Gartner Inc (IT) — Q2 2019 Earnings Call Transcript

Thank you, Sarah, and good morning, everyone. We appreciate you joining us today for Gartner's second quarter 2019 earnings call. With me today are Gene Hall, Chief Executive Officer; and Craig Safian, Chief Financial Officer. This call will include a discussion of second quarter 2019 financial results and our current outlook for 2019 as disclosed in today's press release. In addition to today's press release, we have provided a detailed review of our financials and business metrics in an earnings supplement for investors and analysts. We have 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 a follow-up. On the call, unless stated otherwise, all references to revenue and contribution margin are for adjusted revenue and adjusted contribution margin, which exclude the deferred revenue purchase accounting adjustment and the 2018 divestitures. All references to EBITDA are for adjusted EBITDA with the adjustments as described in our earnings release and excluding the 2018 divestitures. All cash flow numbers, unless stated otherwise, are as reported, with no adjustments related to the 2018 divestitures. All growth rates in Gene's comments are FX neutral, unless stated otherwise. 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. In aggregate, we refer to these products for business leaders as GxL. 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 2019 foreign exchange rates. 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 2018 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 thank you for joining us. In the second quarter of 2019, we achieved strong performance across our business, with total revenues increasing by 12%, driven by double-digit growth in all our segments: Research, Conferences, and Consulting. Our impact continues to be significant on a global scale, as we support over 15,000 enterprise clients in more than 100 countries while employing over 16,000 associates worldwide. Research, our most prominent and profitable segment, is essential to our value proposition, showing a 10% increase compared to last year. The Gartner formula for sustained double-digit growth is crucial for our success in Research, consisting of indispensable insights, exceptional talent, sales excellence, and enabling infrastructure. We implement best practices for all these elements with a focus on continuous innovation. Global Technology Sales (GTS) caters to leaders in IT and accounts for over 80% of our total research contract value, showing a 14% year-over-year growth. Every region, company size, and industry experienced double-digit growth. Global Business Sales (GBS), serving roles outside of IT, represents about 20% of our total contract value and is also on a growth trend, with a slight acceleration to 1% in contract value. Our GxL product line is gaining traction, with a sequential increase of $20 million in contract value, providing tailored solutions for clients that lead to better pricing and higher retention rates. In Q2, GxL contract value rose 71% year-over-year, with new business increasing by 51%. We anticipate achieving double-digit growth in GBS by year's end. Our Conferences segment also performed well in Q2, with a revenue increase of 29%. Gartner Conferences combine valuable research with interactive experiences, making them key events for executives. We are investing in our Conferences portfolio and have seen success in expanding our flagship IT Symposium conference in Canada. Additionally, we launched the Gartner CFO and Finance Executive conference, which saw high attendance from key executive levels. We plan to introduce more conferences targeting other GBS functions. Our Consulting segment also showed a 10% revenue increase. Gartner Consulting complements our Research offerings with project-based work to support clients' strategic initiatives. Our quarter's growth came from both our labor-based and Contract Optimization segments. As you will hear from Craig, we revised our guidance for the remainder of the year due to a slight decrease in expected revenues and a modest increase in costs. The revenue adjustment is attributed to lower non-subscription research revenue, particularly from legacy non-subscription products, as we shift focus to subscription-based offerings. In Q2, our non-subscription revenues fell below expectations, which we believe will impact future revenues. Additionally, subscription revenue growth is somewhat below our initial forecasts due to several minor factors that collectively had an effect. These included sales leadership changes and adjustments in our sales strategies. The other reason for our revised guidance relates to increased costs, driven by our success in filling open sales territories faster than anticipated. We have made significant strides in reducing the time territories are open, leading to increased sales when new representatives are onboarded. However, this also means higher short-term costs related to compensation, training, and technology. Consequently, we expect our SG&A expenses to be higher than previously planned, with benefits expected to materialize in 2020. Our adjusted guidance reflects this expected revenue reduction alongside a minor cost increase. Looking ahead, we feel well-positioned for sustained double-digit growth. We foresee ongoing growth in GTS and are at a turning point in GBS, with expectations for increased growth from our investments. We anticipate that GBS will drive both higher research contract value growth and increased profits. Our Conferences and Consulting segments are also progressing strongly. Heading into 2020, we expect double-digit growth in revenue and EBITDA that aligns closely with that growth, leveraging the strategic positioning of GTS and GBS.

