Gartner Inc (IT) — Q4 2018 Earnings Call Transcript

Thank you, Heather, and good morning, everyone. We appreciate you joining us today for Gartner's fourth quarter 2018 earnings call. With me today are Gene Hall, Chief Executive Officer; and Craig Safian, Chief Financial Officer. This call will include a discussion of fourth quarter 2018 financial results and our outlook for 2019, as disclosed in today's press release. In addition to today's press release, we have provided an earnings supplement for investors and analysts, in which we provided a detailed review of our financials and business metrics. In the earnings supplement, we included a full non-GAAP P&L, excluding divested operations. This table combines Heritage Gartner and Heritage CEB, and removes the operating results of the divestitures starting January 1, 2017. For 2018, the table provides the results as if we had used the net proceeds from the divestitures to repay debt on December 31st, 2017. This gives you a view down to adjusted EPS for 2018 that reflects how we are thinking about the business as we move into 2019. Please note our Events segment has been renamed Conferences to align with the Business Operations. Also in our discussion of Global Business Sales or GBS, we will refer to the GXL products. These are the products for business leaders across the enterprise. Gartner for Marketing Leaders is GML; Gartner for Finance Leaders is GFL and so on. We've introduced six of these products over the past five quarters and we'll introduce more in the future. In aggregate, we will refer to these products for business leaders as GXL. We've posted the press release and the earnings supplement on our website investor.gartner.com. Following comments by Gene and Craig, we will open up the call for your questions. We ask that you limit your questions to one and follow up. On the call, unless stated otherwise, all references to revenue and contribution margin are for adjusted revenue, excluding divested operations and adjusted contribution margin, excluding divested operations, which exclude the deferred revenue purchase accounting adjustments and the recently divested businesses. All references to EBITDA are for adjusted EBITDA, excluding divested operations with the adjustments as described in our earnings release and excluding the divested operations. All cash flow numbers unless stated otherwise are as reported with no adjustments related to the divested operations. All growth rates in Gene's comments are FX neutral, unless stated otherwise. Reconciliations for all non-GAAP numbers we use are available in the Investor Relations section of the gartner.com website. Finally, all contract values and associated growth rates we discuss are based on 2018 foreign exchange rates. In the earnings supplement, the abbreviation ex D.O. indicates that the metric excludes divested operations. As set forth in more detail in today's earnings release, certain statements made on this call may constitute forward-looking statements. Forward-looking statements can vary materially from actual results and are subject to a number of risks and uncertainties, including those contained in the company's 2017 annual report on Form 10-K and quarterly reports on Form 10-Q as well as in other filings with the SEC. I encourage all of you to review the risk factors listed in these documents. Now, I will turn the call over to Gartner's Chief Executive Officer, Gene Hall.

