Gartner, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Gardner fourth quarter 2019 earnings conference call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then one on your telephone. If you require any further assistance, please press star then zero. I would now like to turn the conference over to your speaker today, David Cohen, Gardner's GVP of Investor Relations. Please go ahead.

Thank you, Sarah, and good morning, everyone. We appreciate your joining us today for Gartner's fourth 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 fourth quarter 2019 financial results and our outlook for 2020 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 an earnings supplement for investors and analysts. We've 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. 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. References to organic growth exclude the recently acquired topo. All growth rates and genes comments are FX neutral, unless stated otherwise. Reconciliations for all non-GAAP numbers we use are available in the Investor Relations section of the Gartner.com website. Finally, all contract values and associated growth rates we discuss are based on 2019 foreign exchange rates unless stated otherwise. As set forth in more detail in today's earnings release, certain statements made on this column may constitute forward-looking statements. Forward-looking statements can vary materially from actual results and are subject to a number of risks and uncertainties. including those contained in the company's 2018 annual report on Form 10-K and quarterly reports on Form 10-Q, as well as in other filings with the SEC. I encourage all of you to review the risk factors listed in these documents. Now, I will turn the call over to Gartner's Chief Executive Officer, Gene Hall.

Good morning, and thanks for joining us. In 2019, we continued to deliver strong performances across our businesses. We made progress on our core strategy of establishing leading market positions in every role across the enterprise while continuing to drive innovation. We grew our sales forces and reduced open sales positions to record lows. We made substantial investments in GBS products, service, and sales to accelerate future growth. We also made substantial investments in critical support functions, such as recruiting, to ensure we have the talent to support sustained, long-term, double-digit growth. We helped more than 15,000 enterprise clients in 100 countries around the world with their mission-critical priorities. We provided great jobs to 17,000 associates around the world and positioned our company for the long-term benefit of our shareholders. In 2019, total revenues were up 11%, fueled by double-digit growth in each of our business segments, research, conferences, and consulting. Research, our largest and most profitable segment, is the core of our client value proposition. Our research business was up 11% year over year. The Gartner formula for sustained, long-term, double-digit growth continues to drive success in our research business. As we've 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 continuous 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 grew 12% against a tough compare over the prior year. In most of our top markets, including the US, UK, and Canada, we had strong double-digit growth. We also had growth of more than 20% in a number of markets with slow GDP growth, such as Japan, Brazil, and Saudi Arabia. And this is due to the high value clients received from our products. Despite these strengths, GTS contract value growth decelerated. There were three primary factors. The single biggest factor was the impact of our revised strategy for serving very small tech vendors, as we've discussed previously. The next largest factor was leadership changes in Germany and India, which we've also discussed previously. Finally, we had challenges in China. So while GTS had some challenges, we achieved strong double-digit contract value growth of 12%. And we've put actions in place to address the challenges and expect to see improvements over time. We continue to have vast market opportunity across all sectors, sizes, and geographies. We've made investments over the past two years, including sales headcount, that position us well to capture that market opportunity. Following 12% growth in GTS headcount over the past two years, we expect GTS headcount growth for 2020 in the high single digits. Last quarter, I outlined three sales optimization initiatives, dynamic territory planning, just-in-time recruiting, and just-in-time training. Over time, these initiatives will help us align our cost growth with our revenue growth while enabling us to train and employ our sales hires more effectively. We estimate that these new programs are the equivalent to adding three to five points to our reported headcount growth. 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've addressed for several years, as well as other major enterprise roles, including HR, finance, legal, sales, and more. GBS contract value continued to accelerate, growing 8% organically. Retention improved more than 400 basis points for the year, and productivity was up significantly. GBS growth accelerated throughout 2019, though we did have some challenges. The GBS marketing practice has some products unique to marketing that have weak retention and low profitability. Marketing contract value grew only 4% largely due to these products. As we align our cost growth to revenue growth, we're transitioning to these lower margin, low retention products, to more profitable GXL products. We're making this transition as the lower margin products come up for renewal during 2020. And we expect this will have a negative impact on our 2020 CD growth, but will improve profitability going forward. Our GXL product line continued to gain momentum, with contract value increasing $43 million during 2019. GXL products provide greater value to clients because they're 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 client organizations. We implemented the Gartner Formula for Growth in GBS. In 2018, we invested in the products, processes, and Salesforce growth. In 2019, growth accelerated and our GXL products gained momentum. We have built a great foundation for future growth. Our conferences segment also delivered a terrific performance in 2019, with double-digit revenue growth of 18% and conference attendee growth of 8%. Gartner conferences combine the outstanding value of our research with the immersive experience of live interactions, making every conference we produce the most important gathering for the executives we serve. Looking ahead to 2020, we plan to introduce more new conferences. For example, in Europe, for GTS, we'll launch security and risk management and data and analytics summits. And in Europe, for GBS, we'll launch marketing symposium expo and supply chain planning summit. Our consulting segment also achieved double-digit growth in 2019, with revenues up 14%. 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 was a combination of our labor-based business and strength in our contract optimization business. We had a record year in the contract optimization business. We expect another good year in 2020, but likely at a lower growth rate given how strong 2019 was. Over the past several years, we've made great progress in the consulting business and are well positioned for continued long-term success. Summarizing, we delivered another strong year across all three of our business segments. Looking ahead, we are well positioned for sustained long-term growth. With the great strategic position of GTS and GVS, together with leveraging the investments we've made, we expect strong top-line growth and EBITDA growing in line with revenues. With that, I'll hand the call over to Craig.

