高德納諮詢公司 (IT) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Gartner, Inc.'s earnings conference call for the fourth 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 March 6, 2007. The replay can be accessed by dialing 888-286-8010 for domestic calls and 617-801-6888 for international calls and by entering the passcode 62215392. This call is being simultaneously webcast and will be archived on Gartner's website at investor.gartner.com. As a reminder, this call cannot be taped or otherwise duplicated without the Company's prior 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 statements made by Gartner management during today's call. The Company cautions you that these statements are just predictions and that the actual events or results may differ materially.

The Company encourages you to read its SEC filings including its 10-K for the period ended December 31, 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, 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 am going to begin this morning with an overview of our results for the year and an update of the progress we've 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 2007, and then we will open the call up for your questions.

Our 2006 results reflect successful execution of our growth strategy. We grew our contract value to $640 million, which is the highest level in Gartner's history. Our research contract value grew 11% over last year on an FX neutral basis. 2006 revenue is up 7% over 2005. Our fourth quarter revenue growth in research was 16% compared to 2005. We delivered $156 million in EBITDA, which is a 48% increase over 2005, and our 2006 normalized EPS increased more than 80% over 2005.

Growing our research segment remains our highest priority and we have four key strategies to achieve that growth -- introducing innovative new products; increase sales capacity effectiveness; strengthen retention through world-class service; and price our offerings to match the strong value that we provide.

Let me comment briefly on the activities we have underway to support each of these initiatives. During 2006, we introduced a new product line, Gartner for IT leaders. These products are tailored for specific roles in IT departments. The products sold well to both new and existing clients and we expect them to continue selling well during 2007. We are continuing to increase sales capacity and effectiveness. During 2006, we added more than 100 new salespeople. In addition, we made several changes to improve our sales effectiveness, including enhanced training and new marketing programs.

Client retention helps determine our growth rate. If we lose a client we have to sell another one just to stay even. As a result, we made a number of changes to improve our service levels with the objective of improving client retention. For example, we reduced the time required for a client to schedule an analyst by 50% during 2006.

Pricing products is an important factor in profitability as well, so we set prices to reflect the strong value we deliver to our clients. During 2006, we introduced a pricing model where we do not discount our new products and do not discount sales to new clients. In addition, we raised prices on existing clients when those contracts came up for renewal.

Finally, we discontinued offering any new so-called enterprise agreements where clients pay a fixed-price without regard to the number of users. These changes have resulted in higher unit prices.

Our events business is highly complementary to our research business, since we leverage our research content at events. In addition, many research clients find strong value in also attending our events. Our events business growth is based on adding innovative new events, new locations, new hot topics, new verticals, and new event formats. During 2006, we launched 10 new events. In addition, we have grown our existing events through strong content, targeted marketing, and new loyalty programs.

Let me now turn to our consulting business. We made a number of changes to improve the performance of our consulting business. One of our objectives is to continue to improve the utilization of our consultants. To do this we have identified target accounts where we are negotiating larger and longer running engagements. We've also developed solutions that improve our effectiveness in delivering to clients. And finally, we have introduced operational improvements to help ensure we have the right consultant at the right client, at the right time.

With our strong emphasis on growing our research and events segments, growth in consulting slowed. This was primarily due to a change in incentives for the success piece segment of the consulting business.

Summarizing, our 2006 results demonstrate continued acceleration in the growth of our business, especially in our research segment.

I will now turn it over to Chris, who will take you through the details of our financials, and then we'll open the call to questions.

Thank you, Gene, and good morning, everyone. In February of 2005, we established a strategy to capture our market opportunity and to accelerate profitable growth. We shared a three-year financial roadmap to help you track our progress.

Our continued focus and successful execution of this strategy delivered the results we announce today; results that show we are on track to meet or exceed our growth objectives. We are particularly pleased with the research segment's strong revenue and contract value growth in 2006, and we begin 2007 with solid momentum for continued growth for the coming year and beyond.

For the full year of 2006, we delivered strong financial performance. GAAP EPS grew to $0.50 versus a loss of $0.02 a year ago. Normalized EPS increased to $0.67 versus $0.36 in 2005. Normalized EBITDA was $156 million, an increase of 48% over 2005. Normalized results exclude META integration costs, META intangible amortization, and stock-based compensation under FAS 123R.

Revenue increased 7% over last year and importantly, research revenue grew 9%. As Gene mentioned, contract value ended the year at an all-time high of $640 million.

Now I will review the details of our quarterly financial results. For the fourth quarter, total revenue was $304 million, a 5% increase from the fourth quarter of 2005. Normalized EBITDA for the quarter was $52.3 million, a 25% increase from the $41.9 million we reported last year. Net income was $22.6 million or $0.20 of GAAP EPS. This is a 54% increase over $0.13 in the fourth quarter of '05.