Good morning, and thanks for joining us. 2018 was a strong year. We continue to have world-class operational execution and innovation, while making progress on our core strategy of establishing leading market positions in every role across the enterprise. We continue to invest in our business to drive sustained double-digit growth. Across the business, we grew sales forces and reduced open sales positions to record lows. We made substantial investments in GBS products, service, and sales to accelerate future growth. We also made substantial investments in critical support functions, such as recruiting to ensure that we have the talent to support sustained double-digit growth. We divested several non-core businesses to focus on our enormous market opportunity. We helped 15,600 enterprise clients in 100 countries around the world with their mission-critical priorities. We provided great jobs to 15,000 associates around the world, and delivered market-leading returns for our shareholders. Few organizations had this level of global impact. In 2018, total revenues were up 12%, fueled by strong performances from our Research, Conferences, and Consulting businesses. Research delivered another strong year of double-digit growth, up 12% over 2017. One factor fueling our growth is the consistent application of the Gartner Formula. The Gartner Formula for growth is our playbook for driving sustained double-digit growth. It consists of indispensable insights, exceptional talent, sales excellence, and enabling infrastructure. For all of these, we drive globally consistent execution of best practices and continuous improvement and innovation. We continue to apply the Gartner Formula to the Global Technology Sales, or GTS, and Global Business Sales, or GBS. GTS source leaders and their teams within IT and represents 80% of our total contract value. In GTS, our performance continued to accelerate in 2018. Contract value growth increased to 14% and sales productivity improved. We again delivered double-digit growth in every region across every size company and in virtually every industry. This acceleration is driven by three primary factors: consistent application of the Gartner Formula for growth, continued growth in our sales force, and a reduction in the proportion of open territories. During 2018 we have the best level of execution yet of these programs. GBS serves leaders and their teams outside of IT. This includes supply chain and marketing, which we've addressed for several years as well as other major enterprise roles including HR, finance, legal, sales, and more. Each of these roles has the same needs for our services as IT. For example, HR leaders recognized that future effectiveness depends on talent analytics. We help HR leaders build their talent and analytics capability and use it to drive successful business decisions and outcomes. Talent analytics capabilities are dynamic and constantly changing. So HR leaders are continually having to adapt. This is an example of why our HR offering is as essential for HR leaders as our IT offering is for IT leaders. Over time, our HR business has the potential to have contract value of over $1 billion. Finance, sales, marketing, and supply chain could be equally large. This gives GBS incredible growth potential. Our objective in 2018 was to build the initial foundation for sustained double-digit growth to realize this incredible opportunity. We're implementing the Gartner Formula for growth across GBS. In 2018, we put special emphasis on three key areas: products, processes, and sales force growth. As David said, we refer to our products for business leaders as GXL. GXL products delivered sustained growth compared to legacy products. They provide greater value to clients because they are tailored to the clients’ individual needs. This in turn results in higher prices for users and stronger retention. Beyond pricing retention, GXL products provide exponentially more growth opportunities because we can sell these high-value products throughout our clients’ organizations. We've had GXL products in our supply chain business, and they've been very successful. We've also GXL products in our marketing business and they’ve been very successful. Beginning late in 2017 and continuing into 2018, we added the GXL products for the largest GBS roles, including HR, finance, sales, and legal. Over time, we'll add more GXL products for other roles. Another essential element for sustained growth is best practice training, tools, and processes. Over the past decade, we've developed sales training, tools, and processes, or TTS, that are among the best in the world. During 2018, we began equipping the GBS sales force with these best practices. The learning to use these best practices isn’t easy. It's a significant change from the previously way of doing things and can take talented, experienced salespeople years to become proficient. For example, in GTS, we hired talented, highly experienced salespeople. These new hires take three years to achieve full productivity. In the second year, they sell almost double their first year. And productivity continues to improve again in year three. One way to think about GBS is that virtually all the salespeople and their managers win their first year with Gartner in 2018. Like experienced hires, they need to learn the Gartner best practices. It will take them some time to become fully proficient. With the other products and the Gartner Formula, we grew sales capacity 23% during 2018, which sets us up for long-term growth in 2018 and beyond. As a growth company, we were aggressive in building this foundation to provide long-term double-digit growth. We transitioned from legacy to higher value GXL products as fast as practical. We piloted the new GXL products in late 2017. The new products were rolled out, and salespeople were trained during the first half of 2018. Salespeople continued to sell the legacy products during the first half to close out their existing pipeline. Beginning at mid-year, salespeople began selling only GXL products. As a result, sales of legacy products were robust in the first half but stopped in the second half. As expected, the GBS sales force rapidly went up the learning curve and sales of GXL products accelerated throughout 2018. Our sales force sold more than $100 million of GXL new business, almost tripled the $37 million from 2017. And almost half of these sales were from products that weren’t fully launched until mid-year. However, the transition from legacy to GXL had an impact on our 2018 contract value growth. GXL has accelerated but not fast enough during 2018 to outpace the decline in legacy sales. As our sales force continues to gain experience selling GXL products in 2019, we expect to achieve double-digit contract value growth by the end of the year. As I noted earlier, we haven’t yet introduced GXL products to replace all legacy products. So we have salespeople who don’t have GXL products to sell. These salespeople will continue selling legacy products until we introduce the GXL replacement. As a result, we’ll still have some legacy product new business until that point. So in GBS, we entered 2019 with a 23% larger sales force. That sales force is more tenured and it’s further up the learning and productivity curve. We have a higher mix of GXL products, which have greater retention. And we’ll have a full year of our retention programs. This is our path to double-digit growth. Beyond Research, our Conference and Consulting businesses performed very well in 2018. Gartner Conferences delivered incredible insights to our attendees while building brand awareness and making them profit. The newly begun Conference segment had its best year yet. Investments we made to conference sales organizations in the Events business were critical in driving these strong results. Revenue was up more than 19% and surpassed $400 million because of the tremendous value our clients get from our conferences. Our Events business accelerated to more than 20% growth for the year compared to no growth prior to the acquisition. The forward-looking metrics for our Conferences segment remain strong going into 2019. Gartner Consulting extends the value of our Research, providing in-depth expertise on longer-term engagements. Our Consulting business grew 7% during 2018. Moving on a strong base, our labor-based business and our contract optimization business both drove improvements over 2017. We ended the year with our backlog up 12% year-over-year, which sets us up for a great 2019. SG&A grew 16%. G&A grew 9%, slower than the overall business. This included investments in growing our recruiting capability to meet our long-term talent needs. As a growth company, we made significant investments in sales to drive future growth. We invested in three areas. First, our largest investment was in expanding the GTS sales force and reducing the number of open territories. This was a key contributor to GTS contract value growth and acceleration. We also invested in expanding the global conferences sales force and reducing the number of open territories. This was a major factor in Conferences having a record-breaking year. And finally, we invested in expanding the GBS sales force, growing headcount about 22%. This provides a great foundation for future growth. In summary, 2018 was a strong year. We continue to have world-class operational execution and innovation while making progress on our core strategy of establishing market-leading positions in every role across the enterprise. We made investments across the business to support sustained double-digit growth and leading indicators are strong. We assist our clients around the world with their mission-critical priorities, provided great jobs for our associates, and delivered another year of market-leading returns for our shareholders. And now here is Craig Safian, our CFO, to give you an in-depth view of our financials.

