Gartner Inc (IT) — Q1 2020 Earnings Call Transcript

Good morning, everyone. We appreciate you joining us today for Gartner’s first quarter 2020 earnings call, and hope you are well. Joining me today on the call are Gene Hall, Chief Executive Officer; and Craig Safian, Chief Financial Officer. The call will include a discussion of first quarter 2020 financial results and our updated outlook for 2020 as disclosed in today’s press release. In addition to today’s release, we have provided a detailed review of our financials and business metrics and an earnings supplement for investors and analysts. We have posted a 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. On the call, unless stated otherwise, all references to EBITDA are for adjusted EBITDA, with the adjustments as described in our earnings release. Reconciliations for all non-GAAP numbers we use are available in the Investor Relations section of the gartner.com website. We’ve updated the definition we use for free cash flow, the cash provided by operating activities determined in accordance with GAAP less payments for capital expenditures. Definition of free cash flow no longer excludes acquisition and other non-recurring items as we believe this change better captures actual cash generated in the period for the purposes of capital allocation. In the supplement, we’ve included the historical add-backs for prior periods as well as what they would have been in the first quarter to allow for comparability. Finally, all contract values and associated growth rates we discuss are based on 2020 foreign exchange rates, unless stated otherwise. 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 2019 annual report on Form 10-K and quarterly reports on Form 10-Q as well as in other filings with the SEC. We encourage all of you to review the risk factors listed in these documents. Now I will turn the call over to Gartner’s Chief Executive Officer, Gene Hall.