These results include the following two pretax items -- $385,000 of non-cash amortization of intangible assets acquired with the purchase of META, and a $4.9 million non-cash charge related to stock-based compensation under FAS 123R. This expense was slightly higher than the estimate we provided in Q3 because our strong sales performance in the quarter increased the performance-based component of our long-term incentive program.

Normalized EPS, which excludes these two items, also increased significantly to $0.22 versus $0.16 last year. For the full year 2006, total revenue was $1.06 billion, an increase of 7% over last year. We reported net income of $58.2 million compared to a loss of $2.4 million in 2005. We delivered GAAP EPS of $0.50 and normalized EPS of $0.67.

Normalized EPS excluded the following pretax items -- $1.5 million of META integration costs; $10.6 million of non-cash amortization of META intangible assets; and a $16.7 million non-cash charge related to stock-based compensation under FAS 123R.

Turning to the details of the P&L for the full year, we continue to reduce cost of service as a percent of revenue, highlighting the operating leverage of our research business, which grew 9% for the year. In absolute dollar terms, cost of service increased 4% versus the same period last year. This is primarily driven by incremental delivery costs associated with continued growth in our events and executive programs businesses, and FAS 123R expense, which was not incurred in 2005.

Stock-based compensation included in cost of service was approximately $8 million for the year. SG&A also decreased as a percent of revenue compared to 2005. The 5% absolute dollar increase over last year relates to our continued investment in growing our sales organization. During 2006, we increased our direct quota bearing headcount by 113. We now have 663 sales associates, a 21% increase from the same time last year. We helped fund this investment with a focus on improving operational effectiveness across the Company. G&A costs are down in absolute dollars despite increased recruiting expenses related to sales expansion and FAS 123R, which was $8.7 million for the year.

Excluding this FAS 123R expense, G&A costs actually declined by 5%. Depreciation and amortization also continued to decline, reflecting our focus on disciplined capital spending on projects that support our strategic initiatives. Depreciation was $23.4 million and amortization was $10.8 million for 2006. The primary component of amortization relates to the valuation of intangible assets acquired through META, which included intellectual property, databases and customer lists. The total value assigned to these amortizable assets was $26 million and the majority of this non-cash amortization has now been expensed.

Capital spending for 2006 was $21.1 million, a decrease of $1.3 million from 2005. This reduction from last year highlights our continued focus on delivering strong cash flow. Net interest expense for 2006 was $16.6 million. We ended the year with $370 million of debt, which included the additional $190 million borrowed to complete the $200 million share repurchase from Silverlake Partners in December.

Our tax rate from 2006 was approximately 32% for the full year. As expected, the rate for Q4 was higher due to timing of one-time tax impacts.

Now let me move on to each of our business units, beginning with research. We are particularly pleased with the strong performance of our research business during 2006. Revenues increased 9% for the full year and 16% for the fourth quarter. Importantly, contract value grew to $640 million, an increase of 11% over last year excluding the impact of foreign exchange. Again, this is the highest contract value in the Company's history.

We anticipated that salesforce expansion and new product introductions would result in contract value growth during the back half of 2006, and this is exactly what happened. On a sequential basis, contract value grew $43 million or 7%. Contract value for core research, which excludes executive programs, grew 11% year-over-year and 7% sequentially excluding the impact of foreign exchange. This is a significant improvement in the trends of the past few years and continued proof that we are growing our research business.

The growth for the year shows increases across all regions and client sectors as well across the entire product portfolio. As Gene mentioned, our Gartner for IT Leaders products have been very well received with our clients. We have seen growth from both new and existing clients, with average spend per client increasing year-over-year as a result of our focus to improve the value proposition and increase effective selling prices.

Contract value for executive programs, which is reported as part of the research segment, increased to $160 million at the end of the fourth quarter. That's up 7% sequentially and 13% year-over-year excluding the impact of foreign exchange. We now have over 3,600 members in our various executive programs. Client and wallet retention also remain strong at 81% and 96% respectively. Wallet retention is up 3 points over last year. Overall research contribution margin ended the year at 60%. Excluding the impact of FAS 123R, which was approximately $6 million in this segment, research margins would have increased 3 points over last year to 62%.

Now turning to events. Revenue from events was $72 million for the fourth quarter compared to $69 million for the same period last year, a 4% increase. In the fourth quarter this year we held 18 events, the same number as last year. For the full year 2006, revenue was $169 million compared to $151 million in 2005, a 12% increase. We held 74 events with over 41,000 attendees compared to 70 events with over 35,000 attendees in 2005. The symposium IT Expo Series remains the premier event for IT professionals, attracting more than 1,700 CIO level attendees in Orlando and Cannes alone, and almost 13,000 total delegates worldwide.

