高德納諮詢公司 (IT) 2007 Q2 法說會逐字稿

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

earnings conference call for the second quarter of 2007.

A replay of this call will be available through August 31st, 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 pass code 35710443.

This call is being simultaneously webcast and will be archived on Gartner's website at www.gartner.com for approximately 90 days.

I will now like to turn the conference over to Mr.

Hank Diamond, Group Vice President of Investor Relations and Corporate Finance, for opening remarks and introductions.

Please go ahead, sir.

Good morning, everyone.

Thank you all for joining us.

On the call with me today are our CEO, Gene Hall, and our CFO, Chris Lafond.

Before we discuss the results for the quarter, I would like to remind everyone of four things.

First, the rebroadcast, reproduction, and retransmission of this conference call or webcast without the express written consent of Gartner are strictly prohibited.

Second, if you did not receive a copy of our press release, it's available on our website at www.gartner.com or on the First Call system.

Third, the Company will be making statements about its future results and other forward-looking statements during this call.

Statements about future results made during the call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are based on current expectations and the current economic environment.

Forward-looking statements and projections are inherently subject to significant economic, competitive, and other uncertainties and contingencies which are beyond the control of management.

The Company cautions that these statements are not guarantees of future performance.

Actual results may differ materially from those expressed or implied in the forward-looking statements.

Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements and projections are specified in the Company's filings with the SEC, including in its annual report on Form 10-K for fiscal year 2006.

Finally, during the call, the Company will be using certain non-GAAP financial measures as defined under SEC rules.

Where required we have provided a reconciliation of those measures to the most comparable GAAP measures in the tables and the press release.

Before I turn the call over to our CEO, let me briefly review the major points from today's press release.

Research contract value, which is a key leading indicator for our business, increased 19% year-over-year for the second quarter in a row.

Total revenue for the second quarter grew 7% year-over-year to $303.5 million.

Second quarter net income was $14 million and GAAP EPS was $0.13 per share, including $0.04 per share in charges and non-operating items.

Normalized EBITDA, which excludes these charges and certain other items specified in the press release, increased 5% year-over-year to $47 million.

Finally, in addition to announcing our financial results, we announced that Karen E.

Dykstra has been appointed to our Board of Directors and will serve as a member of the Audit Committee.

Ms.

Dykstra brings a wealth of financial expertise and operating experience to the Board, including having served as Chief Financial Officer of ADP.

Now, I would like to turn the call over to Gartner's Chief Executive Officer, Gene Hall.

Thanks, Hank.

Good morning, everyone, and thanks for joining.

At our Investor Day in March, we detailed the key initiatives of our strategy to drive long-term profitable growth for Gartner.

They are delivering extraordinary research, expanding our sales capability, producing innovative offerings, and providing world-class service.

I would like to provide you with an update on the progress on our key initiatives.

Let me start with the sales force.

Since I joined Gartner three years ago, we have consistently told you a key factor in growing our research business would be to invest in expanding our sales capacity in order to harvest the sizable untapped market opportunity for our research.

And that approach is working.

You saw in 2006 we grew our sales force by 113 associates and as a result generated 11% growth in contract value on an FX neutral basis.

As a result of that success, we told you that we plan to accelerate the growth of our sales force in 2007, adding around 120 net new sales associates.

And I'm pleased to report that we're doing even better than planned.

As of June 30, we added 102 new sales associates, more than 80% of our original target for the full year, and this enabled us to generate 19% contract value growth during both the first and second quarters.

We carefully tracked the productivity of our sales associates, including our new hires, and we found that our ability to identify, attract highly talented sales associates has continued to improve.

In addition, our most recent hires are becoming reproductive quicker which is a result of hiring the right people and accelerating their training in our improved on-boarding program.

We will continue to aggressively hire talented new sales people because the productivity we have achieved with new sales associates shows us that this is the right approach to exploit our substantial market opportunity and grow our business.

In fact, because the strategy has been so successful, we're modestly reallocating our resources more towards our research business and now expect to add a total of about 150 sales associates for the full-year 2007 versus our prior target of 120.

This will bring our total sales force to over 800 associates.

As Chris will describe in more detail, this reallocation has enabled us to raise our expectations for research growth and trim them for consulting and events growth.

However, our growth expectations for the Company as a whole remain unchanged.

Given that research is our highest return, highest gross business, we believe this strategy is the correct one for accelerating revenue growth and expanding margins over time.

Now just growing our sales force will not be sufficient unless we continue to deliver extraordinary research to our clients.

