Gartner Inc (IT) — Q2 2015 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to our Q2 2015 earnings call. The technology revolution continues to drive demand for our services. We have the right strategy in place to capture the opportunity ahead of us and our business is doing great. We are where we expect to be at this point in the year and all of our underlying metrics are strong. As on prior calls, I will review our key operating metrics on an FX neutral basis, since that's the best way to understand the underlying health of our business. For the second quarter of 2015, contract value again grew 15% and total company revenues grew 12%. We've consistently delivered double-digit contract value growth in every region, every industry and every company size, and this quarter is no exception. The continued successful execution of our proven strategy was central to our success. We continue to get bigger, stronger, and faster every quarter, year after year. Across our three businesses, research, our largest and most profitable segment, accelerated FX neutral contract value growth for the sixth consecutive quarter to 15% and revenues grew 14% in the second quarter of 2015. Retention was strong. For the second quarter of 2015, client retention remained at our all-time high of 85%, which is up one point from the same quarter in 2014. Wallet retention also remained at an all-time high of 106%, which is up a point over Q2, 2014. For the second quarter, sales productivity was up 13% compared to Q2, 2014. We continue to invest in improved recruiting capabilities, training, and tools, and this in turn allows us to drive sales productivity improvement over time. Additionally, during Q2, 2015 sales headcount growth accelerated to 16%. Our consulting business was up 2% as a result of solid performances from our labor-based practice and our contract optimization practice. We continue to maintain a healthy four months of backlog. Our events business also had very strong performance during the second quarter. We held 26 events in Q2, and across those events, we hosted more than 17,000 attendees. For Q2 2015 on a same-event basis, revenue was up 19% year-over-year. Strategically, we also continue to deliver value back to our shareholders. For the first six months of the year, we repurchased $441 million of our shares. The primary reason our business is so successful is our people. At the heart of it, Gartner is a people business. We’re attracting the best talent in the industry in strategic locations around the world and getting them up to speed quickly. We recently gathered our global sales leadership team together. They were incredibly excited about the technology revolution. They see the huge opportunity we have before us and I know the value we deliver to our clients. The insights created by our industry-leading analysts are something we strive to deliver, and the overall client experience with Gartner has never been better. We’ll continue our great momentum as we progress through 2015. We have tremendous clients whether they're growing or facing economic challenges. We know how to be successful in any economic environment. Retention rates are at all-time highs, and we have double-digit growth in every region, every industry, and every company size. 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 will hand the call over to Craig.

