Gartner Inc (IT) — Q3 2019 Earnings Call Transcript

Thank you, Sarah, and good morning, everyone. We appreciate you joining us today for Gartner's third 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 third 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 and 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 deferred revenue purchase accounting adjustments 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 an 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. Thanks for joining us. For the third quarter 2019, we continued to deliver strong performances across our business. Total revenues were up 11% fueled by double-digit growth in each of our business segments: Research, Conferences, and Consulting. We continue to make a significant global impact through these segments. We help more than 15,000 enterprise clients in more than 100 countries around the world with their mission-critical priorities, while providing great jobs to more than 16,000 associates globally. Research, our largest and most profitable segment, is the core of our value proposition. Our Research business was up 10% over this time last year. The Gartner formula for sustained double-digit growth continues to drive success in our Research business. As we previously highlighted, the Gartner formula consists of indispensable insights, exceptional talent, sales excellence, and enabling infrastructure. For each of these elements, we drive relentless, globally consistent execution of best practices and consistent improvement and innovation. Global Technology Sales or GTS serves leaders and their teams within IT. This group represents more than 80% of our total Research contract value. GTS contract value growth was 13% year-over-year. We delivered double-digit growth in every region, across every size company, and in virtually every industry. Global Business Sales or GBS serves leaders and their teams beyond IT and represents about 20% of our total Research contract value. This includes supply chain and marketing, which we have addressed for several years, as well as other major enterprise roles, including HR, finance, legal sales, and more. GBS continued on a path toward double-digit growth with total GBS contract value accelerating to 3%. Our GxL product line continued to gain momentum, with contract value increasing $26 million sequentially. GxL products provide greater value to clients because they are tailored to the client's individual needs. This in turn results in higher prices per user and stronger retention. Beyond better pricing retention, GxL products provide exponentially more growth opportunities because we can sell these high-value products throughout our clients' organizations. For Q3, GxL contract value grew 65% year-over-year and new business was up 39%. We expect continued acceleration in GBS contract value. In Q4, if new business growth and retention improvement is the same as it was in Q3, contract value growth will be 9.6%. Our Conferences segment also delivered a terrific performance in Q2 with double-digit revenue growth of 19%. Gartner Conferences combine the outstanding value of research with the immersive experience of live interactions, making every conference we produce the most important gathering for the executives we serve. I recently attended our IT Symposium Conference in Orlando, Florida. This conference is the most important gathering of CIOs and Senior IT Executives in North America. We hosted around 8,000 attendees on site and about 3,000 of these were Chief Information Officers. This is near all-time highs. At our conferences, you can see firsthand the power of Gartner in helping clients achieve their mission-critical priorities. Clients received incredible insights from our analysts. They networked with leading peers and experienced leading-edge technology from the most important providers in the world. Our executive attendees were inspired and empowered to succeed as a result of the insights we delivered at this important event. Our associates were equally inspired and excited about the incredible value we deliver to our clients. Our Consulting segment also achieved double-digit growth in Q2 with revenues up 20%. Gartner Consulting is an extension of Gartner Research and provides clients a deeper level of involvement through extended project-based work to help them execute their most strategic initiatives. Our growth in the quarter was a combination of our labor-based business and strength in our Contract Optimization business. So, we delivered another strong quarter across all three of our business segments. We continue to have a vast market opportunity. We've made investments over the past two years that position us well to capture that market opportunity. We're preparing our 2020 business plan and expect to continue attractive double-digit growth. We plan to maintain expense growth in line with revenue growth by leveraging investments we've made over the past three years. Specifically, we expect total expense growth to be in line with total revenue growth. We've had a strong history of continuous improvement and continuous innovation. We're shifting the emphasis of our innovations and improvements to be on more tightly managing expenses. Sales is one of our largest expense categories. In sales, we'll be implementing significant innovations that we expect will improve sales expenses relative to contract value. Here are three examples. Territory design is an important factor in determining a salesperson's productivity, especially in a growth company. We've developed a highly sophisticated territory planning capability over the past few years. For 2020, we're making a major advance by making the territory planning process much more dynamic. Another important factor impacting sales expenses is how quickly new sales hires get into the territory and make their first sale. Over the past few years, we developed a very strong recruiting capability. For 2020, we're implementing changes to the recruiting process which will allow us to put salespeople in territory just in time, analogous to just-in-time manufacturing. A third factor impacting sales expenses is training. Over the past few years we developed sales training that is broadly recognized as outstanding. For our next evolution, we're reducing the amount of upfront training and shifting this training to be just-in-time as a salesperson needs it. This will enable us to be even more effective while getting salespeople into territory even faster. Beyond sales, we expect to get leverage from the G&A investments we've made over the past few years. We've already begun making these changes to ensure we get the full impact in our 2020 plan. Summarizing, we're shifting to getting returns from the investments we've made over the past three years while maintaining the long-term growth that captures our enormous market opportunity. Looking ahead, we are well-positioned for sustained long-term growth. We expect continued sustained long-term growth in GTS. We expect continued acceleration in GBS and Conferences and Consulting are on a strong path. Looking ahead to 2020 with the great strategic positioning of GTS and GBS together with leveraging the investments we've made, we expect double-digit topline growth and EBITDA growing approximately in line with revenues. With that I'll hand the call over to Craig.

