高德納諮詢公司 (IT) 2017 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Gartner's Earnings Conference Call for the First Quarter of 2017.

A replay of this call will be available through June 4, 2017.

The replay can be accessed by dialing (888) 286-8010 for domestic calls and (617) 801-6888 for international calls, by entering the passcode 78082285.

This call is being simultaneously webcast and will be archived on Gartner's website at www.gartner.com for approximately 30 days.

I will now turn the conference over to Sherief Bakr, Gartner's Group Vice President of Investor Relations, for opening remarks and introductions.

Please go ahead, sir.

Thank you, Dave, and good morning, everyone.

Welcome to Gartner's First Quarter 2017 Earnings Call.

I'm Sherief Bakr, Head of Investor Relations at Gartner.

With me today in Stamford is our Chief Executive Officer, Gene Hall; and our Chief Financial Officer, Craig Safian.

This call will include a discussion of Q1 2017 financial results as disclosed in today's press release as well as our updated outlook for 2017.

After our prepared remarks, you will have an opportunity to ask questions.

In addition to today's press release, we have provided an accompanying presentation as a reference point for investors and analysts.

Both the press release and the presentation are available on our website, investor.gartner.com.

Now before we begin, I'd like 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 2016 report -- annual report on Form 10-K and quarterly report on Form 10-Q as well as other filings with the SEC.

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

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 for our Q1 2017 earnings call.

We had a great first quarter in 2017.

The positive momentum we had in Q4 continued into Q1, and we continued delivering incredible value to our clients.

We once again delivered double-digit growth in revenues and contract value.

In addition, we recently closed our acquisition of CEB, which I'll talk more about in a moment.

I remain extremely excited about our business, our prospects for growth and our strategy to drive long-term growth and value for our shareholders.

We do business in more than 90 countries around the world.

Because of ongoing currency fluctuations globally, we're going to talk about our results in FX-neutral terms so you can have a clearer understanding of how we're doing.

For the first quarter of 2017, total company revenues increased by 13% and EBITDA increased by 3%.

Research is the core of our business and our largest and most profitable segment.

Research revenues grew 15% in the first quarter.

These results were driven by strong contract value growth and contributions from our recent acquisitions.

Contract value growth for the first quarter of 2017 was also 15%.

We achieved a double-digit contract value growth in every region, across every size company and in virtually every industry.

Client retention was at 83% and wallet retention was 104%, near all-time highs.

In Consulting, we continued to deepen our research relationships with our largest clients and deliver great value.

For Q1 2017, our Consulting business grew 2%.

We grew the number of managing partners 14%, consistent with our long-term growth plan.

And we have full 4 months of backlog, which is in line with our operational targets.

Events drove a strong start to the year with 11% growth in the first quarter of 2017.

We hosted more than 9,000 attendees, which is also up 11% year-over-year on a same-events basis.

Leading indicators for Events are very positive.

Advanced bookings continue to grow at strong rates.

These results reflect strong demand for our services, the tremendous value we deliver and the operational excellence we're known for.

Operationally, we're the strongest we've ever been, and the CEB acquisition is a perfect example.

After announcing our intent to acquire CEB in early January, we completed the acquisition on April 5, 2017.

This aggressive schedule was achieved through operational excellence while simultaneously delivering a very strong quarter in the Gartner business.

The combination of Gartner and CEB will create tremendous value.

This value will come from 3 main drivers.

First, CEB expands our ability to help executives deal with unprecedented levels of disruption and change in our rapidly evolving world.

Secondly, the addition of CEB will allow us to help clients in functions across the enterprise.

In every enterprise, mission-critical priorities are accomplished by teams.

To help our clients with their mission-critical priorities, we need to be able to address functions across the business, not just in individual functional silos.

CEB has traditionally been strong in areas such as HR, sales, finance and legal.

Gartner has traditionally been strong with IT, supply chain and marketing.

Our combined company will help enterprise-wide cross-functional teams address their mission-critical priorities.

Finally, Gartner and CEB together will add more value and provide even more powerful insights than either company could have done alone.

Gartner is world class at analyst-driven research and advice.

CEB is world class in member-based research and best practice case studies.

The combination of member-based research and case studies with analyst-driven research and advice will deliver more value to our clients than what either company could do individually.

It's a perfect case of the whole being greater than the sum of its parts.

Now that we've owned CEB for about a month, I'm excited to report that we continue to be excited about the opportunity for strong value creation.

Gartner and CEB associates are equally excited about the incredible opportunity this presents to have a positive impact on our clients' success.

2020 will be the third full year after acquisition.

We continue to expect that, by 2020, we will see an attractive double-digit growth for both the CEB and the Gartner businesses.

In addition, as Craig will detail in a moment, this deal is immediately accretive in the first year and we expect should be double-digit-percent accretive in 2018.

I'm confident about our future prospects for growth as a combined company and remain excited about our near-term performance.

And with that, I'll hand the call over to Craig.

Thank you, Gene, and good morning, everyone.

Because of the tremendous value we provide to our clients around the world, the investments we are making to capture our best market opportunity, our focus on strong operational execution and our exceptional business model, we delivered yet another quarter of double-digit year-on-year growth.

On an FX-neutral basis, our year-over-year financial performance for the quarter included total company revenue growth of 13%; contract value of 15%; Research revenue growth of 15%; Events revenue growth of 11%; Consulting revenue growth of 2%; adjusted EBITDA growth of 1%; and adjusted diluted EPS of $0.60 per share, which was towards the top end of our guidance range for the quarter.

Our exceptional business model continues to create a consistently high level of free cash flow conversion.

On a rolling 4-quarter basis, our free cash flow conversion was 126% of normalized net income.

I'll now discuss our first quarter business segment and P&L in depth before turning to our balance sheet and cash flow dynamics.

