Gartner Inc (IT) — Q1 2015 Earnings Call Transcript

Thank you and good morning, everyone. Welcome to our first earnings call for 2015. We are doing great as a company. We're where we expected to be at this point in the year and all of our underlying metrics are strong. I will review all of our operating metrics on an FX neutral basis. For the first quarter of 2015, contract value accelerated to 15% and total company revenues grew 12%. We achieved double-digit contract value growth in every region, every industry, and every company size. The continued successful execution of our proven strategy was central to our success. The momentum we saw in 2014 continued into 2015, and we continue to get bigger, stronger, and faster every year. Across our three businesses, Research, our largest and most profitable segment, grew both revenues and contract value 15% in the first quarter of 2015, continuing our 19-quarter trend of double-digit contract value growth. Retention was strong. For the first quarter of 2015, enterprise client retention was at 85%, up one point for the same quarter of 2014. Enterprise wallet retention was 106%, which is up two points over Q1 2014. Our retention metrics remain at all-time highs. Sales productivity remained strong. For Q1, sales productivity was up 12%, compared to Q1 2014. We continue to invest in opportunities that will drive further advancements in this area. Our labor-based consulting was up 5%, while our contract optimization returned to historic norms as expected, which was down compared to the exceptional year we had in 2014. Our Events business also delivered a strong first quarter. In Q1 2015, we drove a revenue increase of 11% year-over-year and attendee growth of 20%. As with other global companies, the strengthening U.S. dollar impacted our reported results, which Craig will detail in a moment. We continue to deliver value back to our shareholders through share repurchase. Year-to-date, we repurchased over $400 million in outstanding shares. And with the previous authorization fully exhausted, we are excited to announce a new share repurchase authorization of $1.2 billion. Another reason our business is so successful is our people. At the heart of it, Gartner is a people business. We are attracting the best talent in the industry, in strategic locations around the world, and getting them up to speed quickly. I recently spent a few days meeting with our top-performing sales associates from around the world, and they have never been more excited about the technology revolution and our opportunity. Our sales associates consistently report that our clients value our services whether they are growing or facing budget cuts. We continue to invest in our sales force to further capture our vast market opportunity and we know how to drive improvements in sales productivity. Our industry-leading analysts coupled with world-class products and services and strong sales capabilities have driven our consistently strong results. We ended 2014 in a great position, and we carried that momentum into 2015. I couldn't be more excited about Gartner. The insights we create, the advice we deliver, and the overall experience for our customers has never been better. We add tremendous value to our clients, whether they're growing or facing economic challenges, and we know how to be successful in any economic environment. Retention rates remain at all-time highs. We had double-digit growth in every region, every industry and every company size, and our operating metrics have never been better. We remain committed to enhancing shareholder value through investing in our business, strategic acquisitions, and share repurchases. We are better, stronger, and faster as a company, and I expect to see robust growth for years to come. With that, I would like to hand the call over to Craig.