Thank you, Gene, and good morning, everyone. Global Technology Sales, the largest part of our business continues to deliver strong double-digit growth. Global Business Sales continued to accelerate after inflecting to growth last quarter. Our strategy to deliver products and services with the compelling value proposition across all enterprise functions is working. Conferences and Consulting are having outstanding years. Third quarter revenue was $1 billion, up 10% as reported and 11% on an FX-neutral basis. Topline growth was impacted by about 100 basis points in the quarter from the product retirements we've previously discussed. In addition, contribution margin was 64% down 10 basis points from the prior year. EBITDA was $140 million, ahead of expectations, although down 6% year-over-year and 5% FX neutral. Adjusted EPS was $0.70 and free cash flow in the quarter was $190 million. Our Research business had a strong quarter. Research revenue grew 9% year-over-year in the third quarter and 10% on an FX-neutral basis. Third quarter contribution margin was 69%. Total contract value was $3.3 billion at September 30th, growth of 11% versus the prior year. We always report contract value growth in FX-neutral terms. I'll now review the details of our performance for both GTS and GBS. In the third quarter, GTS contract value increased 13% versus the prior year. GTS had contract value of $2.6 billion on September 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, down 16 basis points year-over-year. Our wallet retention rates show that our clients spend more with us each and every year because of the value we provide to them. GTS new business grew 12% versus the third quarter of last year, a strong rebound from the second quarter. New businesses are coming from a mix of new enterprises and growth in existing enterprises through sales of additional services and upgrades. We ended the third quarter with 12,728 GTS enterprises, up 2% compared to Q3 2018. We've added over 1,600 new enterprises so far in 2019. The majority of client losses are with our smaller, lower spending clients, which you can see in the client retention rates. Moving forward, we expect to grow the number of enterprises as well as expanding the contract value in those enterprises. The average contract value per enterprise continues to grow. It now stands at $208,000 per enterprise in GTS, up 11% year-over-year. Growth in CV per enterprise reflects both price increases as well as upsell and increased numbers of subscriptions. At the end of the third quarter, we had 3,355 quota-bearing associates in GTS, a growth of 14% year-over-year. We have made investments in the GTS sales force and have seen CV accelerate from 2017. Following the additions we made late last year and early this year, we are recalibrating our expense growth to ensure we align it with GTS CV growth. These changes are consistent with our continuing commitment to strong execution and sustained long-term double-digit growth. We expect GTS headcount growth to end 2019 at approximately 10%. With the hiring we've done, the sales force has the capacity to grow GTS contract value between 12% and 16% per year, consistent with our medium-term guidance. For GTS, the year-over-year net contract value increase or NCVI divided by the beginning period quota-bearing headcount was $104,000 per salesperson, down 4% versus the third quarter of last year. The higher headcount growth late last year and into this year brought down the average tenure as new salespeople take time to get the full productivity. One of the benefits of moderating the headcount growth exiting this year and moving into 2020 is that average tenure will increase, which should improve productivity. Turning to Global Business Sales. GBS contract value was $620 million at the end of the third quarter or about 20% of our total contract value. The momentum we saw last quarter continued, with GBS CV increasing 3% year-over-year. The acceleration in GBS contract value was driven by strength in GxL. Total GBS new business was up 26% and retention improved as well. GxL products are an important part of our strategy and continue to gain share. Looking at total