高德納諮詢公司 (IT) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Gartner earnings conference call for the third quarter 2012.

A replay of this call will be available through December 3, 2012.

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 87-651-517.

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 third-quarter 2012 earnings 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 Q3 2012 financial results disclosed in today's press release followed by an opportunity for you to ask questions.

I'd like to remind everyone that the press release is available on our website; that URL 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 2011 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 these 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.

Welcome to our quarterly earnings call and thanks for joining us.

We had a great Q3 and our business performed well across all three segments, consistent with our performances since 2009.

For the third quarter our research segment achieved double-digit growth in contract value across all regions and in all industry segments.

We also achieved 83% client retention which is an all time high.

Year over year we added more than 800 new client organizations.

Our consulting segment had strong bookings with our backlog up 14% year over year.

And our event segment revenues were up 17% year over year on a same events and FX neutral basis.

We've achieved these results because of the tremendous value we bring our clients.

This is a unique and exciting time to be in IT.

Information technology continues to be the most important driver of growth and productivity for the global economy.

But IT is complex and ever-changing; it's tough to get it right.

To find solutions to their challenges CIOs and senior business and IT leaders are coming to Gartner.

Gartner is the single best source for the facts, the analysis and the road maps our clients need to succeed in this era of unprecedented uncertainty.

Our value proposition is stronger today than it has ever been putting the Gartner brand in a class by itself.

As you've heard me say before, the fundamentals of our strategy are to create extraordinary research insight, to build strong sales capability, to deliver high-value differentiated offerings, to provide world-class service and to continually improve our operational effectiveness.

This strategy has been successful across all our lines of business and across all geographies.

Gartner's Symposium IT Expo is our flagship event series and it is the world's most important gathering of CIOs and senior IT executives.

I just returned from our symposium in Orlando Florida where we hosted more than 10,000 attendees which is up more than 18% over last year and it included more than 2,300 CIOs.

It was our largest event yet and set new records for both attendance and revenue.

At this event I spoke with a number of our clients and I can tell you they are incredibly excited about the impact of IT on their enterprises and the critical role Gartner plays in helping to achieve their enterprises' objectives.

I also had the opportunity to speak with a large number of our salespeople at this event and they are as enthusiastic about Gartner's brand and market opportunity as I have ever seen them.

Like our clients and salespeople, I too am extremely excited about Gartner.

We have a vast untapped market opportunity, and we have the right strategy, and we have the right economic model and the right operating approaches.

With these I believe we will continue to deliver sustained profitable growth over the long term.

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

Thanks, Gene, and good morning, everyone.

We delivered another very strong quarter in Q3.

On an FX neutral basis we once again achieved double-digit growth in revenue, earnings and cash flow.

In research year-over-year contract value growth remained strong at 14% on an FX neutral basis and retention rates ended at or near all-time highs.

In events, our same events revenue were up 17% FX neutral and accelerated in Q3 from Q2.

And in consulting our benchmark and core consulting practices grew a combined 7% year over year FX neutral.

Demand from our services was robust across all three business segments in the third quarter.

Our strong top-line performance and effective execution in capitalizing on the operating leverage in our business allowed us to once again expand our gross contribution margin which is now at 60%, up from 59% in Q3 2011.

As a result we delivered solid growth in earnings in Q3.

In the third quarter normalized EBITDA increased 9% year-over-year and our adjusted earnings per share were up 13%.

With this strong performance through the first three quarters of the year we are well-positioned for a strong finish in 2012.

These results again demonstrate the continued successful execution of our strategy, our ability to consistently deliver on the long-term financial objectives we have communicated to you over the past few years and the overall value we bring to the strategic IT initiatives of our clients.

Now I will review the results of our three business segments in more detail before we take your questions, and I will begin with research.

Third-quarter research revenue was up 11% on a reported basis to $284 million.

Excluding the impact of foreign exchange research revenue growth was 14% in the quarter.

The margin in this segment increased again to 68% as our strong execution continues to capitalize on the operating leverage inherent in the research business.

All of our key research business metrics improved or remained very strong in the third quarter.

Contract value grew to a record level of $1.175 billion, a growth rate of 14% year over year on an FX neutral basis.

Our growth in contract value in Q3 remained broad-based with all client sizes, all geographies and all industry segments delivering strong double-digit growth year over year.

New business again increased from last year continuing the trend we've seen since late 2009.

The new business mix was balanced between sales to new clients and sales of additional services and upgrades to existing clients.

While our contract value growth continues to benefit from our discipline of annual price increases and no discounting, approximately 82% of our year-over-year contract value growth came from volume.

