Yes.

The ones that in the selling cycle now, I'd expect to close in the second half of this year, and then we're going to test the direct mail to people that have gone to events, and if we find that works we'll roll that out.

And that probably would be more like a second half '07 effect.

Okay.

And then just two more questions.

Do you give out an enrichment rate, meaning if a client spends $100,000 with you this year, how much they're spending with you -- excuse me, in 2005, how much they're spending with you in 2006?

We have not the retention number we give our client retention, which is on a year-over-year basis.

How many client we have a year ago at the same time and how many of those clients do we still have.

And a wallet perspective, which is partly there but not totally there and we're actually looking at these metrics now to decide if we want to do some different reporting and we are looking at that but the wallet retention is basically again a year-over-year number that says how many dollars did you have with these clients last year and how much do you have this year?

So that metric can go over 100%, if we spend -- have more spend with those clients but I know it's not at clean as an enrichment number so we are assessing that now

Anecdotally, if you have the enrichment rate, if you've looked at the enrichment rate would you say that it has been increasing since the market consolidated or has it stayed the same for Gartner?

I would -- we do look at the components of where our contract dollar's coming from.

It is moving upward, so I would say to answer your question, yes, it's moving in an upward direction in terms of all the things we've talked about that would be impacting that.

Okay.

And then last question, going back to the consulting business, your bill rate I think you mentioned was $350 per hour.

Is there any thoughts around raising the prices there as you have on the research side?

We are -- the price has gone up kind of over the last couple of years from an average bill rate perspective as we've continued to kind of sell the value of our projects, and we have a lot of value-based selling a lot of fixed-price engagements.

And so we've done, I think a pretty good job of maintaining fairly high billing rates from an industry perspective.

So we feel that we can continue to command those kind of rates.

So I think that there's a huge opportunity to drive billing rates much higher.

Probably not enormous, but we're going to continue to look for ways to again continue to drive value and price accordingly, and I think what you really find is as we execute on the strategy of increasing utilization that will and of itself continue to drive what we think its probably the most important metric, which is revenue per billable headcount.

So that takes a combination of bill rate, utilization, and really kind of takes everything we're doing into account in terms of understanding the successful performance of that business.

And that number is now above $400,000 per year, per billable head, which is quite a high number I think from an industry perspective.

Yes, it is.

Okay.

Great.

Thank you very much.

Thank you.

Your next question is from Steve Kohl with Matador Capital.

Good morning.

Good morning Steve.

I've got a few quick questions.

I guess the first one you mentioned, Eugene I think it was -- or it maybe was Chris on enterprise discounting.

Can you maybe give us a little bit more color on how prevalent that is?

And when you talk about increasing price there, is that off the base amount that they're paying?

Because I know you mentioned there's kind of a lower fee per user, or is it something that you're trying to get them up to a normalized rate within a reasonable timeframe?

And I've got a couple of follow-ups.

On the enterprise -- so-called enterprise contracts, which what we think of our contracts where we had agreed to have an unlimited number of users with unlimited usage.

Basically there's a handful of contracts that are like that.

Order of magnitude it's 25, to give you a flavor for it.

So this is not a widespread problem.

It's a very isolated problem.

And so what we've done is for those clients where we have this isolated problem, as I said, we're going out -- we're not doing any more of those.

And the second thing is that we are going those specific clients and then working out a -- an appropriate solution.

And those clients by the way, nobody likes the higher price, but they know that they are -- have got a surprisingly good deal.

And so while it's always tough negotiating, when people know they're sort of way under were they should be, it's always a little easier there.

So we don't have a lot of pain over that.

Turning to a different question on sales folk.

I know you've mentioned, a lot's folks are kind of up to the Gartner minimums.

How are you doing, I think you mentioned last -- I don't if it's last quarter or the prior quarter to that that you have added another layer that you're also thinking of bringing folks kind of internally managing some of these smaller accounts.

Can you speak to how the sales structure is organized across the different account sizes, is number one?

And number two how quickly when we think -- I think you guys have mentioned I forgot if it was 2 million or something on quotas.

But can you give us some context on how quickly folks get their quotas and how that changes, depending on whether they're working on new business and renewing existing clients, et cetera?

Sure.

Let me start with your first question.

Basically the way we structured our sales force is that we have very large companies where we will have a multi-person team serving those accounts.

And so the -- and we've in fact added a new position to enhance that called a sales associate.

