高德納諮詢公司 (IT) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter four 2012 Gartner earnings conference call.

My name is Patrick, and I will be your coordinator for today.

At this time all participants are in listen-only mode.

Later we will conduct a question-and-answer session.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Brian Shipman, Group Vice President of Investor Relations.

Please proceed, sir.

Thank you and good morning, everyone.

Welcome to Gartner's fourth-quarter and full-year 2012 earnings call.

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

This call will include a discussion of Q4 and full-year 2012 financial results as well as our initial guidance for 2013 as disclosed in today's press release.

After our prepared remarks, you'll have the opportunity to ask questions.

I would like to remind everyone that the press release is available on our website; and 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 our 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.

Finally, I would like to remind everyone that we will be hosting our annual Investor Day next Thursday, February 14, in New York City.

If you would like to attend, please e-mail my assistant, Germaine Scott.

Her e-mail address is germaine.scott@gartner.com.

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

Gene?

Good morning, everyone.

During 2012, the continued effective execution of our proven strategy resulted in another year of double-digit growth in our key financial metrics, and our key business metrics remained at or near record levels, establishing a strong foundation for another great year in 2013.

During 2012, as we have consistently done in the past, we delivered double-digit growth in contract value, revenue, earnings, and cash flow.

Chris will talk about the details of our financial results in a few minutes, but let me touch on a few highlights.

For the full year in Research, our largest and most profitable segment, we added 878 net new client organizations, which is more than any quarter in our history and we delivered 14% growth in contract value.

For the fourth quarter in Research, we had double-digit growth in contract value across all major geographies.

We ended the quarter with 83% client retention, which remains at our all-time high.

We had solid backlog growth in our Consulting segment and consistently strong demand throughout the year for our Core Consulting and Benchmarking services.

Our Q4 Consulting results were impacted by weaker than expected performance of our Contract Optimization business; and Chris will provide more details about that in a moment.

Events had another year of strong growth, with fourth-quarter revenues up 21% over the same period last year.

During the fourth quarter, more than 6,000 CIOs attended our Symposium events.

There is no other gathering in a world like our Symposium series.

I had the opportunity to meet with many of our clients at these events around the world, and these leaders are driving the performance of their organizations, and they consistently see Gartner as central to their success.

These results continue to illustrate the continued success of our strategy and the tremendous value we bring to our clients.

Investors sometimes ask how the macroeconomic environment affects our performance.

Clients value our services whether they are growing or facing budget cuts.

During 2012, the economic environment turned out to be worse than expected by most forecasters, and growth in the global economy slowed.

In this environment, we delivered double-digit growth across all geographies, all client sizes, and virtually every industry segment.

In Europe, the economy contracted during 2012.

We grew at double-digit rates across the region.

We showed double-digit growth in nearly every country in Europe, including some of the most economically challenged countries in the world -- Spain, Ireland, and Italy, among them.

In China, where the economic growth was the slowest in more than a decade, we grew our Research business at double-digit rates.

In the US, economic growth was stagnant, and we grew our contract value double digits.

In this environment, we delivered our 10th quarter in a row of double-digit contract value growth.

Of course, every Company has areas they can improve.

Sales productivity is our opportunity for improvement, and it is one of our highest priorities.

During 2012 we achieved flat sales productivity, in a year with worsening economic conditions.

While this is a good result in a decelerating macro environment, we know we can do better.

We are very focused on executing initiatives to grow the productivity of our salesforce, and we fully expect that these initiatives will result in improving sales productivity.

These are remarkable times for information technology.

We're on the cusp of a massive transition period, the impact of which will be on par with that of the Industrial Revolution.

IT is transforming the world, from governments and cities to banking, healthcare, agriculture, manufacturing, and more.

IT is changing how we work and what we do.

Driving this change are four major technology forces -- Social, mobile, cloud, and information.

Every industry is being affected by these technology forces, and they're driving change on a scale seldom seen.

These transformations aren't just happening during 2012 or 2013.

The technology revolution will remain vibrant for decades to come, and Gartner is at the heart of it.

Gartner is the best source of help for enterprise leaders launching critical initiatives within the technology revolution.

Our assistance often makes the difference between success and failure for our clients.

Because of the huge and growing impact of the four technology forces I just mentioned, we are relevant whether an institution is growing or facing economic challenges.