Thank you, Gene and good morning everyone. Gartner's first quarter continued the growth in momentum we experienced over the course of 2014 with accelerating growth in contract value and ongoing improvements to our retention metrics. Our performance in Q1 puts us where we expected to be, and we are reiterating our previously issued full year guidance, which I will discuss in detail in a few minutes. Our Q1 performance highlights are as follows: FX neutral contract value growth once again accelerated, achieving 15% growth for the quarter, and retention rates matched our all-time highs. Our Events business increased revenues by 11% year-over-year on an FX neutral basis. As we expected, Consulting revenues were impacted by lower contract optimization revenues and declined by 3% on an FX neutral basis for the quarter. Demand for our services was robust across all of our business segments in the first quarter. Our business continues to deliver strong growth, quarter after quarter, year after year. We are engaged on our clients’ most important initiatives and projects. The consistency of our strong retention metrics demonstrates the value and importance our clients receive from our products and services. In both existing and prospect accounts, we are finding new IT, supply chain, and marketing professionals to sell to every day. We remain confident that we will continue to deliver consistent revenue growth and strong financial performance over the long term. And we continue to drive shareholder value through our share repurchase program. In the first quarter, we spent $324 million on share repurchases and as of earlier this week, we had spent well over $400 million year-to-date, fully utilizing our $800 million authorization. As a result, we announced in today's earnings release that our Board of Directors authorized a new $1.2 billion share repurchase program. I will now provide a review of our three business segments for the first quarter and will end with the details of our outlook for the second quarter and remainder of 2015 before taking your questions. But before doing so, I do want to note that the strengthening U.S. dollar has continued to impact our reported results. Just about every currency we operate in is weaker against the U.S. dollar when compared to last year. I will address the impact of foreign exchange in each business segment as I speak about them. Starting with our Research business. Research revenue grew 9% on an as-reported basis and 15% on an FX neutral basis in the first quarter. Acquisitions from 2014 added approximately two points to our organic growth rate in Q1. The contribution margin for Research was 70% in the first quarter, matching our gross contribution margin target for this segment. The other key Research business metrics also remained strong. Contract value grew to $1.562 billion, a growth rate of 11% year-over-year on a reported basis and 15% on an FX neutral basis. This reflects continued acceleration from the last several quarters when our FX neutral contract value growth ranged between 12% and 14%. As has been true in just about every quarter over the past several years, our growth in contract value in Q1 was extremely broad-based with every region, every client size and every industry segment growing at double-digit rates. As we discussed at Investor Day, we revalue our contract value each year based upon then prevailing FX rates. We do this to provide better transparency and FX neutral comparability for this important measure. Our December 2014 ending contract value at current year FX rates was $1.550 billion and our Q1 2014 CV was $1.363 billion. The acceleration in our contract value growth was driven by improvements to both our retention rates and our new business. Client retention ended the quarter at 85%, up a point versus the same quarter of last year and maintaining the historical high we achieved in Q4 2014. Wallet retention ended at 106% in the first quarter, a two-point uptick over last year's first quarter. This was the sixth consecutive quarter of sequential improvement in wallet retention. Wallet retention is higher than client retention due to increased spending by retained clients and the fact that we retain a higher percentage of our larger clients. To eliminate seasonality, our retention metrics are reported on a rolling four-quarter basis. New business again increased significantly year-over-year, up 20% over last year's first quarter. The new business mix is consistent with prior quarters and remained balanced between sales and new clients and sales of additional services and upgrades to existing clients. Our contract value growth also continues to benefit from our discipline of annual price increases and no discounting. We have increased our prices by 3% to 6% every year since 2005 and we will do it again in 2015. We also continue to see strong volume growth in our new business. This reflects our success in continuing to grow the business by penetrating our vast market opportunity with both new and existing client enterprises. As a result, we ended the quarter with 9,837 client enterprises, up 8% over last year's first quarter. Our average spend for enterprise continues to increase on an FX neutral basis, again reflecting our ability to grow our contract value by driving growth in both new and existing enterprises. We have also continued to see improvements to our sales productivity. Our year-over-year comparisons have been impacted by foreign exchange, so we will provide you with the FX neutral results for comparability as well. As we detailed in the past, we calculate sales productivity as the net contract value increase, what we call NCVI per account executive. We look at it on a rolling four-quarter basis to eliminate seasonality and we use opening sales headcount as the period denominator. Over the last 12 months, we grew our contract value by $199 million in FX neutral terms. Using our Q1 2014 ending sales headcount of 1,698 as our beginning period denominator, yields NCVI per AE of $117,000 on a rolling four-quarter basis, a 12% improvement over first quarter last year, when the comparable figure was $104,000. Our Q1 2015 productivity is roughly flat to Q4 2014 on an FX neutral basis. To sum up, we delivered another strong quarter in our research business. Contract value growth accelerated to 15% as we expected. We continue to see strong demand from clients, our retention rates remain at all-time highs and we anticipate continued acceleration in productivity, contract value, and revenue growth over the long term. Turning now to Events, the first quarter is a historically light quarter for our Events business and the FX impact to this segment was magnified by the fact that eight of the nine Events held in the quarter occurred outside of the U.S. and generated revenues in currencies impacted by the strengthened U.S. dollar. On an FX neutral basis, Events revenues increased 11% year-over-year, and the operating metrics remained very strong. During the quarter, we held nine events with 4,065 attendees compared to eight events with 3,394 attendees in the first quarter of 2014. On a same event and FX neutral basis, Events revenues grew 9% with 3,805 attendees, a 12% increase compared to first quarter of last year. The gross contribution margin for Events of 18% for Q1 decreased roughly three percentage points from the first quarter a year ago, again reflecting the FX impact of having eight of the nine events outside of the U.S. and the fact that it is a very small events quarter. The underlying metrics of our Events business remain strong and the business is well-positioned to deliver another year of FX neutral double-digit revenue growth in 2015. Moving on to Consulting; on a reported basis, revenues in Consulting decreased 9% in the first quarter as we expected. This result was driven by a combination of FX impact and the return to historical norms in our contract optimization business. In the quarter, on an FX neutral basis, our labor-based business grew by 5%, while total consulting revenues decreased 3%, reflecting the impact of the return to more normal trending in our contract optimization business. The underlying operating metrics of our Consulting business are also very strong. On the labor-based side, billable headcount of 547 was up 7% from