高德納諮詢公司 (IT) 2006 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to Gartner Inc. earnings conference call for the third quarter of 2006.

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

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

A replay of this call will be available through November the 30th, 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 of 28923008.

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 offer otherwise duplicated with the the Company's prior consent.

The Company would like to remind everyone of the cautionary language about forward-looking statements and projections contained 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 encourage you to read its SEC filings including the 10-K for the period ending December 31, 2005 which discuss important factors that could cause actual results to differ to those made in any forward-looking statements.

The 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 the turn the call over to Mr. Hall.

Please proceed, sir.

Thank you, operator.

Good morning, everyone.

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

Chris is then going to 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 for your questions.

Our quarterly results continue to reflect the positive results from successful execution of our growth strategy.

Our year-to-date revenue is up 8% over 2005, EBITDA for the first nine months of 2006 is equal to the EBITDA for the entire 2005 fiscal year.

Our year-to-date normalized EPS is more than double a year ago.

On an FX neutral basis our research contract value grew 8% over last year.

It is now at at $598 million, that's within $1 million of our all time high reached in September of 2000.

As a result of this performance we're again raising 2006 guidance.

Chris will detail this for you shortly.

Accelerating the growth of our research segment is a priority for us.

We have five key strategies for accelerating the growth of this segment.

First, increasing sales capacity, coverage, and effectiveness, secondly, introducing innovative new products, third, strengthening retention through a world class service, fourth, pricing our offerings to match the strong value we provide, and lastly ensuring that clients are in compliance with our contracts.

Let me comment briefly on each of these.

We continue to increase sales capacity, coverage, and effectiveness.

We're on track to expand our salesforce by 100 to 120 sales associates by the end of the year.

During the third quarter we added 43 sales associates bringing the total to 106 so far this year.

These sales associates have already been assigned to new territories based on previously identified prospects.

We have seen strong client demand for our Gartner for IT leaders product suite.

These products were designed to taylor our offerings to specific rolls and then to sell them directly to individual users in IT organizations.

The demand for these new offerings has led to success in attracting new clients and migrating existing clients to these services.

So far this year we launched seven of these role based offerings and the fourth quarter we'll introduce the next IT leaders product called program portfolio negotiate.

This offering is aimed at IT leaders whose responsibilities include project or program management, standards and methodology, and IT governance.

With this offering there will be nine role-based offerings available including our flagship program, Gartner executive programs which is specifically designed around the needs of Chief Information Officers.

As we mentioned in our investor day in March, an integral part of our strategy is to price our products to match the value we deliver to our clients.

We've made significant progress.

The new pricing model we introduced earlier this year has resulted in higher effective selling prices and a reduction in pricing variability.

We also continue to have success in migrating clients with steep discounts into our Gartner for IT leaders products and our focus on selling to the individual has led to a sales process that is centered on the value, not the price.

We've put in place new on board and customer service processes in our client services organization so that we can provide world class service.

These are having an impact on retention with client retention increasing to 81% and wallet retention increasing to 93%.

We believe there is opportunities to continue to improve in this area.

We've put in place a compliance program that helps ensure clients understand their contractual commitments to Gartner.

This program is showing promising early results.

Let me now turn to our consulting business.

Our strategy in consulting is to optimize our offerings and improve our operational effectiveness.

Our primarily offerings of critical program management, benchmarking, and procurement are performing well.

We've been maintaining head count roughly flat and gaining improvements in utilization.

Our events business performed strongly during the quarter.

We continued our strategy of introducing innovative new events while improving the operational effectiveness of this business.

We're also leveraging the introduction of Gartner for IT leaders in our events business.

At this month's fall symposium in Orlando, for example, we introduced a series of communities around the nine Gartner for IT leader roles.

Community members were able to enhance their experience by connecting with peers at the conference, following suggested agendas and absorbing pre and post event content highly relevant to their job.

We had a very strong program launch with a considerable number of our delegates opting to join a community.

To summarizing, our third quarter results demonstrated continued acceleration in the growth of our business.

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

We'll then open the call to questions.

Thanks, Gene, and good morning, everyone.

Our results for the third quarter reflect the continued success we've had in executing the growth initiatives outlined for you over the past two years.

Our performance continues to track or exceed the targets we laid out for investors in the three-year financial road map established in February of 2005.

We are very pleased in our performance this quarter particularly our growth in research and contract value.

In the third quarter GAAP EPS was $0.08 compared to a loss of $0.02 in the third quarter of 2005.

Normalized EPS doubled to $0.13 versus $0.06 last year.

For the first nine months of 2006, we delivered GAAP EPS of $0.31 versus a loss of $0.15.

