高德納諮詢公司 (IT) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Gartner's earnings conference call for the second quarter 2011.

A replay of this call will be available through September 2, 2011.

The replay can be accessed by dialing 1-888-286-8010 for domestic calls and 617-801-6888 for international calls, and by entering the pass code 62943235.

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 turn the conference over to Brian Shipman, Gartner's Group Vice President of Investor Relations for opening remarks and introductions.

Please go ahead, sir.

Thank you, and good morning, everyone.

Welcome to Gartner's second quarter 2011 earnings conference call.

With me today is our Chief Executive Officer, Gene Hall, and our Chief Financial Officer, Chris Lafond.

This call will begin with a discussion of the quarterly financial results disclosed in today's press release, as well as an update of our increased revenue guidance, followed by an opportunity for you to ask questions.

I'd like to reminds everyone that the press release is available on our website.

That web address is www.gartner.com.

Before we begin, we need to remind you that certain statements made on this call may constitute forward-looking statements.

Forward-looking statements can vary materially from actual results and are subject to a number of risks and uncertainties, including those contained in the Company's 2010 annual report on Form 10-K and quarterly reports on Form 10-Q, as well as in other filings with the SEC.

I would encourage all of you to review the risk factors listed in those documents.

The Company undertakes no obligation to update any of its forward-looking statements.

With that, I would like to hand the call over to Gartner's Chief Executive Officer, Gene Hall.

Gene?

Good morning, everyone.

Thanks for joining us.

Our second quarter results for 2011 continued the trend of accelerated growth that we've delivered through the successful and consistent execution of our strategy for growth.

The fundamentals of our strategy are, first, to create extraordinary research insight, to build strong sales capability, to deliver high value differentiated offerings, to provide world class service, and to continuously improve our operational effectiveness.

This strategy has been successful across our businesses and across all geographies.

In the second quarter of 2011, growth in Research contract value was the fastest since early 2007.

Our contract value ended at the highest level ever reported in Gartner's history, up 16% year over year, excluding the impact of foreign exchange, to over $1 billion.

The 16% year over year increase in research contract value was driven by both record-setting new -- record second quarter new business and strong client and wallet retention.

New business was the highest of any second quarter in Gartner's history, and wallet retention.

New business was the highest of any second quarter in Gartner's history, and wallet retention once again reached 100%.

This growth was achieved despite a mixed global economic development.

Our Events business performed extremely well in the second quarter, with growing year over year increases attendees and in revenue.

In Consulting, the strong pipeline we discussed last year converted to 9% -- sorry -- last quarter converted to 9% sequential improvement in backlog in Q2.

We're confident this business will perform in line with expectations over the full course of the year.

The continued positive momentum in our growth has been driven by the success of our initiatives to improve sales force productivity, drive higher client retention and penetrate new clients.

IT and supply chain management remain the best way for companies to improve in any macro economic environment.

These areas are and will continue to be complex and continuously evolving.

IT and supply chain professionals need expert assistance and insight to help them make critical business decisions that they face virtually every day.

Gartner is the best and most cost effective resource they can turn to for that help and often makes the difference between success and failure in any economic environment.

Our strong contract value growth and high retention rates continue to be a testament to this fact.

I've never been more confident in or excited about our prospects for continued accelerated growth than I am today.

We have a vast untapped market opportunity for our service, which we estimate at over $45 billion for research alone.

There are hundreds of thousands of IT and supply chain practitioners who could potentially be Gartner clients, but have never been educated on the value we can provide.

The Gartner brand is in a class by itself.

Our products and services lead the market, and we have a great business model.

Gartner is the strongest company it's ever been.

With that, I'll turn it over to Chris for additional details and results on our financial outlook.

Thanks, Gene, and good morning, everyone.

The continued successful execution of our strategy resulted in another quarter of double-digit year over year growth in revenue, earnings and cash flow in the second quarter of 2011.

Our results once again demonstrate our ability to consistently deliver on the long term financial objectives we established and communicated over the last few months since our Investor Day in February.

Let me start today with a review of our business segment results for the second quarter and finish with a discussion of our outlook for the remainder of 2011.

In Research, second quarter revenue was up 20% as reported and 14% excluding the impact of foreign exchange.

The gross margin in this segment increased 2 points year over year to 67.3%, as we successfully capitalized on the operating leverage we generate as revenues grow.

Our Research business clearly accelerated in the second quarter.

With the success of our initiatives to improve sales capacity and effectiveness, we grew contract value year over year by 16%, excluding the impact of foreign exchange, to a record level of $1.007 billion.

Recall the contract value related to our acquisition of AMR and Burton was included in the reported contract value in Q2 2010, and so this performance is a true reflection of the growth in our business.

