IT
#Thank you, Gene, and good morning, everyone
Because of the tremendous value we provide to our clients around the world, the investments we are making to capture our vast market opportunity, our focus on strong operational execution and our exceptional business model, we delivered yet another quarter of double-digit year-on-year growth
On an FX-neutral basis, our year-over-year financial performance for the quarter included total company revenue growth of 13%, contract value of 15%, Research revenue growth of 15%, Events revenue growth of 11%, Consulting revenue growth of 2%, adjusted EBITDA growth of 1%, and adjusted diluted EPS of $0.60 per share, which was towards the top end of our guidance range for the quarter
Our exceptional business model continues to create a consistently high level of free cash flow conversion
On a rolling four-quarter basis, our free cash flow conversion was 126% of normalized net income
I'll now discuss our first quarter business segment and P&L in depth before turning to our balance sheet and cash flow dynamics
I'll then provide some high-level comments on CEB's first quarter performance before closing with remarks on our updated 2017 guidance, which includes the expected contribution of CEB for the balance of the year
We will then be happy to take your questions
In addition to my comments, today's press release and our 10-Q, I would encourage you to refer to the presentation posted on our Investor Relations website
The presentation provides an in-depth overview of our Q1 performance by business segment, covering some of the ground that I normally would cover in my prepared remarks
Given that I will spend more time covering the CEB acquisition and our updated outlook, this should still allow sufficient time for your questions, as well as providing a useful reference point for investors and analysts
Beginning with Research; Research revenue grew 15% on both a reported and FX-neutral basis in the first quarter
Acquisitions had a one-point impact on Research revenue growth for the quarter
The gross contribution margin for Research was 69%, a one-point decline compared to the first quarter of 2016. Our other Research business metrics also remain very strong, and we continue to see robust demand for our services across the globe
Total contract value was $1.95 billion as of the end of Q1, FX-neutral growth of 15% versus the prior year
For reference and comparison, our Q1 2016 total contract value at current year FX rates was $1.7 billion
The Q1 2017 measure includes the contribution of L2, an industry-leading marketing company that benchmarks the digital performance of brands, which we acquired in <UNK>h
Excluding L2, total contract value growth would have been 14% on an FX-neutral basis, consistent with the 14% growth we delivered last quarter
We continue to drive contract value growth through strong retention rates and consistent growth in new business
As Gene mentioned, client retention was 83%, down 40 basis points from the first quarter of 2016 and essentially flat on a sequential basis
Wallet retention ended at 104% for the quarter, down by less than a point year-on-year and flat on a sequential basis
Both of our retention figures are close to our historical highs
In Q1, we had an unusually large number of renewals impacted by M&A
Had we experienced a normal level of renewals impacted by M&A, we would have seen an improvement in our retention metrics in Q1. As we look to the balance of the year, we anticipate a more normal level of this type of activity
New business growth remained strong, up 13% year-on-year in Q1. The new business mix is consistent with prior quarters and remains balanced between new clients and sales of additional services and upgrades to existing clients
And as always, we also benefit from our consistent price increases
Our new business growth reflects our success in penetrating our vast market opportunity, with both new and existing client enterprises
We ended the first quarter with 11,166 enterprise clients, up 7% compared to Q1 2016. The average spend for enterprise also continues to grow
It now stands at $175,000 per enterprise, up 8% versus prior year on an FX-neutral basis
This increase in average spend reflects our ability to drive CV growth through both new and existing enterprises
Turning to sales productivity, over the rolling four quarters, we delivered $256 million of FX-neutral net contract value increase
When divided by our beginning of period head count, which was our Q1 2016 ending head count of 2,237, our rolling four quarter productivity per account executive was $114,000, an increase of 8% year-on-year and 9% sequentially
Excluding the impact of the L2 acquisition and therefore, making the metric directly comparable to the Q4 calculation, sales productivity was essentially flat on both a year-on-year and sequential basis
Q1 productivity was also impacted by the uptick in renewals with M&A that I referenced earlier
With a more normal level of M&A, we would have seen a sequential and year-on-year improvement in our productivity measures