the first quarter of 2014. First quarter utilization was 67%, a three-point improvement over first quarter of last year. And annualized revenue per billable headcount ended the quarter at $404,000, a 1% FX neutral improvement over Q1 of last year. As we have discussed in the past, our contract optimization practice has more variability than the other parts of our Consulting business. In last year's first quarter, we saw exceptionally high performance from this part of the consulting business. In Q1 2015, we returned to our historical norms which impacted the year-over-year comparison metrics on both revenues and gross contribution for Consulting. Across the entire Consulting business, we continue to see strong demand for our services and our strategy of investing in managing partners is allowing us to capture that demand. We now have 96 managing partners, an increase of 14% from a year ago. Backlog, the key leading indicator of future revenue growth for our Consulting business, ended the quarter at $101 million. Backlog was also impacted by FX rates and still represents a healthy four months of coverage. With the current backlog and visibility we have into the pipeline, we believe the Consulting business remains well-positioned for 2015. Moving down the income statement, SG&A increased by $25 million year-over-year during the first quarter, primarily driven by the growth in our sales force. As of March 31, we had 1,933 quota-bearing sales associates, an increase of 235 or 14% from a year ago. For the full year, we expect to grow the sales force by roughly 15%. In the first quarter, SG&A was higher as a percent of revenues due to Q1 being one of our seasonally smaller revenue quarters as well as continued investments in our sales capacity, recruiting, and training capabilities. Moving on to earnings, normalized EBITDA was $81 million in the first quarter, a 5% decrease year-over-year on a reported basis. Normalized EBITDA, excluding the impact of FX increased 3% in the quarter. It is important to note that our Q1 EBITDA was affected by two primary items, both of which we included in our guidance. First, the roughly eight-point impact from a stronger U.S. dollar, and second, as I just mentioned, Q1 of 2014 was an exceptionally strong quarter for our contract optimization business. As expected, that business returned to more historical norms in the current quarter. Absent those two items, EBITDA growth would have been approximately 9% in the first quarter. GAAP diluted earnings per share were $0.32, within the guidance range we provided to you in February. Our Q1 2015 GAAP diluted earnings per share includes $0.05 in amortization and other costs associated with our acquisitions. Excluding acquisition-related charges, our normalized EPS was $0.37 in the first quarter. As you would expect, FX and the anticipated return to historical norms in our contract optimization business impacted our EPS results as well. Our first quarter EPS figures were impacted by foreign exchange in two primary ways, first the impact on EBITDA that I just mentioned and second the impact on our tax rate for the quarter. As we have discussed in the past, our tax rate is sensitive to the mix of geographic earnings; with the stronger U.S. dollar, the proportional mix of geographic earnings from higher tax jurisdictions caused the effective tax rate to increase. Our tax rate for Q1 is within the guidance range we discussed last quarter. Turning now to cash, operating cash flow decreased to $6 million during the first three months of 2015 versus $16 million in the same period a year ago largely due to a stronger U.S. dollar and higher incentive and tax payments in the first quarter. The first quarter is seasonally the lightest of the year for operating cash flow and we still expect to achieve the guidance we set for the full year. During the first quarter, we continued to utilize our cash to return value back to shareholders through share repurchases. In the quarter, we repurchased over 4.1 million shares and we used approximately $324 million of cash for share repurchases. Through this week, we have spent well over $400 million, fully utilizing our $800 million authorization. We are pleased to announce a newly approved $1.2 billion share repurchase program which will allow us to continue to deliver value back to our shareholders in a consistent and effective way. We ended the quarter with a strong balance sheet and cash position, despite the more aggressive pace of share repurchases. As of March 31, we had gross debt of $665 million and cash of $282 million, with 96% of our cash balance located outside of the U.S. Importantly, this now represents a net debt position of $383 million. As you know, we put an expanded credit facility in place in December of 2014. This runs through 2019 and gives us ample liquidity to continue to grow our business and execute initiatives that drive shareholder value. As of March 31, we had $832 million available on our revolver. We continue to look for attractive acquisition opportunities as a potential use of cash. We also continue to believe that repurchasing our shares remains a compelling use of our capital. Turning now to the guidance, as you saw in our press release, our guidance remains unchanged from February. Q1 is a lighter quarter for us, but our performance was as expected, which allows us to reiterate our previously issued guidance. Our 2015 guidance still expects total revenues of $2.150 billion to $2.205 billion. This is FX neutral growth of 12% to 15%. Projected revenues by segment on an as-reported basis can be found in our press release. On an FX neutral basis, our guidance remains as follows: Research revenue to be up 14% to 16% versus the prior year; Consulting revenue to be flat to up 6% over 2014. This guidance again assumes that the contract optimization practice within Consulting returns to its historical levels of revenue, which is negatively impacting the Consulting guidance. We expect the labor-based portion of Consulting to grow in the mid-single digits; and Events revenue to be up 11% to 18% over 2014. We still expect EBITDA growth of 10% to 17% over 2014, on an FX neutral basis. Our GAAP EPS guidance remains $2.11 to $2.30 per share. While we now anticipate a lower share count from our accelerated repurchase activity in Q1 and Q2, we also expect higher interest and other costs. While the accelerated pace of repurchases, including incremental interest expense, benefits our 2015 outlook, our projected EPS remains within our original guidance range, which is why we have reiterated our EPS guidance as well. As a reminder, GAAP EPS includes $0.16 to $0.17 per share of acquisition-related charges for the full year of 2015. Our guidance for EPS excluding acquisition and integration charges is to be between $2.27 and $2.46 per share, FX neutral growth of approximately 7% to 16% over 2014. For the upcoming second quarter, we expect GAAP EPS of $0.56 to $0.60, including $0.04 per share of acquisition and integration charges. Our Q2 guidance is impacted by foreign exchange rates, a higher projected tax rate, and the return to trend for our contract optimization business. Since we gave our original guidance in early February, the U.S. dollar has continued to strengthen. Our current guidance takes into account the most recent foreign exchange rates. So before taking your questions, let me summarize. We delivered strong results for the seasonally light first quarter of 2015. Demand for our services is robust and as a result, our research contract value growth rate accelerated again, up to the 15%. Our key business metrics remain strong and in fact many, most notably retention, CV growth, and sales productivity continued to improve or are at or near all-time highs, and we continue to actively explore strategic alternatives for deploying our cash. Going forward, we will continue to invest in our business organically and through acquisitions and return capital to shareholders through our newly authorized $1.2 billion share repurchase program. Finally, with double-digit growth in contract value in the first quarter of 2015, we remain well positioned to deliver another strong year of revenue and earnings growth. Now I will turn the call back over to the operator and we'll be happy to take your questions.