We benefit from having a vast untapped market opportunity for our services.

Every company and government agency in the world is a potential client.

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

Our sustained and consistent performance is due to the successful execution of the right strategy.

As some of you know, 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 consistent strategy will allow us to maintain sustained double-digit growth over time.

During January I met with our sales leaders from around the world.

Our sales leaders, who work with clients from all geographies, all industries, and all sizes, are incredibly enthusiastic.

They, too, are excited about Gartner and the value we provide.

I remain confident in and excited about Gartner.

The Gartner brand is in a class by itself.

Our products, services, and people are superior to the competition, with a great business model, and we are relevant to institutions who are growing or facing budget cuts.

We delivered a double-digit growth in 2012, and we are well positioned for success in 2013 and beyond.

In summary, I would like to leave you with three takeaways from today's call.

First, our business performance was strong during Q4 and throughout 2012, providing a great foundation for 2013.

We continue to deliver double-digit contract value growth.

In Consulting, our Core and Benchmarking businesses deliver solid results.

In Events, we continue to set record attendance and record numbers of CIOs, driven by the consistently relevant and excellent quality of our content.

With a laserlike focus on our proven strategy, we will continue the positive momentum for the coming year and beyond.

Second, clients value our services whether they are growing or facing difficult budget cuts.

And third, we are well positioned to achieve sustained double-digit growth of our key metrics as we have done over the past several years.

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

With a vast untapped market opportunity for our services, we have the right strategy, 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 would like to hand the call over to Chris.

Thanks, Gene, and good morning, everyone.

We ended 2012 with double-digit growth in revenue, earnings, and free cash flow.

Our results continue to demonstrate the successful execution of our strategy and our ability to consistently deliver on the financial objectives we have communicated over the past several years.

In the fourth quarter, we continued to see the strong trends in our key business metrics that we delivered during the first three quarters of the year.

Year-over-year contract value growth remains strong and retention rates ended at or near all-time highs.

Our Benchmark and Core Consulting businesses grew 6% on an FX-neutral basis for the full year, and our Events business increased by more than 20% year-over-year for the third consecutive year.

Demand for our services was robust across all of our primary business segments in the fourth quarter.

Our strong top-line performance and effective execution in capitalizing on the operating leverage in our business allowed us to once again expand both our gross contribution and EBITDA margins.

As a result, we delivered significant growth in earnings both in Q4 and for the full year.

In the fourth quarter, normalized EBITDA increased 14% year-over-year and our GAAP diluted earnings per share was up 33%.

For the full year, we delivered normalized EBITDA of $315 million, up 13% from 2011.

This growth in normalized EBITDA was notable given that in our Consulting segment the Contract Optimization business underperformed our expectations in 2012 and resulted in a negative impact to EBITDA of $8 million.

I will talk more about this in a moment.

GAAP diluted earnings per share was up 24% from last year to $1.73.

With the strong finish to 2012 we are well positioned for continued growth in 2013.

Now I'll provide a review of our three business segments for the fourth quarter and full year, and then I will conclude a discussion of our outlook for 2013.

Starting with Research.

Fourth-quarter Research revenue was up 14% to $300 million, and on an FX-neutral basis Research revenue grew 15% in the fourth quarter and 14% for the full year in 2012.

The contribution margin in this segment increased 65 basis points to 67.6% in the fourth quarter, as our strong execution continues to capitalize on the operating leverage in this business.

For the full year, the contribution margin in our Research business grew by 70 basis points to 68.1%.

All of our key Research business metrics remained very strong in the fourth quarter.

Contract value grew a record level of $1.263 billion, a growth rate of 14% year-over-year on an FX-neutral basis.

As was the case throughout 2012, our growth in contract value in Q4 was extremely broad-based across all geographies, client sizes, and industry segments.

New business again increased year-over-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 80% of our contract value growth came from volume, with the balance coming from price increases.

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

As a result, we ended the quarter with 13,305 client organizations, up 7% year-over-year.

As for pricing, we have consistently increased our prices by 3% to 6% per year on an annual basis since 2005.

We implemented a price increase during the fourth quarter of 2012, and we expect to do so again in 2013.

You should note that the average contract value per client organization has risen to another all-time high of $95,000 per organization, up from $90,000 last year.

We continue to penetrate existing clients by leveraging our strong relationships.