Our transition to role base research products, such as Gartner for IT Leaders, has made a significant impact on the value our clients receive from us, and we continue to create highly differentiated offerings through ongoing innovation.

For example, this quarter we added interactive diagnostic tools to our Gartner for IT Leaders portfolio, further increasing the value clients receive from the service.

The tools help users apply Gartner methodologies to their own situations and receive actionable recommendations tailored to their own specific roles.

These enhancements contributed to the strong performance in our research business which Chris will discuss in more detail shortly.

The second quarter also saw a number of product innovations launched across our business.

Two new conferences from our events business were also added to the calendar.

We launched two new products in the Gartner for Business Leaders suite, which I talked about last quarter.

One for product management and marketing professionals and one for market and competitive intelligence professionals from high-tech companies.

Both have enjoyed early success.

Another strategic initiative we talked about at Investor Day was providing world-class service.

This is critical to our clients' experience with us and fundamentally impacts our long-term client retention.

Initiatives such as reducing the time it takes to schedule a call to an analyst, enhancing our client on-board experience are already bearing fruit.

This is reflected in our strong retention rates, including wallet retention of over 100% for the past two quarters in a row.

We have a number of plans in place for the second half of the year to continue the positive trends in this area.

Overall, the successful execution of these strategic initiatives and programs drove our strong performance in the second quarter and continues to demonstrate that the strategy we outlined to you at Investor Day is working.

Now, before I turn the call over to Chris, I want to highlight a few additional items from the quarter.

First, we continued to improve our operating performance in consulting to position that business to resume revenue growth in the second half of the year with our backlog up 9% in the quarter.

Our productivity and other key metrics in consulting have improved significantly and our strategy to invest in additional senior level consultants and to focus on larger, more profitable deals in fewer strategic accounts is working.

In line with this strategy, we are exiting our small consulting operations in Asia Pacific.

By exiting a geography where we did not have the scale to be successful in consulting, our resources can be reallocated to pursue our best growth opportunities.

Second, our events business had strong attendance and operational performance during the first half.

We did, however, modestly lose momentum in exhibitor sales when we promoted the highly effective former leader of our exhibitor sales team to run our Asia Pacific research sales.

That management change significantly benefited our Asia Pacific research sales but led to a slight deceleration of our events exhibitor sales.

We've now filled that vacancy with a highly capable sales leader with a successful internal track record.

We believe this new leader will be a key factor in boosting the growth of our events business in the back half of the year.

Third, during the quarter, we settled an intellectual property dispute involving Expert Choice and a Gartner subsidiary.

This matter has been publicly disclosed in our 10-Ks and 10-Qs and was the only material litigation outstanding.

This dispute comes from a licensing agreement in the 1990s for a product no longer sold by Gartner, and resulted in a one-time charge of $8.7 million pretax in the quarter.

This will not have any ongoing impact on our business.

Finally, as Hank mentioned, I'm delighted to welcome Karen Dykstra to the Board of Directors.

Karen brings a wealth of financial and operational expertise to the Board and we're looking forward to working with her.

With that I'll turn it over to Chris for additional business unit highlights and detailed performance on another positive quarter for Gartner.

Thanks, Gene, and good morning, everyone.

My message today is much the same as it was at our earnings call last quarter.

We continue to successfully execute on our long-term strategy and financial road map, with the objectives of accelerated growth, expanding margins and improving profitability.

As should now be clear, the focus of our strategy is to expand our sales capabilities to capture the significant untapped market opportunity for our research products.

As I discussed at Investor Day in March, the decision to accelerate the investment in growing the size of our sales force be based on strong research sales and margin performance during the first half of 2007.

Contract value growth of 19% year-over-year in both the first and second quarters of this year and contribution margin expansion of 2 points gives us the confidence the strategy is working, and, therefore, the confidence to accelerate sales hiring.

While we knew this decision would impact margins in Q2, we deliberately increased our spending on the sales organization given the benefit this will have in 2008.

And I am pleased to say that we are able to make this investment for the future while not changing our full-year EBITDA guidance for 2007 because of the accelerated revenue growth this investment is generating.

As I will discuss later, second quarter earnings were impacted by approximately $7.2 million pretax in one-time charges.

That said, the important takeaways for the first half of 2007 are that we accelerated the growth in contract value, delivered double-digit total revenue growth and grew research revenue by 17% which is above our road map target of 12% to 16%.

We now expect full-year 2007 total revenue growth of between 10% and 12%, as well as significantly expanded margins versus 2006.

You will recall that our 3-year financial road map targets total revenue growth of between 11% and 15% by 2009.