Normalized EPS for the first nine months also doubled to $0.44 from $0.20 in 2005.

These results and our continued confidence in the business lead us to increased full-year guidance again.

As I will discuss in more detail later, we believe GAAP EPS will be between $0.49 and $0.53 up from our last estimate of $0.47 to $0.51.

First, let's review the details of our quarterly financial results.

For the third quarter total revenue was 241 million, 7% higher than last year.

We expect to deliver 7 to 8% overall revenue growth in 2006.

Recall that our three-year financial road map targets a growth rate of between 8 and 11% by 2008.

We're well positioned to achieve this growth objective ahead of our original schedule.

Net income was 9.6 million or $0.08 per share.

This included the following two pretax items, a $4.7 million non-cash charge related to the stock-based compensation under FAS 123R and 3.4 million of non-cash amortization of intangible assets acquired with the purchase of META, normalized EBITDA for the third quarter of 2006 was 30 million, a 59% increase from the 18.9 million we reported last year.

For the fir nine months of 2006 total revenue was up 8% over last year to 756 million.

Revenue growth is reflected across all of our three major business segments, with research up 7%, consulting up 6%, and events up 18%.

Net income for the fir nine months in 2006 was 35.6 million compared to a loss of 17.2 million in 2005.

Our year-to-date net income included the following pretax items, an $11.7 million non-cash charge related to stock-based compensation under FAS 123R, 10.2 million of non-cash amortization of intangible assets acquired with the purchase of META, the majority of which is now complete, and 1.5 million in META integration charges.

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

Turning to go the rest of our P&L for the quarter, we continued to reduce cost of services a percent of revenue.

This highlights the operating leverage of our research business which grew 9% in the third quarter.

In absolute dollar terms cost of service increased 4% versus the same period last year.

This is primarily driven by expenses related to the increased number of events over last year and to FAS 123-R which was not incurred in 2005.

Stock-based compensation included in cost of service was approximately 2.1 million for the quarter.

SG&A also decreased as a percent of revenue for the quarter.

As Gene mentioned earlier, we added 43 quota bearing sales associates during the quarter.

We now have 655 sales associates, a 25% increase from the same time last year.

Our focus on operational effectiveness and cost management across our G&A infrastructure allowed us to continue the sales investment without increasing the cost of G&A as a percent of revenue.

In absolute dollar terms SG&A increased 6% versus the same period last year.

This was driven by the additional sales head count, increased recruiting expenses related to sales expansion and FAS 123R which was 2.6 million for the quarter.

Continuing down the P&L, depreciation is down 6% from last year reflecting the reduction in capital spending over the past three years and our focus is projects that support our strategic initiatives and approve operational effectiveness.

We continue to expect capital expenditures of between 20 and 23 million for 2006.

The majority of the amortization of intangibles relates to the valuation of intangibles acquired through META.

The total value was signed to these assets was 26 million when we acquired META on April 1 of 2005.

The majority of the META non-cash amortization was completed during this quarter.

We expect total amortization expense in the fourth quarter to be about $500,000.

In 2007, 2008, total amortization of intangibles is expected to be approximately 1.8 million per year of which about 80% relates to META.

Net interest expense in the quarter was 3.8 million reflecting the interest on the 220 million borrowed against our credit facility.

During 2005 we locked our floating rate debt at 4.9% through the execution of an interest rate swap.

Our normalized tax rate for the third quarter was 24% versus 31% for the third quarter last year.

The lower rate includes a benefit taken for a discreet tax item which occurred during the quarter.

We still expect our full year rate to be between 31 and 32% versus the 2005 rate of 37%.

The decrease in the rate reflects the benefit our international tax structure generates as revenue and profit grow.

At investor day in March we reiterated our commitment to deliver against a three-year financial road map to improve EBITDA margins to between 17 and 20%.

Our year-to-date normalized EBITDA margin is 13.7% versus 9% for the same period last year.

This increase of 4.7 points is driven by margin improvement in each of our three major businesses coupled with the G&A leverage I just mentioned.

Now I will highlight the result for each of our business segments beginning with research.

Revenue from research was 144 million for the third quarter, up 9% from the same period last year.

Our contract value ended at 598 million, an increase of 5% over last year.

This is within a million of the highest contract value ever reported for the Company which was in September of 2000.

Excluding the impact of foreign exchange growth and contract value was 8%.

Our core research contract value increased 4% from June 2006 continuing the growth trends we established in 2005.

Contract value for executive programs which is reported as part of the research segment was 149 million at the end of the third quarter and is up 12% year-over-year excluding the impact of foreign exchange.