Thank you, Gene, and good morning, everyone. 2018 was an exciting year for Gartner. It was the first full year of providing insight and advice to clients across all enterprise functions giving us a much broader addressable market and the ability to provide even more value to our clients. On an FX-neutral basis, our year-over-year financial performance for 2018 included: total contract value growth of 11%; total company revenue growth of 12%; adjusted EBITDA growth of 9%; diluted adjusted earnings per share of $3.63 and free cash flow of $468 million. Demand for our services remains robust around the world. And in the fourth quarter, we delivered excellent financial results across our three operating segments. As our 2019 outlook demonstrates, we expect to deliver double-digit FX-neutral revenue and EBITDA growth with strong cash flow generation. Fourth quarter revenue was $1.1 billion, up 10% on a reported basis, and 12% on an FX-neutral basis. We also delivered a contribution margin of 63%, up about 24 basis points from the prior year, EBITDA of $211 million, up 6% year-over-year, and 6% FX-neutral, and adjusted EPS was $1.20. Free cash flow in the quarter was $7 million modestly ahead of expectations as some major CapEx projects slipped into 2019. Our Research business had another excellent quarter. Research revenue grew 9% in the fourth quarter and 11% on an FX-neutral basis. Total contract value was $3.2 billion at December 31st, a growth of 11.4% versus the prior year. We always report contract value growth in FX-neutral terms. For the full year of 2018, Research revenues increased by 13% on a reported basis and 12% on an FX-neutral basis. The growth contribution margin for Research was 69.1%, consistent with prior years. On Page 9 of the earnings supplement, you will see details of GTS performance over time. In the fourth quarter, GTS contract value increased 14% versus the prior year, accelerating its growth rate both sequentially and year-over-year. GTS had contract value of $2.6 billion at year-end. Client retentions for GTS remained strong at 83%. Wallet retention for GTS was 105% for the quarter, up 70 basis points year-over-year and the highest we've reported for GTS. These retention rates reflect clients spending more with us each and every year. GTS new business grew 14% versus the fourth quarter of last year. We continue to see a mix of new business across new clients, sales of additional services, and upgrades through existing clients. We ended the fourth quarter with 12,998 GTS clients, up 6% compared to Q4 of 2017. The average contract value for enterprise also continues to grow. They now stand at $197,000 for enterprise and GTS, up 8%. This continued and consistent increase in average spend reflects our ability to drive CV growth through new and existing enterprises. Average spend for enterprise has increased consistently over the past several years, but our average enterprise still only has five to six weeks remaining, meaning we still have plenty of incremental penetration opportunities within our existing clients. The investments we have made over the past two years to improve sales force productivity continue to pay off with an increase again in this quarter. For GTS, the year-over-year net contract value increase, or NCVI, divided by the beginning period quota-bearing headcount was $118,000 per salesperson, up 7% versus the fourth quarter of last year. This is the fifth consecutive quarter of year-over-year productivity improvement. The combination of headcount growth and productivity improvements led to GTS accelerating its growth rate over the course of 2018. Turning to GBS. As you heard from Gene, our focus in 2018 was on building the foundation for future sustained double-digit growth in GBS CV. All of our GBS metrics reflected the discontinuation of sales of the largest legacy products. As Gene described, these discontinuations have been based on a purposeful strategy that allows our sales teams to focus on GXL products going forward. GBS contract value finished the year at $607 million, up 1% versus 2017. As Gene also discussed, the future of GBS is our GXL products. Looking at total contract value from the GXL products, we drove an increase of 79% year-over-year, from $109 million to $195 million, from 2017 to 2018. Just in the fourth quarter, in HR and Finance together, we generated $30 million of new CV. On Page 10 of our earnings supplement, you will see the usual summary of GBS metrics. GBS client retention was 82% for the quarter. GBS wallet retention was 95%, down from 100% last year. New business declined by 11% in the quarter versus the prior year. We ended the fourth quarter with 5,451 GBS clients, down about 4% versus the prior year period. For GBS, productivity declined significantly. The year-over-year net contract value increase, or NCVI, provided by the beginning period quota-bearing headcount was $10,000. The average contract value per enterprise at GBS increased about 5% to $111,000. Those were the headline results. However, they have secured what is really happening as we make the transition to GXL products. To drill down, we provided some more details than usual this quarter, and you’ll find the data that will reference included in the earnings supplement. On Page 11, you’ll see the bridge from 2016 GBS CV to 2018 GBS CV. Shown in grey and on the bottom left of the page, you’ll see that new business for the legacy products declined by $81 million in 2018, as we made the strategic decision to discontinue new sales of those products in favor of the new GXL products. The chart on the top left depicts the most important development, growth of new business and the new GXL products. We sold over $100 million worth of GXL new business over the course of 2018, an increase of 176%. And that number obviously ramped over the course of the year as our frontline sellers started making the transition to selling GXL products. The drivers of future GBS growth are the same as they are for GTS: headcount and sales productivity. Improvements and increases in both lead to revenue, profits, and cash flow. In 2018, we grew our sales force 23%, which is an addition to growing 16% during 2017. As this larger sales force continues gaining experience, they will drive accelerated growth. Productivity in turn increases when new business improves, retention improves, or both. While we typically combine new business and attrition in our reporting, we're breaking them out this quarter to help you see what's going on below the headline numbers. New business productivity for GBS overall, a complete measure of how much the GBS sales team is selling is calculated as trailing 12-month new business provided by opening period headcount. This is comparable to the methodology we use for our longstanding productivity measure. On this measure, we ended 2018 at more than $260,000 of new business for sales person. New business productivity for GXL continues to ramp as the team has had more time with the newest products since we started introducing them late in 2017. In 2018, which was only a partial year for most of the practice areas, the team sold more than $100 million of GXL new business. That compares to $37 million last year. Almost half of 2018's new sales are from products that didn't pilot or fully launch until late 2017. The one other thing to note is that legacy new business will not be going to zero. While we have launched GXL products in all the primary functional areas, there are still leadership councils that will continue to have new business until we launch the replacement GXL products. As we shift more of the CV to the GXL products, we expect high retention rates. While legacy GBS CV attrition is close to 30%, GXL attrition is around 20%, almost at GTS levels. Exiting 2018 on a blended basis, that's about 27% attrition. There is still opportunity to reduce attrition, and we've expanded our service teams because we know great engagement means better retention. The underlying drivers of the engagement are the individualized content and service that an enterprise license does not facilitate as naturally. As the attrition rate moves from just under 30% towards the GXL rate or even lower, we will see growth accelerating. With the success that the GBS team is having with the new GXL products, their high retention levels, the programs we have in place to drive incremental improvements in retention, and the stability in the organization and strategy as we enter 2019, we continue to manage towards double-digit CV growth by the end of this year. On Page 12 of the supplement, we outlined a high-level model to help you think about the path to double-digit CV growth the way we do. You can see the sensitivity to improvements in new business productivity and retention. We achieve double-digit growth through a combination of more salespeople already onboard and with more tenure, a better product mix for retention, broader retention programs in place, and a compelling set of new products. If we don't make any improvements in new business productivity or attrition, GBS CV will grow about 8% in 2019. Of course, we are focused on continuous improvement and innovation. For every 100 basis points improvement in attrition, we will see a 100 basis points improvement in growth. For every $7,500 improvement in new business productivity, we will see a 100-basis-point improvement in growth. That's only a 3% improvement. Looking back at the Research business in 2018, GTS had an outstanding year with increases in wallet retention, sales productivity, and accelerating contract value. We are seeing returns on the increased spending we did in 2017 and 2018. For GBS, while CV decelerated in the quarter, we have built the foundations for the future. The market validated the product's value propositions and sales teams have made tremendous progress adapting to the new products and our go-to-market approach. In Conferences, revenues increased by 16% year-on-year in Q4 to $196 million. FX-neutral growth was 18%. We had 15 destination conferences in the fourth quarter consistent with last year. On a same conference FX-neutral basis, revenues were up 18% with an 11% increase in same conference attendees. For the full year 2018, revenue increased by 19% on both reported and FX-neutral basis. Gross contribution margin for the year was 50%, an increase of about 190 basis points from 2017. As you know, we made a number of investments in support of our conference business in 2017. Those investments paid off as Conferences had its best year ever. Fourth quarter Consulting revenue increased by 12% to $96 million. FX-neutral growth was about 14%. Labor-based revenues were $74 million. In our labor-based business, revenues increased 3% versus Q4 of last year or 4% on an FX-neutral basis. On the Labor-based side global headcount of 738 was up 8%, and we had 141 managing partners at the end of Q4, up about 3% versus the prior year. Utilization of 61% was affected by Europe where we had lower levels of backlog. The backlog position in Europe improved as we exited 2018. Overall, backlog ended the quarter at $111 million, up 12% year-over-year on an FX-neutral basis. Our bookings performance remained strong and our 2019 pipeline is encouraging. The contract optimization business was up over 60% versus the prior year quarter. For the full year, Consulting revenue increased by 8%, or 7% FX-neutral, and its gross contribution of 29%, was up 40 basis points compared to 2017. As I mentioned earlier, the overall gross margins for the whole business improved by approximately 24 basis points in Q4 and over 60 basis points for the full year of 2018. SG&A increased 12% year-over-year in the fourth quarter or 14% on an FX-neutral basis. We continue to grow sales capacity and the enabling infrastructure to support our strategy of delivering sustained double-digit growth over the long term. The enabling infrastructure includes investments in human resources functions like recruiting and real estate to support the increased number of associates around the world. Our sales force continues to be our largest investment. And at the end of the fourth quarter, we had 3,894 quota-bearing associates in Research. This includes 3,100 in GTS and 790 in GBS, for growth of 15% and 23% respectively. For the full year, SG&A grew 16% on a reported basis and 15% FX-neutral. G&A, which represents about one-third of the SG&A, grew about 9%, as we continue to see modest operating leverage in G&A, leverage that we can reinvest in other areas to support and drive growth. We've made a number of investments across our selling teams over the course of 2017 and 2018. And our results in 2018 show some of the returns we've been getting for those investments. In GTS, we've made investments to increase territories, reduce open roles, and drive improvements in sales productivity. In 2018, we saw improvements in productivity and the growth rate of CV accelerated. The incremental CV we gained from these investments has value beyond just one year. Similarly, in our Conferences business, we invested in increasing territories, reducing open territories, and management and selling infrastructure for the advent of business. These investments supported almost a doubling of our growth rate in 2018. And we are expecting the same sorts of returns from our investments in GBS. We're investing in growing the sales force, improving service, and launching new products, which we believe will translate to double-digit contract value growth in 2019 and even faster than that in the future. Adjusted EBITDA for the fourth quarter was $211 million, up 6% on both reported and FX-neutral basis. Depreciation was about flat with last year, and amortization took an expected step down from $53 million to $34 million as some of the acquisition intangibles reached their 18-month life. Integration expenses were down year-over-year as we have moved past the biggest part of the integration work. Interest expense in the quarter was $25 million, down from $36 million in the fourth quarter of 2017. The lower interest expense resulted from paying down debt over the past year. The Q4 adjusted tax rate, which we used for the calculation of adjusted net income, was 30.6% for the quarter. This was higher than expected largely due to audit settlements and increased non-deductible expenses. The tax rate for the items due to adjusted net income was 45.3% a quarter. Adjusted EPS in Q4 was $1.20. For the full year, adjusted EPS was $3.63, excluding divested operations. In Q4, operating cash flow was $45 million compared to $22 million last year. The increase in operating cash flow was driven by solid operating results, lower interest expense, and improvements in working capital. Q4, 2018 CapEx was $62 million and Q4 cash acquisition and integration payments and other non-recurring items were approximately $24 million, about $18 million of CapEx we have planned for the fourth quarter slipped into 2019. Free cash flow for the full year was $468 million, which is up more than 36% versus the prior year on a combined basis. 2018 was a very strong free cash flow year for us, but there are a few items, all of which we've discussed in the past need to be aware of. First, the 2018 results include a roughly $40 million catch-up on collections, which should have occurred during 2017. The reported figure also included the free cash flows of a number of divested operations related to the periods prior to closing. We estimate roughly $19 million of an impact there. Taking those adjustments into account, our ongoing 2018 free cash flow would have been $409 million. 2018 was a strong free cash flow year. Our December 31st debt balance was about $2.3 billion. Our debt is now 95% fixed rate. Our gross leverage on a reported basis is up 3.2 times. Adjusted EBITDA for the divestitures, our gross leverage ratio is now about 3.4x EBITDA. We – some of our capacity can take advantage of the decline in the stock price in the fourth quarter, repurchasing of $156 million of our stock. Our capital allocation strategy remains the same. We deploy our free cash flow and balance sheet flexibility on strategic value-enhancing M&A, and returning capital to our shareholders through our buyback programs. We have over $850 million remaining on our share repurchase authorization. Turning to the outlook for 2019. Having completed the divestitures in the fourth quarter, we again provided you with a set of non-GAAP financials we use to evaluate the business. We expect to share this incremental information on an ongoing basis. Before jumping into the details, I wanted to give you the context of how we approached our 2019 guidance and how we are operationalizing what Gene and I have discussed this morning. First, our 2018 ending contract value and corresponding growth rate drives the bulk of our 2019 Research revenues. As CV grows over the course of the year it does positively impact revenue, but growth in Q3 and Q4 has a more muted impact on the current year revenue line. I’d also note that there is a slight headwind to our research and total revenue growth rates caused by product retirements. Second, advance bookings and consulting backlog are the metrics that drive our Conference and Consulting revenue guidance. As mentioned earlier, we had very strong advanced bookings in our Conference business, and our Consulting backlog is up 12% year-over-year during 2019. Third, we continue to invest to support and drive the future growth of our business. After a surge in investing, 2019 will be closer to our typical run rate. Our 2019 plan costs for 11% territory growth in GTS, while maintaining our record low level of open territories, and roughly 14% to 16% territory growth for GBS. We have decided to moderate the growth in GBS, so that we can focus on getting all of our sales teams further up the learning curve with fewer distractions. The territory growth in GBS is predominantly in areas where we have already achieved strong productivity. We continue to invest in our enabling infrastructure functions, but we again plan to grow them at a slower rate than revenue in 2019. And lastly, our guidance reflects recent FX rates. The dollar strengthened over the course of 2018, and FX was causing roughly two-point negative impacts to our projected 2019 growth rates across revenues, adjusted EBITDA, adjusted EPS, and free cash flows. The highlights of our full year 2019 guidance are as follows. We expect adjusted revenues of approximately $4.2 billion to $4.3 billion, those FX-neutral growth of 10% to 13%. In addition to the non-core businesses that we divested over the course of 2018, there were some additional products from the CEB acquisition that we viewed as non-core. We have retired these, which is impacting our 2019 total revenue growth by about 75 basis points. We expect adjusted EBITDA of $720 million to $765 million, FX-neutral growth of 7% to 13%. We expect an adjusted tax rate of around 25.5% for 2019. Please note that if you are adding back from GAAP net income, the rate for the tax effect on the add-backs was about 23.5%. We expect 2019 adjusted EPS of between $3.82 and $4.19 per share, FX-neutral growth of approximately 7% to 15%. For 2019, we expect free cash flow of $455 million to $485 million. That is projected FX-neutral growth of 11% to 19% off of our normalized 2018 free cash flow. All the details of our guidance are included on our Investor Relations site. It is also important to note that we have revalued our contract value at current year FX rates. Our 2018 ending contract value at 2019 FX rates is $2.5 billion for GTS and $594 million for GBS. Details are included in the appendix of the earnings supplement. Lastly on guidance, I'd like to provide some additional information to allow for an understanding of the seasonality and other factors that will impact our revenue and earnings on a quarterly basis. For 2019, we expect our quarterly revenue phasing to be roughly consistent with adjusted revenue phasing from 2018. Q1 will be a little lighter than 2018 as a percent of the full year, impacted by a stronger than normal Q1, 2018. This is also the quarter with the most pronounced impact of product retirements. For the first quarter of 2019, we expect adjusted EPS of between $0.50 and $0.54. Q1 EPS is impacted by slightly lower proportion of revenues, higher depreciation, and foreign exchange. Our strong 2018 financial and operating performance across all of our operating segments continued in the fourth quarter. Notably our strong GTS contract value growth of 14% accelerated over the course of the year and sales of our new GXL products and GBS continue to scale. Our Conferences and Consulting businesses both had strong years. Free cash flow improved significantly in the year. We have divested all the identified non-core assets and used those proceeds to rapidly delever, reducing our debt balance by $1 billion in 2018. And we've resumed our share repurchase program buying over $260 million of our stock in 2018. The trends going into 2019 are strong and our teams are executing the plan. We are applying the Gartner growth formula across the combined business to drive sustained long-term double-digit growth to revenues, EBITDA, and free cash flow. With that, I'll turn the call back over to the operator and we'll be happy to take your questions.