We continue to attract a premier demographic of exhibiting companies and individual attendees through the expansion of our offerings, quality of our content, and our ability to create a high value environment for IT professionals. As a result, we launched 10 new events during the year while maintaining margins within our target range of 49% to 51%.

Moving on to consulting. Revenue was $76 million in the fourth quarter versus $85 million a year ago. For the full year, revenue increased 1% to $305 million. At this time last year, our original guidance for this segment was for revenue growth of between 0% and 5% and total revenue of between $300 million and $315 million.

Last quarter we expected and guided to slower growth for the second half of the year. With a strong emphasis on growing the research segment coupled with a change in sales incentives for the success based fee portion of this business, growth slowed from the first half.

Demand for our consulting services remained solid with backlog ending the year at $110 million. This represents between four and five months of future revenue. Many of our key operating metrics improved from last year. Billable headcount for the quarter was 518 versus 525 in December of '05. Utilization averaged 64% during '06 compared to 62% a year ago. Year-to-date annualized revenue per billable consultant is close to $400,000 per year and the average engagement size now exceeds $210,000, a 39% increase from last year. We executed on our goal to significantly reduce the number of active engagements by focusing on fewer strategic accounts.

Consulting contribution margin for the year was 40%. This is at the high end of our financial roadmap target of 37% to 40%. The increased expense over last year was attributable to costs associated with FAS 123R, costs of exiting less profitable geographies, and investments made in senior level resources who are instrumental to our strategy to grow this business with fewer, more strategic accounts.

Now let me spend a moment on cash flow and our capital structure. Cash from operations for the full year totaled $106 million compared to $27 million in 2005. Cash from operations is now approaching $1.00 per share and will exceed that in 2007. Capital expenditures were $21 million down from $22 million last year. Free cash flow, defined as cash from operations less capital expenditures was $85 million compared to $5 million last year.

We will continue to drive shareholder value through the evolution of our capital structure. In 2006, we took a number of actions in this regard. We purchased 5.4 million shares for a total of $80.3 million under the $100 million share repurchase program initiated in the fourth quarter of 2005. This included one million shares purchased from Silverlake Partners during the secondary offering.

In December we purchased 10.4 million shares directly from Silverlake at a total cost of $200 million. In January, we closed on a new credit facility which has increased our total debt capacity to $480 million and increased our flexibility at lower cost. And finally, our Board authorized a new $200 million share repurchase program. This new program replaces the previously established $100 million program.

Now let me turn to our business outlook for 2007. In 2007, we expect that total revenues will grow by 8% to 11% to approximately $1.15 billion to $1.177 billion. Projected revenues by segment are as follows -- research revenue was approximately $635 to $645 million, an 11% to 13% increase; consulting revenue of [$317 million] to [$327 million], a 4% to 7% increase; events revenue of approximately $188 million to $193 million, an 11% to 14% growth; and other revenue approximately $10 million to $12 million.

We expect normalized EBITDA for the full year to be between $189 million and $199 million, an increase of 21% to 28% over 2006. In 2007, the cost associated with FAS 123R is expected to be approximately $24 million to $26 million, of which 30% will be incurred in Q1.

For 2007, we expect total depreciation and amortization to be approximately $27 million with about $1.5 [million] of that related to the amortization of the remaining META intangibles. We expect interest expense of approximately $25 million; other expense of $2 million. We once again do not anticipate any special charges in 2007. We are projecting an annual effective tax rate of 33% to 34%, average fully diluted share count of 107 million shares for the year.

GAAP EPS for 2007 is expected to be between $0.68 and $0.75 as compared to $0.50 in 2006. This is a 36% to 50% increase over 2006. GAAP EPS includes the amortization of intangibles related to the acquisition of META and the impact of FAS 123R. These two items impact earnings by approximately $0.16 per share in 2007. We will no longer be reporting normalized EPS.

The Company will continue to improve its cash generation as we drive growth in our research business. In 2007, we expect cash flow from operations of $135 million to $150 million, up from $106 million in 2006. With capital expenditures of between $20 million and $25 million, we expect to generate free cash flow of between $110 million and $130 million. This is between $1.03 and $1.21 of free cash flow per share. As we have demonstrated over the past year, we will continue to use our strong cash position to reduce our shares outstanding through the share repurchase program announced today.

While our policy is to provide annual but not quarterly earnings guidance, I want to provide enough information to allow for an understanding of the seasonality and other factors that will impact our revenue and earnings on a quarterly basis. I would like to remind you that revenues from our events business are based on the timing of our events.

In 2007, you can expect similar quarterly phasing to what was reported in 2006 with close to 80% of the revenue coming in the second and fourth quarters. Our fourth quarter remains our most significant, with the annual fall symposium IT Expo Series occurring in October and November.