So that's dealing with larger account for -- that's our largest accounts.

For the vast majority of our accounts, we have a sales person that's assigned to those, and that sales person would typically have 10 to 20 accounts that they're covering.

And then for accounts that would be smaller, typically 1 billion -- less than $1 billion in revenue is kind of our cut off, we had an inside sales organization where the clients are contacted primarily over the phone with the sales person as oppose to in person, which are the other groups I was talking about.

And so the -- that's kind of how we think about structuring our sales force.

And as we add people to it, we've basically added in each of the areas we saw there was opportunity.

So there are a -- there are literally hundreds of companies over $1 billion that were not assigned to sales people last year.

So we've added salespeople, we're now calling on those clients.

There are also many large companies that were assigned to someone, but have multiple locations, like for example, maybe they're headquartered in Germany, but they have major development center in Detroit.

Well, basically we need the sales person in both Germany and Detroit.

And in many cases in the past, in most cases in the past we did not have both of those.

And so that's the second major area that we're adding capacity.

Okay.

In terms of quotas, Gene, should we think of it, I presume each level has different quotas.

Does that right or am I not thinking of that correctly?

Actually each level has different quotas.

And in addition to that if hire -- because we have so many companies that we didn't having any territory at all.

As we hire people we have a position that is basically to develop new business.

And they would have a different quota if they had no renewals than if someone who's got a big company that's got lots of renewals.

Okay.

Got you.

And last question, back to consulting.

When you guys talk about getting up to the 48% margin, I think that's kind of target you'd like to move it from 44 to 48 in a contribution margin.

What utilization number, when you think of the, how do we get there?

Is it moving that utilization number up is the biggest driver?

Is it continue to move contracts size and the third part of that is, how much of that is related to fixed-price engagements versus time and materials?

Basically, we think there's two factors.

The sort of operational metrics you look at is the utilization, but utilization is driven by how big your contracts are.

If you have a longer-term contract then people -- the extreme you've got a consultant working with one company per year, they're 100% utilized.

And so that's good.

The second factor is whether it's follow-on work or whether it's a whole new client.

So if you negotiate a client -- a contract with one client and then you do follow-on work, it's just like a renewal in our research business, you do a renewal, it's more likely you can do a renewal where it starts at the end of the previous work, and so the consultants have more utilization.

And so those factors are really what drive our utilization, which is in turn drives the overall economics.

Okay.

And in terms of when you look at fixed price engagements, I know you had -- I presume that goes up and down a little bit.

Can you give us some flavor for how you envision that next?

Well, basic majority of our contracts today are fixed price engagement.

We track the profitability of every engagement.

We measure people on it and track it tightly.

And as you can imagine, it's again tight in utilization that we priced it well, and then we have to get good utilization in the contracts and we get good returns.

Very good.

Thank you all very much.

Congratulations on a good quarter.

Thank you.

Thank you.

and your next question is from Sam Hoffman with [Avar].

Please proceed.

Good morning.

Good morning.

I just had a quick question on the $24 million.

Can you give a bit more color on when that $24 million was added to contract value and when it's flowed out?

And are there still out flows taking place?

Yes.

Hi Sam, it's Chris.

A couple of things.

When we first acquired META back in April, in that second quarter of 2005 is when we first added the META contract value.

When we acquired META it was in the 60 -- 55 to 60 million range.

I don't have the number in front of me, but roughly that.

Their contract value was heavily weighted towards the fourth quarter actually.

So the outflow started fairly quickly for a couple of reasons.

Number one, META was fairly generous in their out clauses in their contracts, and so there were some clients who immediately decided to exercise those clauses.

So right in the second quarter we started to see leakage, which we expected.

As we got to the fourth quarter, it was their biggest piece of their contract value, I'm going to guess 40%-plus of their contract value was at the time in their fourth quarter, so we saw a lot of leakage there.

What we have left is only 3 million or just under $3 million I guess of contract value remaining for META, and, so over the next few quarters as those contracts come up for renewal, we will see whatever is left of that to renew.

So very little impact left, those are kind of the multi-year deals that we haven't been able to transact on nor have clients comments that they want to cancel.

So we're hoping we have decent renewal rate from that last few million, but it's small enough now that it's not a material impact for the overall results.

Okay.

But we should continue to see I guess you could call it provision for your contract value growth rate for the next quarter and even maybe a bit in the fourth quarter?