contract value from the GxL products, we drove an FX-neutral increase of 65% year-over-year from $154 million to $254 million. We've updated the GxL data we provided the last few quarters on Page 11 of the earnings supplement to highlight the trend in GxL new business and contract value. We sold $35 million of GxL new business in Q3, up 39% 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 41% of our total GBS contract value, up 15 percentage points from Q3 of last year. We're driving increased client engagement through expanded service teams and growing adoption of individualized content and service. For the standalone of quarter, we drove the attrition rate down for GBS. For contracts that were up for renewal in the third quarter, attrition improved by about 500 basis points over the prior year quarter. Again, this is a result of the increased engagement we've discussed, a richer mix of GxL renewals, and all of our other retention programs having an impact. Our path to continued acceleration and double-digit growth for GBS is clear. As Gene detailed, the path to double-digit growth is based on new business growth and attrition improvement consistent with Q3. At the end of the third quarter, we had 910 quota-bearing associates in GBS or growth of 19%. Headcount was down sequentially as we are recalibrating our cost base. We expect GBS headcount growth to moderate by the end of the year as we shift to reap the benefits of the investments we've made. In conferences, revenues increased by 16% year-over-year in Q3 to $66 million. FX-neutral growth was 19%. Third quarter contribution margin was 41%, down 239 basis points from an especially strong third quarter 2018. The largest impact on the year-over-year Q3 contribution margin comparison was the movement of our Europe supply chain conference into Q2. On a year-to-date basis, conferences contribution margin was flat compared to the prior year. We had 18 destination conferences in the third quarter. On a same conference FX-neutral basis, revenues were up 20% with a 9% increase in attendees and a 100 basis point improvement from same conference contribution margin. Turning to Consulting. Third quarter Consulting revenues increased by 18% year-over-year to $93 million. FX-neutral growth was 20%. Consulting contribution margin was 28% in the third quarter. Labor-based revenues were $78 million, up 11% versus Q3 of last year or 13% on an FX-neutral basis. Labor-based billable headcount of 809 was up 11%. Utilization was 57% as the third quarter is our seasonally lowest utilization quarter and also when our annual MBA hires join the company. Backlog at September 30th was $109 million, up 3% year-over-year on an FX-neutral basis. Our backlog provides us with about 4.5 months of forward revenue coverage in line with our operating targets. Contract Optimization revenues were up 74% versus the prior year quarter. As we have detailed in the past, this part of the Consulting segment is highly variable. The compares get significantly more challenging in the fourth quarter. SG&A increased 15% year-over-year in the third quarter and 17% on an FX-neutral basis. We will continue to grow sales capacity and the enabling infrastructure to support our strategy of delivering sustained double-digit growth over the long-term. We have started the process to recalibrate the sales and infrastructure investment to align cost growth with revenue growth. EBITDA for the third quarter was $140 million, down 6% year-over-year on a reported basis and 5% on an FX-neutral basis. In the third quarter this year, EBITDA was adversely affected by about four percentage points or $5 million impact due to the product retirements we have discussed. Taking that into consideration, underlying FX-neutral EBITDA was down about 2% in the quarter. Depreciation was up about $3 million from last year as additional office space went into service. Amortization was flat sequentially. Integration expenses were down year-over-year as we have moved past the biggest part of the integration work. During the quarter, we recognized an unrealized gain of $9.1 million related to a minority equity investment that we sold in October. The gain is in other