I'll then provide some high-level comments on CEB's first quarter performance before closing with remarks on our updated 2017 guidance which includes the expected contribution of CEB for the balance of the year.

We will then be happy to take your questions.

In addition to my comments, today's press release and our 10-Q, I would encourage you to refer to the presentation posted on our investor relations website.

The presentation provides an in-depth overview of our Q1 performance by business segment, covering some of the ground that I normally would cover in my prepared remarks.

Given that I will spend more time covering the CEB acquisition and our updated outlook, this should still allow sufficient time for your questions as well as providing a useful reference point for investors and analysts.

Beginning with Research.

Research revenue grew 15% on both a reported and FX-neutral basis in the first quarter.

Acquisitions had a 1-point impact on Research revenue growth for the quarter.

The gross contribution margin for Research was 69%, a 1-point decline compared to the first quarter of 2016.

Our other Research business metrics also remain very strong, and we continue to see robust demand for our services across the globe.

Total contract value was $1.95 billion as of the end of Q1, FX-neutral growth of 15% versus the prior year.

For reference and comparison, our Q1 2016 total contract value at current year FX rates was $1.7 billion.

The Q1 2017 measure includes the contribution of L2, an industry-leading marketing company that benchmarks the digital performance of brands, which we acquired in March.

Excluding L2, total contract value growth would have been 14% on an FX-neutral basis, consistent with the 14% growth we delivered last quarter.

We continue to drive contract value growth through strong retention rates and consistent growth in new business.

As Gene mentioned, client retention was 83%, down 40 basis points from the first quarter of 2016 and essentially flat on a sequential basis.

Wallet retention ended at 104% for the quarter, down by less than a point year-on-year and flat on a sequential basis.

Both of our retention figures are close to our historical highs.

In Q1, we had an unusually large number of renewals impacted by M&A.

Had we experienced a normal level of renewals impacted by M&A, we would have seen an improvement in our retention metrics in Q1.

As we look to the balance of the year, we anticipate a more normal level of this type of activity.

New business growth remained strong, up 13% year-on-year in Q1.

The new business mix is consistent with prior quarters and remains balanced between new clients and sales of additional services and upgrades to existing clients.

And as always, we also benefit from our consistent price increases.

Our new business growth reflects our success in penetrating our vast market opportunity with both new and existing client enterprises.

We ended the first quarter with 11,166 enterprise clients, up 7% compared to Q1 2016.

The average spend for enterprise also continues to grow.

It now stands at $175,000 per enterprise, up 8% versus prior year on an FX-neutral basis.

This increase in average spend reflects our ability to drive CV growth through both new and existing enterprises.

Turning to sales productivity.

Over the rolling 4 quarters, we delivered $256 million of FX-neutral net contract value increase.

When divided by our beginning-of-period headcount, which was our Q1 2016 ending headcount of 2,237, our rolling 4-quarter productivity per account executive was $114,000, an increase of 8% year-on-year and 9% sequentially.

Excluding the impact of the L2 acquisition and therefore making the metric directly comparable to the Q4 calculation, sales productivity was essentially flat on both a year-on-year and sequential basis.

Q1 productivity was also impacted by the uptick in renewals with M&A that I referenced earlier.

With a more normal level of M&A, we would have seen a sequential and year-on-year improvement in our productivity measures.

As always, we remain highly focused on improving our sales productivity and remain confident that the initiatives we have implemented to drive productivity will positively impact our results in both the short and long term.

To sum up: It was another strong quarter for our largest and most profitable segment.

And as you will see from our updated outlook, we continue to target another year of mid-teens growth.

Moving to Events.

Events revenues were up 11% on an FX-neutral basis in Q1.

On a same-events and FX-neutral basis, Events revenues increased by 6% year-on-year in the first quarter.

Q1 is typically a smaller quarter for our Events business.

And we held 11 events in Q1, 1 less than in the prior year quarter.

On a same-events basis, attendees were up 11% versus last year.

Events Q1 gross contribution margin was 38%, down by approximately 200 basis points compared to the first quarter of 2016.

This was primarily due to higher year-on-year investments to support our growth strategy in a seasonally light quarter.

In summary, we had a strong Q1 in our Events business.

Our outlook remains unchanged.

We still expect double-digit revenue growth on a constant currency basis for the full year.

Turning to Consulting.

On an as-reported basis, first quarter Consulting revenues were flat year-on-year and increased by 2% on an FX-neutral basis, coming off a very strong Q1 last year.

On the labor-base side, billable headcount of 650 was up 5%.

And we had 125 managing partners at the end of Q1, a 14% increase over the year-ago quarter.

Backlog, the key leading indicator of future revenue growth for our Consulting business, ended the quarter at $103 million, down 9% year-on-year on an FX-neutral basis.

As we noted last quarter, our Consulting backlog benefited in 2015 and the early part of 2016 from a very large contract booking in a nontarget geography, which was a significant driver of backlog improvement in Q1 2016.

Excluding this one large contract, Consulting backlog decreased by 4% year-on-year.

This represents approximately 4 months of forward backlog, which is in line with our operational targets for this measure.

Consulting gross contribution margin declined by 140 basis points year-on-year primarily due to a modestly lower utilization but was up strongly on a sequential basis.

For the full year, we continue to target Consulting revenue growth of 2% to 7% on an FX-neutral basis, in line with our long-term growth target range of 3% to 8%.

Moving down the income statement.

SG&A increased by 18% year-over-year in the first quarter.

In normalized terms, our SG&A increased by 16% year-over-year.

As we detailed on our Q1 2016 call, our Q1 results were positively impacted by lower stock compensation expense related to changes to the executive team.

This resulted in approximately $5 million of SG&A savings in Q1 '16.

That was a nonrecurring benefit.

In addition, the phasing of our SG&A investments for 2016 were more back-end loaded, making our Q1 2017 compare a bit tougher.