Thank you, Gene, and good morning, everyone. 2019 marked another year of strong revenue growth for Gartner. Global technology sales, the largest part of our business, again delivered double-digit growth. Global business sales accelerated, growing more than 8% organically, the highest growth rate since the acquisition in 2017. Our strategy to deliver products and services with a compelling value proposition across all enterprise functions is working. Conferences and consulting had outstanding years as well. Year-over-year financial performance for 2019 included total contract value growth of 12 percent, FX neutral total revenue growth of 11 percent, FX neutral adjusted EBITDA growth of 2 percent, diluted adjusted EPS of $3.90, and free cash flow of $462 million. Demand for our services remains robust around the world, and as our 2020 outlook demonstrates, we expect strong top-line growth to continue as we adjust cost growth to align with revenue growth. Fourth quarter revenue was $1.2 billion, up 11% as reported and on an FX-neutral basis. Top-line growth was impacted by about 60 basis points in Q4 from the product retirements we discussed in prior quarters. Contribution margin was 63%, flat versus the prior year. EBITDA was $218 million, up 3% year over year and 5% FX neutral. Adjusted EPS was $1.18, with upside from a lower than expected tax rate. And free cash flow in the quarter was $40 million. Our research business had a strong fourth quarter. Research revenue grew 11 percent year-over-year on a reported basis and 12 percent on an FX-neutral basis in the fourth quarter. Fourth quarter contribution margin was 70 percent. Total contract value was $3.4 billion at December 31st, growth of 12 percent versus the prior year. We always report contract value in FX-neutral terms. For the full year 2019, research revenues increased by 9 percent on a reported basis and 11 percent on an FX-neutral basis. The gross contribution margin was 70%, up 56 basis points from the prior year. I'll now review the details of our performance for both GTS and GVS. In the fourth quarter, GTS contract value increased 12% versus the prior year. As you know, we were up against a tough compare, which will continue into the first quarter of 2020. In most of our top markets, including in the U.S., U.K., and Canada, we maintained strong double-digit growth. And by utilizing our sales excellence playbook, we were able to drive greater than 20% growth in challenging markets like Japan, Brazil, and Saudi Arabia. As Jean just detailed, GTS-CV decelerated due to three primary factors. First, and the largest factor, was the impact of the way we sell and service very small technology vendors, which we've discussed on prior calls. Second, as we've discussed previously, we made sales leadership changes in both Germany and India, And both of those changes intersected with a tougher macro environment in those markets. And third, we had challenges in China, where the economy has slowed and we also made a leadership change. As Jean mentioned, we put actions in place to address these challenges and expect to see improvements over time. GTS had contract value of $2.8 billion on December 31st, representing just over 80% of our total contract value. Client retention for GTS remains at around 82%, where it has been running throughout the year. Wallet retention for GTS was 104% for the quarter, down 96 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 7% versus the fourth quarter of last year. New business is coming from a mix of new enterprises and growth in existing enterprises, through sales of additional services and upgrades. As with CV and wallet retention, which are all related, we faced difficult compares this year. We ended the fourth quarter with around 13,000 GTS enterprises, up 1% compared to Q4 2018. Net client additions were impacted by higher churn and lower ads in the small enterprise part of the market. These tend to be lower spending clients. A key factor was a shift in strategy specifically in the small tech company sector that we've discussed previously. We expect to lap the strategy shift during the course of 2020. The average contract value for Enterprise continues to grow. It now stands at $214,000 per enterprise in GTS, up 12% year-over-year. Growth in CV per enterprise reflects both price increases as well as upsell and an increase in the number of subscriptions. At the end of the fourth quarter, we had 3,267 quota-bearing associates in GTS, or an increase of 5% year-over-year. As part of our planning for 2020 and our Salesforce optimization initiatives, we moderated our growth and sales headcount exiting the year. This is in contrast to the end of 2018, when we did a higher-than-normal level of advanced hirings. We expect to see productivity improve in 2020 as overall Salesforce tenure increases and we continue to make improvements in recruiting, training, and sales tools. These changes are consistent with our commitment to strong execution and sustained long-term double-digit growth on the top and bottom line. We expect GTS headcount growth for 2020 in the high single digits. We are able to do this while driving CV growth in part because of the above average hiring we did in late 2018 and early 2019. In addition, as a result of the sales optimization program Gene highlighted last quarter and earlier today, we are driving greater efficiencies in how quickly we can deploy new salespeople. We estimate that these new programs are the equivalent of adding three to five points to our reported headcount growth. Beyond 2020, we would expect to resume headcount growth modestly below CV growth. For GTS, the year-over-year net contract value increase, or NCVI, divided by the beginning period quota-bearing headcount was $99,000 per salesperson, down 13% versus the fourth 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 