Our client retention rate ended the quarter at 83%, and we maintained client retention near record highs for 10 quarters in a row.

In addition to retaining our Research clients at an impressive rate, the clients we retained continue to increase their spending with us.

Wallet retention ended the year at 99%.

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

And 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 fourth quarter.

We grew our contract value by $155 million on an FX-neutral basis year-over-year.

We continue to see high levels of demand from clients, and we expect acceleration in contract value and revenue growth over time.

We remain confident in our ability to deliver double-digit annual revenue growth in this business over the long term.

Moving on to Consulting.

Revenue in our Consulting business declined 8% on a reported basis in the fourth quarter.

Excluding the impact from foreign exchange, Consulting revenue declined 7%.

For the full year, Consulting revenue declined 1% to $305 million, but grew 1% excluding foreign exchange.

While the segment results were below our expectations, our Benchmark and Core Consulting businesses grew 6% excluding foreign exchange in 2012.

This is towards the high end of our long-term financial objectives for this segment.

Backlog, the key leading indicator of future revenue growth for our Consulting business, ended the quarter at $103 million, which represents 2% growth year-over-year and a healthy four months of backlog.

Additionally, our pipeline looks equally solid as we begin 2013.

Billable headcount of 503 was up 5% from the fourth quarter of 2011.

This reflects our focus on matching resources to the demand we saw in our labor-based Consulting business during 2012.

Fourth-quarter utilization was over 67%, up 330 basis points from the prior quarter; and revenue per billable headcount ended the quarter at $445,000.

Excluding the Contract Optimization business, the overall Consulting segment had a very strong 2012.

So let me spend a moment on Contract Optimization.

As we told you in the past, this part of our Consulting segment can fluctuate from quarter to quarter and year to year.

To put this business in perspective for you, Contract Optimization represents only 10% of our Consulting segment and continues to decline as a percentage of Consulting and total Company revenue each year.

We expect Contract Optimization revenue to range from approximately $30 million to $40 million annually.

It ended 2012 at the low end of that range, after ending slightly above $40 million in 2011.

While this impacted overall Consulting results in 2012, we expect the overall Consulting segment to grow in the range of our long-term financial objectives in 2013.

Turning now to Events.

Events in the fourth quarter increased 21% year-over-year on a reported basis, and 24% excluding the impact of foreign exchange.

During the fourth quarter, we held 14 events with 22,548 attendees, compared to 12 events with 20,500 attendees in the fourth quarter of 2011.

Total attendees at our events during Q4 on a same-events basis were up 5% year-over-year and exhibitors were up 21%.

For the full year, revenue for our Events business increased 20% year-over-year on an FX-neutral basis.

At the 62 events held in 2012 versus the 60 held in 2011, attendees were up 8%, exhibitors were up 20% year-over-year.

On a same-events (technical difficulty) attendees were up 7% and exhibitors were up 18%.

For the full year 2012, the Events gross contribution margin was 46%, up 148 basis points from 2011.

Moving down the income statement, during the fourth quarter our total gross contribution margin was 59%, compared to 58% in the prior year.

For the full year, our total gross contribution margin increased 86 basis points to 60%.

These increases were primarily due to the successful execution of our strategy to capitalize on the high incremental margins and operating leverage inherent in our Research business.

SG&A increased by $15 million year-over-year during the fourth quarter.

We continue to tightly control G&A costs across the entire Company and continue to believe that this expense item will provide us with a source of operating leverage in the future, as G&A will continue to decline as a percent of revenue.

The SG&A increase is driven by the growth in our salesforce.

As of December 31, we have 1,417 quota-bearing sales associates as compared to 1,268 a year ago.

For the full year we added 149 salespeople, constituting 12% growth and slightly below our long-term target of growing our salesforce by 15% to 20% per year.

As we have told you in the past, we will always be (technical difficulty) about the expansion of our sales organization.

When sales productivity remained flat in the back half of 2012, we slowed the pace of hiring in order to improve productivity.

As Gene mentioned, we are focused on increasing sales productivity and, as we have consistently told you, intend to grow our salesforce by 15% to 20% annually.

Salesforce growth in 2012 should not be construed as a change in our growth expectations.

We remain confident both in our market opportunity and growth expectations.

Moving on to earnings, we delivered another strong quarter of solid earnings growth.