Our key performance metrics for consulting our annual targets -- utilization in particular fluctuates from quarter to quarter, primarily due to seasonal factors such as holidays and vacations. We anticipate the timing of revenue for consulting segment in 2007 to approximate the pattern of 2006.

Over the past two years we have made significant progress on our three year financial roadmap, which included our expectations for contract value growth. We remain confident with this guidance and are on track to accelerate growth in our research business. This growth will continue to drive earnings and margins towards the targets we have established.

Before we finish and begin the question-and-answer session, I want to remind you again about our annual Investor Day in New York City on March 8. Please call Germaine Scott at 203-316-3411 to register or if you have any questions about the event. We look forward to seeing you there.

And with that, I will open up the call for questions. Operator?

Peter Appert, Goldman Sachs.

I was hoping you could just give us some more color on what is going on in the consulting business, specifically how you change the incentive programs and what seems to be a fairly meaningful deceleration in revenue growth and profit performance in the second half of the year. What is the source of your confidence you can turn that around in '07?

Basically in consulting, couple things I'd mention. One is that, as you know, our research business margins are much higher than consulting. So we really put a lot of emphasis on growing research throughout the year. One of the things that we did as a part of that is we took away some sales incentives that we have historically used for one portion of our consulting business, and that particular portion does success fee-based consulting. The last year -- I'm sorry, in '05, they had a particular strong end of the year. In '06, after we removed those incentives, they had a particularly weak result. So if you look at our consulting business, it's really -- the performance of the rest of consulting was about on par with '05. That success fee-based portion was the only portion that really underperformed where we expected.

What we have done for '07 is reinstated the incentives like we had used historically, which is why we have a little more confidence that in '07 we won't see the same performance. So it's just that one piece of the business that had the problem.

The other thing about it is because it is success fee based, 100% basically of the shortfall drops to the bottom line. And so it affects the entire business disproportionately because there's no cost savings that come about if you don't get the revenue. So again, we've reinstated the incentives we have used historically and we believe that will address that issue on go-forward basis.

Was your thought, Gene, that you were giving consideration to just exiting that portion of the consulting business?

No, it's actually a great business for us. We basically, I think, underestimated how important our sales force was in generating demand for that business. And so when we lowered the incentives, the salesforce wasn't as aggressive with that business and so our sales fell off there. And I think that was combined also with the fact that, as you know, we have been really emphasizing research because it's disproportionate to high profitability. So the combination of telling them sell as much research as you can and cutting out the incentives in that particular piece of consulting I think is why we had that shortfall.

And just a reminder because I have forgotten, it is the same sales organization, correct, that is selling research and consulting?

That is correct. It's the same sales organization.

Unrelated topic Gene or Chris, is it possible to give us any metric looking at average price realizations this year versus last year? Just we're trying to get to a measure of the portion of revenue growth that's driven by price increase.

Sure. As we have talked about a number of times from a pricing perspective, we did a number of things in 2006. First, we implemented an annual price increase, which was in the 3% to 5% range across the research portfolio. That was number one. Number two, the launch of our new products, Gartner for IT Leaders, the price point was higher than the existing product [site] given the improved features and functionality and value proposition for the client. And so what we have seen is that we have been able to and continue to feel comfortable with pricing of those new products. So those products have done well in the marketplace both with new and existing clients, and we have seen people move to that new pricing.

On the 5% price increase, annual price increase, we have seen that also hold fairly well. We haven't had too much push back. So the net of it is -- and again, as we've talked about many times, we have about 45% of our business is multi-year in length, so we still haven't touched even all the clients across the portfolio. So the net of what we're seeing is we are certainly seeing some -- no real issues in the marketplace in terms of that pricing and our average effective prices are increasing.

What are you doing in '07 in terms of across the board pricing?

Our plan is to continue to do kind of an annual price increase, which I think is consistent with how most professional services companies operate. As we launch new products into the marketplace, we will price them accordingly and probably similar to the way we handled it with Gartner for IT Leaders.

What we're doing -- our price increase strategy with our clients is where we have clients that are way underpriced, because of what was done historically, we are converting them to new product at much higher prices. So what you see is that we are raising the base prices as Chris said, something like 5% a year, but then we are also having people upgrade to these very attractive new products where the price that they would pay is something like 50% more than they would be paying on average. The prices for any individual client vary, but that's kind of the average kind of pricing we are seeing.

And just one other piece of color on that. If you look at the underlying growth in contract value, the new business portion of our growth is up about 50% year-over-year so we've got really strong new business. And obviously that new business being with new clients where we're not discounting and we're selling the newer products or even existing products at list price, so we're seeing much better quality in terms of pricing on that new business.

So the base price is the same sort of 3% to 5%, '07 versus '06, though?