to full productivity. One of the benefits of moderating the headcount growth exiting this year and moving into 2020 is that the average tenure will increase, which should improve productivity. Turning to global business sales. GBS contract value was $647 million at the end of the fourth quarter, or about 20% of our total contract value. The momentum we saw last quarter continued, with organic CV growth increasing to 8% year-over-year. GBS CV growth, including the recent acquisition of Topo, increased 9% year-over-year. We grew across all of our major functional areas with particular strength in supply chain, where we have maintained strong double-digit growth and in HR, which grew CV almost 9% year over year. Our marketing practice grew 4% in 2019. We have begun transitioning some lower-margin marketing products to more profitable GXL products as they come up for renewal. We're making this change to better align our costs and revenues. This transition will continue in 2020 and will have an impact as we move through the year. While this will have a short-term negative impact to our CV growth rates, We'll see the benefits over the medium and long term in terms of increased profitability. The impact of research revenue is built into our guidance. The acceleration in GBS contract value was driven by strength in GXL, which, as we've detailed, is an important part of our strategy and continues to contribute a larger and larger share of GBS CV. Total GBS new business was up 16% in the quarter, driven by GXL new business, which was up 31% year over year. On page 11 of the earnings supplement, we provide additional information to highlight the trend in GXL new business and contract value. We sold $58 million of GXL new business in Q4, up 31% 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 contract value increased 55% year-over-year from $191 million to $297 million and now makes up 46% of GBS CV, up about 14 percentage points from Q4 last year. We are driving increased client engagement through expanded service teams and growing adoption of individualized content and service. For the standalone quarter, we drove attrition rates down for GBS. For contracts that were up for renewal in the fourth quarter, attrition improved by 520 basis points over the prior year quarter. Again, this is the result of the increased engagement we've discussed, a richer mix of GXL renewals, and all of our other retention programs having an impact. At the end of the fourth quarter, we had 869 quarter-bearing associates in GBS, or a growth of 10%. Headcount was down sequentially as we continued to align our cost growth to our revenue growth. We expect GBS headcount growth in the mid-single digits in 2020 as we focus on realizing the benefits of the investments we've made. For GBS, the year-over-year net contract value increase, or NCVI, divided by beginning period quota-bearing headcount was $67,000 per salesperson, up significantly from last year's $14,000 per salesperson. The inclusion of topo contract value positively impacted GBS productivity by about $5,000 per salesperson. Conferences revenues increased by 11% year-over-year in Q4 to $217 million. FX neutral growth was 12%. Fourth quarter contribution margin was 53%, up 47 basis points versus the year-ago period. We had 15 destination conferences in the fourth quarter. On a same conference FX neutral basis, revenues were up 9% with a 1% increase in attendees. Attendee growth was impacted primarily by the merging of two infrastructure and cloud-related conferences into one. Fourth quarter ticket bookings were up 11% year over year. For the full year of 2019, revenue increased by 16% on a reported basis and 18% on an FX neutral basis. Gross contribution margin was 51%, an increase of 20 basis points from 2018. Turning to consulting. Fourth quarter consulting revenues increased by 9% year-over-year to $104 million. FX neutral growth was 9%. Consulting contribution margin was 28% in the fourth quarter, up 34 basis points versus the prior year quarter. Labor-based revenues were $80 million, up 9% versus Q4 of last year, or 10% on an FX neutral basis. Labor-based billable headcount of 815 was up 10%. Utilization was 60%. Backlog at December 31st was $116 million, up 7% year-over-year on an FX neutral basis. Our backlog provides us with about four and a half months of forward revenue coverage, in line with our operating target. Contract optimization revenues were up 7% versus the prior year quarter. As we have detailed in the past, this part of the consulting segment is highly variable. Full-year consulting revenue was up 11% on a reported basis and 14% on an FX-neutral basis, and its gross contribution margin of 30% was up 108 basis points from 2018. SG&A increased 14% year-over-year in the fourth quarter and 15% on an FX-neutral basis. The growth in SG&A reflects the double-digit headcount growth earlier in the year in both GTS and GBS. For the full year, SG&A grew 14% on a reported basis and 16% 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 align sales and enabling infrastructure cost growth with revenue growth. EBITDA for the fourth quarter was $218 million, up 3% year-over-year on a reported basis and up 5% on an FX-neutral basis. In the fourth quarter of this year, EBITDA was adversely affected by about two percentage points, or a $4 million impact, due to the product retirements we've discussed. Taking that into consideration, underlying FX-neutral EBITDA was up about 7% in the quarter. Depreciation in the quarter was up approximately $13 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. Net interest expense excluding deferred financing costs in the quarter was $25 million, up from $23 million in the fourth quarter of 2018. Net interest expense is up due to a modestly higher interest rate as a result of the row forward of our floating