Thank you. Just, I guess, on GBS, I understand the comments you made, I guess broadly why there is a lot of change is happening in terms of the product set and new sales people. And so it's going to take time. But I think certainly relative to my expectations and the investors' expectations, it seems like it's harder or taking longer or at least the performance in the fourth quarter probably is a little weaker than we would have thought. So how does it compare to your expectations and what if it is taking longer or as harder? What's different than you would have said before?

Hey, Tim, it's Gene. I wouldn't characterize it that way. Basically we, as I mentioned in my remarks, our focus has been how do we get to sustained double-digit growth as quickly as possible. And to do that we needed to introduce new products, and we needed to train the sales force on those products, and maybe gain a sales learning curve. As we talked about in the past, we allowed them to keep some of the legacy products in their pipeline until midyear of 2018. We trained them in the first half of 2018 on the new products. And so if you look at the learning curve, they didn’t really get a chance to start the learning curve very well until the second half of 2018. And as Craig and I both mentioned, what happened basically at the end of the year is, they couldn’t sell the legacy products, so that fell off naturally, and their acceleration on the new products wasn’t fast enough during 2018. It will be in 2019, it wasn’t fast during 2018 to make-up for that falloff. We did that purposely. There wasn’t something that we didn’t know what was going to happen. We knew we were purposely that we talked about less of the quarters of that exact strategy of liking to finish up the pipeline and then training people in the first half on the new products and selling those exclusively for the people have them beginning in the second half of last year.

I wanted to follow up on that. The pace at which you are growing the sales force has changed compared to what you mentioned three to six months ago. What factors are influencing your decision to slow down the growth of GBS?

We rapidly expanded our Global Business Services in 2018 to position ourselves for a strong 2019. We plan to maintain a solid double-digit growth rate throughout 2019. As we have done in the past with Global Technology Services, if productivity in 2019 does not meet our expectations, we will adjust accordingly. However, we believe we are entering 2019 with a much stronger sales force and are eager to see a return on that investment. Once we begin to see significant returns, I anticipate that sales force growth could ramp back up to the 20% range.

And Tim, it’s Craig. Good morning. The one thing I’d add is that we have moderated the growth rate. We are still projecting 14% to 16% GBS territory growth for 2019, which by many measures is still pretty rapid growth. But moderating allows us to have one less management challenge as we roll into 2019. As Gene and I both mentioned, we are thinking about 2019 with 23% more salespeople. They all have more tenure or will have more tenure in 2019 than they had in 2018. We've made great progress on the GXL new business sales and several other factors are working in our favor as well. So, again, as we moderated the growth, we have all that in mind as we pivot into 2019.