Client retention reached 81% and wallet retention is at 93%.

Both of these key metrics are up from the September 2005 retention rates of 78 and 92%.

Our research contribution margin rose to 62% in the quarter as compared to 60% in 2005.

This improvement reflects the leverage in our research model.

As research grows our contribution margin expands.

Turning to events, revenue from events was 24.1 million for the third quarter compared to 17.2 million in the same period last year.

We held 17 events with over 6500 attendees compared to 13 events with 5100 attendees last year.

The majority of our ongoing events delivered double-digit increases in attendees, exhibitors, and revenues, a strong indication of the continued relevance these events have with both our clients and as part of our product portfolio.

The results once again highlight the strength of the events business and our effective portfolio management which allows us to grow existing events while continually launching successful new events.

Moving on to our consulting business, revenue was 70 million in the third quarter versus 73 million a year ago.

As we told you last quarter, our focus in the consulting segment remains on operational and margin improvement.

We expected and guided to slower growth for the second half of the year.

Demand for our consulting services remained solid with backlog growing to 108 million or 8% sequentially.

This represents between four and five months of future revenue.

Billable head count for the quarter was 517 versus 533 for the third quarter of 2005.

Our operational improvement is having impact with key performance metrics continuing to improve.

Utilization averaged 61% during the quarter compared to 59% a year ago.

Year-to-date annualized revenue per billable consultant is around 400,000, and the average engagement size now exceeds $180,000.

In contribution margin and consulting was 41% for the first nine months, up 3 points from last year and above the high of the target we set in our financial road map.

We remain focused on executing operational improvements to deliver continued margin, utilization, and revenue growth in the segment.

Now I will turn to the balance sheet and cash flow.

Operating cash flow for the quarters of 42 million, bringing the full year to 75 million, up from 28 million a year ago.

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

During the quarter we repurchased 1.1 million shares of our stock at a cost of 16.5 million.

As of September 30, we have repurchased a total of 4.5 million shares at a cost of 63.1 million under the $100 million share repurchase program announced in October of 2005.

We ended the quarter with slightly more than 116 million fully diluted shares outstanding.

Finally, our revised guidance for 2006 we now expect total revenue to grow by 7 to 8% over last year to approximately 1.55 billion to 1.7 billion for the full year.

Projected revenues by segment are as follows.

Research revenue of approximately 563 to 568 million, and 8 to 9% increase over last year, consulting revenue of 311 to 316, a 3 to 5% increase, events revenue of approximately 168 to 171, an increase of 11 to 13% and other revenue of between 13 and 15 million.

We're also increasing our EBITDA estimates to between 153 to 158 million, an increase of 46 to 50% over 2005.

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

We now expect expenses associated with FAS 123R to be about 16 million, the increase in this non-cash expense is driven by much lower than expected forfeiture rate as turnover has declined and higher than anticipated payout of our long-term equity incentive program based on strong sales performance in our research segment.

We are still expecting average fully diluted shares outstanding to be between 115 and 117 million shares for the year.

We have again increased GAAP EPS guidance for 2006 to between $0.49 and $0.53 as compared with a loss of $0.02 in 2005.

Normalized EPS is expected to be between $0.65 and $0.69 per share, a $0.29 to $0.33 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 our acquisition of META, and the impact of FAS 123R.

These three items impact earnings by approximately $0.16 per share in 2006.

Total depreciation and amortization for the year will be approximately 34 million.

This includes 10.6 million of amortization related to the META intangibles I mentioned earlier.

We expect full-year interest expense of approximately 16 million in 2006 and we are projecting an annual effective tax rate of between 31 and 32%.

We continue to expect cash flow from operations of 95 to 110 million up from the 27 million delivered in 2005.

With capital expenditures of 20 to 23 million, we expect to generate free cash flow of 75 to 90 million.

We will continue to use our strong cash position to reduce our shares outstanding through the share repurchase program.

As a reminder we do not provide quarterly guidance.

However, I would like to take a moment to provide insight into the fourth quarter seasonality of our business.

Research tends to have its lowest contribution margin in the fourth quarter due to costs associated with analyst support for symposium and year end sales activity.

On the other hand, events margins are the strongest in Q4 with our flagship symposium IT Expo events held around the world in October and November.

Given the success so far this year we're also continuing our investment in sales capacity and product development in Q4.

Before I finish, I want to direct to you a presentation and fact sheet we have posted on the Investor Relations section of our website at www.gartner.com detailing much of the information we discussed today.

With that we'll open the call up for yours questions.

Operator.

[OPERATOR INSTRUCTIONS] Your first question is from the line of Brandon Dobell with Credit Suisse.