Thank you, Gene, and good morning, everyone. As Gene just discussed, Gartner carried the strong start to 2015 into the second quarter, delivering 15% growth in contract value and maintaining all-time highs in retention metrics. Our performance in the first half of the year puts us right where we expect to be, and accordingly, we are reiterating our full-year guidance. Our financial highlights for the second quarter on an FX neutral basis include contract value growth of 15% for the second straight quarter. This is the sixth consecutive quarter of contract value growth improvement. Events revenue increased by 19% year-over-year on a same-event basis. Year-over-year consulting revenues increased by 2% and normalized EBITDA was up 12% versus the prior year. We continue to see robust demand for our services across all of our business segments. Our strong top-line performance and effective execution in capitalizing on the operating leverage in our business allowed us to once again expand our gross contribution margin. Our business continues to deliver double-digit growth, quarter after quarter, year after year. We are engaged in our client's most important initiatives and projects. In both existing and prospective accounts, we are finding new IT, supply chain, and digital opportunities for consistent revenue growth and strong financial performance over the near and long term. I will first provide a review of the business results for the second quarter and end with the details of our outlook for the third quarter and the remainder of 2015 before taking your questions. As a global business, it is worth noting the continued strength of the U.S. dollar once again impacted our reported results. Just about every currency we operate in is weaker against the U.S. dollar compared to last year. I will comment on the impact of foreign exchange in each business segment as I speak about them. Starting with our research business, research revenue grew 8% on an as-reported basis and 14% on an FX neutral basis in the second quarter. The gross contribution margin for research was 70%, up 1 point compared to the second quarter of 2014 and matching our gross contribution margin target for the research segment. All of our other research business metrics remain very strong. Contract value grew to $1.595 billion, a growth rate of 11% year-over-year on a reported basis and 15% on an FX neutral basis. Our growth in contract value was extremely broad-based with every region, every client size, and every industry segment growing at double-digit rates. The acceleration in our contract value growth was driven by improvements to both our retention rates and our new business. Client retention was 85%, a third quarter in a row of this historical high. This is up one point versus the second quarter last year. Wallet retention is also at an all-time high, ending at 106% in the quarter, a one-point uptick over last year's second quarter. This was the seventh consecutive quarter of sequential improvement in wallet retention. Wallet retention is higher than client retention due to a combination of increased spending by retained clients and the fact that we retain a higher percentage of our larger clients. As we have discussed in the past, our retention metrics are reported on a four-quarter rolling basis in order to eliminate any seasonality. Once again, new business significantly increased year-over-year, up 17% over last year's second quarter. The new business mix is consistent with prior quarters and remains balanced between sales to 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. We implemented a price increase during the fourth quarter of 2014, and we expect to do so again later this year. Our new business growth reflects our success in penetrating our vast market opportunity with both new and existing client enterprises. As a result, we ended the quarter with 9,956 client enterprises, up 9% over last year's second quarter. Our average spend per 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. Sales productivity continues to improve as well. We are up 13% on an FX neutral basis as compared to last year. As we have detailed in the past, we calculate sales productivity as the net value contract increase, what we call NCVI, for account executives. 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 $205 million in FX neutral terms. Using our Q2 2014 ending sales headcount of 1,787 as our beginning of period denominator yields NCVI per account executive of $115,000 on a rolling four-quarter basis. Again, that's a 13% improvement over the second quarter last year when the comparable was $101,000 at constant currency rates. To sum up, we delivered another strong quarter in our research business. Contract value growth again accelerated, achieving 15% year-over-year growth. We continue to see strong demand from clients, and our retention rates remain at all-time highs. Looking forward, we have a very strong pipeline. Our headcount growth has accelerated. The programs we have in place to drive productivity around recruiting, training, and tools are working. We anticipate continuing to improve sales productivity, which positively impacts contract value growth and research revenue growth over the long term. Turning now to Events. For the quarter, our event segment continues to deliver strong year-over-year revenue growth. On an FX neutral basis, events revenues increased 15% year-over-year. This was achieved despite three events being moved out of Q2 and into Q3. During the quarter, we held 26 events with over 17,107 attendees compared to 28 events with 16,594 attendees in the second quarter of 2014. In Q2, we launched a new event for digital marketing leaders, which exceeded our expectations. On a same-event and FX neutral basis, event revenues grew 19% with 16,554 attendees, a 7% increase compared to the second quarter of last year. For the first quarter, events revenue was up 14% over the prior year with 35 events versus 36 events in the same period last year. The gross contribution margin for events increased roughly 3 percentage points from the second quarter