income. This was a heritage CEB minority investment in a small company, which was acquired. Net interest expense excluding deferred financing costs in the quarter was $22 million, down from $25 million in the third quarter of 2018. Our lower net interest expense resulted from lower average debt balances of roughly $170 million. The Q3 adjusted tax rate, which we use for the calculation of adjusted net income was 22.8% for the quarter, lower than expected as a result of more favorable income mix and timing of reserve movements. The tax rate for the items to adjust net income was 24.2% in the quarter. Adjusted EPS in Q3 was $0.70, above our expectations due to operating upside and a lower tax rate. In Q3, operating cash flow was $220 million, compared to $249 million last year. The decrease in operating cash flow is primarily driven by lower EBITDA. Q3 2019 CapEx was $36 million and Q3 acquisition and integration payments and other non-recurring items was approximately $7 million. This yields Q3 free cash flow of $190 million, which is down 17% 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 119% of adjusted net income, excluding divested operations and working capital timing. The lower conversion is due to timing and we expect to finish the year with the conversion rate in the high 120s. Turning to the balance sheet. Our September 30th debt balance was about $2.2 billion. Our debt is effectively 100% fixed rate. Adjusting EBITDA for the divestitures, our gross leverage ratio is now about 3.3 times EBITDA. We repurchased $95 million of stock in the quarter at an average price of about $134 per share. We will continue to be price sensitive and opportunistic as we return capital to shareholders. We have $777 million remaining on our repurchase authorization. Our capital allocation strategy remained the same. We deployed 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. Earlier this month, we acquired TOPO, a provider of insight and advice for sales leaders. The overall purchase price was $33 million with a portion of the consideration deferred for a couple of years. Turning to the outlook for 2019. Revenue, adjusted EBITDA, free cash flow, and adjusted EPS guidance all remain unchanged from last quarter. The top line growth outlook on an FX-neutral basis remains strong and we are committed to the same second half targets we provided in July. As you're thinking about the fourth quarter in the context of third quarter results, there are two points to keep in mind. First, Consulting outperformed our expectations in the quarter in both labor-based and Contract Optimization. Most of the upside was revenue we previously forecasted for the fourth quarter. And second, as we began the process to realign our expense growth with our revenue, we shifted some costs out of Q3 and into Q4. Our guidance reflects FX rates as of September 30. FX is causing a roughly two-point negative impact to projected 2019 full-year growth rates across revenue, EBITDA, adjusted EPS, and free cash flow. The highlights of our full-year guidance are as follows: We expect FX-neutral revenue growth of 10% to 11%; we expect adjusted EBITDA in FX-neutral terms of down 1% to up 4%; we expect an adjusted tax rate of around 25.5% for 2019 which implies a mid-50% rate for the fourth quarter; our tax planning related to our intellectual property is ongoing and we anticipate incremental tax costs in the fourth quarter. Please note that, if you are adding back from GAAP net income the rate for the tax effect on the add-backs is also about 25.5%. For 2019, we expect free cash flow of $400 million to $430 million. That is a 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. In summary, GTS contract value growth continues to be strong and sales of our new GxL products and GBS continue to rise. Our Conferences and Consulting businesses both had great quarters. We expect to finish the year with free cash flow conversion from net income in the high 120 percents. As we prepare for 2020, we are actively recalibrating our investments to ensure cost growth is in line with revenue growth. And we continue to apply the Gartner 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.