Thank you, Gene, and good morning, everyone. Global Technology Sales, the largest part of our business continues to deliver exceptional growth. Global Business Sales contract value growth turned positive. Our strategy to deliver products and services with a compelling value proposition across all enterprise functions is working. Conferences and Consulting are having outstanding years. This year, we are completing a period of above-trend investments across our business positioning us for sustained long-term double-digit growth. Second quarter revenue was $1 billion, up 9% on a reported basis and 12% on an FX-neutral basis. The product retirements we discussed last quarter impacted the top line growth rate by about 130 basis points. In addition, contribution margin was 64%, up 39 basis points from the prior year. EBITDA was $185 million, up 1% year-over-year and 4% on an FX-neutral basis, slightly above our expectations. Adjusted EPS was $1.45 with meaningful help from tax, and free cash flow in the quarter was $197 million. Our Research business had a strong quarter. Research revenue grew 8% in the second quarter and 10% on an FX-neutral basis. Second quarter contribution margin was 69%. Total contract value was $3.2 billion at June 30. FX-neutral growth of 11% versus the prior year. I'll now review the details of our performance for both GTS and GBS. In the second quarter, GTS contract value increased 14% versus the prior year. GTS had contract value of $2.6 billion on June 30, representing just over 80% of our total contract value. Client retention for GTS remained strong at 82%. Wallet retention for GTS was 105% for the quarter, up 25 basis points year-over-year. The combination of the client and wallet retention rates show how our clients spend more with us each and every year reinforcing the value we provide to clients. GTS new business increased 4% versus the second quarter of last year, which had very strong new business growth. New business is coming from a mix of new enterprises and growth in existing enterprises through sales of additional services and upgrades. The third quarter pipeline is strong. We ended the second quarter with 12,739 GTS enterprises, up 3% compared to Q2 2018. The average contract value for enterprise also continues to grow. It now stands at $203,000 for enterprise in GTS, up 10% year-over-year. As we discussed previously, we continue to invest in GTS. The investments in headcount growth and improving productivity are driving the GTS acceleration you have seen over the course of 2018 and into the first half of 2019. At the end of the second quarter, we had 3,207 quota-bearing associates in GTS or growth of 14%, reflecting our planned growth and the better-than-expected reduction in our open territories. For GTS, the year-over-year net contract value increase, or NCVI, provided by the beginning period quota-bearing headcount was $110,000 per salesperson, up 2% versus second quarter of last year. This is the seventh consecutive quarter of year-over-year productivity improvement. Turning to Global Business Sales. GBS contract value was $602 million at the end of the second quarter or about 20% of total contract value. CV returned to growth, increasing 1% year-over-year. Many of our GBS metrics continue to be affected by the discontinuation in 2018 of sales of the largest legacy products. As we described the last couple of quarters, the discontinuations were based on a purposeful strategy that allows our sales team to focus on GxL products going forward. GxL products continue to gain share and are an important part of our strategy. Looking at total contract value from the GxL products, we drove an FX-neutral increase of 71% year-over-year from $133 million to $228 million. Similar to the last two quarters, on Page 11 of the earnings supplement, we provided a bridge from the first quarter to second quarter. We sold $29 million of GXL new business in Q2, up 51% versus the prior year quarter. We continue to make great progress with our GXL products across each of the functions GBS serves. More than half of the GXL new business in the quarter came from newly launched products. GXL CV now makes up 38% of our total GBS contract value, up 16 percentage points from Q2 of last year. While legacy GBS CV attrition is close to 30%, GXL attrition is around 20%, almost at GTS levels. We reduced attrition levels through improving client engagement. We are driving increased client engagement through expanded service teams and growing adoption of individualized content and service. For the standalone quarter, we drove attrition rates down for GBS. For contracts that were up for renewal in the second quarter, attrition improved by about 270 basis points over the prior year quarter. Again, this is a result of the increased engagement, we discussed in all of our other retention programs having an impact. We continue to expect to achieve double-digit CV growth in GBS by the end of this year. The combination of improving attrition and corresponding retention rates and continued ramping of GXL new business are the metrics that will get us there. At the end of the second quarter, we had 919 quota-bearing associates in GBS or growth of 24%. We expect GBS headcount growth to moderate by the end of the year to approximately 16% to 18%. We have made significant investments in GBS in sales as well as in research, products, and services. With the investments we have made and those contemplated in our guidance, we are well positioned to see the benefits as we move into 2020. In Conferences, revenues increased by 27% year-over-year in Q2 to $141 million. FX-neutral growth was 29%. Second quarter contribution margin was 57%, up slightly from the same quarter last year. We had very strong growth from GBS Conferences including marketing and supply chain. As Gene mentioned, we also had a very successful launch of our first Conference for finance leaders. The Evanta continues to grow over 20%, a significant improvement from before we owned it. We had 27 destination Conferences in the second quarter. On the same Conference FX-neutral basis, revenues were up 21% with an 18% increase in attendees. The second quarter is typically our second largest quarter after the fourth quarter and Q2 was strong for our Conferences business. Second quarter Consulting revenues increased by 7% to $104 million. FX-neutral growth was 10%. Consulting contribution margin was 33% in the second quarter. Labor-based revenues were $79 million, up 3% versus Q2 of last year or 5% on an FX-neutral basis. Labor-based billable headcount of 773 was up 9%. Utilization was 63%. Backlog at June 30 was $110 million, up 7% year-over-year on an FX-neutral basis. Our pipeline for the second half of the year remained strong. Contract optimization revenues were up 27% versus the prior year quarter. As we have detailed in the past, this part of our Consulting segment is highly variable. SG&A increased 13% year-over-year in the second quarter or 16% 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 in real estate to support our increased number of associates around the world. As we discussed at Investor Day, our largest