As always, we remain highly focused on improving our sales productivity and remain confident that the initiatives we have implemented drive productivity will positively impact our results over both the short and long term
To sum up, it was another strong quarter for our largest and most profitable segment
And as you'll see from our updated outlook, we continue to target another year of mid-teens growth
Moving to Events; Events revenues were up 11% on an FX-neutral basis in Q1. On a same-events and FX-neutral basis, Events revenues increased by 6% year-on-year in the first quarter
Q1 is typically a smaller quarter for our Events business and we held 11 Events in Q1, one less than in the prior year quarter
On a same-events basis, attendees were up 11% versus last year
Events Q1 gross contribution margin was 38%, down by approximately 200 basis points compared to the first quarter of 2016. This was primarily due to higher year-on-year investments to support our growth strategy in a seasonally light quarter
In summary, we had a strong Q1 in our Events business
Our outlook remains unchanged
We still expect double-digit revenue growth on a constant currency basis for the full year
Turning to Consulting; on an as-reported basis, first quarter Consulting revenues were flat year-on-year and increased by 2% on an FX-neutral basis, coming off a very strong Q1 last year
On the labor-base side, billable head count of 650 was up 5%, and we had 125 managing partners at the end of Q1, a 14% increase over the year-ago quarter
Backlog, the key leading indicator of future revenue growth for our Consulting business, ended the quarter at $103 million, down 9% year-on-year on an FX-neutral basis
As we noted last quarter, our Consulting backlog benefited in 2015 and the early part of 2016 from a very large contract booking in a non-target geography, which was a significant driver of backlog improvement in Q1 2016. Excluding this one large contract, Consulting backlog decreased by 4% year-on-year
This represents approximately four months of forward backlog, which is in-line with our operational targets for this measure
Consulting gross contribution margin declined by 140 basis points year-on-year, primarily due to a modestly lower utilization but was up strongly on a sequential basis
For the full year, we continue to target Consulting revenues growth of 2% to 7% on an FX-neutral basis, in-line with our long-term growth target range of 3% to 8%
Moving down the income statement; SG&A increased by 18% year-over-year in the first quarter
In normalized terms, our SG&A increased by 16% year-over-year
As we detailed on our Q1 2016 call, our Q1 results were positively impacted by lower stock compensation expense related to changes to the executive team
This resulted in approximately $5 million of SG&A savings in Q1 2016. That was a nonrecurring benefit
In addition, the phasing of our SG&A investments for 2016 were more backend loaded, making our Q1 2017 compare a bit tougher
Staying with SG&A, our sales force continues to be our largest investment, and as of the end of the first quarter, we had 2,460 quota-bearing sales associates
This is an increase of 223 or 10% from a year ago
This is lower than our base level assumption for the full year, primarily due to the timing of our training academies
On a normalized basis, our quota-bearing sales growth was around 11.5%, and we continue to plan for approximately 13% sales head count growth in 2017. Moving on to EBITDA and earnings; adjusted EBITDA was $106 million in the first quarter, meeting our Q1 EBITDA expectation
Adjusted EBITDA was up 3% year-over-year on a reported basis and up 1% on an FX-neutral basis, as top-line growth was partially offset by the higher SG&A spend, I just referenced
Moving down the income statement; depreciation charges increased year-over-year in the quarter reflecting capital spending to support our growth, while acquisition and integration charges increased by almost $5 million
Depreciation charges increased year-over-year and the quarter reflecting capital spending, while acquisition and integration charges increased by almost $5 million, primarily related to the CEB acquisition and to a lesser extent, L2 – sorry about that
Our GAAP tax rate for the quarter was 24.9%, which is approximately 1 point lower than the guidance of approximately 26% we gave three months ago
The tax rate was lower than guidance in large part due to a projected favorable impact of earnings mix and the timing of certain costs
Adjusting for acquisition charges, our normalized tax rate for the quarter was 25.7% and is also lower than our previously issued guidance of approximately 27% for largely similar reasons to the reduction in the GAAP rate
GAAP diluted earnings per share was $0.43 in the first quarter
Our GAAP EPS figure also includes $0.17 worth of acquisition and integration charges, approximately $0.04 higher than we had guided