Please proceed.

Hi.

Thanks.

A couple of quick ones here.

Wanted you to give a little more color on the sales force, maybe break it down either by productivity or tenured, just trying to get a better feel from a [Inaudible] perspective of how you think about how mature it is, the productivity, is there a big variance in productivity and then, Gene, you also mentioned having success with educating your customers a little bit more about the contractual obligations.

Would like to hear a little more from that perspective and then finally, maybe for Chris, think about the CapEx number, from your perspective or the Company's philosophy, do you think it would make more sense to increase CapEx spending whether it is for software or for whatever it would be if you can get more research revenue growth out of it or do you think there is not that much correlation between what you guys are flippant the CapEx lie versus the research revenue growth right now?

Thanks.

Hi, Brandon, it is Gene.

Hi.

In terms of the salesforce, basically as you know, we've added a lot of people to our salesforce, and so we have -- we have added roughly 20% additional people to salesforce.

That basically means that with our turnover sales people 15 to 20% a year, that we have something like roughly 40% of people in their first year at the salesforce.

Okay.

It is a relatively immature, to your point, it is a relatively immature salesforce, and we expect that as these people get -- we track productivity by tenure, and it takes a year until people sort of really get traction, and their productivity continues to increase in the second year, and so we expect that over time that productivity will increase.

Okay.

With regard to compliance, we've introduced a compliance program, and it basically -- the -- a lot of clients have not been familiar with the terms of our agreements which basically is that when you have a user write with Gartner, it is for your own personal use.

It is not that you can take it and use it for the whole company.

Many software companies have had, maybe 15 years ago, and so clients want to be in compliance with us, and in many cases they're not aware of it.

What we're doing is we track usage by individual and by company, and we have basically an education program we work with our clients to make sure they understand what the terms are and then we work with them to actually make sure they're in compliance.

That is important for us long-term because it helps make sure we have good growth opportunities.

Obviously if one company buys one license and then 100 people use, it we're a lot worse off than if all 100 people buy licenses.

So the as I said it is something that we see as important for our long-term growth.

Right now we have very low -- we have such open market, it is not a problem today, but it is something we think will make sure good growth going into the future.

Okay.

Brandon, it's Chris.

The question you asked on CapEx, just a little background.

Obviously we've been very focused on managing our capital expenditures to a 20 to 25 million range over the last few years.

One from an overall expense point of view and two, from a cash flow point of view.

What I think we have done kind of in the last 24 months is really refocus our efforts to the things we think will have the biggest impact on moving the business forward, so we have spent money on Gartner.com and continue to do that.

We are -- have spent money in our salesforce around sales force automation tool.

We are looking at moving forward things like CRM and knowledge management for the research organization, so I think we have within the kind of 20 to 25 million range the ability to execute on the things we think will have the biggest impact.

I don't think we have to spend more.

The other balancing factor is as we've been making a significant amount of change, how much change can we push through the organization so even if we increased it more, would we be as successful as we are today in terms of being focused and managing effectively.

I think we're -- I think the range still makes sense, and I think we will be able to execute on the things that will have the biggest impact on research.

One quick follow-on if I could.

I think you had given some breakout between the executive program and the rest of research from a growth perspective and if you can give that, that would be great.

Thanks.

If you look at contract value for the quarter, excluding foreign exchange on a year-over-year basis, total contract value was up 8%.

Research would be up 7%, and executive programs up 12%.

That's all FX neutral.

At this point I know in the past couple quarters we have been talking about the impacted of META, there is still a little bit of impact of META, but there's still less than $2 million less of META contract value.

Essentially all of META has been transacted on.

Thanks a lot.

Thanks, Brandon.

From the line of Goldman Sachs with the next question we have Peter Appert.

Good morning.

Two questions, please.

First, Chris, can you give us a better understanding of why there is such volatility on a quarterly basis from the tax rate?

What was this discreet item in the current quarter, and can 31, 32% be sustained for the next couple of years?

Is that the number we should be thinking about for '07 and '08 and secondly, maybe for Gene, just a better understanding of what's happening in the consulting business?

I think I understand the strategy, but it looks like you've taken a step down in terms of revenues obviously, but also in terms of profitability, so I am wondering if you're rethinking the strategy at all in that business.

Thanks.

Hi, Peter, it is Chris.

Thanks for the questions.

On the tax rate let me answer the second part first.

We do believe that kind of 31, 32% is a sustainable number.

We have a tax strategy that we put in place in terms of as we kind of start to grow research and particularly grow internationally, we take advantage of lower offshore rates.

We do believe that as we move ahead that that 31, 32% is a sustainable kind of number.