dollar investments are in GTS where we have seen strong growth in contract value and higher productivity. Our continuing investments in GCS, the Conferences' sales team, have been driving faster growth in that segment. GBS investments are also continuing, and we expect to see contract value acceleration this year and going forward, which will drive a return on the investments we have been making. Across all of our sales teams, we are investing to increase territories to reduce open roles and to drive improvements in sales productivity. Adjusted EBITDA for the second quarter was $185 million, up 1% on a reported basis and 4% on an FX-neutral basis. EBITDA was adversely affected by about 5 percentage points or $7 million impact due to the product retirements. Taking that into consideration, the underlying FX-neutral EBITDA growth was about 9% in the quarter. Depreciation was up about $3 million from last year as additional office space went into service. Amortization was flat sequentially after taking an expected step down in the fourth quarter last year 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 excluding deferred financing cost in the quarter was $23 million, down from $28 million in the second quarter of 2018. The lower interest expense resulted from paying down roughly $250 million in debt over the past year. The Q2 adjusted tax rate, which we use for the calculation of adjusted net income, was negative 3% for the quarter. The adjusted tax rate for the quarter was affected positively by an intercompany sale of intellectual property, which resulted in a material favorable impact on the adjusted tax rate. The tax rate for the items used to adjust net income was 23.1% in the quarter. Adjusted EPS in Q2 was $1.45 with upside relative to our expectations from below the line items including a lower-than-expected tax rate. In Q2, operating cash flow was $227 million compared to $174 million last year. The increase in operating cash flow was driven by lower interest expense, lower taxes and contributions from working capital. Q2 2019 CapEx was $39 million, and Q2 cash acquisition and integration payments and other nonrecurring items were approximately $8 million. This yields Q2 free cash flow of $197 million, which is up 25% versus the prior year quarter, normalizing 2018 for divestitures and working capital timing. On a rolling four-quarter basis, our free cash flow conversion was 126% of adjusted net income excluding divested operations and working capital timing. Turning to the balance sheet. Our June 30 debt balance was about $2.2 billion. Our debt is 100% fixed rate. Adjusted EBITDA for the divestitures, our gross leverage ratio is now about 3.2x EBITDA. We repurchased about $2 million of stock in the quarter. We will continue to be price-sensitive and opportunistic as we return capital to shareholders. We have about $870 million remaining on our repurchase authorization. Our capital allocation strategy remains the same. We deploy our free cash flow and balance sheet flexibility by returning capital to our shareholders through our buyback programs and through strategic value-enhancing M&A. Turning to the outlook for 2019. We've recalibrated our revenue outlook, modestly lowering the growth expectations in Research including the non-subscription fees while increasing the expectations for Conferences and Consulting. The top line growth outlook on an FX neutral basis remained strong. In addition, as we move through the first half of the year, we decided to make modest investments, most notably reducing the level of open territories in GBS. Our GTS and Conferences investments have been generating returns, and we expect to see returns from the GBS investments as we move into 2020. As a result of these changes, we revised our outlook relative to our initial guidance. As you think about modeling the operations for the rest of the year, we expect mostly typical seasonality for the quarter we're facing. In addition, our guidance reflects FX rates as of June 30. Due to U.S. dollar strengthening, we expect FX to cost roughly a two-point negative impact on projected 2019 full year growth rates across revenue, EBITDA, adjusted EPS, and free cash flows. Looking at our updated full year guidance, we expect revenue towards the lower end of the $4.2 billion to $4.3 billion range. That is FX neutral growth of 10% to 11%. This reflects research revenues of about $3.355 billion to $3.380 billion or adoption at the midpoint of about 2%. About half of the reduction is from non-subscription products and services. As a reminder, in addition to the non-core businesses that we've divested over the course of 2018, there were some additional products from the CEB acquisition that we viewed as non-core. We retired these, which is impacting our 2019 total revenue growth rate by about 75 basis points. This is almost $30 million, about two-thirds of which drops to EBITDA. Additionally, as Gene mentioned, our Q2 non-subscription-based revenues were lower than expected, and we expect this trend to continue for the rest of the year. We expect adjusted EBITDA of $670 million to $700 million. FX neutral growth of down 1% to up 4%. Some of the lower EBITDA reflects modestly lower revenue expectations. In addition, this reflects incremental operating expense of 1% to 2% versus our prior outlook. As Gene mentioned, we decided to invest on the original plan to take advantage of the opportunities we see for increased growth, most notably the reduction in open territories. We expect an adjusted tax rate of around 25.5% for the full year 2019. Please note that if you're adding back from GAAP net income, the rate for the tax effect on the add backs is also about 25.5%. Our full year tax rate remains unchanged despite the benefit in the second quarter. Our tax planning related to our intellectual property is ongoing, and we anticipate incremental tax costs in the fourth quarter. We expect 2019 adjusted EPS of between $3.39 and $3.64 per share, a range of down 7% to flat year-over-year. For 2019, we expect free cash flow of $400 million to $430 million as the projected FX neutral change of down 2% to up 5% versus our normalized 2018 free cash flow. All the details of our full year guidance are included on our Investor Relations site. For the third quarter, we expect adjusted EPS of about $0.40 to $0.45 per share. As you build your models, remember that last year's third quarter EBITDA was very strong. This year, we have a larger cost base, and the third quarter is a small revenue quarter, which magnifies the effect of the costs. And finally, we expect our adjusted tax rate to be in the low 30s on a percentage basis. Through the first half of the year, we have delivered strong results across our business. Notably, GTS contract value growth continues to be strong and sales of our new GxL products in GBS continue to rise. Our Conferences and Consulting businesses both had outstanding quarters. Free cash flow was up versus last year and conversion was stable. We are applying the Gartner formula across the combined business to drive sustained long-term double-digit growth to revenues, EBITDA, and free cash flow.