With our strong first-half research performance and the impact of the initiatives that I will discuss, we remain well-positioned to achieve this objective.

Turning to the details of our results for the second quarter, let me start by highlighting the performance of each of our business units.

Research, our largest segment and primary growth engine, delivered strong revenue growth and margin expansion.

We are delivering significant operating leverage in this segment of our business.

For the first half of 2007, research revenue grew 17% versus 2006, and contribution margin increased 2 points to 63%.

We generated a second consecutive quarter of 19% contract value growth reaching a record $683 million at June 30, 2007.

For the first half of 2007, contract value growth has accelerated significantly from 2006 as we reap the benefits of our investments in increased sales coverage, new product launches and improved customer service.

Contract value is a leading indicator for our business and a strong predictor of future revenues.

And, as Gene mentioned, we will now exceed our original target to add 120 sales associates this year and as a result have increased that target to 150 and raised our guidance for 2007 research revenue growth.

We are executing well to both upgrade our existing customer base to our new products, including Gartner for IT Leaders and Gartner for Business Leaders, and attract new business from new clients.

The positive reaction that our existing customers have had to our new products is reflected in improved retention rates, including second quarter client retention of 82%, up from 80% last year and wallet retention of 103% up from 90% last year.

This was the second consecutive quarter that wallet retention has exceeded 100% and demonstrates that our existing customers continue to increase their spend on Gartner research.

We are also attracting new research clients at a faster pace as reflected in the growth of new business, which on an FX neutral basis was up 16% sequentially and 24% year-over-year.

These results were broad based with growth across the entire research product portfolio, all client segments, and all geographies.

Another important driver of our research results is the growth of our executive programs, which offer premium role-based products for CIOs and senior IT executives.

Contract value for executive programs, which is reported as part of total contract value, was $173 million on June 30.

This represents a year-over-year increase of 20% as reported or 15% on an FX neutral basis.

We now have over 3,600 members in our various executive programs.

Significantly, we delivered research contribution margin expansion of 2 percentage points year-over-year despite the increased investments we're making in products and service.

We have further strengthened a strong foundation for continued growth and margin expansion.

Moving on to our consulting business, revenue was $83.6 million in the second quarter, flat from last year as billable headcount for the quarter ended at 487, down 5% from 513 in 2006.

This result is consistent with our strategy to allocate our incremental sales capacity to research which is our highest margin business.

As we previously outlined to you our focus in the consulting segment is to improve productivity and invest for future profitable growth.

In particular, we are focusing our efforts on larger, more profitable engagements and exiting areas where the return on investment is not acceptable.

We are also adding additional senior level resources and new benchmarking products which account for our higher year-over-year expenses.

As Gene mentioned and consistent with the strategy, we are exiting consulting operations in Asia Pacific, a region where our lack of scale resulted in poor utilization and margins.

This decision resulted in approximately 40 consultants being exited or redeployed and a charge of $2.7 million that is reflected in our second quarter results.

All of these efforts are showing signs of success as demonstrated by our improved productivity metrics during the quarter.

Utilization of 73% was its highest in over five years, up 6 percentage points, both year-over-year and sequentially.

And revenue per billable head increased to over 500 -- $450,000.

Consulting contribution margin for the quarter was 41%, above our financial road map target of 37% to 40% and up more than 4 points from the first quarter of 2007.

Our strategy is working and we expect year-over-year consulting revenue growth to resume in the second half as reflected in our backlog which increased to $109 million at June 30.

Turning to our third segment, events, I will focus the results on the first six months of the year since, as we previously disclosed, the quarterly results were skewed by the timing of four events that were held in the first quarter this year versus the second quarter last year.

So looking at the first half of 2007, we increased events attendance by 12% over the first half of 2006 to more than 20,000 people with 39 events held in both years.

We also increased our contribution margin by 1 point to 46%.

This highlights our continued operational effectiveness and the execution of our conferences.

While we did generate solid revenue growth of 9.3%, this was slightly below our expectations due to the lower exhibitor sales resulting from the management change that Gene discussed earlier.

It's also important to note that exhibitor sales were up modestly over last year.

We have resolved this issue and are already seeing a pick up in sales for the second half of the year and, as a result, we expect overall revenue growth in this segment to improve for the second half.

Our updated guidance for events reflects a reduction of approximately $3 million in revenue for the full-year.

Moving down the income statement, the impact of foreign exchange on cost-of-services resulted in approximately 40% of the year-over-year increase in Q2 and 40% of the first half of the year.

Our annual merit increase was the main driver of the remainder.