I think if you want to look at it from the perspective of kind of doing a normalized view of both revenue and CV, obviously from a revenue perspective we acquired their deferred revenue, which we ran out.

So that's impacting the year-over-year revenue view as well as the contract value view.

So yes, you will see the impact of that you know kind of impacting what the true year-over-year growth numbers are and what we really think the longer-term opportunity is.

Okay.

And then just two questions on capital management.

I saw that you bought back more than the 1 million shares from Silver Lake and I thought that you had decided not to buyback more stock after that deal, so I'm curious when that was completed.

And then also, I saw that you paid them some debt, and I'm wondering whether that's going to continue through the rest of the year?

Yes.

A couple of things.

The additional 390,000 shares that we purchased were done before the beginning of the quarter before we announced the secondary offering, so from the secondary offering up until later this week when our window opens, we have not bought anything.

Our window will open again on Thursday or Friday of this week, and we will again be back in the market.

We still have over $50 million left on the authorization from the board to repurchase shares and we expect to do that.

On the debt capacity -- or the debt question, we do have a schedule of payments, so we've make those schedules payments and we will continue to do that.

At this point do we expect to be more aggressively paying down versus our schedule?

Probably not -- we'll pay what we need to and we'll use our funds to do other things to drive shareholder value and feel comfortable that we'll be in the marketplace on share buyback.

Okay.

And do you have any plans on eliminating more options outstanding through buybacks?

Is that something under consideration?

No, I think -- as you know last year we did an option buyback program where we bought back underwater options from our associates.

We do not expect to do that again.

That was a one-time thing where we think we have taken care of the options that were underwater and that made sense for us to take out of circulation.

So now our focus is really around making sure we effectively manage new grants and manage that within an appropriate level, so that we can maintain and reduce our share count over time.

Okay.

Great.

Thanks.

Sure.

And one other thing, just I wanted to clarify one statement I made earlier.

Brandon had asked about the META amortization.

I think I said was 1.5 million a quarter, It's actually 0.5 million a quarter, so I apologize for that.

So anybody looking at modeling, amortization starting in the fourth quarter it should be about 0.5 million a quarter probably for the next four, five, six quarters, and then it pretty much drops-off from there.

Your next question is a follow-up from Laura Lederman.

Hi, guys.

Just one additional quick question.

The sales headcount numbers you're giving I assume are net.

Can you talk a little bit about sales churn, what you're seeing versus historical levels?

Thanks.

Hi, Laura, it's Gene.

Are you asking about the turnover on our sales force?

Yes.

The sales additions you've talked about all those numbers were net.

So I'm just trying to --

Yes.

Basically, our sales turnover has comes down a few points from where it was.

It's -- we'd like to see it even little bit lower.

But it's well within the range that any sales force would typically see.

So again it's getting better and it's in the range.

Final question on competition.

I guess at high level it's just you enforced out there.

Who else are you seeing when you talk to companies when they don't buy, why don't they buy, just kind of a high level competition in [Tam versus Sam].

Thanks.

That's a great question, Laura.

When we -- in our negotiations, the majority of our negotiations, there is not a - someone else they're considering.

But basically what we're doing is we'll go in and propose our products, and they decide to buy whether they see the value there or not.

And that's the majority of cases.

Clearly, they're getting help making decisions, but it's not -- they could be getting stuff from a wide variety of sources.

But in an individual decision making, is whether they see the value in our product as opposed to, is our product better or worse than someone else's product.

That's typically what we see.

That's the majority of the cases.

When they don't buy or just that they figured we don't need that help?

Yes.

If they don't buy, we go in and we say, okay, it costs $20,000 for a particular product, and then the discussion is does the client think it's worth the $20,000?

And so that's the -- that's really the discussion as opposed to well, I got something for $10,000 or whatever.

Again, they're getting - what we do id help people make decisions.

They're clearly getting help in making decisions from a wide variety of sources.

And so we have a wide variety of competitors in that sense.

But in particular negotiations, it would not typically be our product versus a product from someone else directly.

Operator, are we done with the questions?

Yes, sir.

That concludes the questions-and-answer session.

I will turn the question back to Mr. Hall for any closing remarks.

Thank you, operator.

I appreciate you guys all listening the call today, and we look forward to talking to you again another quarter.

Thanks.

Thank you for your participation in today's conference.

This concludes the call.

And you may now disconnect.

Have a good day.