On the quarterly differences that you've seen, this quarter we actually had a discreet item, it was related to an international entity that we shut down a couple of years ago.

As a result of a particular tax regulation, we're able to book a gain on a loss that we had there, and so that reduced the rate for the quarter.

We took the benefit of that.

Can you give us specifically what the dollar amount was?

The dollar -- the total dollar amount was -- what we booked was about I think a $5 million benefit before tax to our P&L.

Again, that related to an international entity that we closed down and took a write off on.

We will have a few of those as we move ahead.

Really, the quarterly fluctuation is really just due to very specific one-time events that we take advantage of when we can and on the flip side we do believe again that that rate that we talked about around 31, 32 is sustainable, and that's what you should think about moving forward.

Good morning, Peter, it's Gene.

With regard to consulting basically, the -- our consulting business, as we talked earlier, the strategy basically there is to focus on the product lines we think would give the best margins long-term and also to improve the overall operational efficiency of the business, and so to do that, we've been holding head count relatively flat and improving the utilization of the business and then the supporting systems and stuff to support it as well as getting out of product lines and geographies that don't make much sense for us, and the -- what you see in our results is if you look at year-over-year our contribution to that business has improved for the first nine months, and we have a good backlog.

We have four to five months of backlog, and so we're kind of on track to of where we want to and expect to be with that business.

The reason if you look at the third quarter, if you look at this year, the year-over-year comparisons are there is more volatility than in something like our research business, and I will give you a little background what's going on there.

If you look at '05, our -- the first couple of quarters were a little bit soft for our consulting business.

Sorry about that, guys, I actually lost power briefly.

We switched to a different phone.

I will finish answering Peter's question.

We're talking about the consulting business.

Basically there is -- where I was going is basically if you look at last -- first, there is more volatility in the consulting business because the deals are done on a monthly basis, and so there is going to be volatility at something like the research business.

If '05 we had had a relatively week first half, first two quarters and a very strong second half.

When you look at the year to year comparisons, it sort of exaggerates that volatility.

We think the right way to look at it is more what's happened over a longer time period like the first three quarters where if you look at it, it it is pretty much on track where you expect it to be.

Peter, are you still there?

Yes.

Okay.

So I guess consistent with your guidance still looking for modest year to year margin improvement?

Absolutely.

We think we're on a steady progress on that business.

Right.

Okay.

Great.

Thank you.

Your next question comes from the line of Fred Searby with JP Morgan.

Please proceed.

Thanks a lot.

A couple questions.

Can you still give us just aggregate the contract value growth and just give us some sense as to how much of that is being driven by new addressable kind of clients within your existing clients, some sense in terms of the geographical breakdown of that and price as well, and just you said the META spilloff was small.

It seemed quite large last quarter.

Can you give us the number X minute -- minus spilloff it would have been on an organic basis?

Hey, Fred, it is Chris.

How are you?

Good.

How are you doing, Chris.

Let me give some more color around contract values.

If you look at overall contract value as I said, if you strip out foreign exchange, and if you -- it is getting harder and harder to strip out META because it is pretty well integrated and there is very little left, but if you try to normalize for that, you would probably see total contract value growth excluding any impact from META, excluding any impact from foreign exchange growing at about 10%.

If you break that up by core research and executive programs, core would be about 9, executive programs about 13.

There is a little bit of an impact from META still left, pretty much after the fourth quarter it will be kind of completely gone and behind us.

That's kind of how the split looked.

If you start to look under the cover of the contract value again, it's 598 in September, and we reported 567 in September of '05.

So those are the numbers.

If you start to look at it and look at the performance geographically, we've actually seen a pretty healthy growth across all of the geographies, North America, Europe, Asia Pac and even Latin America which is small.

We've seen really nice performance and improvement across all those segments.

As we've talked about many times, we believe that our opportunity continues to be just as large in the U.S. as it is in any of the other geographies, so we're taking advantage of that and seeing that growth again even in North America.

If you start looking at it from a client perspective, what you see is -- normally you would see anywhere from 40 to 50% of our new business coming from new clients, and therefore anywhere from 50 to 60% coming from existing clients.

We actually are seeing good growth not only from the new clients we're targeting as we brought you new sales reps on and new territories, but also seeing growth in our existing client set so you're seeing the benefit of not only the addition to the salesforce but some of the pricing changes Gene mentioned as well as the new product launches which have gone pretty well.

So then further if you really look at it from a client point of view we're certainly seeing great growth in our user clients which have been our focus this year.

The product has been focused on end-users, and we've seen really nice growth in that end-user part of our business, so hopefully that gives you color around contract value and what we're seeing.

That's great.