Yes, thank you. I guess, first on sales force productivity. I think your original guidance had assumed kind of flat to, I think you said marginally up. You seem to be off obviously to a good start in Q1. Can you update, I guess, how it's trending relative to your annual expectations and is that still how you're thinking about the year? And maybe dive into I guess, where you saw productivity improve or what the driver was of that?

Sure, thanks Tim. On the productivity front, we are up 12% on an FX neutral basis versus Q1 of last year. We are essentially flat to where we ended the year, ended 2014, and so it's consistent with what we laid out at Investor Day in terms of an expectation of roughly flat productivity. That being said, as you can imagine, we are working very, very hard to make sure that we can continue to improve that productivity on a go-forward basis.

You have been aggressive with the buyback over the last few years, but you definitely increased the pace to a much greater extent earlier this year. Can you explain what changed that led to such a significant increase in your buyback efforts?

Tim, we've had a strategy that we talked about where acquisitions are the first priority, and buybacks the second priority for us from a capital deployment perspective. We mentioned that our target for 2015 was to extinguish the share repurchase authorization or the remaining share repurchase authorization that we had heading into the year. Based on everything we were looking at, based on our cash flow generation, based on our balance sheet flexibility, and capacity under the revolver, we determined that it would be a good thing to accelerate over the first quarter and the half of the year. So, we have essentially hit our full-year target as of earlier this week.

Do you have a - so, I guess how should we think about the rest of the year then? What's a - do you have a new full year target I guess, that we should have in mind?

So the way we are thinking about it, Tim, is, with the new $1.2 billion authorization we believe that will last us between 2.5 years to three years. And as always, we will look at the market in terms of what's out there from an acquisition perspective or other ways for us to deploy capital. But all other things being equal, we believe that we will use the $1.2 billion over the next 2.5 years to three years.

Okay. Thank you.

Yeah, good morning. So I know sometimes us analysts think that sales force headcount growth is just a cell in a model and it is much more complicated than that in terms of a bottom-up build. But it sounds like pretty much every KPI is favorable right now and sales force headcount growth, I think it was 14%. You are expecting 15% for the year which would still be towards the lower end of the targeted long-term range, so I guess Gene, what's the current thought on that to growing it even faster?

Hi, Jeff. So the - as you pointed out, our sales force - the target range for our sales force growth is 15% to 20%. We determine where we are in that range basically by looking bottoms up, which sales managers have the capacity in their particular territories and their experience level to handle that growth. And we are very confident we're going to be in that range of 15% to 20% this year.

Well, let me just - so, but you are going to be towards the lower end of the range, and I think your retention among your sales managers is good and I think that you have training programs that you have been working on. So I guess at what point do you think that maybe you drift towards the midpoint or higher of the range? What's the current bottleneck on the management training or capacity or recruitment or whatever it is?

So like everything in our business, we aim to have continual improvement in it and acceleration. The things that determine that the level of sales force is obviously recruiting capacity, we think we're in good shape there, the amount of experience and tenure of our management team which, as you said, we have very little turnover among our managers. And it's just doing an assessment individually - the individual territories kind of where that adds up. Again, as we look at that and the development of our manager, we see that accelerating over time.

Got it, and then Craig, just for modeling purposes, within consulting on a quarterly basis, which quarters are the tough comps for contract optimization? Is it Q1 and Q3, which were the quarters that you had a stronger overall consulting growth in or any other quarters to call out for a tough CO Comp?

Yes. It's actually Q1 and Q2 Jeff are the two tough quarters from a comparability perspective. Q3 and Q4 our expectation is, will be roughly in line with what we did last year.

Okay, and then the Q2 EPS guidance that you gave 0.56 to 0.60, just to verify, is that a GAAP number or is that an adjusted EPS number?

My apologies for not being clear. That is a GAAP number which includes roughly $0.04 of acquisition integration charges.

That's helpful. Thank you, guys.

Thank you.

Hi. Thanks for taking my questions. I guess first off the growth rate in the consulting billable headcount, it seems to be about the highest we have seen in nearly two years. Could you just help us think about that, are you seeing greater demand for your consulting services and if so, when can we expect this to show up in your consulting revenue growth?