This quarter's year over year growth is notable given that our comparisons were increasingly difficult this quarter, yet we showed acceleration in contract value growth.

As Gene mentioned, the second quarter of 2011 was the fastest growth for contract value that we've recorded since the second quarter of 2007.

At the same time, we showed acceleration from the first quarter, which puts us on pace to hit our long term target of 15% to 20% growth for the full year.

New business increased 26% year over year and, consistent with the trend of the past few years, was balanced between sales to new clients and sales of additional services and upgrades to existing clients.

In addition approximately 85% of our contract value growth came from volume versus price.

This volume growth reflects our success in continuing to penetrate our vast market opportunity with both new and existing clients, and as a result we ended the client with 11,607 client organizations, up 5% year over year.

In addition to sales of new subscriptions, our contract value growth continues to benefit from our discipline annual price increases and no discounting.

Over the long term, we continue to expect to increase our list prices by 3% to 6% per year.

From a client perspective, our retention rates continue to improve, as we retained more of our clients, and the clients we retained increased their spending on Gartner Research.

Client retention increased one point year over year to 82%, and we've maintained client retention near our all time highs for four quarters in a row.

Wallet retention increased 7% points year over year to over 100%.

Wallet retention is higher than client retention due to a combination of increased spending by retained clients and the fact that we retain a higher percentage of our larger clients.

As we've discussed in the past, our retention metrics are reported on a four quarter rolling basis in order to eliminate any seasonality.

In summary, our Research segment continued to perform strongly and growth accelerated in the second quarter.

We grew our contract value by $135 million in a year over year basis, we'reseeing increasing levels of demand from our clients, and we expect continued acceleration in revenue contract value growth over time.

As a result, we remain confident in our ability to deliver 15% to 20% annual revenue growth in this business over the long term.

Turning now to Events.

The strong performance in our Events business in recent periods continued in the second quarter.

Revenue increased 28% year over year on a reported basis and 24% excluding the impact of foreign exchange.

During the second quarter, we held 21 events, with 11,295 attendees, compared to 9,697 at equal number of events in the second quarter of 2010.

On a same events basis, which is assumes events held in the second quarter of 2011 were also held at some point in 2010,revenues increased 27% on a reported basis, or 24% excluding the impact of foreign exchange.

This revenue growth reflects strong growth in both attendees and exhibitors.

We continue to benefit from our efforts to increase client retention by enhancing the client experience and value that our events provide.

On this same measurement basis attendees increased 14% and the growth in attendees coupled with sales effectiveness initiatives helped drive a 13% increase in exhibitors on the same event basis.

In the second quarter the events gross contribution margin increased by 7 percentage points year over year to 46%.

This was driven by three factors.

First, a shift in our events calendar with one high margin mature event held in Q1 last year that moved Q2 this year.

Second, the elimination of two lower margin events.

And third and most importantly, continued growth in attendees and exhibitors at our ongoing events.

These results, following our 24% increase in revenues in the first quarter of 2011, excluding the impact of foreign exchange, and 21% increase in revenue for the full year 2010, clearly demonstrate that [the continued] strength in the events business is driven by the high value that attendees find in our events.

We expect this foundation, along with strong advance bookings for the remainder of the year,will translate into strong growth for the full year 2011.

With these strong first half results, our Events business remains on track for another outstanding year, and I'll talk more about our outlook in a few minutes.

Moving on to Consulting.

As we told you last quarter, our sales pipeline heading into the second quarter was solid and up significantly year over year.

Successful conversion of the pipeline resulted in much stronger bookings than we experienced in the first quarter and a sequential increase in the backlog of 9%.

Backlog, the key leading indicator of future revenue growth for our Consulting business, ended the quarter at $95 million.

This represents a healthy four months of backlog, and additionally our pipeline looks equally strong again as we start the third quarter.

Revenue in Consulting grew just under 3% year over year as reported and declined 2% excluding the benefit of foreign exchange.

Billable head count of 490 reflects our continued investment in transitioning to a managing partner model for this business.

Second quarter utilization was 64%, and revenue for billable head count remained above $400,000 per year, ending the quarter at $414,000.

While the revenue results for the Consulting business continue to be slightly below our original expectations, we remain very optimistic for the outlook for this segment for the rest of 2011.

This confidence stems from many factors, including, as I mentioned, an improved backlog at the end of the second quarter and the fact that our pipeline remains strong and up significantly compared to this time last year.

Moving to the income statement, during the first quarter, our total gross contribution margin increased by 2 percentage points year over year to 58.3%.