We continue to effectively manage costs to capitalize on the leverage in our business model.

I am pleased with the progress we're making in controlling G&A expense.

Overall, SG&A increased 13% year-over-year in the second quarter due to the continued investment in our sales organization, which we have grown by 25% over the same period last year.

The cost of this investment includes not only direct head count costs but incremental recruiting and other costs like facilities in T&E.

If we look at just G&A, it was lower, both year-over-year and sequentially, as we continue to successfully leverage our infrastructure.

G&A for the second quarter declined as a percent of revenue and on an absolute dollar basis declined about 1% year-over-year.

This is even more impressive when you consider that the year-over-year comparisons were unfavorably impacted by about $3 million due to foreign exchange and by $2.5 million of additional FAS 123-R expense.

We continue to look for and capture opportunities to control corporate cost and lower our G&A as a percent of revenue.

Before I turn to our updated guidance, I would like to review the four unusual items that impacted our GAAP earnings this quarter, two negative and two positive.

As Gene mentioned, we settled an intellectual property dispute involving Expert Choice and a Gartner subsidiary.

This matter has been publicly disclosed in our 10-K and 10-Q filings and stems from a licensing agreement originally entered into in the early 1990s for a product no longer sold by Gartner or its subsidiaries.

The settlement resulted in a one-time charge of $8.7 million in the quarter.

This will not have any ongoing impact on our business.

Second, we incurred a headcount reduction charge related to exiting our Asia Pacific consulting business.

As I mentioned earlier, this resulted in a pretax charge of $2.7 million.

On an annual basis, this decision will eliminate approximately $7 million to $8 million of revenue and $1 million of contribution margin from our consulting segment.

Third, we reversed a reserve for the closure of a facility in England that we are now using due to the growth in our business.

This resulted in a pretax credit of $2.3 million and this expense for the lease will be taken into SG&A expense over the remaining term of the lease which ends in 2011.

Fourth and finally, we received a recovery related to improper tax advice in connection with an acquisition in the late '90s.

This resulted in a pretax credit of $1.8 million recorded under non-operating income.

Together, these four items reduced pretax income by $7.2 million and GAAP EPS by $0.04.

I will now review our updated guidance for 2007.

We have increased the low-end of our guidance for total revenue and reiterated our guidance for normalized EBITDA, as the strength in our research business is offsetting the elimination of consulting in Asia Pacific and the slight first-half shortfall in events.

We now expect total revenue to grow 10% to 12% over last year to approximately $1.168 billion to 1 billion 187 billion (sic -- see Press Release).

Updated projected revenues by segment can be found in our press release.

We continue to expect normalized EBITDA to grow 24% to 30% over last year to between $193 million and $203 million.

Normalized EBITDA excludes certain items, including the non-cash expense associated with FAS 123-R, which we estimate to be between $25 million and $27 million.

We also continue to expect operating cash flow of between $135 million and $150 million despite the cash costs of these charges.

We continue to effectively manage working capital.

Capital expenditures are expected to be at the high-end of our range of $20 million to $25 million.

Although our overall operating results expectations for 2007 have not changed, our prior guidance for GAAP EPS did not reflect the $0.04 per share impact of the one-time charges in the second quarter; therefore, we're reducing our full-year guidance for GAAP EPS by $0.04 to a range of $0.67 (sic -- see Press Release) to $0.73.

Which is a 32% to 46% increase over 2006, despite the inclusion of these charges.

Let me spend a moment on the quarterly phasing you should expect.

The timing of our revenue guidance by segment remains similar to the quarterly skew we discussed at Investor Day, and from an EPS perspective, we had originally expected approximately 10% of the full-year EPS guidance to be earned in Q3.

We now expect this to be slightly higher with the balance in Q4.

In closing, let me summarize our first-half performance.

Our research segment is performing above the expectations we originally established for the year.

We delivered strong revenue growth and capitalized on the significant operating leverage that exists in this business to expand our margins.

The strong research performance gives us the confidence to accelerate our investment in growing the size of our sales organization.

This deliberate decision has already begun to positively impact our performance and will provide further benefits in 2008.

We continue to effectively manage our events portfolio by eliminating less profitable events and launching successful new ones.

This led to a significant increase in the number of attendees at our events and an improvement in the contribution margin.

Our decision to move the head of our exhibitor sales to Asia Pacific led to an immediate improvement in that region's research sales performance, but we underestimated the impact to exhibitor sales.

We have filled this role and expect improved performance in the second half.

Our focus in consulting remains on improving productivity and margins.