Yeah. Thank you. To start, can you just give some more color on the improved GTS new business sold trend? And I guess, what I'm wondering is, last quarter you talked about an abnormal amount of management or operational change and that had some impact. I'm just curious, does it tie back to those regions or just anything you can say about the improved GTS new business sold trend?

Good morning, Jeff. Thanks for the question. I think our new business performance, obviously we want to drive consistent double-digit improvements in our new business on a year-over-year basis. We got back on track for that trend in the third quarter with strong new business growth. I think that the challenges we detailed last quarter, we are working our way through them. It takes time to work through them. So I would definitely not attribute the rebound to – those things all bounce back. But I just attribute it to: one, we have a huge market opportunity which we continue to go after; two, we've continued to grow our sales force to go after that opportunity; and three we have an expectation that we'll drive double-digit growth in our new business to basically support or sustain double-digit growth within GTS.

Okay. And then on the way that you're managing expenses and margin I know it's being well received from your shareholder base, but I guess just want to make sure that the way you're managing it doesn't ultimately impact growth. And I hear you on the GBS sales headcount that you've kind of already made the investment and it's time to harvest that. But the other things that you're citing, they sound to me like kind of the continual improvements that Gartner is always making. So am I wrong about that? Is there some reason why we should think that those productivity impacts will be bigger from this round of initiatives? Or are there other areas other than kind of harvesting GBS sales headcount where you're actually reducing spend or not making investments that you otherwise would have made?

Hey Jeff, it's Gene. I've categorized our efforts into three areas. First, in Global Business Services, as you mentioned, we have made significant investments since acquiring CEB, and we are starting to see returns from those investments. We have trained the sales force and launched the products, and now we are focused on ensuring we generate returns from this initiative, which we believe has significant potential. Second, in Global Technology Services, we made similar investments over the past year, even increasing our investment rate compared to before the CEB acquisition. While the situation is not as pronounced as in GBS, we are implementing innovations that we believe will materially impact expenses relative to contract value, which is crucial for sales. Lastly, we believe there is potential to achieve leverage in our General and Administrative expenses that we haven't fully realized in recent years. For example, as we expanded, we undertook several major real estate projects, and those projects have now reached a stage where we can start reaping benefits, leading to a reduced drag on G&A. This is part of the reason we anticipate G&A growth will lag behind our overall revenue growth in the future.

Okay. Thank you.

Thank you, good morning. I was wondering if you could just talk a little bit more around the client count reduction. It's been three quarters now. I know you said most of it was on the small business side, but that's usually the case. So I was just wondering if there's anything incremental. And your confidence in growing that again are you going to shift strategy to more larger accounts or if there's any change there at all?

Good morning, Manav. And thanks for the question. I think the enterprise account trend has a few things going on there. One is; as we have talked about in the past, any M&A obviously won't impact that count and we have been in a period where there's been more M&A than normal, and that has a modest impact on the count. The second piece which we talked about last quarter was, we're continually refreshing and updating our data sources, and that does and has over the last three or four quarters impacted the enterprise count a little bit to the negative as we've cleaned up data and consolidated certain enterprises; again, another modest impact. The third thing I'd say is, which I alluded to in the prepared remarks, we're continuing to add new enterprises at a very strong clip in GTS. As I mentioned through the first three quarters, we've added over 1600 gross new enterprises. You will note a modest uptick or downtick I should say in our client retention rate. And essentially you're not seeing the increases you've historically seen in our enterprise count because of the cleanup and because of the small downtick in the client retention rate. Going forward, I don't think there's any change in the strategy. It's not about going after larger companies. The note I'd make around the really small companies and small tech companies in particular is, we have a different strategy around how we're attacking them. The bulk of our market is really not them, and so, we want to make sure that we handle that bit of the business in a more efficient, more effective, and more profitable manner. But the market opportunity remains really vast, and we'll continue to go after that opportunity by adding new salespeople and by growing the enterprise count over the long term.

Okay, got it. And Gene just to follow-up on your last comment there around seeing the returns in a lot of your investments and making sure you see more. I guess how will we see it? Like shouldn't we also see some of that with some signs of improved margins, given the heavy investment? Or is that maybe two years out which is why you guided to flat margins for next year?