This increase was due primarily to the successful execution of our strategy to capitalize on the operating leverage inherent in our Research business and, to a lesser extent, having a seasonally stronger quarter in our events business.

SG&A increased by $22 million year over year during the second quarter.

The increase was attributable to growth in our sales force, as well as the impact of foreign exchange.

As of June 30, we had 1,146 [quarter-bearing] sales associates, and since December 31 we added 95 salespeople to remain on track to achieve our target of growing the sales force by 15% to 20% for the full year.

We again reduced G&A as a percent of revenue year over year by continuing to tightly control G&A costs across the entire Company.

Moving to earnings, we delivered another strong quarter.

Normalized EBITDA was $68 million, up 19% year over year, and diluted income per share was $0.32, up 60% year over year.

Our normalized EBITDA margin increased to 18.6% from 17.1%, or 150 basis points.

This trend continues to reflect our commitment to improving margins even as we invest in the growth of our business.

As expected, our Q2 2011 GAAP diluted income per share included $0.02 per share of noncash amortization costs associated with the AMR and Burton acquisitions.

Turning to cash, as we expected, our strong performance in the quarter translated into an increase in cash flow, mainly driven by cash from operations, which increased 14% to $89 million.

For the full year 2011 and over the long term, we continue to expect to generate free cash flow substantially greater than our net income, given our tight cash management and the negative working capital characteristics of our Research business.

During the first quarter we deployed excess cash principally to return capital to our shareholders through share repurchase program.

We repurchased over 930,000 shares at a total cost of just under $36 million.

We ended the quarter with a strong balance sheet and cash position, with net debt of $95 million.

Our current credit facility runs through December 2015, and at this time provides us with $350 million of remaining borrowing capacity.

We have ample cash flow and liquidity to continue to grow our business and execute initiatives that drive increased shareholder value.

We continue to look for attractive acquisition opportunities as a potential use of cash.

In the absence of appropriate acquisition opportunities, we believe that repurchasing our stock remains compelling use of our capital, and we have over $416 million remaining under our existing Board authorization.

Now let me turn to our business outlook for the remainder of 2011.

2011 is off to a strong start, and we're well positioned for double-digit revenue earnings and cash flow growth this year.

The details of our guidance are included in our earnings release issued this morning, but let me take a minute to highlight some of the changes.

Overall, on a consolidated basis we're raising the low end of our previous issued revenue guidance by $10 million, and we're raising the high end of our previous revenue guidance by $5 million.

With respect to Research, we now expect revenues between $995 million and $1.015 billion for the year.

We're raising our range on both the low and high end by $5 million and expect this segment to grow between 14% and 17% for the full year.

Next, in Consulting we now expect revenues of between $310 million and $325 million.

While we modestly reduced the top end of our previous guidance range, we still remain confident this segment will grow between 3% and 8% for 2011, consistent with our long term objectives

In our Events business we now expect revenues between $135 million and $145 million, an increase of $5 million to both the low and high end of our previous guidance range.

From a seasonality perspective, I would highlight that our third quarter will have eight fewer events as compared to the second quarter.

Additionally, the majority of these events will be held outside the USand in our smaller scale.

Advance bookings for both exhibitors and attendees look very strong for events we will hold in Q4, which is our symposium season and seasonally the largest quarter of the year.

And as a result, we expect stronger revenue growth in the Events business in Q4 than during Q3.

There are no other changes to our previously issued guidance.

So to summarize, Gartner's Research business experienced acceleration in the second quarter, growing CV fastest pace in four years, and we generated double-digit growth in Research revenue.

We're deploying our substantial cash flow, both to invest in our business and return capital shareholders through our share repurchase program.

And, finally, we're well positioned for double-digit revenue earnings and contract value growth and increasing returns to our shareholders for the full year and over the long term.

With that, I'd like to turn the call back over to Gene before we take your questions.

Gene?

Thanks, Chris.

[Russ Braden] has been a highly valued member of Gartner's Board since 2007.

He recently changed jobs and was named CEO of a major technology company that Gartner covers in our research.

Russ understands the importance of Gartner's research objectivity and independent and, with great sensitivity to that, has resigned.

We will miss him and wish him all the best in his new endeavor.

With that, we'd now like it take questions.

Larry, we're ready to take Q&A now.

(Operator Instructions).

And our first question comes from the line of Peter Appert of Piper Jaffray.

Please proceed.

Thanks.

Good morning.

So, Chris, the margin leverage continues to be very impressive in the context of the sales force expansion.

So you in the past talked about comfort, I think, with low 20% operating margins.

I'm just wondering if you're rethinking the potential leverage in the business and upside potential in margins in the context of performance you guys have been able to generate?