year ago to 53%. On a year-to-date basis, we improved gross contribution margin by approximately 3 points to 48%. Moving on to consulting, on a reported basis, revenues in consulting decreased 6% in the second quarter and were up 2% FX neutral. In the quarter on an FX neutral basis, our labor-based business grew by 1%. We also saw higher demands for contract optimization in the quarter than we had forecasted. As we've discussed in the past, our contract optimization has a higher degree of variability than the other parts of the consulting business. The underlying operating metrics of the consulting business are also strong. On the labor base side, billable headcount of 564 was up 12% from this point in 2014. Second quarter annualized revenue for billable headcount ended at $409,000 and utilization was 68%, a 2-point decline over the second quarter of last year. Across the entire consulting business, we continue to see strong demand for our services, and investing in managing partners is allowing us to capture that demand. We now have 100 managing partners, a 15% increase over the second quarter of 2014. Backlog, the key leading indicator of future revenue growth for our consulting business, ended the quarter at $97 million. Backlog was impacted by FX rates and still represents a healthy four months of forward coverage. With the current backlog and visibility we have into the pipeline, we believe that the consulting business remains well positioned for 2015. Moving down the income statement. SG&A increased by $90 million year-over-year during the second quarter, primarily driven by the growth in our sales force. As of June 30th, we had 270 direct quota-bearing sales associates, an increase of 283 or 16% from a year ago. For the full year, we expect to grow the sales force by 15% to 16%. In the second quarter, SG&A was higher as a percentage of revenues due to continued investments in our sales capacity and recruiting and training capabilities. Moving on to earnings, we delivered a solid quarter of earnings growth. Normalized EBITDA was $110 million in the second quarter, up 5% year-over-year on a reported basis and 12% on an FX neutral basis. GAAP diluted earnings per share was $0.61, up 5% year-over-year and a penny higher than the Q2 guidance range we provided on the last call. Our Q2 2015 GAAP diluted earnings per share include $0.04 in amortization and other costs associated with our acquisitions. Excluding acquisition-related charges, our EPS grew 2% to $0.65 in the second quarter. The FX impact on earnings and EPS was similar to the FX impact on normalized EBITDA. Turning now to cash, first half operating cash flow decreased by 2% to $149 million from the first half last year, largely due to a stronger U.S. dollar and higher incentive and tax payments. We continue to expect to achieve the guidance we set for the full year. During the second quarter, we continued to utilize our cash to return value back to shareholders through share repurchases. In the quarter, we had share repurchases of $117 million. Year to date, we have repurchased $441 million of our shares. Share repurchases and strategic acquisitions are primary uses of capital. We recently announced we purchased Barcelona-based Nubera e-business. This small acquisition occurred in July, so it does not impact Q2 results. Nubera operates a site called GetApp, which is complementary to the software advice and matches with one of our core value propositions, helping people in businesses of all sizes make the right technology decisions. We were able to use foreign cash to fund the purchase. The terms of the deal have not been disclosed, but it should be noted that this acquisition was substantially smaller than the Software Advice acquisition last year. We ended the quarter with a strong balance sheet and cash position despite the pace of share repurchases. As of June 30, we had gross debt of $715 million and cash of $358 million, with 94% of the cash balance located outside of the U.S. This now represents a net debt position of $357 million. Our current credit facility runs through 2019 and gives us ample liquidity to continue to grow our business and execute initiatives that drive shareholder value. As of June 30, we had $776 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. As of June 30, we had $1.2 billion available under our share repurchase authorization. Turning now to guidance, given our performance on a year-to-date basis and the fact that we have performed as expected, we are reiterating our revenue, normalized EBITDA, free cash flow, GAAP EPS, and normalized EPS guidance. All the details of our guidance are contained in the press release. Highlights of our guidance include FX neutral total revenue growth of 12% to 15%, FX neutral research revenue growth of 14% to 16%. FX neutral normalized EBITDA growth of 10% to 17%. Our GAAP EPS guidance also remains unchanged at $2.11 to $2.30 per share. 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 third quarter, we expect GAAP EPS to be in the range of $0.36 to $0.38 per share. Acquisition and integration charges for Q3 are expected to be approximately $0.04 per share. The third quarter is historically one of our smaller revenue and earnings quarters. This will be true again in 2015. So before taking your questions, let me summarize. We delivered another strong quarter in Q2. Demand for our services is robust, and as a result, our research contract value growth rate ended with 15%. Our key business metrics remain strong and in fact many, most notably: retention, contract value growth, and sales productivity continue to improve or are at or near all-time highs. We will continue to invest in our business both organically and through acquisitions and return capital to shareholders through our share repurchase program going forward. Finally, with 15% growth in contract value in the second quarter of 2015, we remain well-positioned to deliver another solid year of revenue and earnings growth for the full year 2015. Now I will turn the call back over to the operator, and we will be happy to take your questions.