This has led to a 6 point improvement in utilization over last year and contribution margin has improved from 32% in the fourth quarter of 2006 to 37% in the first quarter and now to 41% this quarter.

Our decision to exit consulting in Asia Pacific will further improve our operating results in the segment.

We had four one-time charges in the quarter which reduced GAAP EPS by $0.04 and there is no ongoing impact to our P&L from these charges.

Finally, our full-year EBITDA guidance remains unchanged.

We are funding the incremental investment in sales capabilities through strong research performance.

We remain on track to deliver to the financial road map we discussed at our last Investor Day in March.

And finally, before I turn it over to our call, I'd like to welcome and introduce our new Head of Investor Relations, Hank Diamond, that you heard earlier.

We're pleased to have Hank, a seasoned IR professional, join us and we all look forward, and Hank looks forward, to meeting you and working with you as we move ahead.

With that, I'll now open the call up for your questions.

Operator?

Thank you.

(OPERATOR INSTRUCTIONS) Please stand by for your first question.

First question, please.

Can we have the first question, please.

Sure, your first question comes from the line of Peter Appert with Goldman Sachs.

Please proceed.

Thank you.

Gene, you know, for the last couple of quarters it feels like the great momentum you're enjoying in the research business has been essentially offset by weaknesses and other parts of the business, particularly consulting.

And so it raises questions, obviously, in investors' minds in terms of visibility around earnings broadly, so what can you tell us in terms of getting some confidence that the problems you have had in consulting really are fixed and that we will see some margin leverage out of this business in the second half.

Hi, Peter, it's Gene.

As our know, our strategy is really focused on growing the research business.

The reason for it is that it has incremental profitability is the best of all of our other businesses.

Consulting, we have a choice between in sales focus, we focus people more on research and less on consulting and that is what has driven the consulting results in terms of the top-line.

In the first half of this year, particularly in the first quarter, we had -- we really pushed our research business a lot with our sales force.

You saw that result of research and consulting, to your point, that didn't have great results.

Second quarter, we twisted the knob a little more, more sales in consulting.

That's why the bookings were up 9% year over year.

It's one of the things that we're going to make the balance, where we have great growth in research and growth in the range that we have given in our guidance, especially our long-term guidance, for consulting.

You can still, you can expect the kind of growth in consulting to be consistent with what we provided in our long-term road map which is what you saw in our bookings growth above the range in the second quarter.

Okay.

And the exiting Asia, obviously helps you from a margin perspective, even though that business was profitable on a contribution basis.

Yes, that is a great question, Peter.

In Asia Pacific, we had about 40 consultants spread around four widely-dispersed countries, thousands of miles apart.

So we were below scale there.

The -- if you take all the costs into account, we don't think it had positive contribution overall.

And even worse than that, it was a very small portion of our consulting business and so our management team had to spend time in working those issues.

Our sales team had to spend time in working sales in Asia Pacific in consulting.

So because we had so few people, we decided it made much more sense to let our sales team there focus on research and have our consulting management team focus on the Americas and Europe where we do have the scale in that business.

And so we actually think by next year it will have a positive financial impact.

Okay.

And then unrelated item for Gene or Chris, the -- can you just remind us the typical pattern in terms of the productivity ramps for new sales associates and in particular, you've been so aggressive in sales expansion, I wonder if there is any risk to margins associated with ramping up a large member of less productive sales people on a near-term basis.

This is Gene, I will answer that.

We track the productivity of our sales people very closely.

We review it on a regular basis and we divide it by class of sales person in terms of, you know, think of when they joined or vintage, so we know exactly how long it takes for a new salesperson to join.

We have been accelerating the number of new sales people we have added over the past three years.

And what we found is that adding the new sales people, we have been able to get their productivity up faster and simultaneously, we have been growing the productivity of the not new people as well.

And the net of that has been the overall productivity has been rising in the whole sales force and we see that trend continuing, actually.

We see the trend for the whole sales force productivity to continue to rise because we're focused on both getting the new people more productive quickly and also getting the more experienced people more productive as well.

I'll give you an example of the kinds of things we're doing.

We have -- last year we started implementing a screening tool that each one, every associate or prospect that applies to us, to be a sales person, takes a test that was developed by comparing our best sales people.

And so we compared the skills of the applicants with the skills of our best sales people and then we take the top group of people on that test and then they go through an introduce process.

What that has allowed us to do is actually be better at hiring people that are going to be more successful than we were a year ago for our new people.

That helps make sure that new people get more productive more sooner.

The second thing we have done there is we have greatly enhanced our training program and so with better training, that also helps new people get up to speed sooner.