Great.

Thanks, Peter.

That's a great question.

Yes, as we said all along, our first goal was to drive the business back into the 20% range and then take a look at where it is from there.

Obviously, at the beginning of this year, we looked at our expectations.

We originally had thought we could grow margins annually between zero and 100 basis points.

If you recall, atInvestor Day we increased that by 50 from 50 to 150.

So we continue to be very confident in our ability that even as we expand the sales force, grow and invest in the business as we have been doing, that we will continue to see margin expansion.

And so as you've seen this year, we're continuing to see it in the 100 and 150 basis point range this year.

So our expectation is we certainly think that for the foreseeable future we can keep driving this into the mid 20s, and as we said before that doesn't necessarily mean that's where the ending point is so at this point is.

So at this point I would expect that we can continue to see the kind of expansion we think we can see in that 50 to 150 basis points for quite some time.

Thanks, Chris.

How important have the AMR and Burton deals been to the margin leverage story?Is that a key driver?

I wouldn't say it's a key driver to the margin leverage.

Obviously, anytime we do an acquisition we have opportunity to reduce costs, particularly around G&A, but those were relatively small business, so I would say this those two cases the cost takeout was a relatively small impact.

On the margin they were probably less scale, obviously, and less profitable in Gartner.

So certainly, as we bring them into the Gartner business we can get some leverage out of there.

But I would say given their size and scale that was not the major driver of any of our financial margin results.

Got it.

And, Gene, the -- a lot of concern in the market in terms of potentially weakening macro environment.

Your results don't seem to reflect that.

Any color in terms of tone of business what you're hearing back from salespeople, et cetera?

Peter, it's Gene.

Great question.

I just got back from a meeting with our sales [leaders] from around the world, and I've never seen them more enthusiastic and energized about the opportunity we have in the future growth prospects that they're seeing today and through the rest of the year and going forward from there.

So a lot of enthusiasm.

And in terms of our client feedback, continuing enthusiasm as well.

So anything that relates to IT, as I said in my remarks earlier, IT remains kind of the single best leverage point for most companies to improve their business, and they recognize that and are focused on it, and we're the best source of help for that.

And I think that's what's driving the continuing strong demand for our services.

Got it.

And one last thing, Gene.

So the AMR and Burton deals obviously have worked out quite well.

I know you would be interested in doing other things.

Is there anything on the table, anything in the pipeline that looks intriguing?

Peter, as I said before, acquisitions continue to be an interest to us, as they always have.

We track a number of companies and obviously can't comment on any specific company or segment or anything like that.

Great.

Thank you.

And our next question comes from the line of Dave Lewis of JPMorgan.

Please proceed.

Good morning, guys.

I was wondering, Gene or Chris, if you could comment on inquiries and over -- the overall technology industry and the question -- type of questions you're getting and just the pulse of inquiries right now.

So the inquiries from our clients are up substantially year over year.

They're -- it's up slightly more than our overall growth as a business.

And the main things that -- the top topics that people are interested in are, one continues to be cloud computing, and another is how best to have mobile applications and apply mobile applications to their business.

That's great, Gene.

And could you also just touch on the corporate level or executive level participation these in conversations or involvement?

I think that has -- you're seeing a bit of a change there, butdoes that help the sales?

Are you seeing more involvement from executives that have to be more in touch with technology than, say, last year or a few years ago?

Yes.

Great question.

We have about 3,500 CIOs as our clients around the world, so basically we're talking to the technology leaders of virtually every important institution in the world.

And obviously that's a big help, understanding what their priorities are and advising them on how to improve their businesses.

That's great.

And one last one, and I'll roll off here.

Chris, could you provide just a little bit of guidance on currency, foreign exchange, with the guidance, and what the contribution might be there?

Thanks, Dave.

That's a good question.

Obviously foreign exchange rates have moved around quite significantly.

As you know, when we start the year and give our guidance, we try not to anticipate.

It's not our job to anticipate foreign exchange.

So when we set the guidance at the beginning of the year, we used kind of the rates around January 1.

When we did the latest guidance, we used the rates over the last week or so when we finalized our guidance.

So we've not made any assumptions they are going to change from here.

If they do we'll obviously revise our guidance as we get through the next quarter.

So there's a lot of uncertainty, and we're not trying to be predictive of where they're going.

Thanks, Chris.

(Operator Instructions).

And our next question comes from the line of Dan Leben of Robert W.

Baird.

Please proceed.

Great.

Thank you.

Just first, can you talk about trends you saw in Europe during the quarter?Any changes -- any differences between the periphery and core of the [comment]?

Yes, it's Gene.