Hey, Manav, I'll jump in. You mentioned margin so Gene looked over to me. So I think the way to think about it is, I think you're right. So two things; one is, we're not providing 2020 guidance yet. We're working our 2020 operating plan as we speak and we'll give you and all of our investors the details of that plan in early February. Two, I do think there is time that takes to actually see those benefits flow through especially given the routable nature of the bulk of our revenues. And so what Gene stated and which I affirmed is, we believe for 2020 revenues and expenses and EBITDA will grow roughly in line with one another. And in my mind that's the first step towards seeing the real benefits of all the investments we've put in place.

All right. Got it. Thank you, guys.

Good morning, everyone. Gene mentioned some changes in sales, and I would like to get more details on that. I've always considered your sales turnover crucial for long-term success. By lowering that upfront and implementing a just-in-time approach, what does that really entail? Additionally, is there any risk regarding productivity with this change, as well as with the modifications in the recruiting process and the new territory management strategies? What are the potential risks associated with those strategies?

There is always risk in any initiative, but we believe these changes have significant upside potential. For instance, regarding training, our traditional approach involved onboarding new hires with a training period of six to eight weeks, which is generally effective. However, we've noticed that retention of information diminishes after only a couple of weeks. Therefore, we've developed an innovation to condense initial training to about two weeks, with further training provided throughout their first year as needed. For example, when a salesperson is about to interact with a client regarding a specific product, it’s far more beneficial for them to receive targeted training on handling client objections just before that interaction rather than several months beforehand when retention might be lower. This new method ensures that while they receive the same amount of training, it's delivered more effectively by giving them the foundational tools upfront and then weekly updates on relevant topics tailored to their immediate challenges. Studies support that salespeople who train right before they need to apply what they've learned are more engaged compared to those who train weeks in advance for tasks they won't tackle until months later. So, we're looking at the same training level, but with a smarter delivery approach. This also positively impacts our cost structure, as representatives can enter their territories sooner than before, allowing them to familiarize themselves with their client base and achieve their first sale more quickly, which boosts their confidence.

Great. That's helpful. And then Craig just one for you. When you talked about free cash flow, I think I heard you say, excluding the divestitures. But could you also say when you're talking about conversion excluding working capital movements. And if so, two part or are you changing how you talk about cash flow conversion, number one? Number two, is there anything about the working capital characteristic particularly now that you've got CV growing at GBS that we should think it's different than what it's been in the past?

Good morning, Gary. That's a great question. The working capital timing adjustment we discussed refers to the catch-up from when we fell behind at the end of 2017, which impacted our free cash flow for that year. At the time, we estimated that this would affect our free cash flow by about $40 million, as we faced challenges with invoice integration, causing approximately $40 million of 2017 free cash flow to be pushed into 2018. When we mention the adjustment for working capital timing, we are referring to reallocating that $40 million back to 2017 to improve our year-over-year comparison and provide a clearer picture of our organic growth rate in free cash flow. Regarding the second part of your question, there are no changes to the company's working capital characteristics. We remain committed to capitalizing on the benefits of the negative working capital from our Research businesses. We are very focused on this, as previously discussed. As GBS contract value accelerates, it positively impacts those negative working capital elements; with this business growing faster, we can leverage it more. Lastly, we are also dedicated to enhancing the efficiency of our working capital. As we move forward, we expect to continue gaining benefits and potentially see even greater advantages from the fundamentals of our working capital model as both GTS CV and GBS CV grow.

Thank you.

Thanks very much. Craig, you mentioned the two main reasons for keeping the guidance you see in Consulting and the expenses shifting into Q4. Would you say there is similar conservatism in the guidance than last quarter? And are there any incremental factors that you're seeing that are maybe a little bit less good and that's the reason you're keeping it the same?

Good morning, Toni. Thank you for your question. Regarding our guidance, after Q2 and our adjustments, we focused on meeting our commitments for the second half of 2019. As we progressed through Q3, the timing related to Consulting and the deferral of certain expenses from Q3 to Q4 had significant impacts. While you could say we were somewhat conservative with the Q3 estimate, I don't want to suggest an overarching conservatism regarding our second half target, which we remain committed to.