Staying with SG&A: Our sales force continues to be our largest investment.

And as of the end of the first quarter, we had 2,460 quota-bearing sales associates.

This is an increase of 223 or 10% from a year ago.

This is lower than our base-level assumption for the full year primarily due to the timing of our training academies.

On a normalized basis, our quota-bearing sales growth was around 11.5%.

And we continue to plan for approximately 13% sales headcount growth in 2017.

Moving on to EBITDA and earnings.

Adjusted EBITDA was $106 million in the first quarter, meeting our Q1 EBITDA expectation.

Adjusted EBITDA was up 3% year-over-year on a reported basis and up 1% on an FX-neutral basis, as top line growth was partially offset by the higher SG&A spend I just referenced.

Moving down the income statement.

Depreciation charges increased year-over-year in the quarter, reflecting capital spending to support our growth, while acquisition and integration charges increased by almost $5 million.

Depreciation charges increased year-over-year in the quarter, reflecting capital spending, while acquisition and integration charges increased by almost $5 million primarily related to the CEB acquisition and to a lesser extent L2.

Our GAAP tax rate for the quarter was 24.9%, which was approximately 1 point lower than the guidance of approximately 26% we gave 3 months ago.

The tax rate was lower than guidance, in large part due to a projected favorable impact of earnings mix and the timing of certain costs.

Adjusting for acquisition charges, our normalized tax rate for the quarter was 25.7% and is also lower than our previously-issued guidance of approximately 27%, for largely similar reasons to the reduction in the GAAP rate.

GAAP diluted earnings per share was $0.43 in the first quarter.

Our GAAP EPS figure also includes $0.17 worth of acquisition and integration charges, approximately $0.04 higher than we had guided.

The higher charges were due to the rapid closing of both of our announced acquisitions.

Adjusted EPS was $0.60 per share in Q1, down 10% versus Q1 of 2016.

As mentioned earlier, our adjusted EPS was towards the higher end of our Q1 guidance, so we are right where we targeted to be coming out of Q1.

The year-on-year growth rate was obviously impacted by our Q1 2016 adjusted EPS, which as you may recall was up 65% last year.

Turning now to cash.

In Q1, operating cash flow was an outflow of $30 million compared to a $13 million inflow in the year-ago quarter.

The first quarter is seasonally the lightest quarter for the year in terms of cash flow given the combination of seasonality in our operations as well as the timing of incentive payments.

Additionally, we announced the CEB deal during the first week of January.

It's normal for clients to pause their purchasing cycles when there is M&A amongst their vendors, as they look to see if there are any benefits they can extract.

In fact, that's what we advise our clients to do in many similar situations.

Our new business bookings accelerated over the course of the first quarter, culminating in an exceptionally strong March.

Because of that timing, some of the cash that we normally would have collected in Q1 will now be collected in Q2.

This impacted our Q1 cash flow figures.

Q1 2017 capital expenditures were $11 million, and Q1 cash acquisition and integration payments were $18 million.

This yields free cash outflow of $23 million.

This compares to Q1 2016 free cash flow of $18 million.

The year-on-year change is primarily driven by the timing of contract value growth in the quarter and the related collections, as I just described; higher incentive payments; higher CapEx; and higher acquisition and integration payments.

Turning to the balance sheet.

We had a busy quarter related to the CEB acquisition, successfully securing an attractive financing package, which I'll detail a bit later.

Given that the acquisition closed just after the end of Q1, I will focus my comments on our post-closing balance sheet rather than the March 31 snapshot.

Relative to the $703 million of gross debt we had at the end of 2016, our gross debt increased by approximately $2.9 billion, related to the acquisitions of CEB and L2.

In total, we had approximately $3.6 billion of gross debt as of the 5th of April, comprising of the following: $1.485 billion of Term Loan A, $500 million of Term Loan B, $545 million drawn on our revolver, $800 million of high-yield bonds and $300 million of bridge financing.

Slide 11 of the presentation on the investor relations site details our debt schedule and the respective interest rates.

In addition to the new debt instruments, we have also increased the amount of interest rate swaps to lock-in the interest rates of a significant portion of our floating debt.

In total, we have $1.4 billion of hedges in place.

Adding in the $800 million of high-yield bonds, more than 60% of our gross debt has a fixed interest rate.

At the time of the announcement of the CEB acquisition in early January, I noted that we expected the average interest rate to be between 4.25% and 5%.

Due to a more favorable mix of lower-price debt and better pricing on all debt tranches, our weighted average interest rate, including the cost of hedging, is approximately 4%.

From a net debt perspective, we had approximately $3 billion of net debt upon closing, consistent with what we expected in January, which translates to approximately 4.3x leverage on a pro forma combined last 12 months of adjusted EBITDA.

Turning now to some high-level comments on CEB's Q1 performance.

As we didn't own CEB until early Q2, the following results are what CEB would have reported as an independent company for the first quarter of 2017.

CEB would have reported total adjusted revenues of $214 million and adjusted EBITDA of $36 million.

Using CEB's methodology, constant currency CEB segment contract value growth was down about 1% year-over-year, while constant currency CEB segment wallet retention was 89%, flat year-on-year but up by more than 1 point sequentially.

As with any large acquisition, we are in the process of harmonizing accounting treatments, calculation methodologies and purchase accounting.

We'll report back to you any changes or adjustments on our Q2 Earnings Call in August.

Turning to guidance.

Slide 15 of the presentation gives you our high-level outlook for 2017 based on 12 months of Gartner plus 9 months of contribution from CEB.

In addition, the slides detail the most significant below-the-line items to help you with your models.

As is our practice, our EPS guidance is on both a GAAP and adjusted basis.

However, given that the CEB transaction closed only a month ago, please note that our GAAP estimates are likely to be subject to change as we complete purchase accounting and further refine our estimates for other GAAP related expenses.