No, Europe basically was in trend, and I think we saw similar performance across all the countries in Europe.

So, no, nothing to call out any specific country or Europe as a whole.

Okay.

Great.

And then on the Events business, you've had very strong performance there, as some of these corporate travel budget have came back.

Help us understand what the opportunity looks like there for adding new events.

Are there some things that, as you look into 2012 and 2013, that we're going to some opportunities to add some new ones?

That's a great question.

Actually we're planning that now, and we think we can add -- we have the opportunity to add between probably three and ten events each year.

And, again, we haven't locked that down in terms of what those are going to be for next year, but we're confident we can do that for the foreseeable future.

We don't see any limit in terms of the number of events.

That will continue to grow every year as far as we can see out.

And are -- the follow-up on that, are the bulk of the opportunities taking successful conferences in the USand moving them around the world, or are there new opportunities in the US as well.

So there's actually three kinds of opportunities.

There are new opportunities in the USstill.

But in our existing -- we're actually seeing great growth in our existing events, and so one of the foundations is -- one of the foundations of our event strategy is continue growing those existing events.

And that's [provides] a great foundation for growth.

And then, as you said, continue to add new events in the USand continue to add new events outside the US as well.

So one reason we're seeing such robust growth from the events is we're both growing existing events -- again, we don't see any natural limits to that, as well -- as well as adding other events to it over time.

That's kind of what's provided great growth.

Obviously, it's been supported by the relax in travel restrictions, but I think the other two factors are even more important.

Great.

Thanks, Gene.

And our next question comes from the line of Robert Riggs of William Blair.

Please proceed.

Hi.

Thanks for taking my questions.

As you think about the 2011 guidance, Research has performed very well, Events has performed very well.

Is Consulting really going to be the swing factor that gets you towards the higher end of that or at the low end, or is there still some room in the Research business?

Well, when you think about each of the three segments -- Rob, it's Chris -- first, as you get through the year, Research gets pretty tightly predictable,obviously, with our subscription revenue.

So the ability for the Research number to move pretty significantly gets smaller and smaller as you move through the year.

So I would say the Research number, barring foreign exchange movements, is pretty tight in that range.

Events -- obviously fourth quarter is our biggest Events period.

It's our symposium season.

Probably 50%, 60%-ish of the revenue stream for the year.

So it's a big quarter.

We have great visibility right now into early bookings on the exhibitor side.

It's trending as high as it's ever been for those conferences, so we feel really good about those events.

Obviously, attendees book closer to the events, so visibility there is a little less, so there's obviously some variability, which is why the range is still relatively wider there in that business.

But again, right now everything is trending nicely.

All of our events continue to see the kind of growth I shared earlier on the 20% to 30% top -- revenue growth in those events.

So that's all looking really strong.

Consulting, we have a nice form on backlog now.

We are entering the back half of the year with strength.

As we talked about many times our, contract optimization business is the piece of the business that has a little less visibility for us, and so -- and a little less consistent seasonality as to when clients are doing large deals, which is why we have the range we have there.

So I don't think consulting should be a huge driver to the overall revenue variability, but that's the way you should think about each of the three business segments and the visibility we have to each of them.

Great.

Thanks.

And when you think about driving the increased penetration at your existing customers, any changes with the sales forces to drive that productivity higher, be it incentives or the way they're approaching the businesses?

What's the key there with the existing clients?

We have a lot of focus with driving sales force productivity.

And if you look at the numbers, the sales force productivity have been going up quarter by quarter.

And it's whole series of programs, ranging from making sure we hire the right people to the best training -- we think the best training programs of any sales force.

And all those things apply actually to new clients as well as with existing clients.

When you focus on making great salespeople, it doesn't really matter whether they're selling additional stuff to existing clients or whether they're actually [going to] new clients.

And, in fact, that's what we're seeing.

We're seeing really good strength across both upgrading existing clients, selling additional things to existing clients, as well as adding new clients.

So all three of those are being very robust.

And, again, it's because if you got great salespeople, those salespeople can sell in all three of those environments.

Great.

Thank you.

(Operator Instructions).

Great.

Well, if there's no more questions, just one clarification during my comments.

This is Chris.

Earlier I made a comment that during the first quarter we repurchased 930,000 shares at a cost of $36 million.

That should have been during the second quarter.

For the full year 2011, we repurchased about 2.3 million shares at a total cost of about $87.9 million.

So with that, unless there's other questions, I'll turn it back to Gene.

Thanks, operator.

I think that will do it for us today.

Thank you, everyone.

If you have any additional questions, please contact Brian Shipman at 203-316-3659.

Have a great day.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may disconnect at this time.

Have a great day.