And the third thing we have done is interspersed the training in a way that rather than getting trained completely up front without selling anything and then they go into their territory, we train them some, they sell some, train them more and they sell some and so forth, that their actual time to first sale and their overall productivity in their first three and their six months has been getting better.

And so it gives you a flavor for, it's not as simple as we're hiring new sales people and everything is stagnant.

We're actually increasing the productivity of both the new sales people and the more experienced as we hire them.

Got it.

Okay.

Thank you.

And then one last thing.

You have an estimate of what the FX impact on operating income was?

Peter, it continues to be negligible.

Okay.

As we mentioned many times, we kind of have a natural hedge with our revenues expenses and that has continued even with the significant movement we have seen in FX this quarter.

Great, thank you.

Sure.

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

Please proceed.

Yes, a few questions really following up on Peter's is the comfort and the EBITDA guidance for the year.

It just feels like there is less cushion -- excuse me -- than in the past Gartner -- excuse me -- try to model relatively considerably.

So, I guess what I am asking is is there less cushion a bit?

And I guess following up on that, I realize that you have become more scientific, if you will, in your sales force and how you train them, but have you taken a haircut, if you will, to what a traditional new person does over the next six months, because I really agree with Peter that having a higher percentage of new people seems to imply a greater deal of risk and then I have a question after that as well.

All right, let me answer the first part and Chris the second part.

On the first part, in terms of the sales, we track the productivity in a very detailed way and so we think there is very little risk that the productivity of new sales people won't be there.

In terms of the EBITDA guidance, I will give that to Chris.

Yeah, Laura, it's Chris.

From an EBITDA guidance perspective, we obviously put guidance out that we feel comfortable with, or we wouldn't put that guidance out.

So we certainly feel very comfortable with the guidance we have given.

It's consistent with the guidance we gave last quarter.

We are very mindful and thoughtful of ensuring as we said at the beginning of the year that we can invest in the future while delivering the results that we have committed and that we committed at the end of the first quarter where if everyone recalls, we increased our EBITDA guidance by about 4 to $5 million.

So overall, we feel comfortable, certainly from, at this point in the year, we have great visibility into the research part of our business.

That part of our business we feel comfortable about.

And as we said many times, the other two businesses, we have a little less visibility to just due to the nature of the businesses.

Again, we feel comfortable there.

And before I exit, there are two things I wanted to clarify for my comments.

One was the press release our EPS guidance is $.066 to $0.73, I believe in my comments I said 67 was the low.

The proper range is $0.66 to $0.73 for EPS.

And I also mentioned in cost-of-service that the impact of foreign exchange was 40% in Q2, it was actually 60% of the increase driven by foreign exchange.

I wanted to clarify those two points.

Following up on the concept of profitability and weighing that against sales increase, I guess I understand the reason for increasing the number of sales people, but it seems that is there a bit of a tradeoff in terms of profitability?

Obviously you want to increase sales but not at the price of profitability.

So kind of talk about theoretically that it's a goal of increased profitability versus accelerating the top-line.

Yeah, Laura, as I think I just mentioned, we're absolutely mindful of the guidance we have given, but we're also, you know, long-term thinking about the business.

We're not thinking about only the quarter-to-quarter impact.

We're thinking about the long-term view that we believe the benefit of continuing to add to our sales capacity will have.

We have seen it, we're measuring it, we feel very comfortable with it as can you see from the research performance where we have dramatically accelerated CV growth, dramatically accelerated revenue, added two points to margin improvement.

We are driving leverage out of that part of our business, which is as all of you look at your models, is clearly the thing that drives the biggest future profitability and growth of our, you know, of our earnings.

We feel very comfortable we're adding at the appropriate pace.

We feel comfortable to bring them in a way that doesn't have a dramatically negative impact to earnings and we believe that as we think forward to '08 and beyond that we're doing the right things that will continue to allow us to get to, or if we're, you know are really successful, achieve above what we have given as longer-term guidance.

All right.

If you look at the less-than-expected exhibitor sales and events, I didn't realize it was one person in charge of exhibitor sales.

Literally there was only one person or was he the leader or she the leader and, therefore, the group didn't perform as well?

Can you give us a better understanding on the exhibitor sales?

Yeah, hi, Laura, it's Gene.

We actually have in our events business, we have a sales force that sells exhibitor, it sells to exhibitors for our events and so there is a sales force there, a person who leads the sales force.

And we moved the -- and we had a very strong leader in the sales force.