Thank you. I haven't had time to analyze the numbers, but you've provided some insights about Q3. The implication is that you will need to see significant margin improvement in Q4 to align with your range. I understand that all your forward-looking metrics seem positive and consistent with your trends. Can you clarify if there are any changes in the timing of expenses this year that would make the year-over-year improvement particularly notable in Q4?

Thanks, Tim. Good morning. So there's really two things going on. One is Q4 is historically our largest quarter both from a revenue and from an earnings perspective, and 2015 Q4 will be no different than past Q4. I think what we are seeing is two things. One is we have got great strength as we head into the balance of the year and we do expect, you know, to deliver to our full-year guidance. The other thing is, as we have talked about in the past, the return to normal trends for our contract optimization business actually depressed margins in the first half of the year, and we expect it to return to historical trends in the second half. And so we get what looks like to be a bump from that, but it is actually just a return back to normal.

Okay, that's helpful. Then, the gross margin for the research business, you had been seeing declines for a couple of quarters there and a reverse to the positive side this quarter. Is there something that changed or something more positive happening underneath there?

You know, Tim, I think we managed to a long-term target of 70% gross contribution margin on the research business. We're in fact right at 70%. We are actually up a point year-over-year. I think what you see quarter-to-quarter is a little bit of noise. We are managing to that 70% level and we expect to deliver roughly in that range over the long term.

Okay. Thank you.

Good morning. On research productivity, I know it continues to increase or sales productivity now continues to increase year over year, and you are talking about it continuing to go higher still. But if I look at the last couple of quarters, I think it has declined slightly on a sequential basis. Obviously, we can only see the LTL metric. You have better visibility into quarterly trends. What gives you confidence in the increase and where are you at with rolling out some of the programs that were initially piloted more broadly?

Thanks, Jeff. I will take the first part of the question and Gene will take the second part. The way we look at sales productivity, we actually think the best way to look at progress, because we do it on a rolling four-quarter basis, is to look at it on a year-over-year basis. That eliminates the seasonality, and also, with Q3 and Q4 generally being our larger quarters, it is harder to move the needle in the smaller quarters like Q1 and Q2. And so what gives us confidence is for the last three quarters, we have seen really nice year-over-year improvements on that rolling four-quarter sales productivity.

It is Gene. The improvements you mentioned are stemming from the changes we are implementing to enhance our recruiting efforts. We have several programs in place aimed at ensuring we recruit individuals who are the perfect fit for Gartner, and these programs are consistently improving. We are committed to continuous progress. Additionally, we are focused on providing excellent training programs, which also continue to improve. We have upgraded our tools to enhance sales productivity as well. Part of our strategy includes ongoing improvement and innovation in these areas. Some initiatives that were previously in pilot are now being rolled out and showing great results. Other initiatives currently in pilot will be launched next year, further boosting sales productivity. As Craig indicated, it is the fundamental changes we are making that contribute to sales productivity, and due to these improvements, we anticipate that sales productivity will keep growing over time.

Is it too early to get a read into symposium registration in the major markets - US, Europe, etc., and especially how are CIO registrations trending if it is not too early?

It is not too early to say that the trend for that business is where we would expect it to be. We are seeing exactly the expected trend.

Good morning. Thanks for taking my questions. First off, I was wondering if you can talk a little bit about your Nubera acquisition. It seems you're starting to develop more of a presence here catering to smaller and mid-size businesses which is a bit of a shift from your traditional focus on larger enterprises. Now that it has been over a year with Software Advice, you have got two acquisitions in this space. Can you share any updated thoughts and views on the market opportunity here and the competitive landscape?

Thank you for the question, Anj. In our traditional business, we have successfully sold at least one seat in 110,000 targeted enterprises, and we believe there is over a $58 billion opportunity in this market, where we currently generate $1.6 billion. This indicates significant growth potential in our traditional sector, and we will continue to pursue it aggressively. However, this focus is on the 110,000 largest companies across the 95 countries where we operate. There are also tens of millions of small businesses that present excellent opportunities, although our traditional model may not be the best fit for them. Last year, we acquired Software Advice, which offers innovative ways to serve this market. Additionally, Nubera operates in a similar space with a slightly different approach that complements Software Advice, allowing us to better cater to those small businesses that are ideally suited for these models, while our traditional business is geared towards the larger enterprises.

Got it. Shifting gears a little bit to consulting, the headcount growth in consulting at 12% seems to be about the fastest growth we've seen in about five years. I'm wondering if you can talk about what you are seeing in your business that's driving that and when we may expect to see that translate to consulting revenue.

Sure, Anj. It is Craig. Two prime things driven the headcount growth. One is our continued growth in investments in managing partners, and so as you just heard we are now at 100 managing partners, which is up 15% year-over-year. The second thing, which is a little bit of an apples and oranges thing, is last year we acquired one of our sales agents and we had typically treated those consultants as subcontractors. When we did the acquisition, they came onto our books, and so actually a significant portion of our growth on a year-over-year basis relates to just that acquisition. The good news when you look at the consulting business going forward is given those investments in managing partners, the quality of our backlog and, also, given the way the pipeline looks, we have had some confidence in bringing in additional people to fulfill on that backlog. So we are very pleased with where we are from a consulting perspective, backlog, and revenue, and we expect to hit our full-year guidance in that business.

Okay. Great. Thank you.

This is Ryan filling in for Manav. Just a question on the M&A pipeline, given you mentioned a lot of your cash sits overseas, should we be thinking that most of the deals would be focused on the international space or are there still assets in the U.S. that you find attractive?