to fixed interest rate hedges. The Q4 adjusted tax rate, which we used for the calculation of adjusted net income, was 34% for the quarter as we incurred less incremental tax costs associated with our intellectual property than anticipated. The tax rate for the items used to adjust net income was 23.5% in a quarter. The adjusted tax rate for the full year was 18.9%. Adjusted EPS in Q4 was $1.18, above our expectations primarily due to a lower tax rate. For the full year, adjusted EPS was $3.90. EPS growth for the year was 7 percent. Operating cash flow for the full year was $565 million compared to $471 million last year. The increase in operating cash flow was primarily driven by improved collections and lower integration costs. CapEx for the year was $149 million, and cash acquisition and integration payments and other non-recurring items were approximately $45 million. Brief cash flow for the full year was $462 million, which is down 1% versus the prior year. Adjusted for divested operations and working capital timing benefits in 2018, brief cash flow grew 13% for the year. 2019 was a strong cash flow year as we made significant improvements in our collections process and benefited from lower cash interest costs. Free cash flow conversion from adjusted net income was 130 percent. Turning to the balance sheet. Our December 31st debt balance was about $2.2 billion. Our debt is effectively 100 percent fixed rate. Our gross leverage ratio is now about 3.2 times EBITDA. We repurchased $58 million of stock in the quarter at an average price of about $154 per share. For the full year, we repurchased $199 million of stock. We will continue to be price sensitive and opportunistic as we return capital to shareholders. We have $715 million remaining on our repurchase authorization. Our capital allocation strategy remains the same. We deploy our free cash flow and balance sheet flexibility by returning capital to our shareholders through our buyback programs and through strategic value-enhancing M&A. Turning to the outlook for 2020. Before jumping into the details, I want to give you some context of how we approached our 2020 guidance, which includes a return to aligning our cost growth with revenue growth. As you can see, we've revised the presentation to simplify the way we provide guidance. The new approach is intended to convey more clearly and directly our expectations for the business. We have set the guidance based on our best view of what we expect to deliver in 2020. Based on our experience last year, we believe providing simpler, more transparent guidance will be helpful to you in building your models. Note that the approximate guidance levels for EPS and free cash flow are calculated assuming point forecasts using the revenue growth and EBITDA margins as a starting point. The EPS and free cash flow results will vary depending on where revenue, EBITDA, and everything else in between land. Three additional context points. First, Our 2019 ending contract value and corresponding growth rates are a key driver of our 2020 research revenue. Second, advanced bookings and consulting backlog are the metrics that drive our conferences and consulting revenue guidance. We had solid advanced bookings in our conferences business, and our consulting backlog is up high single digits. Third, we continue to invest to support and drive the future growth of our business. In 2017, through the first half of 2019, we invested ahead of growth. and 2020 is a return to our typical approach of investing as we grow. The highlights of our full-year guidance are as follows. We expect FX-neutral revenue growth and research of about 9.5 percent, conferences growth of about 10 percent, and consulting growth of about 3 percent. The consulting outlook reflects very challenging compares versus a strong contract optimization year in 2019. The result of these segment growth rates is an outlook for consolidated FX-neutral revenue growth of approximately 9%. At today's FX rates, we expect FX-neutral growth rates to be roughly in line with our reported growth rates. We expect adjusted EBITDA margin to be at least 16.1%, which would be flat to 2019. We expect an adjusted tax rate of around 22% for 2020. We expect 2020 adjusted EPS of about $4.06, which is growth of about 4%. If the tax rate were constant, EPS growth would be approximately 8%. For 2020, we expect free cash flow of about $505 million. That's a projected change of about 9% versus our 2019 free cash flow. All the details of our full-year guidance are included on our investor relations site. It is also important to note that we have revalued our contract value at current year FX rates, which had a very modest overall impact. Our 2019 ending contract value at 2020 FX rates is $2.8 billion for GTS and $649 million for GBS. Details are included in the appendix of the earnings supplement. In terms of the quarterly phasing for 2020, we expect our quarterly revenue to be roughly consistent with what you saw in 2019. You can also assume quarterly phasing for the below-the-line items consistent with last year. Expect our tax rate for the first quarter to be higher than our annual rate. Finally, for the first quarter of 2020, we expected just an EBITDA of about $150 to $155 million. In summary, GTS contract value closed the year with healthy 12% growth. While we did not quite reach double-digit growth in GBS, GV growth accelerated to 8% organically, and the sales of our new GXL products and GBS continue to rise. Our conferences and consulting businesses both had great years. Free cash flow was strong, and conversion from net income for the year was 130%. Going into 2020, we have aligned our cost growth with revenue growth, and we will continue to apply the Gartner formula across the combined businesses 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. Operator?