Good morning, and thanks for joining us. I hope you’re all safe and healthy. The COVID-19 pandemic is a humanitarian crisis that continues to drive massive social, economic and operational disruption everywhere around the world. As we navigate this environment, there are three messages you should take away from our discussion today. We’re well positioned to help our clients address the pandemic and the economic downturn. We’ve taken steps to carefully manage our costs and cash flow in response to the economic downturn, and we will come out of the recession strong and well positioned to resume driving long-term, sustained double-digit growth. As most of you know, Gartner operates in three business segments: Research, Conferences and Consulting. Each of these business segments has been impacted somewhat differently by the current environment. Research is our largest and most profitable segment and remains the core of our value proposition. Our Research segment is well positioned to operate as a virtual business. Prior to the pandemic, the majority of our analysts, experts, and thought leaders were located in countries around the world. They were already supporting our clients via tele and video conferences. A large share of our sales and service teams were placed in centralized office locations, where we’re selling and servicing our clients remotely. All Gartner associates are equipped with laptops configured for a virtual work environment as part of our business continuity program. In response to the pandemic and local government directives, we closed our offices during Q1. Because we had a strong infrastructure in place, associates were able to make a smooth transition to working from home. Of course, not everything went as planned. For example, some associates have relatively slow Internet connections. And some managers had to adjust to managing their teams remotely. Our most immediate challenge has been an increased difficulty bridging prospects and some clients in their remote environments rather than in their offices. We continue to make a significant global impact with our research insights, tools and advice. We’re agile with our research content. We continuously adapt our risk agenda to ensure we’re addressing topics that support our clients’ current mission-critical priorities. Q1 was no different. When news of the pandemic broke, we added comprehensive content for every major functional role across the enterprise on critical topics, such as what steps to take in response to COVID-19, how to ensure that employees are productive working from home, and how to make smart cost reductions across the organization. Additionally, we took the best cross-practice content and made it available to all clients. Findings from our expanded coronavirus coverage and real-time surveys are being widely used by our clients. These insights have also been cited by well-known media outlets, including the Wall Street Journal, CNBC, The Economist, and more. During Q1, we significantly increased the number of webinars and other virtual events where we deliver content to our clients. These have been highly valued. For example, in early March, we launched a global webinar on Leading Through COVID-19. Registrations for that event were about eight times more than our average for 2019 webinars. Client engagement is one of the biggest drivers of retention. By being agile and adapting our content, our client engagement has remained strong. Our services are very cost-effective and provide high value to clients because we’re able to deliver the right content to the right audience at the right time in a virtual format. Our new business and renewals have been impacted by COVID-19. In today’s environment, we see three categories of clients. First, there are those companies and industries most impacted by COVID-19, such as travel, entertainment and retail. Renewals and new business with companies in these industries are more difficult than they were last year. However, many realize they continue to need our services and are continuing to buy, just at a slower rate. The second category includes companies that have been minimally impacted economically by COVID-19, such as those providing goods or services like food, cleaning supplies, and some types of software. Renewals and new business within these companies continue at about the same pace as they have in the past. The third category comprises companies that are not directly impacted by COVID-19, but are experiencing reduced demand for their products and services. While these companies continue to buy, they’re scrutinizing all purchases, including Gartner products and services. This can extend the time to complete a sale or a renewal. Across Global Technology Sales (GTS) and Global Business Sales (GBS), our clients have expressed how important our services are, especially during these turbulent times. Our HR, finance, and legal practices had demand and buying cycles similar to IT. Out of the GBS practices, supply chain and marketing businesses had the weakest performance in Q1. Due to interruptions in supply chains, many supply chain leaders have been forced to pause their strategic initiatives and become more directly involved in tactical supply chain operations. This often extends the time to complete a sale or renewal. As we discussed last quarter, we’re phasing out certain marketing products with low profitability, which has reduced the retention and growth rate of our marketing practice. Overall, our Research business is well positioned to operate successfully as a virtual business. Our Conferences segment has been impacted the most by COVID-19. Because of government mandates and health concerns, we were able to hold only a limited number of conferences during Q1. With this situation, we’re now planning to hold 17 destination conferences later this year out of our original full year plan of 77. This, as well as our reduced events schedule, will reduce our expected revenues from our Conferences business. Based on the reduced expected revenues from this segment, we’ve taken steps to reduce costs, including staff reductions. Our conferences provide tremendous value to both attendees and exhibitors. We’re in constant contact with our exhibitors. They continue to have a high level of interest and are ready to return when it’s safe to do so. There’s a similar level of interest among potential attendees. We’re carefully developing changes to our conferences to increase safety, such as sanitization standards, additional separations, etc. We’re also developing virtual conference formats. We held our first virtual conference just last week. That conference, aimed at sales leaders, went from concept to event, including the marketing in less than three weeks. There were nine sessions held over a single day. We had more than 1,900 total registrations for this conference. The Net Promoter Score was 77, a strong score that exceeded our expectations. While we are operationally planning to hold conferences during the latter part of the year, we recognize that this may not be possible due to government mandates or health concerns. As a result, our updated financial guidance assumes that we will be unable to hold these conferences. Looking to the long term, we expect Conferences to continue to be an important contributor to our overall business. Gartner Consulting is an extension of Gartner Research and provides clients with a deeper level of involvement through extended project-based work to help them execute their most strategic initiatives. Consulting has also been impacted by COVID-19. Many clients are postponing major new initiatives until they have more clarity as to the impact of the pandemic and the economic downturn. Consequently, our backlog was up only 1% during Q1. Looking across our business, during Q1, we closed our offices worldwide for the safety of our associates and to comply with government mandates. Consistent with guidelines, we’ve reopened our offices in Shanghai and Beijing. We’ll use our experiences with these offices to reopen in other countries when shelter-at-home directives begin to relax. We’ve taken steps across the business to manage our costs without impairing our ability to drive growth in the future. We’ve implemented very tight controls in staffing levels, including hiring freezes where appropriate. We reduced staff in our Conferences business, as I mentioned earlier. We significantly cut non-labor spending and slowed our capital expenditures such as the build-outs of new office space. The operational changes we made will help ensure we have positive cash flow. In addition, we’re tightly managing our financial operations functions to positively impact cash flows. We’ve also taken measures to help ensure we maintain adequate liquidity. We ended the quarter with $228 million in cash. On April 1, we drew an additional $300 million from our revolver, and we have another $700 million of capacity available. Finally, we’ve negotiated an amendment to our credit facility with financial covenants that gives us improved flexibility. We will come out of the recession strong and well positioned to continue driving long-term sustained double-digit growth. We continue to have vast market opportunity across all sectors, sizes, and geographies. We’ll continue to maintain and improve our core capabilities to capture our market opportunity while carefully managing our cost structure and cash flow. We plan to maintain and improve our analyst and adviser capability for developing highly valuable research insights, and strong services capability to meet client needs. We plan to maintain and improve our sales coverage and capacity while taking this opportunity to address underperforming sales territories. We will remain agile, so we’re prepared for whatever may come next. In summary, as we navigate the uncertainties of this unique environment, these are the three messages you could take away from our discussion today: we are well positioned to help our clients address the pandemic and economic downturn; we’ve taken steps to carefully manage our costs and cash flow in response to the economic downturn; and we will emerge from the recession strong and well positioned to resume driving long-term, sustained double-digit growth. I’ll now turn the call over to our CFO, Craig Safian.