But we will also be providing you with guidance for both GAAP revenue and adjusted revenue.

The only difference is the deferred revenue fair value adjustment, as required as a part of purchase accounting for business combinations.

Gartner's revenue guidance is largely unchanged.

We've adjusted up Research revenues modestly to reflect the L2 acquisition.

For CEB, we expect GAAP revenues of between $519 million and $549 million for the 9 months of 2017.

Excluding the estimated deferred revenue fair value adjustment of $209 million, we expect adjusted revenues of between $728 million and $758 million for the balance of the year.

In addition, we expect adjusted EBITDA between $190 million and $205 million.

This equates to a combined company adjusted revenue range of $3.4 billion to $3.5 billion and an adjusted EBITDA range of $685 million to $735 million for 2017.

Again, I'd remind you that these figures are for 9 months of CEB results.

To arrive at the relevant full year adjusted revenue and EBITDA figures for 2017, you can just add the first quarter performance numbers that CEB would have reported, which I detailed earlier.

On a GAAP basis, our 2017 earnings per share is expected to be significantly impacted by acquisition-related accounting and integration charges, of which the vast majority are noncash in nature.

Slide 16 of the presentation reconciles the per share differences between our updated GAAP and adjusted EPS guidance ranges.

The after-tax impact of acquisition and integration adjustments, such as the fair value deferred revenue adjustment and incremental amortization and integration charges, totals approximately $4.42 per share at the midpoint and is detailed on Slide 16 as well.

Putting this all together, we expect adjusted EPS of between $3.32 and $3.60 per share.

When compared to our previous stand-alone adjusted EPS guidance range of $3.15 to $3.35 per share, this represents between 5% and 7% accretion for 2017.

While it is too early to provide specific 2018 guidance, we continue to target double-digit accretion to our adjusted EPS.

Slide 22 details the key assumptions below EBITDA that we have used to calculate our updated adjusted EPS outlook.

We expect the total cost associated with stock-based compensation expense in 2017 to be approximately $67 million to $68 million.

Total depreciation should be approximately $69 million to $70 million.

And amortization should be approximately $196 million, inclusive of the amortization of acquired intangible assets.

In addition, net interest expense is expected to be approximately $112 million, which includes approximately $90 million of incremental expense for the balance of the year.

For our tax rate, we are projecting an annual effective rate for GAAP of approximately 33% to 34% and for adjusted earnings of approximately 32% to 33%.

Please note that our full year GAAP actual tax rate may also change based upon final purchase accounting.

Our tax rate may also vary from quarter to quarter due to the projected geographic mix of earnings, the impact of ASU 2016-09 related to stock-based awards as well as the timing of certain items.

Finally, our EPS guidance is based on a weighted average fully diluted share count of approximately 89.5 million to 90.5 million shares for the full year 2017.

This incorporates the additional 7.4 million shares issued in conjunction with the transaction.

The 89.5 million to 90.5 million share estimate is a weighted average fully diluted share count which has 1 quarter pre acquisition and 3 quarters post acquisition.

We'd expect to exit 2017 with approximately 92 million shares outstanding.

Turning to our cash flow guidance.

Similar to GAAP EPS, our 2017 operating cash flow is expected to be significantly impacted by charges related to the CEB acquisition as well as incremental interest expense.

The details and components of our cash flow guidance are also contained on Slide 15.

For free cash flow, we now expect to generate between $335 million and $365 million in 2017.

Free cash flow is based on operating cash flow guidance of $315 million to $345 million, capital expenditures of $95 million to $105 million and cash acquisition and integration payments of $115 million to $125 million.

And again, this is assuming 12 months of Gartner and 9 months of CEB.

This also obviously has the impact of significantly higher cash acquisition charges and interest expense payments.

It is worth noting that CEB's strongest free cash flow quarter has historically been Q1.

This was true in 2017 as well.

What you see in our combined free cash flow guidance reflects 12 months of Gartner and 9 months of CEB but excluding CEB's strongest quarter.

If we looked at free cash flow on a pro forma combined 12-month basis, we estimate that the guidance range would be $415 million to $445 million and adjusted net income-to-free cash flow conversion rate of approximately 140%.

While the timing of the deal has impacted the 2017 cash flow guidance, we did acquire a larger cash balance than we anticipated, which we were able to utilize for our strategic initiatives.

Turning to our Q2 guidance.

For the second quarter of 2017, we expect GAAP EPS of between negative $1.12 and negative $1.04.

This includes approximately $1.91 per share of non-GAAP adjustments.

Therefore, on an adjusted basis, we expect adjusted EPS of between $0.80 and $0.85 for the second quarter of 2017.

In closing, we had a strong start to the year, and we expect this performance to continue throughout the balance of 2017.

Our Research business delivered another quarter of mid-teens growth, and contract value growth was 15%.

Our Events business is back on track to deliver double-digit growth in 2017.

And Consulting delivered another quarter of growth following a very strong year-ago quarter.

From a stand-alone Gartner perspective, our 2017 revenue and adjusted EBITDA outlook is largely unchanged, and we expect to continue our trend of double-digit growth.

The addition of CEB further strengthens our ability to capture the vast market opportunity ahead of us, as we are now able to address the mission-critical priorities of virtually all functional business leaders across every industry and size of enterprise worldwide.

On an adjusted basis, the acquisition of CEB is expected to be immediately accretive, with between 5% and 7% accretion in 2017.

We also continue to expect double-digit-percentage adjusted EPS accretion in 2018 and remain confident in our ability to generate long-term double-digit growth with strong free cash flow conversion.

I'll now turn the call back over to the operator, and we'll be happy to take your questions.

Operator?

(Operator Instructions) This comes from the line of Anj Singh at CSG.

Congrats on closing the deal.