Thanks. Can you provide an update on the revenue outlook for the Research business, specifically regarding the non-subscription segment? In the recent quarter, you disclosed point-in-time revenue figures, which appeared to be consistent sequentially and showed a 17% year-over-year increase. Can you elaborate on why the non-subscription segment is lower than expected, given that it seems to indicate steady and healthy growth?

Hey, good morning Tim. Thanks for the question. So on the Research revenue, as you point out, a chunk of the reduction relates to non-subscription revenue. There are a couple of factors going on there. They're buried within the disclosure and the year-over-year growth rate you're seeing. So as you know, we retired a bunch of products at the end of 2018, and we're dealing with the impact of that in 2019. That was contemplated in the original guidance. On top of that, there were a number of non-subscription products tied to GBS that were not retired, but did not get the sales focus in the first half of the year as we've been driving real focus on GxL and subscription products. And so the revenue on those fell off faster than we had anticipated, and we're baking that continued fall-off into the balance of the year, and that is obviously impacting the growth rate and the guidance a little bit, but more pronounced the outlook for the rest of the year. On top of that, there are some additional non-subscription revenues, which, as you point out, continue to perform very strongly, but have come down modestly from more elevated levels of performance in previous quarters.

Okay. Regarding the subscription aspect of the guidance change, the Research revenue forecast adjusted by approximately 2%, and we only have six months remaining. I'm trying to understand how GTS' growth fits into this, particularly in light of a more challenging comparison slowdown of 80 bps, and why this leads to a two-point adjustment in the full-year outlook for half of the year. Even if it's just one point related to subscriptions, it seems to suggest a larger impact than I expected unless the initial guidance anticipated additional acceleration in GTS.

Yeah. Hey, Tim, it's a good point, and you're right. Again, about half of the reduction relates to subscription, half to non-subscription. So, about 1% is a more accurate way to think about it. I think a couple of things. So one is that with GTS, it's still performing really, really well, 13.5% growth is very strong. And again, it's up from where we were in 2017, and early parts of 2018. It had been humming along at north of 14%, and obviously, that modest slowdown we saw in the second quarter has a flow-through impact, and it's not just the quarterly impact and flowing that through we've also modulated the expectations for Q3 and Q4, and that had a modest impact on the outlook as well. And so it's really the – essentially, and Gene described it, which was our outlook was for stronger total combined CV growth through the first half of the year. We're off that modestly and that's causing that roughly 1% impact on the subscription revenue for 2019.