Thank you, Gene, and good morning, everyone. I hope you, your families, and your colleagues are safe and healthy as we navigate the pandemic and the economic downturn. I’ll provide an update on our strong liquidity and capital structure as well as an overview of the cost actions we have taken to ensure our financial flexibility. Then I will review our first quarter results, including the impact of COVID-19. Finally, I’ll describe our updated outlook for the year within the context of the rapidly evolving macro environment. Beginning in early March, as we started to see the impacts the pandemic could have on our business, we quickly pivoted to EBITDA preservation and cash conservation mode. Gene described many of the actions we took. The goal of all of those actions was to ensure our financial strength and ongoing flexibility. I’ll start this morning with a discussion of our cash and balance sheet position. At the end of the first quarter, we had $228 million of cash, which is more than we need to run the business. On April 1, to increase our cash position and preserve financial flexibility, we drew $300 million on our revolver, bringing our cash balance to $528 million. This puts our liquidity in a very strong position, reinforced by our ability to continue to generate positive free cash flow. We have additional revolver capacity of more than $700 million available to us as well. Cash flow trends in April continued on a positive track. Our March 31 debt balance was about $2.2 billion. That increased by $300 million to $2.5 billion after the April 1 revolver draw. We have also amended our credit facility to provide greater covenant flexibility as follows: First, our total leverage covenant has increased 0.5 turns from 4.5 to 5x. Second, our secured leverage covenant has increased by 0.25 turns from 3.5 to 3.75x. Our interest coverage covenant is unchanged. The calculations use gross debt, trailing 12-month EBITDA, and trailing 12-month interest expense. Gross debt, EBITDA, and interest expense used for the covenant calculations are defined in our 2016 credit agreement. Based on the debt levels after the incremental revolver draw on April 1, our leverage ratios under the covenants were 3.5x total debt, 2.4x secured debt, and 7.4x interest coverage. These are all well within the required levels for compliance under our credit facility. While we don’t expect to need the incremental covenant capacity, we secured the amendment to ensure future financial flexibility. We repurchased $73 million of our stock in the first quarter. Of that total, $34 million related to open market stock repurchases. We paused our share repurchases during the last week of February and will not resume until we have a clearer picture of how the pandemic and economic downturn will play out. In addition to our strong cash position and access to capital, we are taking steps to align our costs with our revenue, allowing us to continue to generate positive free cash flow. Going into the current situation, we had already built a plan for 2020 that aligns cost growth with revenue growth. Following the rapid changes in the world as a result of COVID-19, we took additional steps to ensure our long-term financial health and operational excellence through a number of cost-avoidance initiatives. We made tough decisions to eliminate merit increases, freeze hiring temporarily, restrict travel, cancel internal meetings, and reduce third-party spending. We have also made reductions to our Conferences staff to better align our cost structure with our Conferences revenue and new schedule. These decisive actions help ensure our ongoing financial flexibility in this challenging and uncertain environment without compromising on the quality of the insight, advice, and service we provide to our clients. We remain well positioned to reaccelerate and drive future growth once the timing of the economic recovery from this pandemic becomes more evident. Moving to our first quarter results. Research and Consulting growth were in line with our expectations, and we moved quickly to manage costs late in the quarter. First quarter revenue was $1 billion, up 5% as reported and up 6% on an FX-neutral basis. Excluding Conferences, our revenues were up 11% year-over-year on an FX-neutral basis. In addition, the contribution margin was 66%, up 200 basis points versus the prior year. EBITDA was $214 million, up 51% year-over-year, and 53% FX neutral. Our EBITDA performance was tracking strongly through February and then benefited from the cost-avoidance initiatives we implemented in March. Adjusted EPS was $1.20, and free cash flow in the quarter was $31 million. Research revenue in the first quarter grew 10% year-over-year on a reported basis and 11% on an FX-neutral basis. First quarter contribution margin was 72%, as margins benefited from temporary cost-avoidance initiatives, which we will only keep in place while the macro environment remains challenging. The total contract value was $3.5 billion at March 31, with FX-neutral growth of 11% versus the prior year. As we do each year, we have updated our historical research metrics at 2020 FX rates in our earnings supplement. Global Technology Sales contract value at the end of the first quarter was $2.8 billion, up 11% versus the prior year. GTS contract value growth and associated metrics performed well in January and February before slowing late in the quarter as the COVID-19 response led to lower new business growth and modestly lower retention rates. The more challenging selling environment had an impact on most of our reported metrics. Client retention for GTS remains at around 82%, down about 50 basis points year-over-year. Wallet retention for GTS was 104% for the quarter, down about 200 basis points year-over-year. GTS new business declined 2% versus last year. We ended the first quarter with 12,826 GTS enterprises, slightly up from last year. The average contract value per enterprise continues to grow. It now stands at $219,000 for enterprise in GTS, up 11% year-over-year. Growth in contract value per enterprise reflects a combination of upsell, increased number of subscriptions, and price. At the end of the first quarter, we had 3,196 quota-bearing associates in GTS, representing an increase of 5% year-over-year. As part of our cost reduction programs we announced in late March, we temporarily froze headcount growth. For GTS, the year-over-year net contract value increase, or NCVI, divided by