Can you also -- what percent of your existing clients are still heavily discounted clients that you can migrate over time of these higher price points?

It's a great question.

Let me talk a little bit about how that migration works.

As we first put the price increases into effect last year, about 45, 40, 45% of our business is multi-year.

As a result, many of those clients we haven't touched yet.

That is probably close to half the client base we haven't even had a renewal come up for yet and probably even more than that because anybody that renewed last fourth quarter we probably got in under the wire before we actually touched them.

So it's a big chunk of clients we haven't touched yet because multi-year haven't come up for renewal.

If you look at our renewal SKU, it is anywhere from 20 to 23% in the first three quarters, and it gets close to 29, 30% in the fourth quarter, so that's kind of the quarterly pattern we see in terms of contracts up for renewal.

As we worked as I think we've talked about on the call before, what we've done with our existing clients is try to work them over time in a fairly reasonable manner, so we certainly aren't going to take clients that may be discounted at 30% to within 5% over night.

We're going to work that over a period of years.

I think there is still plenty of runway for us to move clients even that we've touched once further up the chain over a number of years as we continue to see opportunity as we improve product and drive value and get them closer to the price point.

I think significant opportunities fail to touch a lot of clients.

A follow-up on that.

This is obviously the life blood of your business, and it looks like your fourth quarter guidance given how strong this number, I was really excited when I saw this number look subdued relative to what this number would suggest, so I am just trying to understand that and what you baked in in terms of bonus accruals, in this quarter, and next quarter since that is the bonus period.

Thank you.

Thanks, Brad.

What you see -- a couple of things, right, certainly as we've talked about all year, a significant amount of our growth is coming in the back half of the year and so even on the sales booking side as we start to really see the ramp in contract value, you're going to see more of that revenue come into the P&L as we get into '07.

When you look at the fourth quarter certainly seeing some nice growth in contract value, as we get into the fourth quarter, what you're still seeing on the revenue line is the impact of META, so last year we had the full contract value of META which was running off, and we're still running off those contracts, a good -- as we said many times,ing 50, 60% of those contracts we did not renew and we knew that was going to be the case.

You're seeing the revenue on those running off and this year you're starting to see some of the impact of that which will disappear as we get into '07.

You have a little bit of impact of the META acquisition still on the revenue line, and what you see on the expense side as I talked about is in the fourth quarter we traditionally see slightly lower margins in the research business because we do have our analysts on the road significantly.

We have increased costs in supporting events, increased costs in supporting our sales efforts in the fourth quarter, we are also continuing our focus on adding sales capacity, and product development efforts as we continue to enhance the products we put out and continue to roll out new products.

We have seen success so far this year, and as a result we're continuing to put money into that as we've seen the positive results we've had through the first three quarters of the year.

Great.

Thank you.

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

Please proceed.

Good quarter.

Just a few questions.

One, can you talk a little bit on future price increases?

In other words, you put in a general price increase a year ago, can you talk a little bit about the sort of price elasticity of demand and your ability in your mind to have future price increases, also you talked about increasing sales head count this year by roughly 20% so far.

Can you give us a rough feel what you think you will increase head count by next year?

And final question would be acquisition opportunities.

Obviously META was a very good acquisition.

Anything else interesting out there or are you likely not to make many acquisitions, even tuck-in's thank you.

In terms of price increases, we have a two-part price increase strategy.

One is that we are getting all of our clients a once a year nominal price increase when their contract comes up for renewal, and so the -- everyone will get -- that's the first piece of it.

They get a once a year price increase for their existing contracts.

The second thing we're doing is as we introduced new products we're pricing those new products much higher than we have priced in the past.

What we're finding is that both those strategies are working very well, that the new -- in the past we priced much lower than we really needed to.

We didn't price according to value.

We got out negotiated frankly.

As we've introduced these new products, we found that a willingness to pay has been very strong and the kind of price increase we're getting when people upgrade to those products is very strong.

Similarly with the modest price increases we've had I think 5% in terms of just across the board, we've had very little pushback on those as well.

So we've been getting a lot of price traction, and we intend to keep that strategy.

One other thought, too, is that as part of this new products what we're finding is that again for -- we don't allow our sales people to discount those new products and no pushback at all, and what clients are doing is, for new clients obviously they take those and don't know of any difference.

For the existing clients we're finding is that people have sort of upgrade plans.

If they have 50 users, they're planning to do 10 of them this year and 10 the next year and 10 the next year and so forth.

We see that as a source of sustained growth over time.

That's on the price increase, what's going on with the price increase.

Again, if anything it's exceeded our expectations in terms of our ability to price our products to capture the value there.