Hey Anj. How are you? So yeah, the growth in billable headcount was a little higher than we’ve typically seen. Some of that is driven by the managing partner growth which we’ve talked about as a strategic imperative for us. That was up 14% year-over-year. What's allowed us to go a little bit faster on the billable headcount growth is the combination of the quality of the backlog and the quality of the forward-looking pipeline. We generally only hire when we have visibility and we've had better visibility in that business, which largely stems from the benefits we're getting from the managing partner investment. And so as we get better visibility, higher quality backlog, et cetera, rolling forward allows us to invest in growing the billable headcount with more confidence.

Got it. That's helpful. Also you guys used to give out a client organizations number, is there a reason why you didn't provide that this quarter? And if you could just help us understand how much of your growth is coming from new clients versus existing client penetration, is it still roughly 50/50? If you could just update us on that?

Sure. So on your first question, on the client organization number. As we talked about last year, we believe that number of client enterprises is actually a better way and more transparent way to provide what's actually happening with our client count, where a company equals an enterprise, whereas in client organizations it was buying centers, where a company could have multiple buying centers. And so, over the last year we’ve provided both metrics, but we said on a go-forward basis, we are going to focus just on the enterprise number which again we believe is a better number. And then also our retention metrics are now tied to that enterprise number as well. Your second question again? I am sorry, Anj.

New business versus existing.

If you could just help us...

Right the new business? Yeah. So the way to think about the new business mix is, it is historically been this way and it looked this way in the quarter as well. It comes - it falls about a third, a third, a third. So, a third of it comes from upgrades and new services to existing clients. A third comes from further penetration within existing clients and a third comes from net new logos.

Hi. I was wondering, could you give us some idea of how, I know we went through sort of the sales force training and you set up a facility, but how much has that been extended into other regions. Do you have a sense of what percentage of new employees are now going through the sales force training program?

Yeah Joe, it's a great question. It's Gene. The - that sales force training program that we talked about is important in driving sales force productivity. And to your point, we've now rolled up, to where all of our new sales people globally are getting that new training program. And we're quite optimistic.

Great. So having said, I mean just on that question, how long do you think it takes, I mean what - how long do you think it takes to reach sort is of having a full turnover on the sales force so everyone has gone through the program at least once? Is that going to be a 12 month to 18 month period?

So we don't take our experienced sales people back through that program. And our sales force turnover is actually pretty good. We don't lose sales people. We lose sales people really, at a very competitive rate. And so because we are only taking new sales people through it, it will take some time before everybody has gone through that. And we have separate things we do with our existing sales people to improve their productivity. So this program itself is oriented for when we hire new people, making sure they get up to speed as quickly as possible and that they actually wind up with higher average productivity over the course of their career.

All right, okay. And then it sound like new sales is a big contributor to the contract value growth. Can we get an idea of what those new sales are? What is the consistency of those new sales? In other words, are those more geared toward some of the newer technologies that are out there and are those clients any different than your standard clients?

So the new enterprises that we are selling really aren't different from our existing enterprises. As we’ve talked about at Investor Day, we see about 110,000 enterprises that we can target, that we do target actually, and of those, only about 10,000 are clients today. And so our mission is every year to add a few hundred more of those enterprises. And as Craig pointed out, that's a portion of our growth. We also then have another portion of our growth which is selling more toward existing enterprises and we are very successful at that as well.

Yeah, so it is really based on last year, it's really a Q1 and Q2 phenomenon. So, we'll feel the impact of the return to historical norms most notably in Q1 and Q2. And again, if you think about it, it is most notable in Q1 and then a little bit more in Q2 and then basically Q3 and Q4 look like it's looked the last several years. And so as we think about what the results look like for this quarter as well as our guidance for Q2, there's an impact related to the return to historical norms Q3/Q4 no impact really.

Thank you.

Thank you, good morning gentlemen. The first question is around the M&A pipeline, just in terms of can you update us, what are you seeing there? I mean, clearly you’ve been a lot more aggressive with the buybacks which is great. But is that a sign that there really aren't a lot of deals on the horizon? And can you just remind us what the acquisition contribution for the quarter was as well, please?

Hey Manav. So, we have at any given time we track 100 or more companies. We will continue to do that. Our acquisition pipeline looks very robust, and it is very consistent with what we have seen in the past and that's our number one choice for deployment of capital. And we feel like that the repurchase - if you look at our cash flow, plus our balance sheet that we feel like we can do all the acquisitions we need and still do the repurchases that you have seen and the repurchases that we’ll do going forward. So you shouldn't take that, that we see a less acquisition pipeline because of our aggressive purchases earlier this year.

And then on your - the second part of your question, Manav. So as we said, acquisitions had a two-point benefit on the Research line and it would be about a one-point benefit on the total revenue line.

Okay. And then just on the back to the productivity, I guess you pointed out that it was flat sequentially, so - but you are still obviously gunning for much better than flat productivity by the end of the year. Can you just help us understand the sensitivity around, if that improves obviously, better than flat, how margins should be impacted?