The higher charges were due to the rapid closing of both of our announced acquisitions
Adjusted EPS was $0.60 per share in Q1, down 10% versus Q1 of 2016. As mentioned earlier, our adjusted EPS was towards the higher end of our Q1 guidance
So we are right where we targeted to be coming out of Q1. The year-on-year growth rate was, obviously, impacted by our Q1 2016 adjusted EPS, which as you may recall, was up 65% last year
Turning now to cash; in Q1, operating cash flow was an outflow of $30 million compared to a $13 million inflow in the year-ago quarter
The first quarter is seasonally the lightest quarter for the year in terms of cash flow, given the combination of seasonality in our operations, as well as the timing of incentive payments
Additionally, we announced the CEB deal during the first week of January
It's normal for clients to pause their purchasing cycles when there is M&A amongst their vendors, as they look to see if there are any benefits they can extract
In fact, that's what we advise our clients to do in many similar situations
Our new business bookings accelerated over the course of the first quarter, culminating in an exceptionally strong <UNK>h
Because of that timing, some of the cash that we normally would have collected in Q1 will now be collected in Q2. This impacted our Q1 cash flow figures
Q1 2017 capital expenditures were $11 million, and Q1 cash acquisition and integration payments were $18 million
This yields free cash outflow of $23 million
This compares to Q1 2016 free cash flow of $18 million
The year-on-year changes primarily driven by the timing of contract value growth in the quarter and the related collections, as I just described, higher incentive payments, higher CapEx and higher acquisition and integration payments
Turning to the balance sheet, we had a busy quarter related to the CEB acquisition, successfully securing an attractive financing package, which I'll detail a bit later
Given that the acquisition closed just after the end of Q1, I will focus my comments on our post-closing balance sheet rather than the <UNK>h 31st snapshot
Relative to the $703 million of gross debt we had at the end of 2016, our gross debt increased by approximately $2.9 billion related to the acquisitions of CEB and L2. In total, we had approximately $3.6 billion of gross debt as of April 5, comprising of the following: $1.485 billion of term loan A; $500 million of term loan B; $545 million drawn on our revolver; $800 million of high-yield bonds; and $300 million of bridge financing
Slide 11 of the presentation on the Investor Relations site details our debt schedule and the respective interest rate
In addition to the new debt instrument, we have also increased the amount of interest rate swaps to lock in the interest rates of a significant portion of our floating debt
In total, we have $1.4 billion of hedges in place
Adding in the $800 million of high-yield bonds, more than 60% of our gross debt has a fixed interest rate
At the time of the announcement of the CEB acquisition in early January, I noted that we expected the average interest rate to be between 4.25% and 5%
Due to a more favorable mix of lower-priced debt and better pricing on all debt tranches, our weighted average interest rate, including the cost of hedging, is approximately 4%
From a net debt perspective, we had approximately $3 billion of net debt upon closing, consistent with what we expected in January, which translates to approximately 4.3 times leverage on a pro forma combined last 12 months of adjusted EBITDA
Turning now to some high level comment on CEB's Q1 performance, as we didn't own CEB until early Q2, the following results are what CEB would have reported as an independent company for the first quarter of 2017. CEB would've reported total adjusted revenues of $214 million and adjusted EBITDA of $36 million
Using CEB's methodology, constant currency CEB segment contract value growth was down about 1% year-over-year, while constant currency CEB segment wallet retention was 89%, flat year-on-year, but up by more than 1 point sequentially
As with any large acquisition, we are in the process of harmonizing accounting treatments, calculation methodologies and purchase accounting
We'll report back to you any changes or adjustments on our Q2 earnings call in August
Turning to guidance, slide 15 of the presentation gives you our high level outlook for 2017 based on 12 months of Gartner plus nine months of contribution from CEB
In addition, the slides detail the most significant below the line items to help you with your model
As is our practice, our EPS guidance is on both a GAAP and adjusted basis
However, given that the CEB transaction closed only a month ago, please note that our GAAP estimates are likely to be subject to change as we complete purchase accounting and further refine our estimates for other GAAP-related expenses
We will also be providing you with guidance for both GAAP revenue and adjusted revenue
The only difference is the deferred revenue fair value adjustment as required as a part of purchase accounting for business combinations