Normalized EBITDA was $97 million in the fourth quarter, up 14% year-over-year, and GAAP diluted earnings per share was $0.61, up 33% year-over-year.

Our normalized EBITDA margin increased 60 basis points to 20.4%; and as expected, our Q4 2012 GAAP diluted earnings per share includes $0.02 in amortization and other costs associated with our acquisitions including Ideas International.

This trend continues to reflect our commitment to improving margins while also investing in the growth of our business.

For the full year normalized EBITDA was $315 million, up 13% year-over-year.

GAAP diluted earnings per share was $1.73, up 24% year-over-year.

Our normalized EBITDA margin increased 50 basis points to 19.5%.

And as I mentioned previously, our earnings were adversely impacted by a shortfall in our Contract Optimization business.

EPS was positively impacted by a lower than expected tax rate in the fourth quarter and for the full year, largely due to the release of tax reserves related to the close of tax audits.

Also, diluted EPS for the full-year 2012 included acquisition-related charges of $0.05 per share compared to $0.04 per share in 2011.

Turning to cash, our strong performance for the full year translated into continued growth in free cash flow, which increased by 11% to $237 million.

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 fourth quarter, we utilized our cash to return capital to shareholders through our share repurchase program.

We repurchased almost 480,000 shares at a total cost of approximately $22 million.

For the full year we repurchased 2.7 million shares at a total cost of $111 million.

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

Our current credit facility runs through December of 2015 and at this time provides us with almost $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 an absence of appropriate acquisition opportunities, we believe that repurchasing our shares remains a compelling use of our capital; and we have $210 million remaining under our Board authorization.

Let me now turn to our business outlook for 2013.

Based on the strong business trends we experienced in 2012, we believe our businesses are well positioned for another year of strong growth.

Our guidance for 2013 is based on the following assumptions.

The current macroeconomic environment continue throughout the year; revenues of the Contract Optimization business in our Consulting segment remain at 2012 levels; sales productivity remains at 2012 levels; our salesforce grows approximately 15%.

And with regard to foreign exchange, our guidance is based on the spot rates in early January.

We have made no attempt in our guidance to anticipate any strengthening or weakening of the US dollar from the actual foreign exchange rates in early January.

In light of the current macro environment, we believe these are prudent assumptions.

So for the full-year 2013 we expect total revenues will grow by 10% to 13% to approximately $1.78 billion to $1.82 billion on a reported basis.

Projected revenues by segment can be found in our press release; but I would note that we expect growth in each of our three segments during 2013, with Research revenue expected to be up 13% to 14%, Consulting revenue up 2% to 7%, and Events revenue up 6% to 12%.

Moving down the income statement, we expect normalized EBITDA for the full-year 2013 to be between $350 million and $370 million, an increase of 11% to 17% over 2012.

In 2013 we expect the cost associated with stock-based compensation expense to be approximately $37 million to $38 million.

Total depreciation and amortization should be approximately $33 million to $34 million, inclusive of the amortization of acquisition intangible assets.

We expect interest expense of approximately $10 million; other expense of approximately $2 million.

We are projecting an annual effective tax rate of approximately 31%, and our guidance is based on an average, fully diluted shares outstanding of approximately 95 million shares for the year.

Note that our tax rate may vary from quarter-to-quarter due to timing of certain items.

Our GAAP earnings guidance for 2013 is for EPS to be between $1.96 and $2.10 per share.

The intangible amortization associated with the acquisitions of AMR, Burton, and Ideas will equate to approximately $0.04 per share for 2013.

As a result, we expect our EPS, excluding amortization from acquisitions, to be between $2.00 and $2.14 per share.

We also expect to grow free cash flow as we drive growth in our Research business.

In 2013 we expect cash from operations of $296 million to $316 million; capital expenditures of $37 million to $38 million; and free cash flow of $259 million to $278 million.

Thus, we expect to grow our free cash flow by 10% to 17% in 2013 and generate free cash flow per share of $2.73 to $2.94, substantially above our income per share.

I would like to note that cash from operations includes $3 million to be received as a tenant improvement allowance in connection with the previously disclosed lease arrangement on our Stamford headquarters.

The $3 million in the related cost of these improvements are reflected in our capital expenditures despite being reimbursed by the landlord.