the beginning period quota-bearing headcount, was $92,000 per salesperson, down 21% versus the first quarter of last year. As we gain more clarity on the economy and the short-term demand environment, we will look to increase sales hiring to position us for sustained long-term double-digit growth on the top and bottom line. Global Business Sales contract value was $646 million at the end of the first quarter. That’s about 20% of our total contract value. Contract value growth was 8% year-over-year, both reported and organic. GxL contract value grew 48% to $307 million, while legacy contract value declined 13% year-over-year to $338 million. Total GBS new business was down 12% in the quarter, impacted largely by supply chain and marketing. Our supply chain practice saw a decrease in both retention and new business. The supply chain practice was uniquely affected in the quarter by the global disruptions caused by the pandemic developments in Asia. Last quarter, we explained that we’ve stopped selling and renewing some lower-margin marketing products. As expected, this impacted GBS growth. The GxL legacy split in GBS becomes less meaningful every quarter, so we are phasing out reporting GBS in that way. This quarter, we are providing the new business and attrition dollars for GxL and legacy as we did in 2019. In the first quarter, total GxL new business was $22 million, while legacy new business was $5 million. Also in the first quarter, GxL attrition was $17 million and legacy attrition was $14 million. Client retention for GBS was 83%, up about 170 basis points year-over-year. Wallet retention for GBS was 101% for the quarter, up about 700 basis points year-over-year. We ended the first quarter with 5,025 GBS enterprises, down about 4% from last year. The average contract value per enterprise continues to grow. It now stands at $128,000 per enterprise in GBS, up 13% year-over-year. Growth in contract value per enterprise reflects upsell, an increased number of subscriptions, and price. At the end of the first quarter, we had 862 quota-bearing associates in GBS, down 1% year-over-year. Headcount was down sequentially and year-over-year as we optimized our territories and then temporarily froze hiring as part of our cost-avoidance program. For GBS, the year-over-year net contract value increase, or NCVI, divided by the beginning period quota-bearing headcount was $57,000 per salesperson, a significant improvement compared to when it was negative last year. As we communicated in March, the Conferences segment has been materially impacted by the global response to the pandemic. We were able to hold a few small conferences early in the first quarter, resulting in $14 million of revenue. We will not have any conferences through August. For the rest of the year, we have revised the schedule for in-person conferences. The result is a plan for fewer conferences with a focus on maximizing the value we deliver for our clients. I’ll review some additional points related to Conferences in the guidance section a bit later. First quarter Consulting revenues increased by 3% year-over-year to $96 million. FX-neutral growth was 4%. Consulting contribution margin was 31% in the first quarter, down 14 basis points versus the prior year quarter. Labor-based revenues were $81 million, up 3% versus Q1 of last year, or 4% on an FX-neutral basis. Labor-based billable headcount of 808 was up 9%. Utilization was 62%. Backlog at March 31 was $110 million, up 1% 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 target. Contract Optimization revenues were up 1% on a reported basis versus the prior year quarter against the difficult comparison. As we have detailed in the past, this part of the Consulting segment is highly variable. SG&A decreased 4% year-over-year in the first quarter and 3% on an FX-neutral basis as the cost-avoidance initiatives we implemented, specifically around internal meetings and travel, went into effect. EBITDA for the first quarter was $214 million, up 51% year-over-year on a reported basis and up 53% on an FX-neutral basis. Depreciation in the quarter was up approximately $3 million from last year as additional office space went into service. Amortization was flat sequentially. Net interest expense, excluding deferred financing costs in the quarter, was $25 million, up from $23 million in the first quarter of 2019. Net interest expense is up due to higher floating to fixed hedge costs as we rolled previous contracts forward. The Q1 adjusted tax rate, which we used for the calculation of adjusted net income, was 22.5% for the quarter, roughly in line with our guided full year rate. The tax rate for the items used to adjust net income was also 22.5% in the quarter. We completed an intercompany sale of an intellectual property in April 2020. We expect it will have a material favorable tax impact on our second quarter 2020 financial results. This benefit was already reflected in our full year guidance. Adjusted EPS in Q1 was $1.20. We have updated the definition we use for free cash flow to be: cash provided by operating activities, less capital expenditures, and we will no longer be adding back adjustments or non-recurring items. This free cash flow definition provides a measure that reflects cash available for capital allocation like debt repayment. Operating cash flow for the quarter was $56 million compared to $36 million last year. The increase in operating cash flow was primarily driven by cost-avoidance initiatives and improved collections. CapEx for the quarter was $25 million. This includes a small software acquisition that helps increase analyst productivity through automation and AI. Excluding the small acquisition, CapEx would have been down versus the prior year quarter. Free cash flow for the quarter was $31 million, which is up 101% versus the prior year. This includes outflows of about $10 million for acquisition, integration, and other non-recurring items. Free cash flow as a percent of revenue or free cash flow margin was 10% on a rolling four-quarter basis, continuing the improvement we’ve been making over the past few years. Free cash flow as a percent of GAAP net income was about 150%, almost back to historical levels. Since there is significantly more uncertainty and volatility in the economy than normal, we are providing an updated outlook for 2020. Before I go through the outlook assumptions for each segment, I’ll start with the overall approach we have taken to