So maybe just on GBS again, losing clients in that business, I mean, I guess, I thought you guys were still going to sell the legacy business for those who wanted it and so on and so forth. So can you just help me bridge why you’re losing clients? And just a little bit more color on why legacy is getting hit so quickly that fast?

To clarify our strategy, we will continue to allow clients with legacy products to renew as they wish. Our renewal rates for legacy products are currently slightly higher than they were when they were under CEB, and they have been improving since transitioning to GBS. We will support clients who prefer to keep renewing these products. For new clients, we are focusing solely on GXL products, as they offer greater value and better retention for clients. This approach not only provides better value but also enhances the long-term economics of the business.

And I suppose, just in terms of visibility, I mean, I guess one of the things that everyone’s liked about Gartner is given your subscription model and so forth you have the visibility. But at least it sounds like over the last few quarters things haven’t played out on the GBS side as we would have expected. So I guess what I'm trying to ask is, if I heard you correctly, I think you guys said you'd get to 8% with no further improvements this year. And I was just wondering how confident you are even in that 8% really?

So, I guess, what I'd say is that’s purely the math of it meaning that if our productivity does not improve and our retention does not improve. By the way, we are certainly aiming to improve both productivity and retention. But if they did not, if you just take the pure math of it, that gets about 8% growth. And that's why we're pretty, I've said for quite some time, we are driving to get you double-digit growth by the end of '19, that table just shows the kind of pure math from where we are in terms of getting there.

I guess, following on the – this line of questioning from others. Do you think you pushed change too fast with CEB, given the state the business was in when you acquired it? And maybe, specifically, as it relates to the move to the seat base or the newer products, can you compare just how that transition went – Eugene, when you did that after joining Gartner a number of years ago? And how that’s looking now? When we look back at the numbers from then, it doesn't appear, but hard to tell that there was this much sort of impact to the numbers that you pushed that change through. And so just help us understand how that happened in the past and the confidence that provides or how that frames what you're seeing today? Thank you.

That's a long time ago, Gary. I'll keep it short. When we began and accelerated our growth back then, we lacked the Gartner Formula and the capabilities in recruiting, training, tools, and processes that we have today. Consequently, that acceleration took longer. Our approach remains unchanged, and we are following our plan for the CEB acquisition. We acquired the company and developed new products. Last year, we mentioned that during the first half, they focused on selling legacy products while we trained them on the new products. We have now transitioned them to the new products, and that progression aligns with our expectations. We’ve intentionally decided to move faster now because we have improved recruiting, training, tools, and processes compared to 15 years ago.

I have a follow-up question, perhaps for Craig. When I review the free cash flow guidance for the year, I'm not sure if we will see the working capital benefit in the latter half of the year that the acceleration of CV or GBS typically indicates. Can you clarify our expectations for the free cash flow profile of the business? If we successfully accelerate the CV segment, should we anticipate a significant improvement in cash conversion as we approach year-end and move into next year, or is there something different to consider? Thank you.

No. Good morning, Gary. I think the way to think about the free cash flow, I think, 2018 was a very strong free cash flow year for us as illustrated by the metrics and made really good progress over the course of the year, first, catching up on some of the challenges that we exited 2017 with, and then just having a very strong collection year. And we have fueled the bulk of that the great free cash flow year in 2018 was the accelerated growth and the accelerating growth rate of our GTS business, which again represents a little more than 80% of that total CV base. As we pivot into 2019, we still expect very strong conversion and working capital benefit from that great growth rate that we’re getting from GTS. I think your hypothesis is correct in that. As we accelerate the growth of the GBS business, we get to take more advantage of working capital benefits that are just structurally inherent to a subscription business, where we’re billing all upfront and then delivering and recognizing the revenue over the balance of the contract. So as we get towards that double-digit growth rate by the end of 2019, that’s what we’re targeting, we should see the working capital benefit improve and the conversion metrics will look better as a virtue of that as well.

Did the macro environment this quarter play any part of role in sort of the GBS slowdown or customers maybe more reluctant to their subscriptions, just given some of the volatility, perhaps caution? Thanks.

Yes, the answer is no. Looking at our business, Q4 was very strong. GTS experienced great growth, and we also saw significant growth in Conferences. Our backlog and Consulting bookings were up 12%, which is a solid performance for us. The overall story of GBS is quite straightforward: the ramp-up in the GXL products had not yet compensated for the decline in the legacy products. We expect that to reverse in 2019, which is what was happening in GBS.

Your guidance for 2019 at the midpoint suggests a slight contraction of over 30 basis points in adjusted EBITDA margins. As the sales team and GBS increase their efforts, this makes sense. It seems like this year could be more about investment, as productivity levels are not yet at their peak. How should we anticipate this evolving in the future? Historically, you've indicated a desire to maintain consistent margins. Is it possible that we could see margins begin to grow once the GBS sales team reaches a higher level of productivity? Thank you.

Good morning, Toni. So the way we’re thinking about managing the business is very consistent with how we’ve managed in the past. We’re obviously focused on accelerating the top-line growth rate in doing so because Research has such great structural gross margins. We do typically get some gross margin leverage flowing through. As I talked about in my prepared remarks, we had gross margin leverage both in the fourth quarter and on a full-year basis in 2018. We'll continue to manage our G&A to grow at a slightly lower rate than revenue growth. And so there's operating leverage there as well. And we'll continue to invest in sales. And I think, in 2018 and 2019, we have invested across the board. I mentioned investments in GTS. I mentioned investments in our conference sales. And I talked about the kind of returns that we're getting in '18 and beyond or expect to get beyond from those prior investments. With GBS, we are investing - we invested in '17 and 2018, we're continuing that investment in 2019 with the goal of getting double-digit CV growth by the end of '19, and then that accelerating from there. So double-digit is not the end game for us. It's just a stopping point on our way to see even faster growth. As that happens, there is some leverage that we will get on that GBS selling line. But again, the way that we think about managing the business going forward is a little bit of gross margin leverage, a little bit of G&A leverage. And we'll continue to make sure that we're investing appropriately in sales to fuel sustained double-digit growth rate to the top-line.