These amounts are not expected to have any impact on free cash flow during the life of the renovation project, which should end in early 2013, and they are not expected to recur.

While our policy is to provide annual but not quarterly guidance, I would like to provide some additional information to allow for an understanding of the seasonality and other factors that will impact our revenue and earnings on a quarterly basis.

In 2013, total revenue, segment revenue, and EPS phasing by quarter will approximate our reported results from 2012.

I would also point out that the first quarter will again be the seasonally lightest quarter, with EPS coming in at less than 20% of the full-year EPS.

I would also like to remind you that our Events segment is highly seasonal and more than 50% of the full-year revenue will be recognized in Q4 because our Fall Symposium series is held at that quarter.

At this point we plan to hold between 64 and 67 events in 2013 as compared to 62 in 2012.

Finally I would like to spend a moment on the impact of foreign exchange as it relates to our reported contract value.

As we have communicated to you in the past, Research contract value is reported on an FX-neutral basis throughout each year.

We do this so you can understand the true organic growth in our Research segment.

In January of each year, we restate the opening contract value at current foreign exchange rates.

As a result of changes in FX rates since January of 2012, contract value on January 1, 2013, is approximately $7 million higher than the $1.263 billion reported on December 31.

As a result, $1.270 billion is the baseline figure you should use for comparison purposes when analyzing FX-neutral contract value growth in 2013.

So to summarize, we delivered great results both for the fourth quarter and full-year 2012.

Demand for our services is strong and as a result we generated double-digit revenue growth, and our key business metrics remained strong in 2012.

Our initiatives to improve operational effectiveness, coupled with the positive operating leverage inherent in our businesses, delivered strong margin expansion; and we generated substantial cash flow.

As always, we are actively exploring strategic alternatives for deploying our cash.

We will continue to invest in our business and return capital to shareholders through our share repurchase program.

We expect to repurchase shares throughout 2013.

Finally, with double-digit growth in contract value in 2012, we established a solid foundation for delivering another strong year of revenue and earnings growth in 2013.

We're well positioned for double-digit revenue and earnings growth and increasing return to shareholders over the long term.

We will now be happy to take your questions.

Operator?

(Operator Instructions) Eric Boyer, Wells Fargo.

Thanks.

Hey, Gene, could you just comment on the IT spending environment in terms of your offerings today compared to where -- last year at this time?

Yes.

Hey, Eric.

There is two separate issues.

I'm not sure I understood the question.

The overall IT spending environment, we are expecting IT spending in FX-neutral terms around the world to grow about 3.9% during '13.

So that is one.

If you are asking about how much people are spending on IT goods and services, that would be it.

That doesn't cover our spending and what they are spending on Gartner-type services.

Does that answer your question?

Well, I was just wondering about the demand for your type of product compared to where you were last year, as far as budgets and just how difficult of a selling environment it is today compared to last year.

Yes.

The selling environment is the same.

Basically our selling is limited by the amount of sales capacity we have.

There is essentially unlimited demand.

It is a matter of how fast we can get to clients and educate them on the value of our services.

So that, in essence, the selling environment that we see is exactly as last year.

Last year at this time, we had -- and throughout the year -- had infinite demand.

We have the same situation today.

So with the salesforce growth assumption of 15%, is that just really due to the productivity being a little bit slower than where you had hoped it to be, just because of the macro environment?

Is that how we should think about it?

We basically would have said in the past, and we continue this, which is as we -- we would like to grow our salesforce 15% to 20% a year.

We are going to grow at the lower end when we see sales productivity not advancing as fast as we would like, and at the higher end when we see the productivity there.

So, you can interpret that we will be in the 15% end because we think there is an opportunity to continue to improve sales productivity and we want to focus on that at this point.

Again, during the year, if that changes, if we see productivity tick up, we would accelerate our hiring during the year.

Then just finally, I noticed you talked about double-digit growth across geographies.

Is that the same for your vertical breakout as well?

We had double-digit growth, as you mentioned, across all geographies around the world.

We had double-digit growth across virtually every industry segment.

And the couple of segments that weren't were just below, so they were -- they rounded down as opposed to rounding up to double-digit.

So it is not like one fell off and went -- was mid single-digit or something like that.

It was just slightly below double-digit in a couple of segments.

Any detail on which ones those were?

Government, I assume, maybe?

I'd take it as noise basically.