developing the updated outlook for 2020. First, we’ve taken our experience and results from March and April to drive our forecast for the balance of the year. Second, we have not forecast a recovery for 2020. Third, our overall outlook assumes that we will not be able to run conferences for the balance of the year. We do have plans in place to start delivering conferences again in September if that proves possible. And fourth, we are calibrating our cost reduction programs with our top-line results. If business is weaker than forecast, we will further reduce costs to protect EBITDA dollars and cash flow. And if business is stronger than forecast, we will reinstate certain expenses that we had turned off to protect profitability. With the strengthening of the U.S. dollar, we are providing the updated guidance in reported dollar terms, making no assumptions on future changes or volatility in exchange rates. We now forecast reported Research revenue of at least $3.425 billion for the full year, about 1% to 2% growth. This reflects a continuation of late March and April new business and retention trends through the rest of the year. We expect total contract value to decelerate from the first quarter due to a more challenging customer spending and decision-making environment. Based on what we are seeing in March and April, and improvements we have made in the business over the past decade, contract value growth should remain above the levels we saw in the last downturn. Contract value changes earlier in the year have a larger impact on full-year Research revenue growth. There is a lag effect on Research revenue. Therefore, slower contract value growth this year may lead to slower Research revenue growth in 2021. As we ramp back up our spending to position ourselves for long-term success, there may be a short-term headwind to margins due to the lag between contract value and revenue growth. For the Conferences segment, as I mentioned, we are currently planning to resume conferences in September. However, our guidance is based on not being able to run any conferences for the duration of 2020. The result, without running conferences for the balance of the year, will be revenue of about $35 million. We will continue to incur costs in the Conferences business, both cost of services and SG&A. Within the business, we have direct expenses related to specific conferences and other expenses that don’t. We won’t be incurring the direct costs related to specific conferences that are canceled. This results in modestly lower cost and lower decremental margins than we had expected when we provided an update in late March. Wherever possible, we expect to roll forward conference participation by exhibitors and attendees to future conferences. If we can run our updated conference calendar in the last four months of the year, we estimate additional revenue of approximately $200 million. Additionally, at the end of April, we reduced the number of associates in conferences to align with the new reality of the business for 2020. Severance costs of $5 million to $6 million will be incurred in the second quarter. Finally, we have the potential to recover insurance for canceled events beyond the amount of the direct expenses, potentially up to the amount of the lost revenue in some cases. The timing of insurance recovery remains uncertain, but our policies are specific to our Conferences business and not generic business interruption coverage. The insurance recovery will not be included in EBITDA and is not included in our EBITDA guidance. However, for debt covenant purposes, the insurance recovery is included in the calculation of EBITDA. We continue to work with our insurance brokers and providers and will provide updates on our progress in the future quarters. We now expect reported Consulting revenue of at least $350 million, or a decline of about 11% for the full year. The Consulting outlook contemplates a slowdown in labor-based demand and reflects very challenging comparisons for the Contract Optimization business through most of the year, implying a decline of roughly 15% for the remainder of 2020. Overall, we expect consolidated revenue of at least $3.81 billion, which represents a reported decline of about 10% versus 2019. For the full year, at current FX rates and business mix, we expect a drag on revenue growth of about 130 basis points. Cost-avoidance programs could yield up to $400 million in savings for the full year, assuming no recovery from the economic downturn. The implied operating costs are not a new run rate but reflect planning assumptions for a cautious view of the revenue outlook. As soon as we can return to a normal operating environment, we will resume spending to drive future growth. We expect adjusted EBITDA of at least $625 million despite a revenue impact we currently contemplate of about $800 million and a roughly $20 million negative impact from FX to EBITDA. If our top line forecast proves conservative and we can restore more normal spending, we continue to expect margins to be at least 16.1%, which will be flat to 2019. We expect an adjusted tax rate of around 22% for 2020. We expect 2020 adjusted EPS of at least $3. For 2020, we expect free cash flow of at least $300 million. Our free cash flow guidance reflects both the P&L outlook we just discussed as well as some slowing of collections. All the details of our full year guidance are included on our Investor Relations site. Finally, for the second quarter of 2020, we expect adjusted EBITDA of about $160 million to $165 million. In closing, we are focused on the right things we need to do for our associates, clients, and shareholders to deliver long-term value. As Gene discussed, we will execute to come out of the downturn better positioned than before to drive long-term sustained double-digit growth. We know that the value of Gartner is the long-term stream of free cash flows we expect to generate by delivering value to our clients in a very large addressable global market. So while we are taking the steps to ensure our short-term financial flexibility, we remain focused on driving long-term shareholder value. Amid a tough economic backdrop, our Research business had a healthy quarter, and Consulting held up as well. We are avoiding expenses, managing cash flow, and working through insurance recovery. We maintain a strong and healthy balance sheet, and are focused on maintaining high levels of liquidity and financial flexibility.