For the first question, I'm just hoping you can discuss some of the assumptions underlying your projections with CEB.

It seems like you're not baking in too much of an improvement in revenue versus, say, where consensus was, perhaps a little lighter on EBITDA.

It would just be helpful to get some context on how you're thinking about the changes you may be making under the hood this year.

Yes.

It's Gene.

So with CEB, we closed the deal about a month ago.

And during 2017, what we'll be focused on is making operational improvements that are going to accelerate growth in 2018 and beyond, and so I think that's kind of what you could expect for our basic plan.

And those operational improvements are things like new seat-based products that combine the best of both research that I talked about earlier; things like accelerating sales force growth; things like integrating service processes -- I'm sorry, improved services processes to strengthen retention; and of course, integrating our back-office processes like how people get paid and things like that, the basic of business.

And so 2017 is really going to be focused on building the foundation we need for accelerated growth in 2018 and beyond.

And Anj, as you know, a large portion of CEB's revenues are subscription-related.

The revenue, in a sense, it doesn't get locked, but it gets close to locked based on where they finished 2016.

2017 is really a transition year is the way to think about it.

As Gene mentioned, we're laying all the groundwork so that we can accelerate growth in years beyond.

We won't be satisfied if we don't see operational improvements over the course of the year, but given the revenue recognition nature, we'll probably see those benefits flow through in 2018 and beyond.

Understood.

That's helpful.

And as a follow-up, with regards to stand-alone Gartner, could you speak to the selling environment as it relates to the productivity?

Is it having any dampening impact that you would call out?

Perhaps if you can just give us a sense of what the improvement in productivity may have been if you had to adjust for that M&A impact.

And I may have missed it, but what is your expectation for how long the M&A activity may impact some of your KPIs?

Yes.

So the selling environment has been, I'd say, the same over the last couple quarters.

We've seen very robust demand for our products.

As we mentioned, last year we saw an acceleration in Q4 in demand for our products.

That continued into Q1.

Contracts come up for renewal when -- based on when the client originally bought.

Companies do get acquired.

This happens all the time, of course.

It's normal.

And it just happened that as -- an unusually large number of contracts came up for renewal where there were large M&A.

And I'm not going to name the companies, but it's names you would know.

So they came up for renewal.

So we have visibility on these.

As we look to the rest of the year, we don't see that happening.

To the point that Craig mentioned earlier and you mentioned, our sales -- all of our key metrics would have been up modestly if we had, had a normal quarter for M&A.

The next question is from the line of Gary Bisbee at RBC Capital Markets.

I wanted to ask about 2 of the strategies that you've talked about in terms of how you can improve the operations at CEB.

First of all, on the client engagement and retention process that you've used, what's a realistic time line as to when or how quickly you can implement some of those processes?

And how you think about when that might actually show up in their numbers.

And the second one, as part of that, Gene, I think one of the critical decisions you made in your early years in Gartner was to move the company forcefully to the seat license model.

Is that an opportunity throughout big portions of CEB's business in the next couple of years?

Or is the business different enough that just maybe more no discounting is the way we should think about the price discipline you can implement here?

So on the client engagement and retention, we have developed a set of automated tools as well as people-based approaches designed to strengthen retention.

As we look at CEB, we've done analysis that helps us understand the impact that it's going to have.

And it'll have the exact same impact as Gartner, so as we look at those.

And so we're going to be not implementing those tools in a big bang but in an iterative process over a period of time that we've already started with.

And so this process has started, and we'll keep doing that.

As such, I'd say you can start.

And then -- you implement the tools, and then the renewal has to come up.

So the clients that we're going to be affecting, their renewals are going to come up next year.

They're not going to come up this year.

And so you can sort of see we'll be making the improvements in engagement now.

Those tools and new people processes will be implemented over time, but you'll start to see the impact as we get renewals really in 2018 and beyond.

With regard to the seat model: So it's our intention to introduce, as I mentioned in my comments, a whole set of new products that are seat-based.

And over a period of time, we expect that all of CEB's product line for new clients will be transitioned to a seat-based product.

The first of those seat-based products is due to be introduced, again for new clients, in mid-summer.

And then we will, again on a kind of iterative basis, keep upgrading all of their products to be seat-based products, which we think -- or add more value to clients than kind of an enterprise kind of product.

And so you'll see those products, especially, I said, first, for new clients.

And then we're going to go back to -- these products will be better than the existing products because it will have kind of the best of both the CEB and Gartner.

So that will be the only thing new clients will be able to buy.

We will also -- we did this at Gartner as well, go back to existing clients and say, "Hey, you can keep the old product if you really like it, but we have this new product that has additional, more value to it.

And if you want to upgrade, you can upgrade to that." And it'll have the new terms, so it won't be discounted.

The pricing -- it'll be seat-based, et cetera.

And so given what I just said, both the client engagement improvement as well as the transition to the new seat-based products with the best of both research will start this summer and will continue on and then -- and so the impact, you'll see the impact over time, really beginning and throughout 2018.

The next question is from the line of Tim McHugh at William Blair.

Just on CEB again, 2 questions, I guess.

One is can you give us some comments on turnover?

And I guess, how -- is there any noise that's been created in that regard kind of since the merger, leading up to the merger, to the best you can tell?

And secondly, just Craig maybe, on the EBITDA, I guess, for Q1, it would seem to be down quite a bit for CEB versus what they at least reported last year.

I don't know if it's comparable or not, but can you give any color on that?

Tim, it's Gene.

You -- were you talking about associate turnover?

Well, all levels, I guess, other than planned kind of cost synergies, the retention of...

As opposed to clients.

You're talking about our...

Yes, yes, no, internal staff.

So yes.

So internal staff turnover at CEB is substantially higher than Gartner's has been before the acquisition was announced.

It hasn't accelerated since then.