Because -- like I said last quarter, they were a little above; this quarter a little below.

Okay, great.

Thanks a lot.

Peter Appert, Piper Jaffray.

Thanks.

Gene, can you talk a little bit about, please, what you are doing to drive salesforce productivity?

Sure, Peter, it's my favorite subject.

Basically there's three areas that we're working on.

The first is recruiting, making sure that we recruit people that are really well suited to be successful at Gartner.

And because we have associates around the world, obviously it is not as simple as just recruiting for the right kind of person in just the US or just New York City.

So the first piece is recruiting.

The second piece is training, and training both for our new hires as well as for our experienced people.

With our rapid salesforce growth, we have got to be prepared to give managers great training to equip them, as we have many new managers with our growth, with the promotions people get and obviously with so many new people coming onboard.

We also have a lot of innovation in our offerings and in what is going on in the technology world, so we need to keep our salespeople up on that.

So that is another important part of the training.

Then lastly, it is productivity tools.

So we basically continually have a set of -- continually enhance the set of tools that we give our salespeople to help them be more productive.

Things like what are the most important topics that our clients are going to care about, and automating certain parts of the selling process so that it doesn't take a salesperson's time.

In fact, it is an automated part of the process.

So those are really the three areas that we are focused on.

Okay.

So you added 21% to the salesforce last year.

Should I take it that basically maybe the onboarding was just -- I don't want to say a little rougher, but just not quite as -- didn't come in as hoped in 2012?

And was that the key reason for reduced productivity this year?

It is a reflection of the higher level of hiring last year?

No, I think basically what is going on with productivity is that clients get a lot of value out of our services whether they are growing or whether they are shrinking.

But when they are shrinking, the selling cycle is a little harder than it is than if they are growing.

So I think the primary thing that affected our sales productivity is -- if you look again, like in Europe, as I mentioned on my prepared comments, the economy actually shrank in Europe; and we grew double-digit there.

Now, if it hadn't been such a terrible -- so many companies in so much trouble, then I think our sales productivity would have tipped up quite a bit.

But again if you look at the global macroeconomic environment, there were many -- a higher portion of companies and institutions that were facing big budget cuts.

Those selling environments are a little bit tougher.

Again, we're very successful there, but it is a little bit tougher and it, I think, had a bit of an impact.

That is why our sales productivity didn't grow as we would have liked it to.

Okay.

That's fair.

Then just not to obsess too much on this, but the guidance on Research revenue growth of 13% to 14% in fiscal '13, to the extent that you end the year with 14% CV growth, it would seem simplistically to imply that you are not necessarily anticipating, at least in the guidance, improved productivity in '13.

Is that fair?

Yes, Peter.

It's Chris.

How are you?

I just commented I think during my remarks that the assumption in our guidance is that sales productivity remains at 2012 levels.

As Gene said, we also do not anticipate the economic environment changing.

So with those two factors we thought it was prudent to assume in our guidance that it would stay roughly where we are today in both of those -- with both of those.

Okay, fair enough.

Then last thing, Chris.

So on margin leverage, just some color in terms of how we should think about the ability to continue to drive margin improvement.

I think you need to look at it in the multiple pieces, Peter.

So if you start with the businesses, as we talk about all the time, we have great incremental margins in all three businesses.

70% in Research; as you know, we are at 68%, so we still have a little bit of room there for expansion.

But we have moved that from 58% to where we are today.

So we have made some big moves over the last few years, and now we are getting and approaching our 70% number.

Still a little bit of room there for improvement.

The Events business, incrementally around 50%; and we still have a little bit of room there.

And Consulting ultimately at 40%, and we still have a little bit of room there.

So you still see a little bit of room on the top line.

Also you are getting a continued mix shift.

So Research has been shifting and went from below 60% to now over 70% of revenues; so we have moved that significantly.

That shift will still give us a little, but certainly starting to approach a number where, while it will still grow, not as fast as we saw in the past.

So that is what is happening on the gross margin side.

When you go below the line we still believe we will get G&A infrastructure expansion opportunities.

I think if you look in our expectations for 2013 we are still expecting G&A to be a lower percentage of revenue.

Then the big driver moving forward is sales productivity.

So over time we expect that as sales productivity improves we start to see the S as a percent of revenue start to flatten and come down.

As you know, that has been inching up as we have expanded our salesforce.