Yes, thank you. Good morning. I wanted to see if you’re willing to provide any of the data around the late March and April new business and retention trends. And as they reset lower starting in mid-March, have you seen them stabilize? And then whether or not you’re able to provide that. Can you tie it to what type of contract value exit rate for 2020 is implied by the updated research revenue guidance?

Jeff, thanks for the question. So the way we’re looking at it, obviously, as we mentioned in our prepared remarks, we are tracking really nicely across the entire business, but across our Research business as well through the first two months of the year. And as you also know, a lot of our business tends to come in, in the last two weeks of each month with a heavy emphasis on the last couple of weeks of each quarter. So we were tracking really well across the businesses. When we looked at March as a stand-alone, recognizing that there was significant disruption, as Gene mentioned, our clients and us, we all shifted from working in offices to working at home. What we saw was new business declines on a year-over-year basis in the 20% to 25% range and some hits on our transactional renewal rates as well, roughly in the five-point range. That’s what we experienced in March. In April, trends are kind of on that level. Some are a little bit better, others are consistent, but roughly speaking, on that level. And again, when we developed the guidance for the year, we have not assumed any sort of recovery. We have modeled that new business experience at a granular level across every region and practice in which we do business and modeled that straight across assuming no recovery.

And what does that imply for CV exiting the year?

So listen Jeff, we don’t provide contract value guidance. Essentially, there’s a wide range of possible outcomes for that contract value. The way we feel about it is it’s definitely going to cause a deceleration in the Research contract value growth rate. That will probably glide down over the year. What we’ve said is based on everything we can see and the improvements we’ve made, we don’t see it drifting down as far as we did in the last downturn.

Okay. Then on the expense savings, I’ll give you kind of my dream buckets, but hopefully, you can just give us some additional perspective. So of like the $400 million, is that your realized savings? And how does it bucket out between like temporary cost avoidance that comes back when the world goes back to normal? I guess, like taking growth headcount out of the planning assumptions, which eventually comes back because you’re trying to preserve the ability to grow at double-digit rates long term. And then the third bucket would be, is there any sizable portion that is some form of permanent cost takeout or productivity?