Yeah, sure. As we talked about at Investor Day, flat productivity got us to roughly 14% close to 15% CV growth, modest improvements in overall average productivity can accelerate our CV growth a little bit more than that. From a margin perspective, you really see the margin flow through in the subsequent year. And so we wouldn't expect margin benefit in 2015 from continued acceleration in sales productivity. You would expect to see it in 2016 and beyond.

Okay, and then in 2016, let's say, you have the same initiatives, does that offset that sort of margin improvement with the new sales investment, like I guess will we see it if you continue this pace, is I guess what I was getting at?

Yeah, no, it’s a good question. The power of our model and the leverage involved in our model says that if we can get research contract value growing 16%, 17% per year, that being the largest portion of our revenue and our highest margin business. The power of the economics of the flow through on that will allow margin to flow through and we'll be able to make investments as well to continue to drive the business.

Okay, all right. Thanks a lot, guys.

Good morning, guys. Can you hear me okay?

We can hear you fine, yes.

Okay, just - one thing - and just if I am looking at this correctly, did client enterprises decline sequentially, and if so, is there anything going on there? It wouldn't seem to jive with your retention number, but I am just curious if there's anything there?

Yeah, so if you look back historically, you will see often there is a modest decline in Q1. Again, it’s generally our lightest new business quarter and the decline is not troubling at all and the thing I would focus in on is the 8% year-over-year enterprise growth.

Great, and then I guess when we think about your client retention and then you talked about it being at all-time highs, but you continue to improve it. Is there a, I guess a theoretical ceiling here? I mean obviously everyone would love 100%, but that's not realistic. But is there a ceiling you might be approaching from a client enterprise retention standpoint?

It's Gene. So we think we can get our retention several points higher than it is today. As we look as we analyze kind of why we have turnover, we have programs that are designed to address those. So we think we have plenty of headroom still left on retention and we are working that. We expect retention to continue to improve over time.

Great. Thanks for that.

Hi, thanks for taking my questions. I guess first off the growth rate in the consulting billable headcount, it seems to be about the highest we have seen in nearly two years. Could you just help us think about that, are you seeing greater demand for your consulting services and if so, when can we expect this to show up in your consulting revenue growth?

Hey Anj. How are you? So yeah, the growth in billable headcount was a little higher than we’ve typically seen. Some of that is driven by the managing partner growth which we’ve talked about as a strategic imperative for us. That was up 14% year-over-year. What's allowed us to go a little bit faster on the billable headcount growth is the combination of the quality of the backlog and the quality of the forward-looking pipeline. We generally only hire when we have visibility and we've had better visibility in that business, which largely stems from the benefits we're getting from the managing partner investment. And so as we get better visibility, higher quality backlog, et cetera, rolling forward allows us to invest in growing the billable headcount with more confidence.

Got it. That's helpful. Also you guys used to give out a client organizations number, is there a reason why you didn't provide that this quarter? And if you could just help us understand how much of your growth is coming from new clients versus existing client penetration, is it still roughly 50/50? If you could just update us on that?

Sure. So on your first question, on the client organization number. As we talked about last year, we believe that number of client enterprises is actually a better way and more transparent way to provide what's actually happening with our client count, where a company equals an enterprise, whereas in client organizations it was buying centers, where a company could have multiple buying centers. And so, over the last year we’ve provided both metrics, but we said on a go-forward basis, we are going to focus just on the enterprise number which again we believe is a better number. And then also our retention metrics are now tied to that enterprise number as well. Your second question again? I am sorry, Anj.

New business versus existing.

If you could just help us...

Right the new business? Yeah. So the way to think about the new business mix is, it is historically been this way and it looked this way in the quarter as well. It comes - it falls about a third, a third, a third. So, a third of it comes from upgrades and new services to existing clients. A third comes from further penetration within existing clients and a third comes from net new logos.

Hi. I was wondering, could you give us some idea of how, I know we went through sort of the sales force training and you set up a facility, but how much has that been extended into other regions. Do you have a sense of what percentage of new employees are now going through the sales force training program?

Yeah Joe, it's a great question. It's Gene. The - that sales force training program that we talked about is important in driving sales force productivity. And to your point, we've now rolled up, to where all of our new sales people globally are getting that new training program. And we're quite optimistic.

Great. So having said, I mean just on that question, how long do you think it takes, I mean what - how long do you think it takes to reach sort is of having a full turnover on the sales force so everyone has gone through the program at least once? Is that going to be a 12 month to 18 month period?

So we don't take our experienced sales people back through that program. And our sales force turnover is actually pretty good. We don't lose sales people. We lose sales people really, at a very competitive rate. And so because we are only taking new sales people through it, it will take some time before everybody has gone through that. And we have separate things we do with our existing sales people to improve their productivity. So this program itself is oriented for when we hire new people, making sure they get up to speed as quickly as possible and that they actually wind up with higher average productivity over the course of their career.

All right, okay. And then it sound like new sales is a big contributor to the contract value growth. Can we get an idea of what those new sales are? What is the consistency of those new sales? In other words, are those more geared toward some of the newer technologies that are out there and are those clients any different than your standard clients?