Yeah. I guess on the subscription piece, just a follow-up. You mentioned some sales leadership – or elevated sales leadership at GTS or maybe some execution hiccups. Can you just go into more detail on that? And to what extent do you view macro as a factor that could be impacting kind of both the small business non-subs revenue as well as the GTS contract value deceleration?

Hey, Jeff, it's Gene. So basically, as I mentioned, so – and as Craig mentioned, GTS is a great contributor. 13.5% is very strong growth. It was a little off what we had expected. As I said, there were a number of small factors that individually wouldn't be a big deal, but happened to all here at once and I'll just go through it. First, we had some management – some leadership changes in GTS. We always have both. We happen to have a greater than usual number. So, for example, we had a leader running Asia for many years, who needed to come back to the U.S. for personal reasons. We had – in Germany, we had our two top people that were running Germany got – one got promoted, one to GBS. We had changes in the – for similar things. So I've just got a – there's a bunch of, in order for this more spread out, it happened for a combination of business and personal reasons to be more concentrated in the first half. So that was one piece of it. Second piece, I mentioned was an expansion of our Dallas and Barcelona offices. We – as we – as a company, we grow. We need to have different talent pools. We – our European headquarters has traditionally been in the London area. Through a combination of Brexit and other talent markets, we've opened a major office in Barcelona, and again, moved a bunch of people, leaders and – into Barcelona, which was disruptive. The similar thing happened between Florida and Texas. This year, we expanded our Dallas office. Again, these were planned quite a bit of advance and just happened here at the same time. And then I also mentioned, we changed our approach to selling to various small tech companies. There are a lot of innovations. Small tech companies are a great market for us, and we organized slightly to make it more effective in selling to that market. Each of those things normally wouldn't have – the rolls fallback, but then you like – there are others, but these are kind of the biggest ones. Each of them were small, but collectively results in that very minor change in our growth rate and subscription revenue. And it's all GTS basically.

And then your view on macro is not a worsening factor?

We don't see it. Looking at our business, our Research – GTS grew 13.5%, GBS accelerated, and our Conferences business had a very strong quarter, one of the strongest we’ve ever had. Our Consulting business also performed well. Overall, we experienced considerable strength across the business. At times, some clients among our 15,000 enterprise clients are doing really well while others are not. However, our Consulting business is showing an uptick in interest regarding cost optimization. Overall, all of our businesses had very strong performance.

Okay. And then just, I guess, similar question given that it's only a half-year effect on the magnitude of the EBITDA guidance reduction and EPS guidance reduction. Is it – should we think about some of this lost revenue being at like a near 100% decremental margin or just a very high decremental margin? And then on top of that, I guess the other factor is GBS sales headcount is going to trend higher because of the closing of the open territories. Is that the right way to think about it, or just – I'm trying to understand the magnitude of it.

Yeah. Jeff, I think, good morning, it's Craig, I think that's the right way to think about it. So for a portion of the revenue reduction, it would have flowed through at very high margins. So basically, cost-based fixed and when the revenue's there, it flows through very high margins. Conversely, when the revenue's not there, the hurt is large flow-through margins as well. On some of the revenue, we were able to, or are able to modulate the costs, but for the most part, they are – it is a fixed cost base. And so your assertion on the large decremental revenue is appropriate. In terms of the cost, I think you're right also. Most notably, it is the reduction in open territories in GBS, but also a little bit in GTS and in our conference sales, but most notably in GBS that is flowing through to the balance of the year. I think the other thing worth noting is some of this – some of the increased spending was baked into our Q2 outlook. At that point, when we gave our guidance, we – our view was we would make it up in other areas and then obviously, as Gene mentioned, with a modest downtick in our revenue expectation and this modest uptick in the cost. It caused us to recalibrate the outlook coming out of the second quarter.

Thank you. Good morning, gentlemen. If I could just follow-up on that – on the EBITDA guidance, I guess you reduced that by about $60 million to $65 million. I think you said that the non-subscription or kind of legacy GBS stuff that you had was $30 million of complete drop-through. So is that the right way to think about it, $30 million of that is that drop-through you talked about? And is the rest of that split between the increased, I guess, investment in sales on the two – GBS and GTS side?

Yeah, good morning, Manav, it's Craig. So I think the way to think about it is – you're roughly right. And so yeah, as I mentioned just before with Jeff, there's some portion of the revenue downside where it's not 100% flow through. We're actually able to eliminate or reduce certain cost, but most of it is flowing through. And then the increased spending, again, most notably around faster growth or lower proportion of open territories in GBS. So, I think that is the right way to think about it.