There are assets in the U.S. and the assets outside of the U.S. as well, and we are looking at both markets. So you shouldn't take it as we are focused on one or the other. We are focused on both. And there's great opportunities in both.

Fair enough. And one of your peers reported yesterday kind of discussed a lot of difficulty in hiring, and you are obviously talking about 15% to 16%. With the labor markets getting significantly better than they were a year ago, what gives you the confidence that you are finding the right people and could you talk about attrition a little bit?

Gartner is a leader in the technology industry, which is an exciting field to be part of. By any measure, we are an excellent workplace and enjoy a strong reputation in the market. Thanks to this outstanding reputation and our top-notch recruiting team, we face no challenges in hiring talent. In fact, as you may have noticed this quarter, our hiring for sales roles has increased. Moreover, we don’t just focus on the number of hires; we examine metrics that reflect how well the new hires fit with our organization. We view this as quality of hire. Not only has our growth rate picked up, but the forward-looking metrics concerning the fit of our new hires at this pace are the best we’ve ever seen, and this improvement continues over time. As Gartner is such a fantastic workplace within a thriving industry, and with our excellent recruiting efforts, we are successfully attracting top talent at an increasing rate. Regarding attrition, it remains within the normal range, consistent with historical levels.

Thanks, I just have a quick question for Craig. Are there still around 65 events planned for this year?

Yes. That is correct.

Thank you, good morning. In terms of research, are you noticing any new competitive threats? Are any established smaller companies launching new products, enhancing their quality, or possibly seeking to hire some of your associates? If so, what measures are you taking to address that? If not, what do you attribute this to, considering the significant market opportunity in front of you – one might expect more companies to be striving to compete for it?

We operate in a highly competitive market with numerous competitors and constant innovation. This has always been the case, and we remain proactive. We monitor our rivals and have actively participated in the market in the past. A fundamental aspect of our strategy focuses on continuous improvement and innovation. Each year, we launch new products. Our innovation is vital to our strategy, enabling us to continually enhance our offerings and become better, stronger, and faster in response to market demands. While the marketplace remains competitive with many innovators, we have consistently performed well due to our awareness and respect for our competitors. We innovate to maintain our lead and are dedicated to continuing this approach.

And consulting, now that you have hit the goal that you had previously laid out of 100 managing partners, should we expect the growth in that number of partners to slow? As the count has grown, are there any innovations in consulting worth calling out that you expect to drive new growth, or is it simply a matter of blocking and tackling with more bodies to drive business?

Andre, on the managing partner front, so we are very pleased that we have reached 100. That's actually not the long-term target for us. As our consulting business continues to grow, we will continue to bring on more managing partners to support and drive that business. And so you shouldn't think of 100 as the finish line by any stretch of the imagination. We will continue to grow the managing partner business to support and drive growth on a long-term basis.

And regarding the second part of your question, in our consulting business, we have the same strategy of continuous improvement and continuous innovation as we do across the entire business. And that business, you know, the service is based on what’s most important from our research organization. So, by knowing what's important to clients on things like digital best practices, the consultants can then apply that in the consulting space, and so you shouldn't think that it's just us adding more managing partners. Actually, our service lines are quite dynamic and innovate over time. And that's what is driving the success of that business.

Thank you.

Hi. I was wondering if you could talk about contract-value growth here for a second. You have obviously moved up to this 15% level which is very healthy, but what should we expect going forward? Is this something that you think you can continue to build on? If you do think you can continue to build on it, what are the chief drivers from this point forward?

It’s Gene. The two main factors that influence contract value are our sales productivity and the size of our sales team. As I’ve mentioned previously, we have various programs in place to enhance sales productivity, and we are continuously innovating on these initiatives. As Craig pointed out, we are observing improvements in sales productivity, which contributes to this growth. The second factor is the size of our sales force. As I noted earlier, we have accelerated the growth of our sales team as well. Both of these metrics suggest that we can continue to expand our sales force over time, leading to sustained growth in contract value, potentially at an increasing rate.

And Joe, if you go back to our Investor Day materials, it was actually flat. That lays out the way we think about it in simple terms, which is modest improvements in sales productivity coupled with 15% or 15 plus percent headcount growth, equates to contract value growth. And so that's why we have said long-term our target is 15 to 20% from a research contract value growth perspective. Again, it's that combination of growing sales headcount and continued improvement in sales productivity.