We felt we needed a stronger leader in our Asia Pacific resource sales force and so we took that leader and moved them over to the Asia Pacific in the fourth quarter of last year.

And it took us longer to get a replacement for that person than we thought and, you know, we have -- we run a lean organization.

When you take an important leader out of a lean organization, you know, you can have a bit of a hiccup.

That is what we had, basically.

And so the real issue is it took us longer to fill the slot than we thought it was going to take.

So if you don't have the leader, you wind up with things like more open sales positions than you should have had in that sales force.

And you wind up with a little less aggressive management of it, because, again, that leader's not there.

And I will, I want to point out that while it was less than our expectations, it was still -- we still did have growth in that business in the exhibitors sales and the attendee sales and operations, which are the other two important parts in the business.

Both did very well.

While this is -- while it was below our expectations, it was it was still quite a reasonable performance.

I guess -- .

And lastly, we have since replaced it with someone who we know well and the early indications are that we're in good shape in that business.

I guess it begs the question that you -- even though the leader left, there are still sales people, can one interpret maybe that there is more topping out of or saturation in the very, very profitable business of selling trade show booths at your events.

Yes, no.

Again, we don't think that is the case at all.

Laura, it was not just purely the fact that you had one person left in the organization.

It's things like if you have 10 more, I don't know the number but if we had more open sales positions, you sell less to clients if you don't call on them.

And so the fact that we lose leadership, you lose a little momentum.

It's not that the sales went down or dropped in half, we just didn't grow as fast.

I think you have to keep in mind that this was a little deceleration, not the sales falling in half or something like that.

It was a combination of when we didn't have the leadership, we have the sales execution that was not as good as when you have strong leadership.

Again, we run a lean mean machine and if somebody is missing out of that, it does hurt.

Thank you so much.

Your next question comes from the line of Eric [Winman] with [Truman, Boyle, and Capital Management].

Please proceed.

Hi, are you still targeting normalized EBITDA margin of 19 to 22% in the 2008 to 2009 time period?

We have made no changes to the financial road map that we put out there as I said during my comments.

We feel very comfortable that the performance we have this quarter as well as some of the initiatives and steps that we have taken so far this year will continue to put us on the same road map target that we established and that road map is taken out to 2009.

So no changes to that, and as we get, as we do every year at Investor Day, in the February, March timeframe, we'll revisit that to provide additional growth.

But at this point, we feel very comfortable with what we have and what we've given.

What is your long-term target of SG&A as percentage of total revenues?

We haven't given a specific target, because we don't break out SG&A by the separate components.

What I will tell us is over the last three years, we have consistently been able to reduce G&A specifically as a percent of revenue and we've reduced the absolute dollar of G&A even this year so far versus last year.

So we continue to take advantage of the infrastructure we've built as we said in the past, we believe we have an infrastructure that can support a large organization.

We continue to take advantage of that and we still think there is room for us to do that into the intermediate future.

What is the weighted average actual price paid for the core research versus IT Leaders you're seeing right now?

The old product versus the new product?

Correct.

That actual price paid.

Yes, you know, I will give you a price point, as obviously different products with different price points but if you use the Advisor's Seat, the seat that gives you access to read all of our research and talk to our analysts, the current price of Gartner for IT Leader seat is in the $23,000 a year rage.

And we essentially provide no discounting on that product.

We do have a migration, two-year migration [pan] for existing clients but other than, that we don't discount the product.

So our price point is pretty close to our, you know, to our target less price of 23.

On the core research seat for the same seat, I don't have the exact number where we are today.

But it's probably, it has been running in the 10 to 12-k range.

Yes.

And that is about the rough average and again, it varies dramatically across the client base.

That is a rough average of the two price points.

If you look out five years from now, do you think the majority of core will transfer into IT Leaders?

Yes, what I would say and Gene can obviously add his comments is we have not put in a forced migration plan, so we don't have a point in time where we are forcing all clients off of the core product onto Gartner for IT Leaders.

However, we have seen good update both from existing and new clients.

We have seen the product be quite successful.

Our expectation is as the clients use it, they will continue over time to migrate their seats and their users onto that product.

Gene, I don't know if you have any other comments to add to that.

No, I think basically the clients do like the product, they're selling extremely well and both the new clients and the upgrade to existing clients and expect over a period of time people upgrade because the value is so much better.

Last question, what is the incremental or contribution margin on research?

If you simply look at our segment contribution margins, you will see that during 2007 what we have actually contributed, if you look at the incremental revenue over the prior year, about 70% of that has flown through the contribution margin line.

We do believe the research business has significant incremental flow through.