So the new enterprises that we are selling really aren't different from our existing enterprises. As we’ve talked about at Investor Day, we see about 110,000 enterprises that we can target, that we do target actually, and of those, only about 10,000 are clients today. And so our mission is every year to add a few hundred more of those enterprises. And as Craig pointed out, that's a portion of our growth. We also then have another portion of our growth which is selling more toward existing enterprises and we are very successful at that as well.

Yeah, so it is really based on last year, it's really a Q1 and Q2 phenomenon. So, we'll feel the impact of the return to historical norms most notably in Q1 and Q2. And again, if you think about it, it is most notable in Q1 and then a little bit more in Q2 and then basically Q3 and Q4 look like it's looked the last several years. And so as we think about what the results look like for this quarter as well as our guidance for Q2, there's an impact related to the return to historical norms Q3/Q4 no impact really.

Thank you.

Thank you, good morning gentlemen. The first question is around the M&A pipeline, just in terms of can you update us, what are you seeing there? I mean, clearly you’ve been a lot more aggressive with the buybacks which is great. But is that a sign that there really aren't a lot of deals in the horizon? And can you just remind us what the acquisition contribution for the quarter was as well, please?

Hey Manav. So, we have, at any given time we track 100 or more companies. We will continue to do that. Our acquisition pipeline looks very robust, and it is very consistent with what we have seen in the past and that's our number one choice for deployment of capital. And we feel like that the repurchase - if you look at our cash flow, plus our balance sheet that we feel like we can do all the acquisitions we need and still do the repurchases that you have seen and the repurchases that we’ll do going forward. So you shouldn't take that, that we see a less acquisition pipeline because of our aggressive purchases earlier this year.

And then on your - the second part of your question, Manav. So as we said, acquisitions had a two-point benefit on the Research line and it would be about a one-point benefit on the total revenue line.

Okay. And then just on the back to the productivity, I guess you pointed out that it was flat sequentially, so - but you are still obviously gunning for much better than flat productivity by the end of the year. Can you just help us understand the sensitivity around, if that improves obviously, better than flat, how margins should be impacted?

Yeah, sure. As we talked about at Investor Day, flat productivity got us to roughly 14% close to 15% CV growth, modest improvements in overall average productivity can accelerate our CV growth a little bit more than that. From a margin perspective, you really see the margin flow through in the subsequent year. And so we wouldn't expect margin benefit in 2015 from continued acceleration in sales productivity. You would expect to see it in 2016 and beyond.

Okay, and then in 2016, let's say, you have the same initiatives, does that offset that sort of margin improvement with the new sales investment, like I guess will we see it if you continue this pace, is I guess what I was getting at?

Yeah, no, it’s a good question. The power of our model and the leverage involved in our model says that if we can get research contract value growing 16%, 17% per year, that being the largest portion of our revenue and our highest margin business. The power of the economics of the flow through on that will allow margin to flow through and we'll be able to make investments as well to continue to drive the business.

Okay, all right. Thanks a lot, guys.

Good morning, guys. Can you hear me okay?

We can hear you fine, yes.

Okay, just - one thing - and just if I am looking at this correctly, did client enterprises decline sequentially, and if so, is there anything going on there? It wouldn't seem to jive with your retention number, but I am just curious if there's anything there?

Yeah, so if you look back historically, you will see often there is a modest decline in Q1. Again, it’s generally our lightest new business quarter and the decline is not troubling at all and the thing I would focus in on is the 8% year-over-year enterprise growth.

Great, and then I guess when we think about your client retention and then you talked about it being at all-time highs, but you continue to improve it. Is there a, I guess a theoretical ceiling here? I mean obviously everyone would love 100%, but that's not realistic. But is there a ceiling you might be approaching from a client enterprise retention standpoint?

It's Gene. So we think we can get our retention several points higher than it is today. As we look as we analyze kind of why we have turnover, we have programs that are designed to address those. So we think we have plenty of headroom still left on retention and we are working that. We expect retention to continue to improve over time.

Great. Thanks for that.

Hi, thanks for taking my questions. I guess first off the growth rate in the consulting billable headcount, it seems to be about the highest we have seen in nearly two years. Could you just help us think about that, are you seeing greater demand for your consulting services and if so, when can we expect this to show up in your consulting revenue growth?

Hey Anj. How are you? So yeah, the growth in billable headcount was a little higher than we’ve typically seen. Some of that is driven by the managing partner growth which we’ve talked about as a strategic imperative for us. That was up 14% year-over-year. What's allowed us to go a little bit faster on the billable headcount growth is the combination of the quality of the backlog and the quality of the forward-looking pipeline. We generally only hire when we have visibility and we've had better visibility in that business, which largely stems from the benefits we're getting from the managing partner investment. And so as we get better visibility, higher quality backlog, rolling forward allows us to invest in growing the billable headcount with more confidence.

Got it. That's helpful. Also you guys used to give out a client organizations number, is there a reason why you didn't provide that this quarter? And if you could just help us understand how much of your growth is coming from new clients versus existing client penetration, is it still roughly 50/50? If you could just update us on that?