So those are the main drivers of margin expansion and EBITDA.

We still feel extraordinarily comfortable that we will continue to deliver margin expansion over time.

I think you have said in the past, Chris, I may have this range wrong, 50 to 150 basis points a year.

Is that still operative?

Yes, we still believe 50 to 150 basis points is absolutely realistic.

You are going to get more towards the high end as you get to real sales productivity expansion; and you will be more at the low end as sales productivity stays flatter.

And that is what you are seeing in our guidance.

Great, thank you.

Tim McHugh, William Blair & Company.

Yes, thank you.

You talked about sales productivity.

Obviously it was flat for the year.

But can you give us any color in terms of vintage of when the salespeople came in, or by region or by vertical, in terms of areas that were stronger or weaker?

I'm assuming it wasn't all exactly flat.

Yes, it was pretty much consistent across the board.

So no big differences in terms of one area.

I think any of the differences were pretty minor and I would put in the category of noise as opposed to something significant.

Okay.

The Contract Optimization business, I understand you gave -- it's usually in a fairly narrow range, but it was the low end of that range this year.

Is there any reason?

Can you point to where there -- was there turnover?

Was projects just pushed out?

What drove, I guess, you to the low end of the normal range?

It's Gene.

That business is a business -- and we've talked about it in the past -- it is a fairly lumpy business, meaning there's a few deals that decide whether -- how that business -- a few meaning on the order of they might do 100 deals a year, something like that.

So if you have a few more deals or a few less deals, that is what swings that business.

The way it works is it is on a contingency fee basis -- most of the business.

So what happens is a client negotiates a deal; we come in.

If we can help them and they buy, get it cheaper, then we make -- we get paid in that business.

If we help them and they don't buy, we don't get paid.

So that is what the nature of the business is.

So we could do a lot of work with clients, and if they actually decide not to purchase from the vendor that we work on, (technical difficulty) contingency fee basis, we don't get paid.

So by its intrinsic nature, it is not a recurring revenue or smooth business.

It is very lumpy.

It was at the -- we had a couple years -- in the last three or four years, it has been at the higher end of lumpy.

And the last year unfortunately it was at the lower end of lumpy.

Okay.

Did you say earlier, Chris, an $8 million swing to EBITDA from that?

Yes.

What I mentioned was if you look back in 2011, we did about $40 million, a little over $40 million of revenue for Contract Optimization.

This year we did just about $30 million.

It is extraordinarily profitable; think 80% of that flows through.

So you are talking about an $8 million year-over-year change to EBITDA.

And that, by itself, is one of the biggest drivers of the year-over-year EBITDA delta that people were looking at versus consensus, I believe.

So a bounce-back in that business, you should see the contribution margin from Consulting improve next year?

Yes.

If it bounces back -- as I also talked about in my remarks, we are not expecting it to grow.

We expect it to be exactly where it was this year.

Should that be different, you will see incremental revenue and an 80% flow-through of that incremental revenue.

So it will bounce right back through to profitability, should it recover.

Okay.

Thank you.

Kelly Flynn, Credit Suisse.

Thanks for taking my questions.

First question relates to Europe.

I know you spoke to a pretty broad-based strength there.

But can you talk about whether or not you're seeing any signs of stabilization or macro-related improving sentiment in any countries?

Any reason for incremental optimism there?

As I mentioned, we had great performance in Europe.

Double-digit growth overall and in most of the countries, including some of the most challenged countries.

In terms of our business, we are not seeing any change this year compared to last year, so we're expecting great growth again in Europe this year.

And I really couldn't comment on -- so our clients are buying from us this year just like they did last year.

I don't really see any change in the overall macroeconomic environment just from our perspective on it.

Okay.

Then related to international, can you talk in terms of, let's say five years out?

Which are the international markets all over, not just Europe, in which you see the most opportunity for growth?

We are in 85 countries today, and we expect to be -- we're not planning to add more countries.

It would be on a very selective basis if we did.

In essence all those countries have tremendous growth opportunities.

We are pretty much growing at good double-digit rates in virtually all of them.

Again, there could be some exceptions around -- in 85; but they all have -- our level of penetration is very low in all of them.

Again, even in the US as we have talked about, we have a very low level of penetration of our opportunities, even in the US where we have had the longest presence.