Okay, got it. And then also just to the earlier question on the macro impact. I think in your 10-Q, you usually have this language on double-digit growth in contract value across your industry segments. And I think last quarter, it was three quarters and in this quarter, you said it was half. So, is that just law of large numbers? I guess it's just trying to use that data point to follow-up and if you are seeing any slowdown, deceleration in your segments.

Yes. I think the way to think about it is, in GTS, where we've traditionally made that comment, it's every client size, every major region and virtually every industry grew at double-digit rates. The comment in the Q, I believe relates to the combined GTS and GBS. And so that's going to be a little more mixed just because we are combining a 13.5% grower with a 1% grower. But on the GTS side, the way we look at the measures, it's been very consistent where we've had that same level of almost universal double-digit growth across every vector that you could look at.

Thank you. So, I wanted to clarify, are you still expecting to get the double-digit CV growth in GBS by the end of the year? And also just in general, I know you made the change in GTS to selling to the small tech companies in terms of sales processes, but are there any sales processes that you're changing in GBS or are you just, just given that GXL has been such a big transition, are you just sort of seeing it takes time and just seeing how that goes, or are you sort of incrementally changing that as it goes along as well?

Hey Toni, it's Gene. We are anticipating double-digit growth in GBS by the end of this year, which will reflect our expectations. We know what our results were for the first half, have our forecast for Q3, and have assessed what we think new business and retention will be in Q4. Our expectation for reaching double-digit growth by the end of 2019 is based on these factors. Regarding our sales process, we have been focusing on ensuring we have the right product line, capacity, direct selling recruitment, training, tools, processes, and retention programs in place. All of these are now established, and we have modeled them based on our successful approach for GTS over the years. While we may make some adjustments as we learn, we believe we have all the necessary components in place, which explains the strong acceleration we're seeing. As Craig mentioned, we achieved $29 million in new business in Q2, which is a 51% increase from Q1 for GxL. These products are performing exceptionally well, and we feel we are on a solid path.

Great. And then I know I ask this question all the time, but given that EBITDA margins for this year at the midpoint of guidance are about 160 basis points lower than last year, which was 100 basis points lower than the year before, I know there are sort of a major transition going on and the revenue growth hasn't come in as quickly as the expense level right now, but what sort of long-term, the right level for margins for the business? I'm not trying to say like where are you going to be this year or next year, etc., but just over time, like what kind of margin level should this business support? Thank you.

Hey, good morning, Toni, it's Craig. So, I think we're not going to give long-term guidance on our margin expectation. I think Gene, in his remarks, outlined the way that we're all thinking about 2020 right now, which is we'll grow revenue at double-digit rates, continue our trend of strength in revenue, and we'd expect EBITDA to grow approximately roughly in line with revenue next year. We've obviously made a lot of investments in the business, again across GTS, GBS, and Conferences. And as we talked about, we really feel good about the returns we're getting in GTS and on the Conferences side, and we fully expect to start realizing those returns in GBS in 2020.

Hi everyone. Good morning. Looking at the slight reduction in revenue and the additional costs suggested by the EBITDA guidance, even if we assume a higher than average margin on that revenue, along with some mix shifts where higher margin revenue is declining more than the total, it appears there is about $40 million of additional costs. If we annualize that, it equates to roughly 4% of your SG&A or over 2% of revenue. That seems to be a reasonable figure considering some investments and expanding into a few more open territories. Can you clarify if I'm on the right track and what exactly is included in that figure? What high-level investments are you making in the latter half of the year?

Good morning, Gary. It's Craig. The way to look at it is that your expense impact estimate is likely a bit high. It's more in the $30 million range. This isn't all about spending in the second half; some of it likely started in late Q1 and certainly continued in Q2. Therefore, you can't simply double it for an annual estimate, as some of this is already included in our 2019 run rate. As Gene mentioned, for instance, in one of our sales units, we decreased the number of open territories from 6% to 2%. This translates to nearly a 4% increase in our workforce, which adds to the costs of those employees. If we bring in that many more people, we may also need additional managers and recruiters to support them. While we strongly believe that reducing open territories will yield benefits in the future, there are upfront costs associated with this, and it's not the only factor affecting our cost line or the reduction in EBITDA, but it's notably significant. Consider the size of our sales force: GBS has 919 people, and GTS has over 3,200. Even modest changes in the percentage of open territories can greatly impact our short-term profit and loss. However, we remain confident that it will pay off in the long term.