Given your progress with your GXL initiative and phase out of legacy products for GBS, can you discuss how you expect GBS contract value growth to evolve over the next several quarters specifically? Should we expect to see a relatively steady ramp towards your targets? Or do you see factors that could cause lumpiness in growth over the course of the year?

Good morning, George. It's Craig. To understand this, it’s important to consider the timing of the discontinuation of legacy products alongside new business sales. As Gene mentioned, we are consistently seeing legacy new business sales in Q1, which are expected to gradually decrease in Q2. The relevant GXL products will be phasing out in Q3 and Q4, while GXL new business sales will continue to increase. Therefore, we anticipate starting to see the benefits of the GXL increase in Q3 and Q4. While we are not providing specific guidance on quarterly CV growth, our focus remains on long-term growth. The key takeaway is linked to the timing of the phase-out that started back in 2018.

And switching gears to the GTS business. Can you discuss how spending intentions are changing among your existing clients there? And how you expect changes in overall IT spending to potentially alter IT research budgets?

Yes. So, as you know, we're a global company. We're in 100 countries around the world. And things vary dramatically depending on which country you're in. And even within the countries, specific industries or specific companies can be either doing well or in distress. And so, I guess, it's a sort of at a total macro level globally. I don't see any giant change like just keep slowdown or even like that. If you look at individual markets or individual industries of those companies, you see puts and takes. But sort of in a global macro – we don’t see a big change there in terms of what we’re seeing.

I have a question about the growth related to GBS contracts. Can you help me understand how the 1.1% CV growth in the fourth quarter relates to the 8% without any improvement in productivity or attrition, as shown in the upper left quadrant of the chart on Page 12?

Good morning, Bill. It’s Craig. Yes, I’m happy to clarify. When we refer to the new business productivity on Page 12, we are talking about the new business generated per salesperson, not the total amount of new business. This figure is based on the number of people at the beginning of the period. As mentioned in my earlier remarks, the new business productivity for salespeople in 2018 was just over $260,000 per individual. By January 1, 2019, we had 23% more personnel compared to January 1, 2018. If you multiply the number of employees by the new business generated per person, you get a total gross new business figure. After accounting for attrition, which we estimate to be around 27% based on the weighted average of our GXL and non-GXL products, we use this percentage on our approximately $600 million base, applying that new business figure gives us the calculated NCVI. The NCVI is derived from the numerator and the CV balance from the denominator, resulting in the 8%.

Okay. One, I wanted to ask about your thoughts on the ongoing pace of hiring at GBS and what assumptions are integrated into the 2019 guidance regarding gross additions and turnover expectations at the headcount level.

We have increased our sales force by 16% in 2017 and 23% in 2018, and we are aiming for a headcount growth of 14% to 16% in 2019. Our turnover rates for GBS and GTS are roughly the same, and we believe this trend will persist into 2019. We are focusing our growth in areas with already high productivity levels. Instead of setting a target for growth percentage, we conduct a detailed analysis of the business to identify where we can effectively and profitably expand our workforce. This approach guided the development of our growth plan for GBS headcount in 2019.

Just a follow-up on that question. If I do the math correctly, I look at your net sales force growth, it looks like you added about 550 people net in 2018. You're targeting about 460 or so for '19. That's a 1,000 people over a 2-year period. Are you having difficulty finding people? Are you having to pay these entry sales people more just to attract them?

The short answer is no, we aren't paying them more than the usual wage inflation in each market. Gartner is a very attractive place to work, and whenever our recruiters go out, we have a strong brand. Additionally, we have an exceptional recruiting team. Thanks to our brand and recruiting capabilities, we have exceeded our expectations. As I mentioned last year, we have fewer open territories than we initially thought because our recruiting has been so effective.

To emphasize, Jeff, when we talk about recruiting and the gross numbers you're referring to, we're specifically discussing GBS. However, our recruitment efforts span worldwide, targeting experienced salespeople as well as recent graduates. This creates a diverse recruitment pool. We are not dependent on any single city or country, which helps mitigate risk. Additionally, I want to reiterate Gene's point about how attractive the Gartner brand is for potential employees, especially in sales, and the effectiveness of our recruiting organization.

I would like to ask a follow-up question focusing on the GXL product. You mentioned that retention is higher for your GXL products compared to the legacy product. Can you explain if there are any differences in pricing or margins between these two product lines?

So the way we thought about the GXL pricing, we're very big fans of simplicity and consistency. And so the GXL products are priced very consistently to their sister products on the GTX side. And those products are set up to deliver very good consistent gross margin for us. We price the value when we price to make sure that we're getting appropriate gross margins. I think the real beauty of GXL when we think about it from a growth opportunity perspective, number one is it's just a better constructive product, it serves the needs of the individual directly, but it also allows us to further penetrate organizations once we get in there. And so what you’ve seen us do on the GTX side, we've actually done on the supply chain and marketing side as well, is, we'll get in with one to one seats in an organization, and then, over time, we will grow that footprint with our product portfolio. And GXL allows us to do that in those enterprises, whereas the legacy leadership council did not.

Craig, regarding the margin issue, while you have slower sales force growth in 2019, you expect improved contract volume performance. It seems there’s a bit of a disconnect regarding the expectation of lower margins. What am I missing here?

You know, all of the CV growth we achieved in 2019 has led to corresponding revenue delays. As we expanded the CV and then CGI throughout 2019, most of that revenue increase will be realized in 2020. One certainty is that we will continue to compensate our salespeople as long as they remain with us, and this is impacting our margins. To put it in perspective, we are still expecting GBS growth of 14% to 16%, following a year in which we increased our sales force by 23%. We anticipate achieving double-digit CV growth by the end of 2019, which will translate into similar revenue growth, but not until 2020, addressing the margin concerns. Thus, 2019 is effectively an investment that we expect to pay off in 2020 and thereafter.