I guess what I was trying to focus on was it seems like you rolled out the new training aspect of the sales force to a number of different regions, and you got a nice little kick on contract-value growth. So, outside of the standard two metrics that you pointed out, I was wondering if there was anything else that you were currently working on that you thought might bring you to that next level? Is there anything else that you could point to?

There are many programs that I can't list all at once. Some have already been launched, others are in pilot stages, and some are still in development. They all fit into three main categories I mentioned earlier: enhanced recruiting, which improves our ability to identify individuals with the skills necessary for success and high productivity at Gartner. We're continuously getting better at this. The second aspect is training, and we've made significant enhancements to our training programs, which we've recently completed rolling out globally, so you might not have seen the full effects of that yet. Additionally, as a result of this rollout, we have further improvements in training planned. Lastly, we're also making ongoing enhancements to our tools. For example, we have a major new upgrade for sales tools designed specifically for new salespeople that is currently being introduced. We will keep moving forward with this. You can think of it as having versions two, three, four, and five; we don't stop at version two and consider it complete, as we aim to consistently enhance sales productivity over time.

Okay. Then the last question for me, obviously, we have started to max out on the margin profile and the research business. You have been taking on some acquisitions which would obviously create some level of dilution. Maybe you could talk about how you feel about the margin profile over a longer period of time. Is there still room for expansion, or might there just be a little bit? How do you balance that versus some of the acquisitions that you are looking at?

Thanks, Joe. We are focused on accelerating our growth rates in research, which is our most profitable business. It generates the best flow-through and significantly enhances gross contribution margins. Therefore, we are fully committed to improving and accelerating research contract value growth, which translates into research revenue growth and overall company revenue growth. As we push research contract value towards the 16%, 17%, and potentially 18% to 19% range, there is definitely margin potential and upside. However, we are very careful to ensure that our investments in the business, whether they involve new sales personnel, tools, recruitment, or training, truly support and drive sustainable long-term growth in research contract value.

Thanks, good morning. Craig, regarding the margin leverage question, you experienced four consecutive quarters of impressive productivity gains. I'm curious why that hasn't translated into improved margins. What seems to be the issue?

So there is no real disconnect, Peter. We have improved our sales productivity, and we are at roughly 15% contract value growth. As we have talked about in the past, the margin unlocks or there's more margin potential unlocking as we accelerate research contract value at an even greater rate; that's number one. Number two, there's always going to be a lag in terms of the productivity and research contract value actually converting into revenue and profit on a roll-forward basis. So I think it is the combination of those two things. When we think about the business again, we reiterated our guidance for the full year and there's a margin expectation built into that guidance. That’s what we are managing to and you know, that’s where we are on a year-to-date basis. But again, as I mentioned to Joe on the last question, we are really focused on how do we continue to accelerate sales productivity so that we can accelerate research contract value growth.

Would that suggest, Craig, that you would be not put words in your mouth here but more optimistic about the potential for some margin upside in 2016 as you carry forward these productivity gains you have seen in the past year?

So Peter, we’re obviously, we’re talking about 2015. We have talked about guidance for 2015. We are not at a point where we are discussing 2016 yet.

Got it. And then this is a little bit nitpicky, but you talked about contract-value growth accelerating 15%. And the number you reported last quarter was 15. So is it just some sort of rounding thing?

If you took it out an extra decimal point, there is acceleration.

Okay, great. Can you talk at all about how you're thinking about the pace of buyback activity? You have been, obviously, pretty aggressive here in the first half. Does it suggest you are accelerating the pace of buybacks versus what you laid out initially?

So, you know, on a year-to-date basis, we have repurchased $441 million of our shares this year. Last quarter when we announced that $1.2 billion authorization, what we said was we expect that to last us 2.5 to 3 years. That's essentially the guidance around share repurchases.

You are significantly ahead of schedule in completing the buybacks in two to three years. So to clarify, you are not altering your expectations regarding the pace, which might suggest a decrease in repurchase activity during the second half?

So, Peter, I want to clarify that we are maintaining our statement regarding the $1.2 billion authorization lasting about two and a half to three years. As always, business conditions may lead to variations in the pace, but we are reaffirming that the $1.2 billion authorization should generally sustain us for roughly two and a half to three years.

Okay. Thanks.