And one of our objectives is to get that turnover to Gartner levels.

As I mentioned in my comments, the associate -- the employees at -- the associates at CEB overall are extremely excited about joining Gartner.

It's a growth company.

They know the brand.

They know the company really well.

It's not something they don't know.

And we have a great reputation in the market -- in the marketplace for hiring, et cetera.

And so -- and then on top of that, since we closed the deal and even before, we've been going out and making sure that all the associates at CEB understand this is about growth and turning CEB into an exciting growth company which will provide great career opportunities for all of the CEB associates.

And that message is getting out there.

And so while -- one of the things that happens with M&A acquisition, is recruiters go after the associates of the company being acquired, telling them all the [best] that's going to happen.

I think so far we've been very successful in fighting that.

And we'll -- I would expect that, as we go into, again, 2018, we'll see that associate turnover drop down to more like Gartner levels.

Thanks, Gene.

And Tim, on the Q1 performance question, I'd note a couple of things.

Number one, it's a pretty light quarter from a revenue perspective.

And you have situations like Evanta which is a double impact.

So really, no revenues in Q1, but their expense base is there.

And then also, last year, the acquisition of Evanta didn't happen until Q2, and so we've got the grow-over problem of expenses that weren't in there last year.

Plus, the revenue doesn't really start coming in until Q2.

There is also, as you can probably see from the revenue, a decline year-over-year on revenues of about $9 million.

That's also flowing through.

And that's really based upon the contract value performance that you saw over the course of 2016 now feathering into the revenue recognition.

And then lastly, we did a little bit of -- or they did a little bit of harmonization with our expense accrual methodologies, and that also had an impact on profitability.

But what I'd say is they landed where we expected them to land in the first quarter.

And then the other thing I'd say is operationally it was encouraging to see sequential improvement, albeit modest, but sequential improvement in wallet retention on that for CEB segment CV.

The next question is from the line of Manav Patnaik at Barclays.

Congrats on closing the deal as well.

My first question was, Gene, you talked about all those retention tools you're going to put in place.

And then you also talked about how the strategic value gives you the synergies across the enterprise functions, providing change, insight et cetera.

I guess what I'm trying to get at is you guys have always been good at the wallet retention metric.

Does the combination potentially help improve that client retention that has been 83%, 84%, which feels like should be a lot higher?

Yes.

So I think, yes, it will improve, again, over time.

It will improve our -- well, it should improve our client retention.

And the reason is that, again, we'll be in more functions in each of the businesses.

And if your -- companies, enterprises get things done by teams, across functional teams.

If you can help across those teams, that's going to give you higher client retention.

The other thing I'll just mention to like keep in mind is, our client retention, there's a couple things that affect this retention that are structural.

One is, there's a -- we cannot -- a big company and a little company want client retention the same.

So Gene's pizza parlor and ExxonMobil are both counted as one enterprise.

And Gene's -- the smaller companies like Gene's pizza parlor go out of business a lot more.

And so there's a portion -- we've talked about this in the past.

There's a portion of our client retention which is the Gene's pizza parlors of the world, the smaller companies that are going out of business.

The second thing is M&A.

If Exxon buys Mobil, we lose one enterprise there.

And so the -- while -- and there may be an impact on us in terms of our contract value, but we definitely lose an enterprise most innings.

So if you look at M&A and out of business: The M&A across all size companies and there's a lot of it in the economy; and then out of business, there's a lot of small enterprises that go out of business, that's kind of the biggest part of our -- of the clients we lose.

And those are things that are kind of just a structural part of the market.

And Manav, that's why the wallet retention measure is so important.

Because, again, it's putting a dollar value on those clients, as opposed to the client retention where Gene's pizza parlor is created equal to the ExxonMobils of this world.

And so it points to us retaining higher-spending clients at a better rate.

And it also points to those clients that stay with us spending more and more each and every year.

So again, that's why we give both measures.

They're both important measures.

And again, we're not satisfied at 83% or 84%.

We do think there's a little bit of room for improvement there, but there are the structural things Gene mentioned which are there and we'll have to deal with forever.

Okay.

And the new products that you talked about, Gene, I guess, maybe it's a little quicker than we expected, but that's good to hear.

But is that new product which you said I guess, the best of IT and CEB, that's going to be targeted just to the CEB clients?

Maybe just some more color there, and what -- like how may products and so forth we should be expecting.

So you can think of the new product in having 2 big differences from CEB's products today.

One is it'll be seat-based rather than an enterprise license.

So it's for the use of an -- of a specific individual.

The second thing is it'll have more research content, and so the -- that provides more value.

And then the third thing is that it will be combined not just more content but also, as I mentioned, the type of content that CEB had and the kind Gartner had which are highly complementary; clients love both of those.

And so we're going to have these new products that will provide a lot more value because you've got both -- it's seat-based so it's for that individual user, and it's got this incredible additional content.

As I mentioned before, we're going to -- the first of -- and we're going to have a new product for each of the areas of CEB's business.

So think about they were in areas like finance, sales, HR, et cetera.

We will introduce new products in each of those areas in a -- not all at once.

We're going to do -- we'll -- as I mentioned, the first one we'll be introducing will be in the summer time frame, this summer's time frame.

And then we expect to follow others -- we have others, meaning like one of those rolls will go first, then another roll and then another roll, then another roll over time.

And we're planning to get all of the new products introduced, you can think about, over a 12-month period.

I mean those are what's going to -- that's what we will be selling.

Got it.

And just one last clarification question for Craig.

The 2017 guidance and the double-digit accretion that you expect in '18, does that include or not or exclude the $50 million of cost synergies that you talked about prior?

So Manav, consistent with what we talked about when we did the announcement, the 2018 is exclusive of cost synergies.

And again, the target that we've talked about ranging up to $50 million, we're working very diligently to be in a place where we can harvest as much of that in 2018.