Thank you. As a reminder, to ask a question, you would need to press star then 1 on your telephone. To withdraw your question, please press the pound key. We ask that you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of Jeff Mueller with Baird. Your line is now open.

Yeah, thank you. I would love some more detail on the three to five points that you're assuming in tech research that you're going to get from the optimization initiatives. Does that also include the increased tenure as you slow the Salesforce headcount, or just what's the operating risk to achieving that? Because three to five points from optimization alone would seem like a lot to me, so I would love any color to how you get there, because I guess my concern would be GTS-CV already decelerating now slowing sales headcount growth fairly meaningfully and calling out the softest in China, which probably gets worse before it gets better. Thanks.

Hey, Jeff. It's Gene. So the three to five points is due basically to having more people selling as a portion of our total payroll. So if you think about it, I'll give you a specific example. With training, we have great training. We have world-class training. And the way we've trained historically is we'd bring someone in, and they'd train for six to eight weeks, and then they would go into territory. And that worked really well. We constantly innovate and make improvements, and we've identified what we think is a big improvement in training that allows us to have better training, and that's to provide just-in-time training. So instead of six to eight weeks up front where they're on the payroll but they're actually not selling, we're going to give them two weeks training up front, and then they'll get the other four to six weeks like a day a week through their first year with it tuned to be what they need at the time they need it, so just-in-time training. So it's actually a better way to train. We actually get more people in territory faster. So instead of having an inventory of six to eight weeks of when they're in training time where they're not selling up front, actually getting into territory after two weeks, that gives us a lot more salespeople actually in front of clients than we have today. And so it's a combination of, in the training we're doing that, we're making similar changes in recruiting, which actually gets people in territory faster. So reducing the number of people that are being paid but actually aren't selling by being smarter about how we're doing it. And that's where the three to five points comes from. If you look at the actual number of territories, for example, in GTS, we're expecting to grow territories in GTS approximately 10% during 2020. And so even though the total number of salespeople won't grow as fast, it's because we're being much more effective at getting people into territories faster. So you can think about it, we'll still have more people in front of clients actually selling. It's just a smarter way to work.

Okay. And then on, I guess, the change in guidance methodology and simplifying it, I think there was a comment that it's the best view of what you expect to deliver. So should we view this as kind of being the equivalent of like the midpoint of the prior range and tying to that it looks like you changed the medium-term revenue guidance from 10 to 14 to at least 10. So would that 10% also be a midpoint-type number, or are these supposed to be like kind of low-end at least-type numbers? Thanks.

Great question, Jeff, and thank you for that. The way to think about the change in the presentation format is, again, it's really simplification and attempting to represent – you know, our best view of from where we stand today, how we expect the business to perform in 2020. And so I wouldn't relate it to a point in the ranges we used to provide. It's really just our best estimate of what we think we're going to do in 2020 from where we stand today. In terms of the medium-term guidance, it's really just fine-tuning and simplifying the way we're presenting it. And so, again, I wouldn't read into it as it's a change. We're just simplifying the presentation.

Okay. Thank you.

Thank you. Our next question comes from the line of Tony Kaplan with Morgan Stanley. Your line is now open. Thanks very much.

You mentioned China being a driver of slower growth in GTS. I was hoping you could help us with what percent of your business is in China, you know, what was driving the slowdown in the fourth quarter, and if any color on how much it did slow. And if you're taking into the guidance an impact from, like, the coronavirus impact, you know, how much are you sort of building in? Thanks.