Correct.

Brandon Dobell, Credit Suisse.

A couple of questions around the customer base. You talked a little bit about pushing away from the enterprise deals. I want to get a feel for what part of the customer base might still be on those or that kind of a pricing strategy? And then broadly also, as you look at what's happened in the past three or four quarters in terms of customer attrition, what kinds of customers are you seeing push back either on the new product strategy, the new pricing strategy, or just is this a change you guys are making to discipline around endless access? I'm just trying to get a feel for what kind of companies aren't renewing. Obviously your wallet retention continues to go up but that client retention number is still down in the 80% range. Of that 20%, who are they?

Let me answer the first one on enterprise deals. Enterprise deals are actually a pretty small percentage of our overall business. We have probably less than 50 of them across the portfolio. So I wouldn't say that it is a -- in terms of the size and scope of our [CVA] base it's not an enormous percentage of that. So from an enterprise point of view, we are not doing any new ones. And we are working with clients that are on enterprise deals today to continue to effectively move them either to our new products or to new pricing models that work for both parties.

In answer to your second question, which clients we're losing -- we've done a lot of work to understand why clients leave us. When clients leave us, it's because they have gotten out of the habit of using the product. If we look at how many times people use our research either talking to an analyst or the written research during the year, the more they use it, they're much more likely to renew. But we kind of think of it sort of like a health club, which is the -- if you don't use the health club, you're not likely to renew your subscription there and we are kind of the same way.

And so it's across all segments. There's basically the clients that don't use us are the ones that don't renew. So we are addressing that in two separate ways. One is in our new products we have designed them so that they are much more likely to use regularly. As you may remember, our traditional product is sort of a search engine where you do a search and you get back documents. And so it's very -- it takes initiative on the part of our user. And sometimes people just get out of the habit of using it. The new products are designed to have stuff that will draw them to us every single day. So that's the first piece of it, is the actual product design -- it's designed to encourage more usage.

This second piece then is we actually are focusing on identifying each of the clients' usage patterns and where they are not using us to actually be proactive and do things like make calls to them and understand what their issues are and how we can help them; also setting up things like email alerts to where the -- on the issues that are of interest to them, instead of them having to go to a search, we actually tell them things that are in the areas that they have interest. And so those are kind of the two things that we are really focused on to address these clients that get out of the habit of using us.

If you look at the last two or three quarters, I'm not quite sure what the right way to ask this question is, but I'm trying to figure out how much analyst interactions or analyst usage people are taking advantage of these days. I guess that the genesis would be my perspective that the more people are engaged with somebody to talk to, the more likely they are going to be to buy more stuff, to renew at higher rates, to have more seats, that kind of thing. Is there a way that you could give us some color around how busy your guys are, how much work they're doing on a one-to-one basis with people, how many calls they're doing, that kind of thing?

Great question, Brandon. So we track the number of inquiries that people do with our analysts. An inquiry is when a client wants to talk to an analyst about one of their problems; track the number of documents read by our clients as well. And it is basically just -- the averages have tracked. So as we've grown the number of clients, the amount of inquiries and the amount of document usage has pretty much matched that.

What we are expecting will happen is as we introduce this usage stimulation program that I talked about a moment ago, and with these new products that actually we will see increasing levels of usage. But we're just introducing those now. So, we'll see that over the future.

And then from a sales perspective, you gave us some headcount numbers. I'd like to get your feeling for what kind of expectations you have built in to your guidance for new hires in '07 or expectations for training costs, that kind of thing in that S part of the SG&A line.

Let me give you some color on that. As we have been saying, our view is to kind of add roughly 10 net new salespeople a month. So you should continue to expect that kind of 100 to 120 new salespeople in '07, similar to what we did this year. We are tracking very well to that. In fact, I think right now versus where we were last year, we are ahead of where we were last year in terms of that. So I think we're still on track and feel very good about our ability to execute on that kind of hiring plan.

From an SG&A perspective, our expectations from a guidance perspective is that the sales as a cost of revenue kind of remains flattish. So as we continue to add salespeople with the growth we've seen already and therefore the runout into 2007, we believe we continue to add that level of salespeople with the productivity we will see in last year's new hires and continue to hold the S part of the SG&A roughly where it is today in terms of percent of revenue. Obviously, the dollars are going to continue to rise in absolute dollar terms.

And then final question from a sales perspective. How has attrition been, either voluntary or involuntary? Any changes in Q4 relative to what we saw in Q2 or Q3?

That's a great question too. Basically, because as you know, our growth in sales capacity is constrained by how many people we lose. What we found is actually that our retention among salespeople is improving so we're actually losing fewer people as we've been -- you know, if we look at through the year or year-over-year comparisons.

Frederick Searby, JPMorgan.