That said, given when contracts run through or the timing of when we can reduce or eliminate certain costs, may roll into 2018.

So think of that more on a run rate basis or an annualized basis, as opposed to all coming through in 2018.

That said, we're going to do our best to harvest as much of that as possible in 2018.

(Operator Instructions) Your next question comes from the line of Jeff P. Meuler at Baird.

Gene, any more thoughts that you're willing to share at this point in terms of how you're planning to structure and combine the sales forces and facilitate cross-sales across the nonoverlapping client base?

So we're going to structure the sales force in a very similar way to what we have -- the way Gartner had been structured.

As you know, we've sold to different client segments.

We had -- our biggest segment was being like CIOs and IT departments.

We also, though, sold to chief supply chain officers and their teams as well as chief marketing officers and their teams.

Those -- for each of those areas, we had a dedicated sales force really.

So you can think about a sales force for all those CIOs and their teams, a different sales force -- part of our overall global sales force with a different set of -- a different, dedicated team selling to marketing leaders and a different team selling to supply chain leaders.

CEB actually followed a very similar approach, and we're going to continue that.

And so you can think about the structure as being -- there will be -- within our global sales force, there will be teams focused on each of the functional areas of business: IT, marketing, supply chain, HR, finance, sales, product development, et cetera.

Okay.

And the facilitation of nonoverlapping clients -- gross sales?

So the -- we've had this opportunity for -- us before.

And basically, we have a sales force set up so that, if there's 2 Gartner salespeople in the account, 1 selling to the CIO and 1 selling to the chief supply chain officer, which again we have today, we encourage and train our salespeople to help each other out because -- I help you today, and then someone else helps me tomorrow.

They all kind of get that and want to collaborate in the accounts.

And then for -- that's for all accounts.

And then for larger accounts, we have a more senior salesperson that would coordinate sales across the accounts.

And we've -- that's what we've already been -- we've been doing that historically.

And Jeff, just to add to that.

The way we think about it is the best way for us to drive growth and penetrate accounts is for the people who specialize in selling IT, supply chain, HR, whatever it might be, to actually go do that and talk to the HR professionals, supply chain professionals, marketing professionals kind of direct.

And so there is coordination, as Gene talked about, but again the way we drive productivity and the way we drive growth is by actually having those salespeople specialized in those functions going after those functions.

Yes.

Just to add one more piece to that.

The way to think about it is not so much that the IT person refers you to the supply chain person, but it's more -- if you understand what the most important mission-critical priorities are that the IT person is working on, the -- if it's a corporate mission-critical priority, which that's what we want to be helping on, it's not just the IT department that's working on that.

The people in finance are.

The people in HR are.

The people in sales are.

The people in HR are.

And so we have a very good process for making sure that, whatever salespeople are calling on an individual enterprise, they -- when we learn about what their -- what the enterprise's mission-critical priorities are, each of the salespeople understands that.

And then to Craig's point then, they can apply that in their functional discipline, whether it be marketing, HR, finance, et cetera.

The next question is from the line of Patrick Halfmann at Morgan Stanley.

Craig, you mentioned strengthening bookings trends throughout the quarter in your prepared remarks.

I'm wondering if that strength carried over into the first few weeks of the second quarter and whether relatedly you would expect to see an acceleration in organic constant currency CEB growth in the second quarter.

Patrick, yes, so we did see an acceleration from Jan to Feb and from Feb to March.

And part of that we attribute to some of the announcement noise as clients looked to see if there was something to be gained from waiting.

And when they found out that there wasn't, they went ahead and bought.

We obviously can't comment on Q2.

We're obviously a couple days into May.

We're in the process of closing our books for April, but again what we feel good about is we've had really strong performance Q3, Q4, into Q1, and we expect that to continue.

The next question is from the line of Peter Appert at Piper Jaffray.

So Gene, the growth in the sales force, you've dialed it back a little bit in the last year or so from the pace of the prior several years.

This is for the, obviously, core Gartner business.

Can you just talk about your thought process around that?

And might that have positive implications from a margin perspective?

Because it is translating into a little bit of improvement, it seems, in sales productivity.

Yes.

So Peter, our -- we remain committed to having double-digit growth in our sales force.

There -- or from time to time, there's things that affect how fast it shows.

As Craig said, this particular quarter, 2 things happened.

One is we had a particularly large growth in Q1 of last year.

Secondly, there was a bit of a timing.

We train our salespeople in classes.

And it happens that, the people that graduate in 2016, they graduated earlier than those people graduating in 2017.

It flows into Q2, as opposed to Q1.

And so that made it look a little lower than it is, but we're still committed to the kind of double-digit sales force growth that we've had historically.

Yes, but it's still below the sort of the 15%-ish number you've been doing.

And so it does -- it feels like it's at a slower pace.

So Peter, as I said before, as you've heard me say before, the way that we develop -- so we target growth in that kind of time -- in that kind of range.

What we actually deliver is based on looking -- as you know, we develop our sales territories bottoms-up based on what each individual manager, sales manager has the ability to manage.

So if we -- at any given point in time, we have some sales leaders that can add a lot more people.

And we have other sales leaders, perhaps they're new to the world and they need a little more time to get their feet on the ground, can't go quite as quickly.

And so the number we end up with, if you -- so if you equalize for timing, like we had this quarter, the number we end up with, whether it's 13, 17, whatever, is basically given by the bottoms-up readiness for individual managers to take additional growth.

So that's why we don't forecast a specific number.

We look at what the ability of the individual managers are, but we're confident it's going to be in that kind of double-digit range.

And again, Peter, we also -- as we've talked about, we go faster in places where we have the management capability to handle and very strong productivity.

And we obviously slowdown in areas that may be impacted by macro things and have lower productivity.