Yes. Well, it’s kind of hard to parse right now. So first, to answer the first part of your question, the up to $400 million is in your 2020 savings. And if you kind of map the changes in our guidance, you’ll need that savings to deliver on the EBITDA guidance we just gave. As we think about it, the cost avoidance, and to be frank, it is more cost avoidance than cost reduction. As Gene mentioned, we’re all very focused on making sure that when we come out of this, we are strong and prepared to rebound back as quickly as possible, similar to what happened during the last downturn. I wouldn’t categorize much of the cost avoidance as permanent. I think that over time, various degrees of it will get turned back on at different paces. So as an example, as you mentioned with growth headcount, if we are growing a business and seeing sales productivity, we’re going to add the right number of research analysts, service people, and salespeople. We will absolutely do that to support the business and drive future growth. Additionally, we have large buckets of spend like travel. That may turn back on at a slower rate than headcount. We’ve made tough decisions around headcount reductions, and when we get out of this or see our way out, we are a people business and we want to ensure that we keep our team happy and motivated, chasing the goal of consistent double-digit growth.

Good morning. I guess the first question. So it’s interesting to me that the cost cuts, and I’m sure this is sort of an output rather than the goal potentially. But maintain this margin around 16%, and you’re cutting that heavily. But Craig, you acknowledged that there’s potential for the revenue to slow on a lag next year and for the margin to go down as you bring the cost back. Why be so aggressive with cost now? And as part of that really going to delay the ability of the business to rebound? Or was this something you felt you had to do to maintain liquidity in other – just solvency of the business?

Yes, sure. I’ll take the first part – go ahead, Craig.

Okay. So I think you’re right. When we saw what was potentially – the impacts on the business, most notably our conferences schedule, right? While Conferences only represent around 11% of revenue, not for nothing, it’s a $500 million business. As we started to look at the potential for not being able to run a full schedule, only being able to run a partial schedule, and potentially not being able to run any conferences at all, we were very focused on EBITDA preservation, cash conservation, liquidity, and financial flexibility. That was our mantra throughout March. We hit the brakes on a lot of items to make sure we maintain as much financial flexibility as possible. We did a good job of getting that in line, making tough decisions when needed. But again, as I mentioned, it’s more cost avoidance than cuts. Unfortunately, we have had to make some cuts, but the bulk of savings is cost avoidance. That kind of rounded to that roughly 16% range. We were not solving for that; it was more about ensuring we can maintain financial flexibility moving forward. I’ll flip it to Gene to talk about the future.

Yes. Again, Gary, quick on here, we didn’t have a target in terms of margin that we were aiming for. We basically wanted to build in sufficient flexibility for the future that we can cover a range of outcomes. We’re thinking about what’s going to happen in 2020 and 2021, and preparing to return to growth.

Okay. Just a follow-up then. Within that up to $400 million of cost, and I realize that will be determined by how revenue comes in. But can you help us understand how much of that was really the Conferences business, where you’ve got the major short-term problem versus how much of that is cost avoidance at Research that you’ll have to rebuild to support getting back to double-digit growth over time?

Yes. Gary, when we talk about the cost avoidance, we do not cater the costs that we don’t have. We have to deliver the conferences, so it’s kind of separate from the Conferences side. What we’ve done on the Conferences side is right size the business as we talked about. The bulk of the $400 million relates to cost avoidance. So we had a plan for 2020. Within that plan, we had pretty decent growth in sales headcount, service headcount, and other areas of headcount. We’ve temporarily frozen all of that, yielding a significant amount of savings. We’ve stopped traveling too, which yields significant savings. That may turn back on later but that’s probably not a binary thing where we immediately go back to spending what we were spending pre-crisis. It’s kind of a mix of different things, but the bulk of the savings really relate to avoiding costs that we had built into our 2020 plan.

Now?

Toni? Toni, is that you? Yes, we can hear you now.

Okay. Gene, you spoke about the three impacted client categories. Could you just give us a sense of the proportions for each of those? Just thinking that the COVID-impacted clients could come back quicker, while maybe the impaired business clients could take longer. Just trying to understand how you’re thinking about the pace of recovery in Research.

So Tony, we don’t have a quantitative breakdown of those. But I’ll give you kind of a qualitative perspective: the largest category is companies not directly impacted by COVID-19. For example, some notch hotels, things like that. The largest category would be those companies not impacted but they might sell things to hotels or airlines, so they have some impact on their operations. That’s the largest category. The second largest category is companies that are directly impacted like hotels, restaurants, airlines, things like that. Equal in size to that is the companies not impacted, like those selling video conferencing software or certain parts of the media business, like streaming media.

Got it. And I know you mentioned earlier that you’d expect Research CV growth to sort of glide down during the year. I guess that’s a result of recession as opposed to a quicker snapback?