In terms of the sales force basically we're planning to expand it at roughly the same rate in '07 as we've done in '06.

Think 100 to 120 additional sales associates.

Lastly, on acquisitions, we're always looking for potential acquisition targets and you might expect don't want to comment on it one-way or the other.

Final question which is for Chris.

Can you talk a little bit about where you think the consulting margins can go long-term?

You've had a nice improvement, but what do you think a static or normalized rate would be?

Sure.

Thanks, Laura.

As we originally set our road map up as you know a couple years ago, we were certainly not where we wanted to be from margin perspective.

We were not even approaching 40.

We were in the mid 30s, mid to low 30's.

We had established a target over a couple year period to get us to that 40% number.

What you're seeing now as we talked about is on a nine-month basis we're sitting somewhere in the 42% range.

We're certainly above the high-end of the guidance that we originally established.

We do believe that if we continue to execute as the management team has in consulting, and as Gene mentioned in terms of the focus, in terms of executing where we can get the best leverage and leverage intellectual capital assets in the most productive way, we certainly think we can keep that in the 40's and certainly think we can approach the mid-40's.

I would probably say over a longer period of time that if we get our utilization up to that 70% level that we really have been targeting, that's where we should expect the margins to kind of drive to.

Thank you.

[OPERATOR INSTRUCTIONS] Your next question is from the line of Megan Talbott with Lehman Brothers.

Please proceed.

Good morning.

A couple of quick questions.

In response to your comments on your sales expansion, if you look at your long-term expectations around where you want to expand both geographically and vertically, so far year-to-date have you concentrated on any specific areas either geographically or vertically?

And if you could talk about -- a little bit about where you're seeing success, and then as a follow-up to your question about next year, you've done a good job this year offsetting some of the increases in your SG&A line.

Do you see enough opportunity next year to do the same thing as you expand your sales force again?

Hi, Megan, it is Gene.

Basically, in terms of expanding the sales, what we tried to do is place our sales people, our new sales people in the areas that had the highest opportunity has been the first rule.

The second rule has been we don't want to disrupt any existing client relationships.

So we've identified a number of prospects and put those in territories.

Second thing we do is that when a salesperson leaves and as I mentioned before we have 15 to 20% turnover a year, we'll typically take those territories, cut them in half and put two sales people where they originally had one.

The reason for that is that our sales people basically have more accounts than they can cover, and so we use that as an opportunity to put in more coverage without disrupting client relationships.

We know that -- from our client research we know that clients value their relationships with their AE a lot and that our retention is much worse if we disrupt relationships.

Those are the two-ways that we are addressed in.

If you look then at those two strategies, at a place like India we're expanding very rapidly because we don't have a lot of existing clients, and there is a lot of prospects there.

There you would see a number of very large number of new prospect territory being set up.

You look at a place in the U.S., for example, there are still a lot of companies that are uncovered.

You see some new prospect territory, you also see a lot of territories that when a salesperson leaves that we take that territory and cut it in half and instead of having, for example, 20 accounts, each person would have 10 which still by the way we don't think that they can -- the 10 is that they can cover effectively.

So if you looked at all of those, basically, so far both of those strategies seem to be working quite well.

Then there is the third piece where we have an option on especially the prospects is we're focusing on industries that have a higher intensity of IT like finance, for example or banking, and so where we have uncovered, large uncovered prospects like that in industries like that, that's another place that we have focused on.

Again, all of those strategies seem to be working very well as we put these sales people in place.

Next year and we think by the way we have the ability to keep doing that for a substantial period of time, I think five years that there is plenty of -- there is so much uncovered territory or underpenetrated territory that we have plenty of room for sales expansion there.

We -- as we grow, we think that we have the leverage in our business to continue to add these sales people, sales capacity while continuing to expand the margins in our business as well, and our -- the sales expense may creep up a little bit, but we think the overall margin in the business actually will continue to improve as we add these sales people because the incremental profitability of our business especially in research is so high.

Megan, it is Chris.

Just to add to that, and specifically, we absolutely believe that the G&A portion of the SG&A line had significant opportunity to continue to be leveraged, so as we've talked about our goal and objective is to maintain the G&A portion relatively so as a percent of revenue, we would expect G&A to continue to decline, and as Gene mentioned depending on how quickly and how much we ramp the sales side, that may keep the SG&A piece overall flat, but it would be more the investment in the sales side, but we still believe there is significant leverage opportunity on the G&A portion of our infrastructure.

Okay.

Great.

Just a quick follow-up on consulting.

You talked about the seasonality in your research and events business.

Is there seasonality in the consulting business as well?