Sure. So on your first question, on the client organization number. As we talked about last year, we believe that number of client enterprises is actually a better way and more transparent way to provide what's actually happening with our client count, where a company equals an enterprise, whereas in client organizations it was buying centers, where a company could have multiple buying centers. And so, over the last year we’ve provided both metrics, but we said on a go-forward basis, we are going to focus just on the enterprise number which again we believe is a better number. And then also our retention metrics are now tied to that enterprise number as well. Your second question again? I am sorry, Anj.

New business versus existing.

If you could just help us...

Right the new business? Yeah. So the way to think about the new business mix is, it is historically been this way and it looked this way in the quarter as well. It comes - it falls about a third, a third, a third. So, a third of it comes from upgrades and new services to existing clients. A third comes from further penetration within existing clients and a third comes from net new logos.

Hi. I was wondering, could you give us some idea of how, I know we went through sort of the sales force training and you set up a facility, but how much has that been extended into other regions. Do you have a sense of what percentage of new employees are now going through the sales force training program?

Yeah Joe, it's a great question. It's Gene. The - that sales force training program that we talked about is important in driving sales force productivity. And to your point, we've now rolled up, to where all of our new sales people globally are getting that new training program. And we're quite optimistic.

Great. So having said, I mean just on that question, how long do you think it takes, I mean what - how long do you think it takes to reach sort is of having a full turnover on the sales force so everyone has gone through the program at least once? Is that going to be a 12 month to 18 month period?

So we don't take our experienced sales people back through that program. And our sales force turnover is actually pretty good. We don't lose sales people. We lose sales people really, at a very competitive rate. And so because we are only taking new sales people through it, it will take some time before everybody has gone through that. And we have separate things we do with our existing sales people to improve their productivity. So this program itself is oriented for when we hire new people, making sure they get up to speed as quickly as possible and that they actually wind up with higher average productivity over the course of their career.

All right, okay. And then it sound like new sales is a big contributor to the contract value growth. Can we get an idea of what those new sales are? What is the consistency of those new sales? In other words, are those more geared toward some of the newer technologies that are out there and are those clients any different than your standard clients?

So the new enterprises that we are selling really aren't different from our existing enterprises. As we’ve talked about at Investor Day, we see about 110,000 enterprises that we can target, that we do target actually, and of those, only about 10,000 are clients today. And so our mission is every year to add a few hundred more of those enterprises. And as Craig pointed out, that's a portion of our growth. We also then have another portion of our growth which is selling more toward existing enterprises and we are very successful at that as well.

Yeah, so it is really based on last year, it's really a Q1 and Q2 phenomenon. So, we'll feel the impact of the return to historical norms most notably in Q1 and Q2. And again, if you think about it, it is most notable in Q1 and then a little bit more in Q2 and then basically Q3 and Q4 look like it's looked the last several years. And so as we think about what the results look like for this quarter as well as our guidance for Q2, there's an impact related to the return to historical norms Q3/Q4 no impact really.

Thank you.

Good morning, everyone. So one question for you on the sales force hiring side, just whether you're seeing improving labor markets as helping or neutral and then if you would have any comments in terms of any geographies that stand out in terms of where the hiring is getting a little bit easier or a little tougher?

So it's Gene. So the labor markets are clearly improving around the world, we see that. However, Gartner is an incredibly attractive place to work for anybody who wants to be in a technology world. We are a premier employer, very attractive and so even as the markets around the world have improved, it doesn't affect our ability to hire because of our attraction as a company et cetera. That hasn't really affected us at all. As you’ll hear that sort of by geography the same thing is true around the world, that our ability to recruit is about the same as it has been anytime over the last three years or four years.

So you're perpetually oversubscribed basically?

Well, we obviously work hard to find the right people but the - again the improving level is not the issue because we are such an attractive place to be.

Got it. And then one question just on acceleration and the contract value on a constant currency basis, now that you've hit the 15% level, is - would it be fair for us to think about that level as being a sustainable level? Is it fair to expect that to continue to be at that level consistently, or should we expect some ups and downs around that? And then if you are going to be able to hit it sustainably what gives you comfort on that?

It's Gene. So, we believe we can grow our sales force 15% to 20% a year. So even at the low end of that range, we grow sales force at 15% a year over time, that means our CV - our contract value is going to grow 15% a year. Again, we think we can do better than that in the sales force, we think we will. And then secondly, we also think that we can simultaneously improve sales productivity modestly each year. As Craig pointed on Investor Day, if you grow - even if you had flat growth in the sales force being only 15% a year, and just improved productivity that accelerates our CV growth.

Excellent. Thank you very much.

Well, thank you all for joining us today. To summarize the key points of today's call, first, we are doing great as a company. We are where we expected to be at this point of the year and all of our underlying metrics are strong. Our contract value growth rate accelerated and rolling fourth-quarter sales productivity is up 12% for Q1 compared to Q1 2014. We remain committed to enhancing shareholder value through investment in our business, strategic acquisitions, and share repurchases. And we're getting better, stronger, faster all the time. I expect to see robust growth for years to come. We look forward to updating you again on our next quarterly earnings call. Thank you for joining us today.