Gartner's revenue guidance is largely unchanged
We have adjusted up Research revenues modestly to reflect the L2 acquisition
For CEB, we expect GAAP revenues of between $519 million and $549 million for the nine months of 2017. Excluding the estimated deferred revenue fair value adjustment of $209 million, we expect adjusted revenues of between $728 million and $758 million for the balance of the year
In addition, we expect adjusted EBITDA of between $190 million and $205 million
This equates to a combined company adjusted revenue range of $3.4 billion to $3.5 billion and an adjusted EBITDA range of $685 million to $735 million for 2017. Again, I'd remind you that these figures are for nine months of CEB results
To arrive at the relevant full year adjusted revenue and EBITDA figures for 2017, you can just add the first quarter performance numbers that CEB would've reported, which I detailed earlier
On a GAAP basis, our 2017 earnings per share is expected to be significantly impacted by acquisition-related accounting and integration charges, of which the vast majority are noncash in nature
Slide 16 of the presentation reconciles the per share differences between our updated GAAP and adjusted EPS guidance ranges
The after-tax impact of acquisition and integration adjustments, such as the fair value deferred revenue adjustment and incremental amortization and integration charges, totals approximately $4.42 per share at the midpoint and is detailed on slide 16 as well
Putting this all together, we expect adjusted EPS of between $3.32 and $3.60 per share
When compared to our previous standalone adjusted EPS guidance range of $3.15 to $3.35 per share, this represents between 5% and 7% accretion for 2017. While it is too early to provide specific 2018 guidance, we continue to target double-digit accretion to our adjusted EPS
Slide 22 details the key assumptions below EBITDA that we have used to calculate our updated adjusted EPS outlook
We expect the total cost associated with stock-based compensation expense in 2017 to be approximately $67 million to $68 million
Total depreciation should be approximately $69 million to $70 million, and amortization should be approximately $196 million, inclusive of the amortization of acquired intangible assets
In addition, net interest expense is expected to be approximately $112 million, which includes approximately $90 million of incremental expense for the balance of the year
For our tax rate, we are projecting an annual effective rate for GAAP of approximately 33% to 34% and for adjusted earnings of approximately 32% to 33%
Please note that our full year GAAP actual tax rate may also change based upon final purchase accounting
Our tax rate may also vary from quarter-to-quarter due to the projected geographic mix of earnings, the impact of ASU 2016-09 related to stock-based awards, as well as the timing of certain items
Finally, our EPS guidance is based on a weighted average fully diluted share count of approximately 89.5 million to 90.5 million shares for the full year 2017. This incorporates the additional 7.4 million shares issued in conjunction with the transaction
The 89.5 million to 90.5 million share estimate is a weighted average fully diluted share count, which has one quarter pre-acquisition and three quarters post-acquisition
We'd expect to exit 2017 with approximately 92 million shares outstanding
Turning to our cash flow guidance, similar to GAAP EPS, our 2017 operating cash flow is expected to be significantly impacted by charges related to the CEB acquisition as well as incremental interest expense
The details and components of our cash flow guidance are also contained on slide 15. For free cash flow, we now expect to generate between $335 million and $365 million in 2017. Free cash flow is based on operating cash flow guidance of $315 million to $345 million, capital expenditures of $95 million to $105 million, and cash acquisition and integration payments of $115 million to $125 million
And again, this is assuming 12 months of Gartner and nine months of CEB
This also obviously has the impact of significantly higher cash acquisition charges and interest expense payments
It is worth noting that CEB's strongest free cash flow quarter has historically been Q1. This was true in 2017 as well
What you see in our combined free cash flow guidance reflects 12 months of Gartner and nine months of CEB, but excluding CEB's strongest quarter
If we looked at free cash flow on a pro forma combined 12-month basis, we estimate that the guidance range would be $415 million to $445 million and adjusted net income to free cash flow conversion rate of approximately 140%
While the timing of the deal has impacted the 2017 cash flow guidance, we did acquire a larger cash balance than we anticipated, which we are able to utilize for our strategic initiatives
Turning to our Q2 guidance, for the second quarter of 2017, we expect GAAP EPS of between negative $1.12 and negative $1.04. This includes approximately $1.91 per share of non-GAAP adjustment