So Gary, it's Gene. First, if you look at our performance, GTS is growing exceptionally well. We have made significant investments there and are seeing great returns. The reason our Conferences business is experiencing record growth is due to our investments and the strong returns we've achieved. As I mentioned before, we've been heavily investing in GBS, knowing we are getting ahead of the curve. We see incredible growth opportunities there and believe we have reached a point where we will start seeing returns from GBS similar to what we've seen in GTS and our Conferences business. We are not making new investments per se; as Craig mentioned, the primary factor affecting costs is the percentage of open territories, which has significantly improved compared to last year across all three of our major sales forces. We are actually exceeding expectations with fewer open territories, which is excellent for long-term growth. Improved retention with existing clients is crucial for better growth, and we already have those territories in place. In summary, we are experiencing great returns from our GTS reinvestments and GCS, and we feel we are just beginning to see those returns from GBS as well.

Good morning everyone. I have a couple of questions regarding productivity. In GBS, productivity was negative 2,000 in Q1 but increased to positive 7,000 in Q2. The earlier guidance for GBS suggested double-digit growth, which included an expected productivity improvement to around 75,000. With the new guidance now available, I would like to know what is expected in this updated guidance.

Good morning, Bill. There's really no change in how to think about productivity. We measure it based on opening period headcount. To achieve roughly 10% growth on a base of just below $600 million, we need to maintain the same level of NCVI, and our opening headcount number hasn't changed. Essentially, it's the same amount. Your calculations for Q1 and Q2 are correct. We believe that a combination of improved retention rates and what we've observed in both Q1 and Q2 is quite favorable. In Q1, for the contracts that came up for renewal, we saw an increase of nearly 200 basis points in pure retention on those transactions. We saw a similar measure in Q2 with an increase of 270 basis points. Additionally, Q2 new business for GBS increased by 16% year-over-year, reversing several quarters of decline in new business on a year-over-year basis. If you model forward, considering the ongoing improvements in retention and the continued ramp-up of our new business, as our sales force gains experience and confidence in selling GxL and as we build real momentum on GxL, that's how we foresee achieving double-digit growth in GBS by the end of this year.

Hi. Thanks. Good morning. Your GTS headcount growth in the quarter accelerated to 14.5%. I recall previously, you were looking to slow your GTS headcount growth and rely more on productivity gains to drive CV growth. So can you talk about your overall strategy in GTS between balancing headcount growth and productivity gains over the next, call it, two to four quarters?

So, George, I will address the first part of your question regarding how we approach expanding our sales force capacity. We determine the number of territories we plan to add each year and the value distribution within those territories throughout the year. We also estimate a certain number of openings. The situation in GTS is similar to what we discussed in GBS; the guidance we provided on sales force headcount growth was based on the number of territories. As Craig and I have noted, we've actually decreased the number of sales territories in both GTS and GBS, which is why the sales force growth appears slightly higher. We're focusing on the actual number of people instead of just the territories.

Yes, George, good morning. To continue the thought and address the second part of your question, there hasn’t been a change in our territory growth assumptions. We have simply become more efficient and effective at filling open territories, resulting in 14% more heads on board compared to last quarter. This is slightly above what we had guided for the full year. In the upcoming quarters, we anticipate maintaining this range due to the low number of open territories and consistent territory growth. We remain dedicated to improving sales productivity consistently. We’ve achieved year-over-year productivity improvements for seven consecutive quarters, and we will continue to focus on finding the right balance between headcount growth and productivity enhancements. As we advance in GBS, we will apply similar strategies to enhance productivity while ensuring we capitalize on the significant market opportunity to drive sustainable long-term double-digit growth.

Hi. So I just wanted to kind of circle back to GXL. What do you think The Street is undervaluing that would result in the ramp necessary to hit that double-digit growth? What do we not see sort of on the outside that you see on the inside from either a product-improvement standpoint or some other area?

Hey, Joe. Good morning. It's Craig. Joe, we've always had confidence in the quality of the product. It truly represents a strong, high-value offering at a relatively low cost, consistent with our IT, supply chain, and marketing products. What gives us confidence is two main factors. One is the continued growth of GXL's new business, which is why we consistently highlight this for investors to demonstrate our progress. While the total numbers can be confusing due to various moving parts, isolating what's happening with GXL, especially on the new business front, shows significant results. In the second quarter, we generated $29 million in new business across all enterprise functions where the new GXL product was launched. Year-over-year, this growth was robust, with overall new business growth for GXL at 51%, and many enterprise functions nearly matching that average. The market response remains strong, and our sales teams are getting more experience selling the product, improving their performance continuously. Coupling this with the improvements we've noted in retention for both GXL and legacy products shows a marked increase in our renewal rates in the first half of the year. If this trend continues throughout the year alongside the GXL ramp-up, considering we aren't selling just small quantities but significant amounts each quarter, that's the underlying reality we're experiencing, and we're aiming to keep this as transparent as possible.