Is that why we saw the utilization rate come down sequentially in the third quarter and is that part of why you saw the margin go up sequentially from the third quarter to the fourth quarter last year?

It is a good question.

If you look at the last couple of years in consulting, you kind of normally see a dip in the third quarter margin.

The reason for that is we tend to have lower utilization of the summer months in Europe and the U.S. as people are on vacation, so you certainly see some seasonality simply because of the timing of when people are on vacation for the holidays, and you certainly see a pick-up in the fourth quarter as all of our consultants and other people in the business are trying to drive -- to hit year end numbers for bonus purposes and other things.

Certainly see that pick back up again in the fourth quarter.

What you also continue to and should continue to see is probably that pattern would not be unusual for us to see and that's why as we look at our overall performance we tend to look at the year to date performance numbers as a real indication of how the business is doing on a year-over-year perspective.

Great.

Thank you.

Your next question is from the line of [Sam Hoffman] with [Adar] Investment Management.

Please proceed.

Can you give the contract value growth excluding the run off of META.

Yes.

The contract value -- META is starting to have less and less of an impact.

If you look at contract value year-over-year from September '05 to '06, if you exclude META and exclude foreign exchange, contract value would be up about 10%.

Let me break out the pieces.

If you just looked year-over-year as we reported, you would see contract value up 5%, FX is about a 3% impact.

Without FX you would be about 8% year-over-year and there is a couple of points related to META which gets you to about 10.

The META piece is get being harder and harder to look at.

Actually, when you get to the fourth quarter, META will be immaterial to any of the changes in the numbers so we'll be able to report apples-to-apples without having to talk about the META impact.

Okay.

And one other question, Gene, you had mentioned at the Goldman conference that ultimately you would have at least 2000 sales reps over time, and I just wanted to clarify it looks like your margins significantly improved this quarter in research, and whether you think you could maintain that type of incremental contribution over time as you grew the salesforce that significantly.

Or at what point would you need to begin adding more research personnel?

As you move to the 2000 ultimate goal?

Great question.

Basically the -- we believe the incremental profitability of our research business will be very high from here on out meaning that there are a number of fixed costs that we don't have to recreate.

I will give you an example.

We -- about half of our users only buy web access, and so for those users, if we double the number of those users, we'll have to buy a web server for every couple thousand users.

There is very -- the only incremental costs, or the only significant incremental costs would be sales cost.

And so even for our higher spec products you still have very good incremental margins, and so as we looked at it, we think that those margins as we grow even after adding 2000 sales people, we think the margins in our research business will go up because all of that additional business will be on the margin more profitable than our existing base because there are fixed costs to be leveraged.

And when will you need to increase your research staff because at this point it seems like you're keeping staff fairly flat.

That's a great question.

We will increase our research staff as we grow.

We'll need to increase it for a variety of things.

First, some of our -- we do have a product that I mentioned before which is web access only.

We also have a product, the other half of our research clients use which is called advisor access where they get the right to call an analyst.

As we grow that business, we'll obviously have to add capacity for that.

Similarly, our events business as we grow events, events uses our analysts as to provide the content that draws people to our events, and so again as we continue to grow the events business, we'll have to add analysts there as well.

We expect we would be adding analysts on a go-forward basis, but again it will be still in the margin, it will be very profitable and at lower rates than what we see now.

That's what you really see going on as you look at the results even now.

Sam, it is Chris.

What I would tell you is that we have been targeting in our road map and continue to believe that we can even with the growth and what Gene talked about in terms of some additions drive the margins and the research business into the mid 60's.

You shouldn't see that 62% is a place where we start to stall out.

We still believe that there is significant margin expansion opportunity even as we grow to get that back into the mid-60's.

Would it be fair to project out into the future what happens in this corridor?

So if revenues grow at 9.3% in a given quarter that expenses might grow at about 2% like they did in this quarter?

We haven't given guidance past the rest of this year yet.

I don't want to give you forward guidance.

We've given what the rest of the year is going to look like.

As we said in the three-year road map, as you can infer from that we should continue to expand.

We expect to get research growth in the 8 to 11% range.

As we get there, as we get towards the end of the road map in 2008 we expect to be -- get towards that margin rates in the mid-60's.

That's the guidance we provided on what we think is going to be happening over the next few quarters.

Ladies and gentlemen, this now concludes the question and answer session.

At this time I will turn the call over to Mr. Hall for closing remarks.

Thanks for joining us on the call today and I look forward to reviewing our fourth quarter and full year results with you early next year.

Thanks again.

Thank you for your participation in today's conference.

Ladies and gentlemen, this concludes the presentation.

You may all disconnect and have a good day.