This volume growth reflects our success in continuing to grow the business by penetrating our vast market opportunity with both new and existing clients.

And as a result we ended the quarter with 12,612 client organizations, up 7% year over year.

And as for pricing, we've consistently increased our prices by 3% to 6% per year on an annual basis since 2005 and that remains our plan into the future.

We've maintained client retention near record highs for the past two years and our client retention rate ended the quarter at 83%.

In addition to retaining our research clients at an impressive rate, the clients we retain continue to increase their spending with Gartner and, as a result, wallet retention also remained strong at 99%.

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

As we have 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 its strong performance in the third quarter.

We grew our contract value by $145 million on an FX neutral basis year-over-year.

We continue to see strong demand from clients and we expect continued acceleration in revenue and contract value growth over time.

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.

Our events business continues to deliver exceptionally strong year-over-year growth.

On a same events basis events revenue growth accelerated in the third quarter from the second quarter of this year with revenues increasing 17% on an FX neutral basis.

On an as reported basis events revenue in the third quarter declined 2% year over year on a reported basis but grew 2% excluding the impact of foreign exchange.

During the third quarter we held 14 events with 5,566 attendees compared to 16 events with 6,676 attendees in the third quarter of 2011.

Our performance in Q3 was in line with the revenue phasing we provided to you at the beginning of the year as two larger conferences that were held in Q3 2011 are scheduled to occur in Q4 of this year.

We are seeing strength in every geography and across the entire events portfolio, particularly at our symposium series events.

As some of you witnessed in Orlando just last week, attendance at our US symposium IT Expo was up over 18%.

Our events business remains well positioned to deliver continued strong growth in the final quarter of 2012 and beyond.

Moving on to consulting.

Revenues in our consulting business grew 1% on an as reported basis in the quarter and 4% on an FX neutral basis.

Our benchmark and core consulting businesses delivered strong results, up a combined 7% on an FX neutral basis year over year in the quarter.

Our Q3 consulting segment results were impacted by our contract optimization business which can vary from quarter to quarter given the nature of that business.

Backlog, the key leading indicator of future revenue growth for consulting, ended the quarter at $106.1 million or a healthy four months of backlog.

Our pipeline remains solid as we enter the fourth quarter.

Billable headcount of 499 was up 4% from the third quarter of 2011 and up from last quarter.

Utilization for Q3 was over 64%, up 280 basis points from the third quarter a year ago, and revenue per billable headcount remained above $400,000 per year, ending the quarter at $415,000.

With a solid third quarter, four months of backlog and a strong future pipeline, the consulting business is on track to deliver results in line with our long-term targets.

Moving down the income statement, during the third quarter our total gross contribution margin increased by 52 basis points year over year to 60%.

This increase was driven by margin improvement in our research segment.

And in particular the successful execution of our strategy and consistently strong expense management continues to capitalize on the high incremental margins and operating leverage inherent in our research business.

SG&A increased by $16 million year over year during the third quarter and this increase was primarily attributable to the continued growth in our sales force.

As of September 30, we had 1,397 quota bearing sales associates as compared to 1,215 a year ago; this represents a 15% growth year over year which is in line with our long-term target growing our sales force by 15% to 20% per year.

Moving on to earnings.

We delivered another strong quarter of solid earnings growth.

Normalized EBITDA was $68 million in the third quarter, up 9% year over year, GAAP earnings per share were $0.33.

Note that GAAP diluted earnings per share in Q3 were negatively impacted by $0.02 of acquisition-related charges.

Our normalized EBITDA margin was 18.2% for the quarter.

All of this is consistent with the phasing guidance for earnings that we laid out at our Investor Day in February.

Turning to cash.

Our strong performance so far this year translated into a significant year-over-year increase in cash from operations, which was $209 million through the first nine months of 2012 as compared to $177 million for the same period in 2011.

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 nine months of 2012 we utilized cash on the acquisition of Ideas International and we've utilized over $89 million in cash repurchasing over 2 million shares of our own stock.

We ended the quarter with a strong balance sheet and cash position with net cash of $55 million.

Our current credit facility runs through December 2015 and at this time provides us with almost $354 million of available borrowing capacity.

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

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

In absence of appropriate acquisition opportunities we believe that repurchasing our shares remains a compelling use of our capital and we have $231 million remaining under our Board authorization.

Now I will turn to our business outlook for the remainder of 2012.

Our business remains well-positioned for another year of strong growth in revenue and earnings.

The details of our guides are included in the press release issued this morning; let me take a moment to highlight some of the changes.

Overall on a consolidated basis we are raising the low end of our previous issued guidance by $7 million for revenue and lowering the high end of our previous issued revenue guidance by $13 million.