And so for example, about 1.5 years ago, we talked about challenges in Brazil, challenges in oil and gas.

We were not growing the sales force in those areas when we were having those challenges.

Now that we've come out of those and oil and gas -- or the energy utility sector, rather, is back growing at double-digit rates, we're now growing in that sector again.

So it is a bottoms-up approach, as Gene talked about.

And we also tap the brakes or press on the gas pedal depending on the market situations that we're selling into as well.

And what we said for this year was we'd -- on that bottoms-up view, we expected around 13% headcount growth.

If we do see productivity improving or if we see we can go faster in places, that may go up.

If we see challenges, we may pump the brakes on it.

The next question comes from the line of Bill Warmington at Wells Fargo.

So a question for you on Consulting.

You've mentioned the backlog being down against a tough comp.

And I wanted to ask when you expect the year-over-year growth to turn positive again there and also if you could talk about some of the opportunities for synergies there with CEB.

The -- so I'll start with the Consulting -- the synergies with CEB.

So the -- our -- the way our Consulting business works today is it is focused in the IT part of our business, not in marketing, not in supply chain.

And as you know, it is -- it helps large clients that want more time, more help from Gartner than they can get from our typical half-hour analyst call.

We've not instituted Consulting in marketing or supply chain.

And we don't at this point have a plan to do that in any of the CEB functions as well.

So the primary way there would be some synergy would be things like lead referrals, things like that, as opposed to seeing an extension of functions like HR, et cetera, like we do in IT traditionally.

Bill, it's Craig.

On the backlog question, your observation is right around the grow-over problem.

The way to think about the backlog on a go-forward basis: Again, we target having about 4 months of forward-looking backlog, and we generally feel pretty positive when we have that amount of backlog ready to go.

Also remember that we are booking and burning within a quarter.

So we may book something in January and actually start working it off in February and March.

Then it doesn't show up in the backlog number at the end of the quarter.

Or a reduced amount shows up in the backlog number at the end of the quarter, but we're actually working and generating revenue and profitability in the quarter.

So there's a combination of wanting to have that 4-month forward target, which we have.

And also, there is a fair amount of book and burn within a quarter as well.

And I would add one last thing to that, which is we don't really want 6 months of backlog because, when the backlog gets too big for our kind of business, clients then -- we're not working on their project, and they're unhappy because we have to delay the start of the project.

And so you don't want to have 2 months of backlog, but we also don't want to have 6 months.

So 4 months is -- and again for our type of consulting business, allows us to meet what -- a start time and a work pace that our clients are happy with.

Sometimes it gets a little higher because you want to have a little bit larger contracts, whatever; sometimes it's lower.

But that 4 months is what we're really targeting.

The next question is from the line of Jeff Silber at BMO Capital Markets.

I wanted to focus on the operating cash flow guidance.

I know you mentioned a number of issues in terms of CEB's first quarter doesn't count in this guidance and the fact that you're adding interest expense, but on a stand-alone Gartner basis, did you update?

Or is there any impact to operating cash flow guidance?

Yes, Jeff, it's Craig.

So in essence, if you actually could do a stand-alone Gartner cash flow, we would have been in the same range where we were.

It's really difficult to do that given the interest expense, the timing of it, acquisition and integration payments, et cetera, et cetera.

On a stand-alone basis, the way we thought about it is, as I mentioned, the prime driver of what we saw in Q1 was really the timing of our contract value growth, with more of it coming in March than in January and February.

And again, so collections that we had anticipated would have come in, in the first quarter are actually now coming in, in Q2, so we'll get the benefit of that in Q2.

And then if we have timing as we've anticipated with April, May and June, we'll get back on track.

So that's the way we thought about the stand-alone guidance, to the effect that we actually could do and model stand-alone Gartner cash flow guidance.

Okay, I understand that.

And I know, again, it's only been about a month since the acquisition, but are there any anecdotes you can share from clients in terms of how receptive they are post acquisition?

So yes.

I mean we've gotten a lot of input from clients, both that we've spoken to directly or have sent messages to our sales force or in written communications.

And the -- it has been much -- even more positive than I would have expected.

So we had a view that this would be very positive long term, but clients that had been buying CEB, we expected that they might have a little trepidation.

Are we -- is Gartner going to not deliver the same value?

For some reason they want CEB products.

And actually it's been quite the opposite.

The client reaction has been -- the typical client reaction has been they totally get why this.

They think it's a great thing to do and are looking forward to product.

So it's been -- we expected good reception over time.

It has been much more positive even than we had expected.

The next question is from the line of Joseph Foresi at Cantor Fitzgerald.

This is Mike Reid for Joe.

Could you -- did you talk about, sorry, we're a little late to the call, about sort of the deleveraging process post the acquisition?

Will that start immediately?

And kind of what that would look like.

Sure.

Mike, the way we are thinking about it and modeling it, and it's consistent with what we talked about when we announced the acquisition, is that we are targeting to get down to around 3x gross leverage over the next 24 to 36 months.

We feel, given the free cash flow generation capabilities of the combined entity, that we'll be able to do that.

We will be looking to do some modest deleveraging over the next few quarters, primarily -- or next 3 to 4 quarters, most notably taking out the bridge financing that's sitting on the balance sheet right now.

That will be modest, but I would expect the real delevering to start moving in earnest over the course of 2018 and through 2019.

And again, within 24 to 36 months, we're targeting to get down to 3x gross leverage.

Thank you.

I would now like to turn the call back to Mr. Gene Hall for closing remarks.

Great.

Thank you.

So as you heard today, we had a great, a very strong Q1, which we're very excited -- the core Gartner business.

In addition, we closed on CEB.

We've now owned the business for about a month.

That is going as planned.

And we're thrilled with the opportunities before us there.

So thanks for joining us today, and we look forward to updating you on our progress next quarter.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.