Okay. Great. And then I wanted to ask about Conferences. I think I probably hadn't appreciated the link between Conferences and Research sales as much as I should have. And so, can you just talk about how the GBS Conferences have been going? And I guess if there's any way to quantify how much benefit you normally get from a conference translating into Research sales later on? And anything in terms of improvement with Evanta, that would be great? Thank you.

So, our Conferences are a great business and it's a great way to leverage our Research, where we do research on a particular topic. Obviously, that's very relevant to the people that are Research clients. It's also very relevant to people that are not yet Research clients. And so, we've introduced, as you pointed out, Conferences for GBS, taken for the ones that we've had smaller and those have all done great. They've really grown very rapidly, they've been very attractive to both the existing Research clients as well as people buying their own ticket separately. And we intend to continue that whole strategy.

Hi, good morning. Thank you for taking my questions. I wanted to discuss GBS a bit. When considering your ability to achieve double-digit growth in GBS next quarter, is that solely dependent on generating new GxL business, or do you believe there is still some potential for improvement in your legacy attrition?

Good morning, Andrew. I believe it's both factors, as we've discussed throughout the year. Our primary focus has been on GxL and new GxL business, which has been performing very well, as detailed in our disclosure information. However, we've also concentrated on enhancing the attrition rates across the entire GBS portfolio. The numbers we've shared over the past few quarters include both GxL and the legacy leadership talent pool. We've observed significant improvements in our attrition rates, which have advanced each quarter, with Q3 being our strongest so far. This improvement spans both GxL and the legacy leadership council business. Therefore, this is indeed a major factor for us. The more significant factor is the ongoing momentum in new GxL business. Additionally, every dollar we save by reducing attrition contributes positively to our overall growth rate.

Great. Thank you. And then, within GxL, again, I know you target a number of different verticals there, HR, sales so on and so forth. I'm just curious if you could speak to where you're seeing the most traction. And then, maybe on the flipside, which verticals you would like to see grow a bit faster? Thank you.

Yes, I'll address the quantitative aspect of that question while Gene can provide a strategic perspective. Since launching the GxL products, we've observed consistently strong and accelerating growth across all functions we serve. Notably, more than half of our new business generated in each of the last three quarters has come from the new GxL products launched after the acquisition. This indicates that we are performing well in marketing and supply chain areas related to GxL offerings that existed prior to the CEB acquisition, but we are also experiencing rapid growth in all functions for which we now have GxL products. Specifically, HR, legal, and finance are all performing exceptionally well with GxL new business seeing significant year-over-year increases, and we are observing substantial progress across all functions.

Yes. If I could add to that there, we don't have a place that we sort of say, hey, it's underperforming relative to the expectations.

Thanks so much. Wanted to go back to the margin discussion. If I go back a number of years ago before you guys bought CEB, now GBS, you were generating adjusted EBITDA margins of close to 19% or so. I know GBS was a different business. You've made a lot of investments and a lot of improvements. But I think when you bought the company, you were hoping to make it a Gartner-like company, which you're making significant amount of progress already. Do you think we can get back to these adjusted EBITDA margins around 19% over time?

Good morning, Jeff. Yes, we are committed to achieving returns on our investments, and we've spent considerable time discussing how we are aligning our cost structure with our revenue growth. It's important to understand that we are focused on this goal. As we move through 2020, we can begin discussing what 2021, 2022, and 2023 might look like. For now, our priority is to ensure we complete this year strong, entering 2020 in the best possible condition regarding both bookings and cost structure. After that, we'll take it from there.

Okay. Fair enough. Thanks so much.

Hi, my first question is about the apparent shift in strategy and whether the investment cycle for GxL has come to an end. Is that correct? If it is, why is this quarter different from the others?