Therefore, on an adjusted basis, we expect adjusted EPS of between $0.80 and $0.85 for the second quarter 2017. In closing, we had a strong start to the year, and we expect this performance to continue throughout the balance of 2017. Our Research business delivered another quarter of mid-teens growth, and contract value growth was 15%
Our Events business is back on track to deliver double-digit growth in 2017, and Consulting delivered another quarter of growth, following a very strong year-ago quarter
From a standalone Gartner perspective, our 2017 revenue and adjusted EBITDA outlook is largely unchanged, and we expect to continue our trend of double-digit growth
The addition of CEB further strengthens our ability to capture the vast market opportunity ahead of us as we are now able to address the mission-critical priorities of virtually all functional business leaders across every industry and size of enterprise worldwide
On an adjusted basis, the acquisition of CEB is expected to be immediately accretive with between 5% and 7% accretion in 2017. We also continue to expect double-digit percentage adjusted EPS accretion in 2018 and remain confident in our ability to generate long-term double-digit growth with strong free cash flow conversion
I'll now turn the call back over to the operator, and we'll be happy to take your questions
Operator? Question-and-Answer Session
And, Anj, as you know, a large portion of CEB's revenues, are subscription-related
The revenue, in a sense, it doesn't get locked, but it gets close to locked based on where they finish 2016. 2017 is really a transition year is the way to think about it
As Gene mentioned, we're laying all the groundwork, so that we can accelerate growth in years beyond
We won't be satisfied if we don't see operational improvements over the course of the year
But given the revenue recognition nature, we'll probably see those benefits flow through in 2018 and beyond
<UNK> - Credit Suisse Securities (USA) LLC Understood
That's helpful
And as a follow-up, with regards to standalone Gartner, could you speak to the selling environment as it relates to the productivity? Is it having any dampening impact that you would call out? Perhaps if you can just give us a sense of what the improvement in productivity may have been if you had to adjust for that M&A impact? And I may have missed it, but what is your expectation for how long the M&A activity may impact some of your KPI?
And Tim, on the Q1 performance question, I'd note a couple of things
Number one, it's a pretty light quarter from a revenue perspective
And you have situations like Evanta which is a double impact, so really no revenues in Q1. But their expense base is there
And then also last year, the acquisition of Evanta didn't happen until Q2. And so we've got the grow-over problem of expenses that weren't in there last year, plus the revenue doesn't really start coming in until Q2. There's also, as you can probably see from the revenue, a decline year-over-year on revenues of about $9 million, that's also flowing through
And that's really based upon the contract value performance that you saw over the course of 2016, now feathering into the revenue recognition
And then lastly, we did a little bit of – or they did a little bit of harmonization with our expense accrual methodologies, and that also had an impact on profitability
But what I'd say is they landed where we expected them to land in the first quarter
And then the other thing I'd say is operationally, it was encouraging to see sequential improvement, albeit modest but a sequential improvement in wallet retention on that for CEB segment CV
And, <UNK>
that's why the wallet retention measure is so important because again it's putting a dollar value on those clients as opposed to the client retention where Gene's Pizza Parlor is created equal to the ExxonMobil's of this world
And so it points to us retaining higher spending clients at a better rate, and it also points to those clients that stay with us spending more and more each and every year
So again, that's why we give both measures, they're both important measures
And we're not satisfied at 83% or 84%
We do think there's a little bit of room for improvement there, but there's the structural things Gene mentioned, which are there and we'll have to deal with for forever
So <UNK>, consistent with what we talked about when we did the announcement, the 2018 is exclusive of cost synergies
And again, the target that we've talked about, ranging up to $50 million, we're working very diligently to be in a place where we can harvest as much of that in 2018. That said, given when contracts run through or the timing of when we can reduce or eliminate certain costs may roll into 2018. So think of that more on a run rate basis or an annualized basis as opposed to all coming through in 2018. That said, we're going to do our best to harvest as much of that as possible in 2018.