Hey, Tony, it's Gene. So China historically has been a good source of growth for us. but it's still a small market for us. Think approximately 1% of revenues and just over 1% of revenues, and so it's not big for us, but it was a fast-growing market for us. What's happened in China really is three things. One is that we had a leadership change. We had a great leader, but the leader was an American whose family, after being there for a few years, his family needed to come back to the U.S., and so we made a change there. And we had another leader that we put in, which is, we think, a very strong leader, but is earlier in their tenure and sort of lowering the market. That coincided with a drop in GDP growth in China to the lowest in 27 years, as well as things like the tariff concerns, the unrest in Hong Kong, and now the coronavirus. And so it's kind of an intersection of a leadership change where, again, we think long-term will be great, but along with a sharp slowing in GDP growth and a lot of concerns about what within the Chinese about what the tariff implications will be on their economy.

Perfect. And then to help us break out GTS and GBS contract value growth in the guidance, you're expecting GBS to average somewhere in like the mid single digit kind of range and as a result of the marketing product changes and I guess how much should the marketing changes have on growth next year? Thanks.

Good morning, Toni. So we don't provide contract value guidance. And so, you know, the way I would think about it is, you know, the best estimate of where we're going to be is kind of where we are today from a growth rate perspective. And that's what's baked into the 2020 research revenue guidance.

Got it. Any color on that? Okay. Marketing.

So we're not going into that level of detail on the marketing. We wanted to make sure that investors understood we were making some changes. It will have a modest impact. The good news is, as Gene mentioned, we're dealing with the contracts as they come up for renewal. they are phased evenly over the course of the year. So it's a pretty modest impact on the revenue line. And as we roll through the year, we'll provide more color on the impact on the contract value growth.

That's great. Thanks so much.

Thank you. Our next question comes from the line of Gary Bisbee with Bank of America. Your line is now open.

Hey, guys, good morning. I'm having a hard time understanding 9.5% research revenue growth in the guidance relative to the Q4 contract value of 11.7%. I think, Craig, in your preamble to the guidance, you even said that, and I quote, ending CV is the good leading indicator of the trend in that business. So why 9.5% versus 11.7% and sort of what's going on there? I think we need more color.

Yes, sure, of course. Good morning, Gary. So I guess two things I'd note. One is there is often, if you look back historically, a little bit of a gap between the kind of point contract value endpoint and where research revenue growth ends up. And there's a couple things driving that. First is really the timing of when contract value growth comes in over the course of the upcoming year in 2020. And so, you know, we've modeled in our best estimate of where we think that revenue in NCVI is going to come and when it's going to come, and that has an impact on the overall growth rates. The second thing I'd note is within that research revenue number is a decent amount of non-subscription revenue. You know, in our revenue disclosures, it's the the kind of point-in-time revenue as opposed to the overtime revenue. And so we have certain product lines in there that are growing fast and help with the overall growth rate. We have other product lines that we are managing down or are flat to declining over time. That also impacts the research revenue growth rate. So I guess what I'd say is where we stand today, based on everything we're seeing and the way we've modeled in our NCVI by quarter, you know, and modeled in new business and renewal rates. Nine and a half percent is our best point estimate of where research revenue is going to end up.

Okay, and then the follow-up, maybe for Gene. So we appreciate, after the last couple of years, the commitment to flat, to improving margins, but it almost feels like when I think about, you know, all your commentary and the guidance here, you're slowing sales headcount and investment to deliver flat margins. And so I guess the question is, you know, something changed with the model because, you know, we've been in the, you know, I think the story you've been telling is a lot of investment over several years in GBS, but presumably there was going to be a return on those investments. You know, and now to get flat margins, it feels like you're having to, cut back on investment, which just seems to imply maybe the model's not as dynamic, or it's more penetrated, or something has changed here. Thoughts?

Yeah. Hey, Gary. So that's not an accurate characterization. I think basically we invested ahead of our revenues over the last three years purposefully, especially in GDS. And now we want to make sure we get a return on that investment. In GTS, as I mentioned, we're still intending to grow the actual number of people selling at quite a good rate. We just found a smarter way to work this year where we think that it will both have a positive impact on Salesforce effectiveness and give us a better cost structure. We have an enormous market opportunity in every segment, in every size company, in every geography, and we're committed to continue to go after that. We just found a smarter way to do it for 2020. In fact, beyond 2020, we'd expect to kind of back to the – as we get the kind of returns on the investments we made and made these changes, getting back to kind of normal Salesforce growth.

The other thing I note, Gary, is, you know, we do continue to invest behind the business. And so even in 2020, and we talked about it, you know, we still have got investments slotted in for GTS to grow headcount, you know, in the high single digits, close to double-digit rates. and also continued investment in GBS as well. And so it's moderating modestly, but we are continuing to invest behind the business, you know, with the whole goal of driving sustained double-digit growth over the long term.