So it's Gene. There is a shift in strategy. You're right, and over the last three years, we have been investing for the future. Specifically, we've focused on implementing the GxL products, training our sales force, increasing our sales capacity, and integrating all the GTS tools and training into GBS, which required significant investment. Now that we've made those investments, we believe we can leverage them effectively. Therefore, we are shifting from making investments to focusing on accelerating the benefits from those investments. We have been investing ahead of our CEB growth, especially in GBS, and now we want to ensure we maximize the returns from those investments.

Okay. And then secondly, and I guess this for you Craig, because you get the margin questions or Gene will at least point to you for them. On the margin side, if GxL improves and the revenues accelerate there as you're implying with the guidance of the contract value, is it fair to say that margins will follow it up? Because I mean it's been an area of dilution. Or is there any reason to think that there'd be a separation there? Thanks.

Hi, good morning, Joe. Thank you. As Gene mentioned, we have made significant investments, primarily in our workforce, and we continue to incur costs associated with that. Our cost structure remains relatively fixed, although it will be affected by inflation and similar factors. We believe that as we enhance our GxL and overall GBS business, it will positively impact our margin profile, all else being equal. However, it's important to note that GBS accounts for only about 20% of our total contract value and approximately 15% of our total revenue, so its impact on margins is relatively modest. The primary source of our margin and profit growth actually comes from our GTS business, which is a $2.6 billion operation growing at 13% annually. We are dedicated to ensuring our cost growth aligns with revenue growth, which is our strategy as we plan for 2020. We will continue to keep everyone informed about how we will manage the business in the coming years.

All right. Thank you.

Hi. Thanks. Good morning. You indicated earlier that GBS CV growth will be about 9.6% in the fourth quarter if new business and attrition improvements in the third quarter carry over to 4Q. Can you outline precisely what assumptions that involve and maybe talk about the top two or three factors that could cause the trends from 3Q not to carry over to 4Q?

Good morning, George. The assumptions for the top line are a 26% year-over-year growth in new business, which we achieved in Q3, along with roughly a 500 basis point improvement in attrition rates, also achieved in Q3. These assumptions were used to estimate the 9.6% based on the amount of contract value expiring in the fourth quarter. Q4 is a significant quarter for us, particularly for GBS, as we generate a substantial portion of our new business then, along with the expiring contract values. It is indeed the quarter with the highest volume of expiring contract values. If we extend what we observed in Q3 into Q4, taking into account the improvements in new business and attrition, our calculations lead us to a 9.6% growth projection.

Got it. That's helpful. And I want to tackle the margin question a little bit differently. Last quarter, you took down the full year margins from about 17.5% to about 16% at the midpoint for EBITDA because you were pulling forward the open territory hires, and now it sounds like you're going to recalibrate your expense growth to match the top line growth, and it's going to take about a year for 2020 for that to happen so roughly flat margins. But as you manage the margins longer term is there room for the margins to get back to where they were just about a quarter ago in terms of the outlook of around 17.5%? Or do you see a structural change in the business that might cause 16% to be the new norm?

Hey, George. Great job rephrasing the question thoughtfully, thank you for that. I want to emphasize that there aren't any fundamental changes in the business. We're operating it similarly to how we've always done at Gartner. Our main focus for 2020 is to ensure that our cost growth aligns with our revenue growth, which is the first step in the process. If everything goes according to plan, there is potential for margin improvement. We will provide more details on that as we navigate through this initial phase, which is primarily about ensuring we are aligned for 2020.

Got it. Thank you.

Well, as you heard today, we, once again, delivered strong performance across all three of our businesses Research, Consulting, and Conferences. Gartner formula for sustained long-term growth continues to drive success in our Research business. Our GTS organization continues to deliver strong performance. GBS continued on the path towards double-digit growth and we expect GBS contract value to continue to accelerate. We delivered credible value to every major function of the enterprise. We have a vast market opportunity. We've made investments over the past few years that positions well to capture that market opportunity. And looking ahead to 2020 with the great strategic positioning of GTS and GBS together with leveraging the investments we've made, we expect double-digit topline growth and EBITDA growing approximately in line with revenues. Thanks for listening. We look forward to updating you again next quarter.