Good morning. This is Gunter Anthony in for Gary. Thinking beyond this year with the some gains in productivity and positive comments around hiring, pipeline and some of your improved training capabilities, is it safe to assume or to think that you might move to the higher end of your long-term 15% to 20% sales headcount hiring range?

It is Gene. We would clearly rather be at the high end of that range than at the low end of the range. We set the range because, as we talked about, the pace of hiring depends on the readiness we have of our first-level managers to absorb all the new people. And so we would much rather be at the high end of that range. And that's certainly our objective.

Okay, great. Just to clarify the 36 to 38 Q3 EPS guidance that's for GAAP, and there's a $0.04 acquisition charge. Is that the way to think about it?

That's accurate, yes.

Okay. And then lastly, just to follow up, the 14% constant currency research revenue growth, was there any contribution from M&A? If so, could you quantify that?

We had Software Advice for the full quarter last year and the full quarter this year. So the comp is actually accurate. So no benefit from M&A.

Great. Thanks so much.

I hate to revisit the margin issue, but when analyzing the third quarter, it appears we are likely facing another decline in margins compared to last year, despite your indication that the contract optimization issue should be less significant this quarter. Additionally, I understand that we have three more events this year that have shifted from Q2 to Q3. Can you confirm that? Are you anticipating margins to fall year-over-year again in the third quarter? If that’s the case, what is the reason?

So, Jeff, what I would tell you is things move around from quarter-to-quarter on a year-over-year basis. I would focus on the full year where, you know, if you take different ranges of the guidance, you can kind of see roughly flat margins on a full-year basis, is what our guidance roughly implies. Again, things are going to move around from quarter-to-quarter. The expectation for Q3, there are obviously more factors at play than just two or three events moving out of Q2 and into Q3. But I would focus in on that full-year margin number.

Okay, fair enough. If I could just go back to the second-quarter consulting results, you mentioned average annual revenue for billable headcount being down about 10% or so. I'm assuming FX has an impact, and contract optimization, I think would have an impact, as well. Was there anything else going on in there to cause that decline?

So, Jeff, the contract optimization wouldn't be baked into that number. FX will have a pretty significant impact on that number, as our consulting business is very global with a significant portion of the revenues being generated in currencies outside of the U.S. dollar. The other piece there is, there was a, you know, a 2-point dip in the utilization rate which we talked about, which would obviously also impact that annualized revenue for each billable headcount.

So would that number have been up on an FX neutral basis?

That number would have been slightly down on an FX neutral basis, largely driven by...

Good morning, everyone. So I have got a question for you on a couple of the acquisitions that you have done in terms of Software Advice and Nubera. One of these, I don't know if you want to call them self-service or definitely a lower labor base content model. As you look out, how large of a percentage of revenue do you think they could be? And ultimately what do you think that's going to do in terms of your potential to take the margins up above where they are now?

Okay. So these are small businesses. They're great businesses, but they're small businesses. So we don't see it having a big impact now. And Craig, do you want to talk about the future?

I mean, you know, we are in this business, and we have bought these businesses because we think they can be meaningful businesses, but as Gene just mentioned, they are still relatively small, nascent, if you will. But we will be focused on growing them. The key for us, as Gene, I think mentioned earlier, is we still have this enormous market opportunity on the organic business. So even if we grow these new businesses at an accelerated rate, it is our absolute expectation that the core business will also continue to grow at an accelerated rate, and so maybe they become a bigger piece, but of a larger pie over the long-term.

It would seem like the opportunity there would be to basically build a larger portfolio of these types of businesses over time. Is that part of the plan, or are you just going to keep them to a relatively small percentage of total?

So again, we think there's tens of millions of small businesses; we want to serve those businesses just like we do the larger businesses and really grow it at the rate that makes sense to service that marketplace.

Got it. All right. Thank you very much.

Thanks to all of you for joining us today. Let me summarize some of the key points of the call. So first, we are doing great as a company. We are where we expect to be at this point of the year and all of our underlying metrics are strong. We continue to invest and improve recruiting capability, training, and tools that drive sales productivity. Our FX neutral contract value growth accelerated modestly. We remain committed to enhancing shareholder value through investing in our business, strategic acquisitions, and share repurchases. We are getting better, stronger, and faster all the time. I expect to see robust growth for years to come. We look forward to updating you again at our next quarterly earnings call. Thank you.