With respect to our research segment we now expect revenues between $1.13 billion and $1.14 billion for the full year, which represents growth of between 12% and 13% on a reported basis for the full year.

With respect to consulting, we now expect revenues of between $310 million and $320 million which is growth of between 1% and 4% on a reported basis for the full year.

And finally, with regard to our events business, we now expect revenues of between $167 million and $177 million.

The increase in our guidance for this segment is a result not only of the strength we've seen through the first three quarters but also what we are seeing in our global symposium series.

We are seeing double-digit revenue growth at all of these events and, as an example, our US symposium recently held in Orlando delivered an 18% increase in attendees, a 25% increase in exhibitors.

From a seasonality perspective I'd remind you that the fourth quarter is the largest quarter of the year for the events business and will make up greater than 50% of the full-year revenues for that segment.

There are no other changes to our previously issued guidance.

So to summarize, we delivered great results for the third quarter of 2012 and demand for our services is strong.

We generated double-digit revenue growth on an FX neutral basis and our key business metrics remain strong in the third quarter.

Our initiatives to improve operational effectiveness, coupled with the positive operating leverage inherent in our business, delivered strong operating margins and we continue to generate substantial operating cash flow.

We will continue to invest in our business and return capital to shareholders through our share repurchase program and we expect to repurchase shares throughout 2012 and beyond.

And finally, with double-digit growth in contract value in the third quarter, we established a solid foundation for delivering a strong year of revenue earnings growth for the remainder of 2012.

We remain well-positioned to continue our consistent delivery of double-digit revenue and earnings growth and increasing returns to our shareholders over the long term.

We will now be happy to take your questions.

Operator.

(Operator Instructions).

Tim McHugh, William Blair.

Yes, I just want to ask about the sales force growth.

It is still within your -- as you said, your 15% to 20% range.

But the last couple quarters you've moved from the high end of that range down towards the lower end.

Can you talk about what you -- do you expect to reaccelerate that and does that in any way reflect the macro environment or just the realities of having to hire and grow a sales force at that pace?

Yes, hey, it is Gene.

Great question.

So basically our sales force growth, as you alluded to and as Chris mentioned, our target is 15% to 20% a year.

Last year we grew a little bit actually above the top of the range and this year we are kind of trending, as you said, toward the lower end of that range.

And it is clearly based on operational aspects and as we look at it, because we were a little higher last year, we are kind of being very picky to who we hire this year and making sure we get all of the right people.

So it's not either a lack of the -- a reflection of the environment, the economic environment or anything like that.

We have robust demand, as we mentioned, robust demand across geographies and across industries and it is purely what we think is the right amount to optimize our operational effectiveness.

Okay, great.

As it relates to the research guidance, can you talk a little bit -- you brought down the high end of that a little bit I guess even as contract value growth has remained pretty strong here.

So can you help me understand why or what changed there in terms of the Assumption?

Yes, there's really no significant change to our thinking for the year.

As you think about -- as we think about guidance obviously we get to the fourth quarter with a subscription model, we have pretty good clarity on how the year is going to end.

And so, as we sit here now looking into fourth quarter, I think all of the analysts were more towards the lower end.

We were looking at the revenue expectations based on the 14% growth and it will get you right in the range that we gave.

So nothing has changed from our perspective in terms of business performance, nothing has changed in terms of our expectations for the remainder of the year.

And obviously fourth-quarter bookings and contract value have very little impact on the quarter -- have a much bigger impact moving into next year as we run out those revenues over the life of those contracts.

So that is why we tighten the range and we tend to do that every fourth quarter in research -- in fact across all three segments as we get closer to the end of the year.

Okay, great.

Thank you.

Peter Appert, Piper Jaffray.

So, Gene, just following up on the prior question about the sales force growth.

I think there had been some expectation, at least among investors perhaps, that given that you had been at the higher end of the range in terms of sales force growth we might see some modest acceleration through the year in CV growth.

And the CV growth has been great at 14%, but pretty consistent through the year.

So, does this imply that you are not getting quite the level of productivity that you might have anticipated from some of the new hires?

Yes, Peter, great question.

So first the -- we are very happy with our results.

As I mentioned, we've got double-digit growth all geographies and all industries.

And so we are very happy with the performance.

When we hire new people, obviously it takes time to get them on board, get them trained, get them up to full productivity and we think they are coming along just -- pretty much as we would expect.

So it is kind of right where we would expect it to be.

Okay.

Would it be realistic to expect -- given that you are going to presumably end this year with something like 15% sales force growth, would it be realistic to expect some modest acceleration in CV growth in 2013?