Certainly what you have seen this year so far is we have chosen to invest in our sales capacity with some of that performance in that part of the segment.

From a pure segment point of view, that is the kind of margin you have seen so far this year.

All right, thanks a lot.

Sure.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Sam Hoffman with ADAR.

Please proceed.

Good morning.

Can you comment on the reason why SG&A went up by 30 million year-over-year for the first half of the year and break it down in terms of how much of that was stuck on sales force growth or other and what expense initiatives are currently underway.

Well, Sam, I think -- we have been talking about the investment in the sales force.

The largest single contributor to SG&A is the fact that we have grown our sales capacity 25%.

We have added over 140 people from the same time last year.

I think last year our sales headcount at the end of Q2 was 612, I think we're at 765 now.

People is, by far, the single largest piece of.

That I just talked about, I just talked about the increase or the decline actually on G&A so our other G&A expenses are continuing to decline.

Recruiting costs have been a component, so certainly as we continue to recruit all of these people, that part of the G&A went up while other parts went down.

From an equity compensation point of view, we have about an incremental kind of $4 million, $4.5 million of incremental equity comp for FAS-123-R costs on the year-over-year basis.

When you boil down the increase, it really is primarily due to the growth in the sales organization that is causing that.

Okay, because if you assume it was entirely based on growth and sales force, that would imply 200,000, I believe, $200,000 more per incremental headcount for only a half a year.

So there must be other things in there.

Sam, we're happy to take you through it offline if you would like to spend some time.

At the end of the day when you look at our incremental costs and you take it on the individual components, G&A is down.

Okay.

FAS 123-R is up.

Recruiting cost is up.

The cost of our sales organization is up, including facilities, including T&E, and including the cost of those people and management.

Right, we have to hire managers in sales.

So it's all related to that activity.

Okay.

Given that your strategy going forward is to only recruit maybe 25 per quarter in the second half, do you expect that growth to decelerate a bit in the second half of the year?

If you also look at the year-over-year compare, keep in mind that in the first half of 2006, we had not yet started to ramp our sales force.

Right.

Okay.

So you're looking at the fact that the bulk of our sales ramp occurred in the second half of the year.

So we had significantly more open positions in the first half of '06 than we did in '07.

Okay.

We had not yet really added the growth capacity that came in the back half of the year.

Yes, my expectation is that on a year-over-year basis the comparison is more apples-to-apples in that we started the ramp.

There is a higher number of people in the back half that compare to that.

You are right in that we were very aggressively hiring in the first half of this year.

Our sales management team will be very focused on closing up the year in the back half of the year which you would normally expect.

Therefore, hiring activity slows down a bit.

From a year-over-year compare point of view, it absolutely will decelerate in terms of year-over-year growth.

Not because we are decelerating our focus on growth, just because of the timing of the investment that occurred in 2006.

Okay.

The other question I had was you grew the sales force very significantly and yet the growth in the contract value sequentially was only about $15 million, which is good growth but not great, certainly not compared to the last couple of quarters.

And so I guess the question is are you confident, kind of repeating some of the questions earlier, that you can meet your objectives given the sales force growth doesn't seem to have paid off yet in this quarter and will it pay off in the third and fourth quarter and how long will it take to kind of ramp up?

Well, at first I think we disagree with you that our investment is not paying off.

I would not agree with that statement.

I mean the people hired in this quarter, obviously didn't pay off in this quarter.

That's what I meant.

Of course, Sam.

Logically assuming that a sales person joins would not pick up and immediately become productive within the first 1 to 12 weeks of being on board.

Okay.

There's certainly for a training period.

There is certainly -- what we have done to effectively bring our sales guys on board.

I think Gene mentioned and commented on the work we have done and the measuring we do to ensure our sales capacity is effective, productive.

We absolutely measure and track that to ensure our investment is paying off appropriately.

So, the approach that we look at, which I think is the right approach, we look at year-over-year increase in contract value of 19% which, is the real performance indicator for us of the effectiveness of the sales organization.

Okay, my last question is are there any other restructurings or other things going on at the company that would cause one-time charges going forward?

No, Sam, we would, as we always do, we would be communicating as soon as we have anything that we need to.

So at this point, there is nothing else that we're aware of that is not included in our guidance that we talked about today.

Okay, thank you.

(OPERATOR INSTRUCTIONS) We have no other questions at this time.

This is Gene.

Thanks for joining us for this call and we look forward to briefing you next quarter.

Thank you for your participation in today's conference, this concludes the presentation.

You may now disconnect.

Good day.