Hey, Joe. It's Gene. The largest single investment is in the sales force. We've increased our sales capacity because it's essential for achieving long-term sustained growth, and we have that established. As the business grows, this capacity will continue to expand. We've also focused on ensuring we have the right products and service delivery teams in place, which is helping to improve retention, as Craig mentioned, and GXL is performing very well. The retention rates for customers returning for renewal have been very strong, and our retention initiatives are benefiting legacy products as well, where, as Craig noted, our retention is also improving. The primary investments are mainly in sales, with some focus on service delivery and product development.

Hi. Thanks. Good morning. Your GTS headcount growth in the quarter accelerated to 14.5%. I recall previously, you were looking to slow your GTS headcount growth and rely more on productivity gains to drive CV growth. So can you talk about your overall strategy in GTS between balancing headcount growth and productivity gains over the next, call it, two to four quarters?

So, George, I'll respond to the first part of your question. We determine a specific number of territories to add each year and the timing of value in those territories throughout the year. We estimate a certain number of openings, as we discussed. The situation in GTS mirrors what we previously explained for GBS. The guidance we provided for sales force headcount growth was based on a certain number of territories. As Craig and I mentioned, we actually decreased the number of sales territories in both GTS and GBS, which is why the sales force growth is somewhat higher. We're not focusing on the number of territories but rather on the actual number of people we have on board.

Yes, good morning, George. To address the second part of your question, our territory growth assumptions haven't changed; we've simply become more efficient at filling open territories, resulting in 14% more staff compared to last quarter. This is slightly above our guidance for the full year. In the next few quarters, we anticipate maintaining this level, given the low number of open territories and the consistent territory growth. We continue to prioritize increasing sales productivity. We've achieved year-over-year productivity improvements for seven consecutive quarters, and we will keep focusing on balancing headcount growth with productivity enhancements. As we ramp up in GBS, we'll apply the same strategies to boost productivity while ensuring we add resources to seize significant market opportunities and drive sustainable long-term double-digit growth.

Hi. So I just wanted to kind of circle back to GXL. What do you think The Street is undervaluing that would result in the ramp necessary to hit that double-digit growth? What do we not see sort of on the outside that you see on the inside from either a product-improvement standpoint or some other area?

Hey, Joe. Good morning. It's Craig. We've always had confidence in the quality of the product, which offers a strong, high-value proposition at a relatively low cost, consistent with our IT, supply chain, and marketing products. Our confidence is bolstered by two key factors. First, the ongoing success of GXL's new business is one reason we consistently share this information with investors to highlight the progress we've made. While it may get obscured in the overall numbers due to various factors, isolating the performance of GXL, especially on the new business side, reveals significant success. In the second quarter, we sold $29 million of new business across all our enterprise functions launching the new GXL product. Year-over-year growth in these functions was robust, with overall GXL new business up 51%, closely mirroring the average across nearly every function, indicating strong market uptake. Our sales teams are becoming increasingly proficient at selling this product. In addition, we've seen improvements in retention rates for both GXL and legacy products, with significant enhancements in renewal rates during the first half of the year. We anticipate this positive trend will continue for the rest of the year, especially since we're not just selling small amounts – we're making millions or tens of millions in sales each quarter. We aim to make this clarity evident to our stakeholders.

Hey, Joe. It's Gene. The largest single investment is in the sales force. We've increased our sales capacity because it's crucial for achieving long-term sustainable growth, and we have that established. As the business expands, that growth will continue. We have also focused on acquiring the right products and building effective service delivery teams, which has led to improved retention, as Craig mentioned, and GXL is performing very well. The retention rates for our initial renewals have been quite strong, and our retention programs are also benefiting our legacy products. As Craig pointed out, our retention there is also improving. Therefore, our key investments are primarily in sales, followed by service delivery and product development.

So summarizing today's call. For the second quarter of 2019, we continue to deliver strong performances across our business. We again delivered double-digit growth in each of our business segments, Research, Conferences, and Consulting. We are well positioned for sustained double-digit growth. We expect continued sustained double-digit growth in GTS, we're at an inflection point in GBS and Conferences and Consulting are on a strong path. Our future at Gartner remains bright. Thanks for joining us today and we look forward to updating you again next quarter.