And Jeff, just to add to that, the way we think about it is, the best way for us to drive growth and penetrate accounts is for the people who specialize in selling IT, supply chain, HR, whatever it might be, to actually go do that and talk to the HR professional, supply chain professionals, marketing professionals direct
And so there is coordination, as Gene talked about
But again, the way we drive productivity and the way we drive growth is by actually having those salespeople specialize in those functions going after those functions
Yeah
So we did see an acceleration from Jan to Feb and from Feb to <UNK>h, and part of that we attribute to some of the announcement noise as clients look to see if there was something to be gained from waiting
And when they found out that there wasn't, they went ahead and bought
We obviously can't comment on Q2. We're obviously a couple of days into May
We're in the process of closing our books for April
But again, what we feel good about is we've had really strong performance, Q3, Q4 into Q1, and we expect that to continue
And <UNK>, and we also – as we've talked about, we go faster in places where we have the management capability to handle and very strong productivity and we obviously slowed down in areas that may be impacted by macro things and have lower productivity
And so for example, about 1.5 year ago, we talked about challenges in Brazil, challenges in oil and gas, we were not growing sales force in those areas when we were having those challenges
Now that we've come out of those and oil and gas or the energy utility sector, rather, is back growing at double-digit rates, we're now growing in that sector again
So it is a bottoms-up approach, as Gene talked about, and we also tap the brakes or press on the gas pedal depending on the market situations that we're selling into as well
And what we said for this year was we had – on that bottoms-up view, we expected around 13% head count growth
If we do see productivity improving or if we see we can go faster in places that may go off
If we challenges, we may pump the brakes on it
Hey, Bill, it's <UNK>
On the backlog question, your observation is right around the grover (59:38) problem
The way to think about the backlog on a go-forward basis, again, we target having about four months of forward-looking backlog, and we generally feel pretty positive when we have that amount of backlog ready to go
Also remember that we are booking and burning within a quarter
So we may book something in January and actually start working it off in February and <UNK>h
It doesn't show up in the backlog number at the end of the quarter or reduced amount, so it shows up in the backlog number at the end of the quarter or reduced amount shows up in the backlog number at the end of the quarter but we're actually working and generating revenue and profitability in the quarter
So there's a combination of wanting to have that four-month forward target, which we have and also there is a fair amount of book and burn within a quarter as well
Yeah, hey, Jeff, it's <UNK>
So in essence, if you actually could do a standalone Gartner cash flow, we would have been in the same range where we were
It's really difficult to do that, given the interest expense, the timing of it, acquisition and integration payment, et cetera, et cetera
On a standalone basis, the way we thought about it is, as I mentioned, the prime driver of what we saw in Q1 was really the timing of our contract value growth with more of it coming in <UNK>h then in January and February
And again, so collections that we had anticipated would have come in, in the first quarter are actually now coming in, in Q2. So we'll get the benefit of that in Q2. And then if we have timing as we've anticipated, with April, May and June, we'll get back on track
So that's the way we thought about the standalone guidance to the effect that we actually could do and model standalone Gartner cash flow guidance
Good morning, Mike
The way we are thinking about it and modeling it and is consistent with what we talked about when we announced the acquisition is that we are targeting to get down to around three times gross leverage over the next 24 months to 36 months
We feel, given the free cash flow generation capabilities of the combined entity, that we'll be able to do that
We will be looking to do some modest deleveraging over the next few quarters, primarily next three quarters to four quarters, most notably taking out the bridge financing that's sitting on the balance sheet right now
That will be modest, but I would expect the real de-levering to start moving in earnest over the course of 2018 and through 2019. And again, within 24 months to 36 months, we're targeting to get down to three times gross leverage