I think as we add salespeople and those salespeople become productive, over time their productivity increases and that is what accelerates our sales force growth -- I mean our CV growth.

Okay.

And then, Chris, in terms of the margin of leverage, it is sort of interesting.

Last quarter, I think if I got the numbers right, the EBITDA margin was up something better than 100 basis points year to year, this quarter up more like 30 basis points.

What drives the variance from quarter to quarter?

It's a couple of things, Peter.

First, if you look at our events business there is some movement there.

You can see if you look at the year-over-year margin there you will see that it is down a bit.

And the reason for that is a shift in the schedule, right.

So third-quarter tends to be our lowest quarter for the events business, our smallest number of events held.

We moved two of our more established events that were held in Q3 last year into Q4.

So when you move those events and the profitability that goes with them, even though we launched two new events the profitability is not quite the same and then obviously there's a bunch of fixed cost in events that occur every year regardless of how many events we hold in a quarter.

So when you look at that, that was a bit of the driver of the year-over-year performance.

If you look on a full-year basis we are still expecting really nice margin expansion.

And so it is really just a timing between quarters and events being kind of the biggest portion of that.

Got it.

That makes sense.

Great, thanks.

Brian Karimzad, GS.

Hey there, just again to follow-up on the sales force productivity.

I mean, has anything changed this cycle in terms of ramping folks versus the last time you did pre-recession, you did a ramp like this where people get a bit hung up on coming up to the curve?

I know some of the mix of customers is probably different than what you have dealt with prior.

Yes, it's Gene.

So, basically we are seeing -- as we bring new people on we are saying their productivity grow at pretty much the exact rate we would expect over time.

And it changes the mix of how many new -- the faster we grow the mix of new people in the sales force goes up a little bit which affects the average.

But in terms of -- we look at it by vintage in each class and what we are seeing is pretty much what we would expect.

Okay, thank you.

Dan Leben.

Great.

Could you talk a little bit about sales retention and your efforts there, how that is played out as you have been more selective on the hiring?

So, Dan, you're talking about our retention of salespeople?

Yes.

Yes, great.

Retention of salespeople is actually very important to us because we like to retain as many of our sales people as we can.

We track it very closely.

In fact, we interview every salesperson that leaves so that we get an assessment kind of what is going on in terms of their -- why they are leaving.

The people that leave are overwhelmingly people that have not done as well performance wise.

And so basically -- and we track that and that continues to be the case.

And so, we feedback that in because it really means that we haven't hired somebody that is the best possible fit for Gartner.

And so, we really focus on what the attrition is, what causes it and then what do we do to actually keep driving that down.

Because over time we would like to get that attrition -- we are kind of in the no more (inaudible) sales forces we talked about before which is kind of 15% to 20% range.

And the attrition, that is the range we have been in, that's the range we are still in.

But we would love to get it kind of below that 15% mark, because we think that would give more tenure to the sales force and have a positive impact on productivity.

Plus obviously when we hire people we like to see them be wildly successful, we don't like making -- hiring people that maybe aren't the best fit for Gartner.

Great.

And then, Chris, looking forward to the fourth quarter when we reset the FX adjustments on contract value.

Where rates are at today what type of a change are we looking for for next quarter?

If you did it today it would probably be very minimal because rates have come back pretty close to where they were at the beginning of the year.

Just for everybody's benefit we establish for CV reporting purposes a fixed foreign exchange rate for the entire year.

So the numbers you see in our results are always FX neutral numbers for contract value.

We don't try to assume where they will be.

When we get to January we will use rates that are in January and that is the rates we will use for the whole year.

Great.

And then last one for me, just within consulting in the fourth quarter a big contract optimization quarter.

Help us understand if there is any crowding out of time usage of consultants as contract optimization either goes through in their ability to work on that already pre-booked backlog?

Hey, Dan, great question.

It is Gene.

The consultants that work in the contract optimization business are separate from the rest of the business.

All they do is contract optimization work, so it doesn't affect the rest of the business.

So if there is backlog in the rest of the business it has no impact at all on the contract optimization consultants.

Great.

Thanks, guys.

[Anj Singh], Credit Suisse.

I am calling in for Kelly Flynn.

Thank you for taking my question.

My first question was if you can comment on how you are seeing clients spending.

If there are any constraints that have come up or gone away over the recent quarter?

Yes, the -- so I would say the recent quarter is not much different than what we have seen in the other quarters this year.

There are a lot of institutions in a lot of distress.

You look at the public sector, there are a lot of public-sector institutions.

In the private sector there are some large institutions that are in a lot of financial distress.

You and I read about it in the news every day.