A couple questions. One, operating cash flow guidance looked exceptionally strong. I wonder if you could just walk through what some of the components are there. And then also, you don't have CapEx, it's not that material for you but should stay kind of flattish with '06.

And then a couple other questions. Could you comment, I didn't see it so if I missed this, what the cash bonus comp was in the fourth quarter given? I assume that's the important part, how much that was up.

And finally, just looking at the events business, the attendees is pacing ahead of revenues. I don't know what the mix issues or pricing is, but what your thoughts are there.

Thanks for the questions. Let me give you some flavor for operating cash flow. As we have continued to grow, particularly the research segment, that has the best cash flow characteristics, right? So we have a vast majority of our contracts billed up front and collected early. So as that business grows and you see that growth now in the 10 percent-ish range --

So it's working capital?

You're absolutely starting to see the working capital. That's one. Second is we believe we can continue to improve our accounts receivable collection efforts there so we are putting some continued focus on improving our days sales outstanding so there will be some benefit there. So working capital will definitely be a big driver of operating cash flow, as well as the fact that we've essentially gotten through a majority of our special charges. As you recall, even though we didn't have any in '06, they were still running out from '05. And so now we simply have left there is longer-term facilities leases that are running out over time. So that number has come down pretty significantly.

So that's the operating cash flow driver. As you noted, CapEx, we expect it to stay kind of in that 20% to 25% range. We feel very comfortable. That's a reasonable level of spend for what we're trying to accomplish and some of the system needs -- we still do have some system investments to make but we think we can manage that within that level. So that will give you the kind of cash flow numbers that we're looking at on the free cash flow side.

From a cash bonus perspective, from an annual basis, our overall pool is about $44-ish million, I think, of total bonus. The actual cash outflow occurs in Q1. So from a cash flow perspective, it's not a cash item until it hits Q1. So what you normally see in Q1 is sizable bonus and commission payments. So Q1's cash flow tends to be the weakest for us and then it strengthens throughout the year. So that will be a pattern you'll see again as we do Q1.

But overall, from an expense point of view, our annual bonus pool is somewhere in the $44 million range. And it is roughly evenly by quarter.

With regard to events, as you may recall, our events business has two sources of revenue. One is we get ticket revenue from attendees but then also from our events we have sponsors that pay us to exhibit at those events, as well. And so what's been going on with events is, the events are very attractive so we've had attendees growing nicely and the revenue from those attendees has been doing great.

On the sponsor side, we didn't have enough sales capacity in selling to exhibitors to grow our sponsor side as fast as we grew the number of events and the event attendees. And so that's why you're seeing the attendees going up and then the revenues lagging a little bit behind.

For '07, we're adding substantially to the events sponsor salesforce and we think that that will allow us to match those two much better hence you'll see actually the total revenue growing in line with the event attendees.

(OPERATOR INSTRUCTIONS). Laura Lederman, William Blair.

Can you talk about how many events that you plan to add in '07? I think, as you said, you added 10 in '06.

And also, can you give us a feel for Gartner for IT Leaders, which ones are growing the most? What are your plans in terms of adding topics for '07? And then I have two follow-ups.

From an events perspective if you look at the trendline, we had 70 events in '05. In '06 we had 74 events. We launched 10 new ones, so obviously we continue at times to retire events. My guess will be that -- or the current plan is that we're going to launch roughly the kind of same number of new events that we launched this year, so probably kind of 10, 11 new events. And we will probably, as we move ahead, discontinue. So I would guess the number of events next year is going to be around the 80 kind of number; maybe a little bit higher than that, but that's the rough range of the number of events that we're going to hold in '07.

With respect to Gartner for IT Leaders, we introduced eight roles in 2006. The first role was introduced in February and then we introduced the last one in November. So they were actually phased through the year. All of the roles exceeded what our expectations were. And so all of the roles actually went quite well. During 2007, we will obviously have all eight in place for the whole year, and so we expect that, in fact, their performance will be even larger for 2007.

In addition to that, we're not going to stand still. One of the core elements of our strategy is product innovation. So we're going to continue to enhance Gartner for IT Leaders during this year. We've got a number of those enhancements identified that we'll roll out each quarter. So those products continue to be even more attractive than they've been. But all eight roles have been exceeding our expectations.

Two final questions, which is -- any push back on the 3% to 5% yearly price increases? You haven't really gone into the second year trying to go back to the trough and get more, so what's your thought on the ability to do that and the belief that you can each year ask for more and more and more, because you think sooner or later there would be some push back.

That's a great question. Basically what we found is that in all of our pricing there has been very, very little push back. As one anecdotal example, we just had our sales kickoff a couple of weeks ago, and our product managers came back and said they were surprised that they got no questions or requests from salespeople pushing back on the pricing at all. And similarly in terms of customer appeals and things like that we've gotten extremely little.