Yes. Craig said in his remarks, we basically assume no improvement during the year. If you think about our new business growth and our retention rates, we delay that through the remainder of the year with contracts coming up for renewal. That gives you an outlook for the Research business.

Got you. And then just for my follow-up. How are you thinking about the timing of conferences, in-person conferences? Are you looking at certain metrics like number of cases and so forth to make the determination of holding them? Do you need to see a vaccine before you feel comfortable having a lot of in-person conferences again? And going forward, would you expect a structurally higher level of virtual conferences? If you could give us any sort of sense of revenue differential between a virtual conference versus an in-person one.

So in terms of timing for restarting conferences, first, we have two kinds: destination conferences where people tend to fly in from around the country, like Orlando, and Evanta conferences, which tend to be smaller and local. We expect the local conferences will likely be feasible to hold before we can hold large destination conferences. As we assess when to restart, we’ll gather input; we actually have focus groups with both exhibitors and attendees to see what they think would be necessary for us to restart. We’ll consider what the rest of the world does, looking at things like whether the NFL is running games in the fall and how people are responding, and measure that against health official guidance. We anticipate that it may not be the same answer around the world. Some companies are already holding such events in China, for example, and we need to watch their health risks and public reactions carefully. Regarding virtual events, we believe it’s reasonable to think they will be more popular. We’re innovating to see how we can hold stand-alone virtual events and combine in-person events with virtual options.

Thank you. Good morning, gentlemen. My first question was just about the Research guidance where the deceleration will exceed the levels in the last downturn. Just hoping for color on what those levels were for GTS and GBS?

Yes, sure. During the last downturn, we were just essentially GTS and our technology business. If you go back to the metrics, the contract value trough was around negative 4%. In the second or third quarter of 2009, that was kind of the bottom. We actually bounced back quickly, and by the midpoint of the next year or end of 2010, we were already back at double-digit growth rates. For the new business and retention, the declines were in the negative 25% range for a couple of quarters during the Great Recession, while retention rates were down about 500 to 750 basis points. However, we believe we are better positioned today compared to 2008, 2009, because of the research we deliver and the levels of engagement we’ve consistently had with our clients.

Got it. If I could just follow up on the EBITDA guidance. The implied second-half guidance is much lower than the Q2 number you gave, and I would think 2Q probably ends up being the worst. I’m curious what the delta is. I think you threw out hints of consoles along the way, but any bridge there?

Yes. I think there are a couple of things there, Manav. We were very fast to harvest cost-avoidance opportunities, and anything we could harvest in Q1, we harvested in Q1. You’ll benefit from that for the next four quarters. So we needed to make sure we harvested as much as possible in Q1 to maintain financial flexibility. Secondly, if you model out Research revenue, as we’ve always said, it lags contract value growth because of the revenue recognition. On the flip side, a deceleration in contract value means the same lag for research revenue. We intend to guide down on the contract value growth over the course of the year. The Research revenue will glide down at a slower rate just because of the revenue recognition methodology on that large part of the business. As we look at Q2 through Q4, we’ve been thoughtful not to assume recovery. We want to manage our business appropriately, maintaining financial flexibility.

Good morning. I just wanted to follow up again on Conferences. Hoping you could speak a bit more about how you’re looking at that business in the medium term. Based on some of those focus groups you referenced, do you expect clients to gradually ramp up to previous attendance levels over the next couple of quarters or years? Or do you think there will be a permanent reset lower? Also, is there a way for us to think about the attendance required relative to previous levels in order to make that a worthwhile endeavor?

We don’t know how fast people are going to come back, so we need to play that by ear. But I do know, as we’ve conducted focus groups, the level of interest that clients have in attending these types of conferences exceeded our expectations. So what we find is a lot of enthusiasm, and people are looking forward to it. Of course, if they don’t feel safe, they won’t attend, but we need to cross that safety threshold. The great news is that underlying demand seems to exist, and people still want to attend for all the reasons they have in the past. To the extent that we can create a comfortable environment, it’ll draw them back faster. We’re working on that.

So as you heard from our call today, as we navigate the uncertainties of our current environment, we are well positioned to help our clients address both the pandemic and the economic downturn. We’ve taken steps to carefully manage our costs and cash flow in response to the economic downturn. We’re going to emerge from the recession strong and well positioned to resume driving long-term sustained double-digit growth. Thanks for joining us today, and we look forward to updating you again next quarter.