But that is not much changed from where it was before.

And for our business it basically doesn't affect our business.

We are just as helpful in helping clients in distress and it is just as common to grow those clients at the same rate as we have clients that are not in distress.

And so, for us it's just they want to use different parts of our service line, different -- they're focused obviously on things like cost reduction as opposed to introducing new products and growth and stuff like that.

But I would say it not much different than what we have seen before.

Okay, thank you.

And one follow up.

The consulting backlog was really strong this quarter.

And I know you said that the strength was quite broad-based.

I was wondering if for consulting you can get a little bit more granular as to where the pockets of strength might be.

Sure, thanks for the question.

If you look over the past few quarters we had seen, as we have said, pretty balanced performance across all of our businesses and all the segments.

We have had a pretty strong performance throughout the year in Europe, but I would say in the third quarter we had a particularly strong performance in North America.

And I would say that really picked up nicely for us from a year-over-year perspective.

And all in all as we look across the entire portfolio we are seeing good demand across all the places that we are doing consulting which is, as you know, limited to North America, major countries in Europe and Japan.

But we are doing well across all of those.

Okay, thanks so much.

(Operator Instructions).

Gary Bisbee, Barclays.

Pinch hitting for Manav this morning.

Two questions if I could.

The first one, just the events business continues to be very strong.

And I guess could you give us a sense what impact the weaker economic activity in Europe is having on that business and are there areas that are much stronger in making up for that?

And the second part of the question, how big historically a driver of incremental business wins in the research business have the events been?

Are those largely existing customers or has that proven to be a good source of future growth in the research business?

So, great question.

So the first one, our events business has had great strength across all areas of the world, just like our research business.

So the -- if you look at even the areas of the world that have been a little weaker we have had great performance.

It's not that like there is one really strong region and the others are not -- it is very balanced performance, again, just like in our research business.

And so -- and what is going on there is, again, technology is critical for just about every initiative that institutions want to undertake.

And so, even in bad times people are undertaking these initiatives to improve their operations.

It could be cost reduction, it could be growth oriented, but they are still using IT.

And so even areas that have real distress still are spending money on IT.

And especially in getting help to make sure their IT investments are used wisely which is what we help them do.

In terms of events impacting our research business, basically our events segment is a great stand-alone segment; we love being in that business.

There is a mix of people there that are -- some of them are research clients and some of them are people that are not research clients.

The reason people come to our events is because they would rather immerse themselves in our research for a few days and get off site as opposed to use the written research, which a lot of our clients do.

So that is really what is driving the difference between the two businesses and why we have people there.

And again, it is both research clients as well as people that are not research clients.

And just (technical difficulty) has that proven to be a fertile ground for driving the research business or is it more -- the ones who aren't clients more they come in and pay their fee and get a few days of it and then move on?

Yes, it is certainly not the biggest source of our growth in research.

So of course there are people there that want to become research clients, but it is not the engine driving the growth of our research business.

Okay, thank you.

Bill Sutherland, Northland Capital Markets.

Just a couple of quick number questions.

So, do you think you will be -- you have had some steady increases in the billable headcount and consulting, is that likely to continue?

Hey, Bill, it's Chris.

Yes, I think the way we think about consulting and the way we talk about it all the time is that we add capacity as we see our backlog build.

And so we have seen a really nice increase in the backlog in the third quarter.

And so, yes, you should expect to continue to see continued growth in headcount commensurate with what we need to do to deliver those services.

So I would say you will see that continue to grow.

We absolutely believe we can drive more productivity out of the consultants we have, so there is certainly a productivity benefit here that we expect to get in addition to hiring more billable consultants.

And, Chris, did the three parts of consulting kind of grow in tandem or were there differences?

No, actually when -- if you think back to the comments I made, just to reclarify them, our core consulting and benchmark businesses were up a combined 7% FX neutral.

So really strong performance in that area and the contract optimization business was down year over year.

And still feel very confident in the guidance we provided, so no issues from a full year perspective as we think about that business.

But really the strength in the performance came out of core and benchmark.

Yes, thanks, I had to jump around a little bit.

Appreciate that.

And then the number of events for Q4, remind me?

Hold on one second.

I think we have held 48 events for the year, we are planning to hold about 65.

So another just under 20 events in the quarter.

Okay, I will do the math.

Thanks, Chris.

We have no further questions at this time.

I will not turn the call back over to Brian Shipman for any closing remarks.

Thank you, Erika, and thank you, everyone, for joining us on today's call and we will speak to you next quarter.

Thank you for your participation in today's conference.

This concludes the presentation.

Everyone may now disconnect and have a great day.