About the only time we found there's a problem is when you have a company that's in financial distress, like they are going bankrupt or they're laying off tens of thousands of people, where they'll come back and they'll say, we need to look at how we reduce the contract. And frankly, what we do in those cases is say, let's reduce the number of users and still increase at 3% to 5% as opposed to just cut the pricing 3% to 5%.

So what you should take away is basically we're not cutting prices or even holding them with anybody. What we are doing is asking the client to pay higher prices per unit. And if they need to cut down, cut down the number of units. But even that's a pretty small group. And the reason -- this is what we expected would happen -- is we are such a small portion of people spending that it's just not on the radar screen. Not to say they wouldn't pay us less if they could, but it's just -- we're typically less than 1/10th of a percent of the IT budget, and so no one is going to make their budget by cutting our -- if you cut 10% off of or increase 5% or 10%, 1/10th of a percent of the budget, it's just not meaningful to people. And we focus them on what's the value they get from the product as opposed to what's the price.

And final question which is the average, not list price, but price paid for Gartner for IT Leaders versus the traditional core research?

Great question. There are different product segments and stuff. There are different offerings in Gartner for IT Leaders. But you can think about it's 50% higher than our historic prices. And again, we don't discount to anybody in Gartner for IT Leaders; it's basically -- there is no discounting on it.

Brandon Dobell, Credit Suisse.

Maybe Gene or Chris, as you look at the mix of customers or mix of revenues from the technology vendors versus corporate clients, any changes in trends there? Any push back from people worried about conflicts of interest from the vendor payment side?

And also I'd like to get a little bit of color around Gartner for the investors on the financial services side, what the traction has been there. Thanks.

Great questions. Gartner for IT Leaders is an end-user product. That's not to say somebody at a technology company who is the CIO can't use it, but it's really oriented towards end-users. And that's really responsible for most of our growth. So what you're really seeing is that our end-user business is growing much faster -- it's bigger any way, and then it's growing much faster than our technology company business. And that's what our emphasis has been on.

I'm sorry, and one other piece with that too is obviously executive programs is the other piece of that business. It's also end-user base. So if you put it all together, again, between our executive programs and the other end user products, they are much larger than the products for vendors and they are much faster growing.

Megan Talbott, Lehman Brothers.

Just a couple of quick ones. In the consulting business I know you talked about how your targets were annual targets, but just a quick follow-up. Have you already reversed the change in the salesforce compensation? So are you expecting to kind of start to grow that business in the first half of the year?

Great question. Yes, we've already made that change in our incentives for the portion of the consulting business that we had done in 2006. And that business is -- the success fee based business is disproportionably weighted towards the end of the year. And so we would expect to see just modest growth in the first half because it's based on negotiating arrangements with vendors. So a disproportionate amount of that happens in the second half. So I'd expect to see a modest increase in the first half and then it to really kick in in the second half. And that's in fact again, the reason the second half was so weak was because this portion of the consulting business tends to happen toward the end of the year.

That makes sense. And then just a couple of nitpicky modeling ones. Is there any expectation in your $25 million in interest expense of paying down debt throughout the year next year?

Let me give you some thoughts on that. I guess our current thinking today as we continue to execute and implement on these share repurchases that we feel a better use of cash is to continue to find ways to return it to shareholders through a share repurchase program as opposed to paying down debt.

We have very attractive debt today. We think debt should be a permanent part of our capital structure because it gives us a good overall cost of capital. So I would expect you'll see us to make minimal declines in our repayment schedule. In fact, we are only required per the terms of our term debt to pay off under $10 million; I think it's around $6 million of debt. So the expectation is that we are going to pay down minimal amount and going to use more of it to repurchase shares.

And that is reflected in the 107 million share count?

Yes, exactly right.

And then one final one -- in the fourth quarter of '06, your gross profit by segment was actually lower than your revenues less COGS, which is usually the reverse. Was there any kind of one-time benefit in the quarter in that differential?

If you just think about -- if you look at each of our segments, each of the segments actually has different seasonal patterns to the expenses and different seasonal patterns to what happens in each one. So for example in events, it happens to be our by far strongest period of the year for events because of our symposium series. And so you see a much higher contribution margin in the fourth quarter than you would have seen all the rest of the year.

On the research side, on the other hand, fourth quarter tends to be oftentimes a lower, a slightly lower margin than the rest of the year. And that is because of the timing of our analysts traveling all over the world to do the symposium and other events; traveling to do sales calls as we particularly get our analysts focused on -- refocused on working with the sales organization to close client deals. And so as a result of all that, you see expenses in the back half of the year more than you see in the early part of the year.

Sam Hoffman, ADAR.