Okay. Thank you.

Thank you. Our next question comes from the line of Manav Patnik with Barclays. Your line is now open.

Thank you. Good morning, guys. So just back on the medium-term guide, you know, it's hard not to interpret that as at least tempering, you know, your expectations of, you know, growth, what was 10% to 14%. And I think, you know, the three things I picked up on was obviously the GTS, Salesforce growth, I guess decelerating. You talked about changes in the GBS. And then I think even marketing, which was a double-digit growth segment for you, I suppose you're seeing it now. Am I missing anything else? And I guess I just wanted to know how temporary are these decelerations?

So let me take the marketing piece first. So our marketing practice today is a combination of new products, products like GML, and then products that were based on other acquisitions like Iconiculture, L2, Heritage CEB. And the GML product, which is our traditional product, last year, as it has for several years, grew way north of 20% on a pretty good CV base. The issue is with some of those other products. And so we're quite long-term optimists about marketing because it's growing. The new products are growing actually. The GML products, which is our core product, are growing extremely well. Because the other products had poor retention and had much lower profitability, Rather than try to retain those clients, what we're doing is making them not renewable and getting people to upgrade to GML, which we know is a much better product. That lowers the total growth rate in the short term, but increases the profitability. Once we go through that transition, we expect that marketing will be a very fast grower as it's historically been, and as GML continues to do today.

The other thing I'd mention, Manav, is as you think about future growth rates, and we've talked about this a lot in the past, there are really two levers that drive the contract value growth rate. So it's investing in incremental headcount. And again, you can look at it in terms of raw headcount, the headcount number, or you can look at it the way Gene described it, which is the amount of available headcount that actually is totalized, talking to clients and selling. And we're looking at it both ways. and productivity improvements. And so from where we stand today, we still believe there is a lot of room to do both, to invest in continuing to grow both sales forces and also to continue to improve productivity across the board. While we had a really nice improvement in GBS productivity, it's still only at about two-thirds of the GTS level. And so there's still room to go there. And GTS we had a little bit of a rough year on the productivity. It's still very strong, but there's definitely room for improvement there. And so if you model in a combination of headcount growth and even modest productivity improvements, we believe we can achieve similar contract value growth rates to what we've done in the past.

Okay. And then just to follow up on the GBS side, so I think you said GXL was 46% of the contract value this quarter. You know, what's a reasonable timeframe or cadence to kind of model in every year on how that percentage progresses, you know, versus the legacy business, I suppose?

Yes, it's a good question, Manav. You know, I'd say two things. One is we've actually improved the retention rates on the legacy, which is, you know, a huge net positive for us. know because we're keeping more more dollars there and and happy clients there and so um that has uh slowed the erosion of the uh of the legacy portion of the overall gbs contract value um but as we roll into the future you know we expect to pass over the the halfway more more than 50 percent of the tv being gbs some being um gxl rather sometime in the first half of of 2020 And that trend will continue over time. And again, if you kind of model in results consistent with what you saw in 2019 in terms of the legacy decline and the GXL growth rates, that'll give you a good sense for that shift and mix. All right. Thank you.

Thank you. Our next question comes from the line of Andrew Nicholas with William Blair. Your line is not open.

Hi, good morning. I wanted to ask about CV growth and GBS and how you expect it to progress over the course of the year. I know you mentioned some of the lower margin products and marketing coming due throughout 2020, which should have an impact on profitability, but I'm just wondering if there's any way to quantify or give some color on just the cadence of CV growth and how maybe some of those products coming due would flow through throughout the year.

Hey, good morning, Andrew. It's Craig. So, you know, we don't provide contract value guidance, you know, for either GTS or GBS. You know, as I mentioned earlier, the phasing of those lower margin products as they come up for renewal across 2020, you know, it's more heavily weighted towards Q2 and Q4, but, you know, we do have contract value in each of the quarters That will come up for renewal. You know, I would expect kind of similar, you know, let me back up for a second. So from a GBS perspective, you know, we had great momentum in 2019. You know, we're closing the year 8.2% organic contract value growth. You know, absent the changes in marketing, you know, we expect to continue to drive really nice growth in GBS. And again, over time, we'll be able to transition and migrate away from those lower margin marketing products that Gene and I both described to higher margin GXL products. So long answer, no specific CV guidance, but we're obviously focused on continuing to drive growth in GBS.

Great. Thank you. And then your EBITDA margin guidance obviously aligns with your messaging last quarter. No surprises there. But I was hoping you could elaborate a bit on some of the factors that could potentially drive margin expansion in 2020. Is that primarily a matter of exceeding your revenue growth projections, or are there other potential areas where we could see some margin upside? Thanks.