So we haven't had -- if I look out five years, we see that we should have -- we certainly have the opportunity for great double-digit growth in every one of those 85 countries.

Okay, great.

Then last question, related to Consulting.

I think you've been pretty clear and helpful on Contract Optimization, but I just want to make sure I understand.

Is there anything else going on in Consulting that was disappointing this quarter?

Or is it all related to the Optimization business?

Hi, Kelly.

It's Chris.

No; it was all related to that.

So I think if you look at the Core Consulting business, that business actually grew 6% for us in 2012, which is great.

It is much faster than it has been growing in the past, up towards the higher end of our range.

So when you look at Consulting, if you look at backlog, if you look margin expansion, utilization, all of the things in that Core business, which again is 90% of the Consulting business, had a really nice, strong performance.

And the whole delta is driven out of this one area that just happens to be such a high incremental margin.

So we feel great about the rest of that business.

Okay, perfect.

Thank you very much.

(Operator Instructions) Brian Karimzad, Goldman Sachs.

Good morning.

I guess first one for Chris.

The free cash flow conversion from the adjusted EBITDA in the '13 guide looks like it is around 74% or 75%.

If I look back historically -- maybe I am running the numbers wrong -- you guys typically do 75% to 80% range.

So, can you walk us through why we are not closer to the midpoint of what you have historically done?

Sure.

Brian, how you doing?

There is probably a couple of things there.

If you look at two things, cash taxes and CapEx, CapEx has increased slightly.

As you know, we are pretty low in terms of CapEx.

We, over the last couple years -- I think last year when you net out the reimbursements from our landlord, we spent I think $29 million in '11, $31 million in '12, and next year it's inching up to $34 million.

So you have a little bit more there.

We think that is absolutely the right investments to make in our business for all those things we are talking about, whether that is productivity or other things that will drive the business.

So we still think that is a relatively low percentage for a company of our size, but that is inching up a bit.

And as we have told you over time, cash taxes has inched up a bit.

So those two things are the drivers.

There is nothing other than that that has fundamentally changed in terms of our cash flow dynamics.

Okay.

Then just on the long-term revenue target.

Something that has been a bit frustrating in this info services space have been these long-term targets that companies set on revenue growth that, frankly, represent numbers that haven't been seen since 2007 and before.

For example, on the Research side I think the last time you did 15%-plus ex-currency growth was 2007.

I guess for the guidance this year you are making an assumption macro doesn't change.

For us, let's say we are taking a three-year horizon, and let's say that macro just stays how it has been for another three years in your industrialized markets, what is your sense on the cap of that Research revenue growth?

How much of it was banking on having a 2007-type level of macro environment?

It's Gene.

Basically, as I mentioned in my remarks, we think there is lots of room to improve our sales productivity, and that is at the heart of what is going on.

So it is less about the macro environment; it is really about our improving sales productivity.

And we think that there is plenty of room for sales productivity.

We think we know what to do to do it, and we have programs to do it.

So if you looked over a three-year time period, we are expecting our sales productivity will continue to go up, and that that will result in accelerating growth over time.

I think it's important to note when we set our long-term 15% to 20% range for Research and all of our long-term objectives, we did not assume that the world was always in spectacular 2007 economic environment.

We expect in normal economic times -- and as Gene said, we are doing lots of things to work on sales productivity.

So I don't think you should read into our numbers that it has to be a perfect economic environment for us to achieve those kind of numbers.

We don't believe that.

Okay.

So most of the productivity then issue is an internal process type thing?

It is not tougher selling environment in Europe and facing cuts?

Again, as I mentioned earlier, when clients have budget cuts, it is harder to sell than when clients are growing and have lots of money.

We can be very successful in that environment.

We are.

But it does -- I think what happened last year is that in a stable economic environment, our sales productivity would've increased; but because the global economy decelerated, it offset our -- the improvements that we had in the pipeline there.

So again, we're going to continue to make improvements, and hopefully the global economy will at least remain stable.

It won't decelerate any further.

Okay, thank you.

At this time there are no additional audio questions.

Speaker, you may proceed.

It's Gene.

I want to thank everybody for joining us today and I want to make sure that I invite you again to our Investor Day, which is next Thursday, February 14.

No better way to spend Valentine's Day than at a Gartner investor conference.

We look forward to seeing you then.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a good day.