Chris, I have difficulty reconciling between a couple of the items in your guidance. And so I'm sorry to go through these details, but I'm just trying to get from the top line to the bottom line. So I'm going to begin with the mid point of your range, which is 195 of EBITDA. If you take off 25 of stock comp and 25 of depreciation, you get to 145 of operating income, $25 million of interest expense gets you the 120 of pretax. Then you have 33% tax rate gets you to that $80 million of earnings. Divide that by 107 shares gets you to $0.75. And that is I believe the top end of your EPS range. And so I am wondering how the midpoint of your EBITDA range gets me to the top end of your EPS range, if I'm off on some of the numbers?

Sam, why don't we give you a call and walk through the model in detail. We can walk you through that so we'll do that separately. You have to keep in mind we have META amortization, we have other expense -- let us walk you through that so you can have your model correct. But I can assure you that the guidance we've given you, all [foots and ties], that much I can assure you.

The other question I had was on the share count. Can you just help me out in terms of whether buybacks are included in the share count? And also how stock comp plays into the share count?

Yes, as you know, we do have a long-term equity program where we continue to issue shares. Our plan is to issue less than 4 million shares a year, roughly probably is what the impact will be; something less than that. And so obviously for us to continue to drive the share count down and to help manage the dilution of that, one of the reasons we want to have a program in place is to do that. So the guidance that we've given assumes that we buy shares back to help offset that dilution. So even though share count will go up, we are going to make sure that we help manage that through the share repurchase program. So our guidance both from interest as well as in terms of the share account does assume we do share buybacks.

I think I get it now. And then my last question is on debt versus cash. What do you view as your maximum debt capacity? And when do you -- how do you trade off the use of your cash flow? It looks like you are now at somewhere between the 5% and the 6% cash flow yield. And so how do you trade off the fact between buying back more shares, paying out a dividend, and using your excess cash, since it seems like you're going to have more cash this year than you are going to need to buy back the 4 million shares?

Well, let me answer it in a couple of ways. I guess maximum debt capacity is -- we think we could certainly borrow and could handle more debt than we have. If you simply take a three times EBITDA number, which I think for us would be a very conservative number, you could get close to $600 million of debt. Today we have $370 million, so whether we decide that there's an interesting acquisition -- we feel like we have more than ample capacity either within our current facility, which our current facility now gives us capacity up to $480 million, we are only at $370 million, so we still have $110 million under the current facility and certainly believe that if it was the right investment opportunity we could certainly borrow more.

So that's one way to look at debt capacity and our thinking around it. We're certainly not going to lever up unless we can find real -- the right opportunities to do something with that cash. But certainly could do that.

What I hope that we've shown over the last couple of years is that we will continue to find ways to creatively return value to shareholders. So, we have done share buybacks. We have done option buybacks. I think we have done lots of things in the capital structure and capital markets area that shows we're looking at every opportunity. So in terms of looking at as we continue to drive cash flow, will we look at every opportunity and explore every opportunity including dividends and other things? We will absolutely continue exploring what makes the most sense, both from being able to fund our growth, return capital to shareholders and make sure we have money for any other kinds of investments we need. So we will explore all avenues as we move ahead.

Laura Lederman, William Blair.

Two quick follow-ups. One is sort of strange, given your solid result, which is there has been a lot of discussion among technology companies of a weakening environment out there. Are you hearing anything in terms of companies -- obviously not impacting you, because you are such a small percentage of [budgets] but companies feeling like they need to constrain their IT budgets a little more?

And separately, Chris, you just mentioned acquisitions. Do you have an active pipeline in terms of looking at things? And what type of things would you be looking at?

Basically, we actually survey our clients to understand what they're doing, what they plan to do with their budgets. And as you can imagine, at any given point in time there are some people that are cutting budgets and there are some people expanding them. But as we sit here today, the majority are looking to expand, and on average expand their budgets, kind of think low single digits. That's what's kind of -- what we see is going on with IT budgets.

Did you see any change at all in the very end of last quarter? The reason I ask is there were a number of IT companies that missed and so it begs the question as to what's going on.

I think you have to separate out -- I would say no, we haven't seen that. And I think you have to separate out how effective people are at negotiating versus what their budgeting and demand is.

And then the second question was acquisitions.

So acquisitions -- we are very interested in acquisitions. We do have people that look at acquisitions, it's a core part of our strategy. We do keep a pipeline of deals that we are looking at and obviously see things, we will, at the appropriate time, make it public.

In terms of priorities, the things that would be most interesting to us would be things that help us accelerate the growth of our research business, since the margins of that are the most attractive. And that's really what we're keyed on.

There are no additional questions at this time. I would now like to turn the presentation back over to Mr. Gene Hall for final remarks.

Thank you, operator. I would like to thank everyone for joining us today and I look forward to seeing you at our Investor Day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.