And then just as the follow-up, and I guess this is sort of expanding on with Toni asked earlier, would your expectation Craig then be going forward that we should think about margins in the context of the base rate we're going to see in ‘19 as sort of the steady state level going forward?

Yes, it’s a good question, Peter. We’re not providing a margin outlook or guidance beyond 2019 at this time. We will discuss this in future investor interactions, such as our Investor Day. As Toni mentioned in her question, and as we have tried to convey in our response, improving the growth rate of GBS will positively impact margin, all else being equal. Looking ahead, our strategy involves accelerating the top line, achieving some gross margin leverage, and gaining a bit of G&A leverage. We will continue to invest in sales to sustain strong double-digit growth rates moving forward.

Hi, this is Mario Cortellacci, filling in for Hamza. Just wondering if you can give us a sense of how you expect organic growth to perform in a slowdown given that CEB is now in the portfolio and GBS? Or maybe even asked in a different way is, I guess, do you view that business as being more discretionary than the GTS segment?

So we don’t view that business as being more discretionary than the GTS segment. Basically, our products are very affordable and they provide very high value. And we have, at any given point in time, and this is true whether it’s IT or its HR, finance, we have clients that are their companies are doing really well and the companies are doing very poorly. And we do well in both environments because when people are doing well, we’ll help them with like growth-oriented issues, when people are doing poorly, we help them with cost control-oriented issues. And so we can do well in both of environments. We shown them GTS, we remain in the same exact place in GTS.

I know there are already questions about productivity metrics. Can you provide insight into those metrics from a regional perspective? I see that you are experiencing territory growth of 11% in GTS and 20% in GBS. Is there any variation in these metrics from region to region? Additionally, what is the timeframe for GBS's sales productivity to align more closely with GTS?

Good morning. It's Craig. The – so I'll take the second question first. So as we think about the corresponding productivity measures, obviously, in GTS, we've been focused on improving the GTS sales productivity. And we've been consistently doing that. And book by no means, or we done there. We're focused on continuing to drive improvements to overall sales productivity. If you extrapolate the 2019 view that we talked about and that path to double-digit and back into what is that mean from a productivity perspective, roughly speaking, I think on average, the productivity would be around $75,000 of NCVI per accounting executive, and the team here second to Matt, just to make sure I'm right, to get close to double-digit growth. And again, there will still be a pretty sizable gap then between that 75 or close to 80K, and the 118K of productivity that we're delivering on the GTS side. We're going to be focused on continuing to improve the GBS productivity over time. And we're going to remain focused on improving GTS productivity over time. Over the long term, there is no reason why they can't be around the same levels. And obviously, if we're doing that and improving both GTS and GBS, our overall contract value growth will continue to accelerate. In terms of the regional differences, I think we manage a pretty diverse sales force that calls on the largest companies in the world, down to relatively small enterprises that have around $100 million in revenue or in that neighborhood. And the people that we're recruiting to sell to those different types of organizations, obviously, have very different backgrounds. So some of them, as I mentioned, are right out of university, some of them come to us with 5 to 15 years of experience, for the largest company, they might have 20 plus years of industry experience. And so the differentiation is probably more important and pronounced there than it is regionally. And we've got sort of that structure set up around the world, again, making sure that we're maximizing the opportunity for the type of account that we're calling on. We do look at productivity regionally. We do look at it by tenure. We do look at it by type of channel that we’re – or type of company that we're selling to. We look at it as compared to cost. We look at it all sorts of productivity metrics. The key for us is regardless of what level we're looking at, are we driving improvements for those productivity measures consistently over time.

I was wondering how the GXL products are different from CEB. You mentioned the pricing model, but what about the products themselves? Do customers need to cancel their legacy CEB subscriptions to switch to GXL?

Hey, it's Gene. The GXL products contain significantly more content compared to the legacy products. They have increased functionality, such as in HR, and we've also integrated relevant technological content into them. Firstly, the GXL product offers much more content than the legacy product. Secondly, the inclusions, like Events and other features, provide a higher value package than what was previously available. In essence, the content quality is improved, there's a greater volume of it, and the additional features included are of a much higher standard. This is why we see the retention rates for the GXL products are much stronger.

And then, I guess my second question. Why hope to the double-digit growth? I think that was given kind of that closure of the acquisition. But a lot has changed since then, like you pulled forward investments, you ramped the sales force, you divested things. And now, it sounds like you're going after the products. I'm just curious. I understand the math pushes you kind of in that direction, but with all the changes post closure, why hold to that target? Why not just lower the target and give yourself more of an opportunity to outperform it?

We have been concentrating on operational changes to capitalize on the significant market opportunity in GBS. We have started by transitioning from lower value legacy products to higher value GXL products, and since they are of greater value, we aim to make that shift as swiftly as possible. We have introduced these products for all major roles, including HR, finance, legal, and sales, with plans to introduce more in the future. Achieving double-digit growth is more of a result we anticipate rather than a specific target we are setting. Based on our understanding of how users will adopt and transition from legacy products, this is the expected outcome based on our strategy. As Craig and I have mentioned multiple times, our aspirations go beyond just reaching the minimum double-digit growth. We aim to be comfortably within the double-digit range, not merely at 10.0%.

So in summary, 2018 was a strong year. We continue to have world-class operational execution and innovation, while making progress on our core strategy of establishing leading market positions in every role across the enterprise. We made investments across the business to support sustained double-digit growth and leading indicators are strong. For GBS, we entered 2019 with a 23% larger sales force or more experienced and further learning productivity curve. We have a higher mix of GXL products, which have great retention and while the full year of our tested retention programs. That's our path to double-digit GPS growth. We assisted our clients around the world with their mission-critical priorities, provided great jobs for associates, and delivered another year of market-beating returns for our shareholders. Thanks for joining us today and I look forward to updating you again next quarter.