Yeah, so, you know, again, our view and from where we stand today is, you know, our guidance is our best view of where we think we're going to land, which is, you know, roughly with flat margins. you know, the way to potentially see margin expansion would be nice improvements in sales productivity, which would correspond with, you know, contract value growth rates accelerating as well. Depending on when that happens, it might flow through into 2021 as opposed to, you know, benefiting us from a revenue upside perspective in 2020. But, you know, the sales productivity is probably the biggest lever we have from a margin perspective.

Thank you. Our next question comes from the line of Bill Warmington with Wells Fargo. Your line is now open.

Good morning, everyone. So a follow-up question on the decline in the sales productivity. How long is typically the lag between the decline in the sales headcount growth and the improvement in the sales productivity?

I would not say one-to-one correlated. As you know, Bill, we're constantly tuning the model of going faster in places where we've got really strong productivity and pumping the brakes or slowing down in places where our productivity is not as strong. You do see it from a pure calculation perspective. If we delivered the same amount of NCVI with less headcount growth, yes, that would equate to higher productivity on average. But the way we're managing it is much more dynamically than that. And again, making sure that at the individual unit levels of our frontline sellers that we are driving productivity, moving people up the learning curve. our 10-year curve, as we've talked about, investing in places that consistently deliver high productivity and slowing down in places that are not delivering from a productivity perspective. So, you know, net-net, you know, we are, just like we've always done, tuning the model to make sure that we set ourselves up to be in a positive position from a sales productivity perspective.

And for my follow-up question on... on the impact of the revised sales strategy for small tech companies. When can we expect, in terms of the phasing, when can we expect the impact of that to start to moderate?

So I would expect to see improvement throughout 2020 and 2021. So I think over the next two years, we'll get back to a really good spot there.

Got it. Well, thank you very much.

Thank you. Our next question comes from the line of Jeff Silber with BMO Capital Markets. Your line is now open.

Thanks so much. Sorry, I just want to go back to the medium-term guidance. First of all, can you just remind us how you define medium-term? And second, if I look at the objectives that you provided, I think, on last year's Analyst Day, you kind of went through the buckets in terms of research, conference, and consulting to come up with your medium-term objectives for revenue growth. Can you just tell us how those have changed, if anything, by the different segments? Thanks.

Good morning, Jeff. It's Craig. So, medium term in our definition is three to five years. So, that's the way to think about medium term. You know, again, my view or our view, I should say, on the medium term guidance is it's sort of unchanged. It's just simplified. The key thing that drives the bulk of our top line is our research business, and that's reflected on the slide in terms of GTS-CV growth and GBS-CV growth, which is unchanged. Our expectations for conferences and consulting, which is not on the page, are essentially unchanged. And so instead of doing the math that would get us, you know, with all the inputs to a range on revenue, we've just simplified it that it's 10+. And so, you know, again, I'd say no change to the medium-term guidance, just simplification in terms of the way we're presenting it.

Okay, appreciate that. And then when you – I think, Gene, you had mentioned that the – and forgive me if I'm misquoting you – that the GTS territories were going to be up 10% this year. Can you just confirm that's what you said? And can you just tell us geographically, are you focusing on specific areas for that increase?

So, again, yeah, I did say GTS territories would be at approximately 10% during 2020. And, again, what we do, as Craig mentioned earlier, is we look at where the territories we believe are going to have the highest sales productivity. And so we have huge opportunities to have territories. And so we basically prioritize, sort of say, based on the tenure of the leader, et cetera, how the team is operating. What are the places that we think are likely the highest sales productivity? And that's the place we add the territories.

And any specific geographies to call out there?

Well, again, we're – again, so we'll be adding fewer territories in China, you can be sure. And, you know, so basically the places that are doing well, we add more territories. And the places that are challenged, like China, we'd be adding fewer territories. So – That's kind of as simple as that. Okay.

Thank you.

Thank you. Our next question comes from the line of George Tong with Goldman Sachs. Your line is now open.

Hi. Thanks. Good morning. Within GTS, you noted challenges from a strategy shift with small tech companies, the sales leadership changes that you've made, and headwinds in China, which you've talked about. Can you elaborate on your remediation actions? In other words, what are you doing to actively reverse these headwinds other than waiting them out, and when you would expect to see normalization in operating performance?

Yeah, George, great question. So in the small tech companies, we basically changed our strategy. There's a huge growth in number of small tech companies because of, cloud-based computing and open source software development tools. And so there's been a very large increase in the number of small tech companies. So it's a great market for us. We started serving that market the way that we do larger companies, and we discovered that was not as cost-effective as we'd like. And so we kept with a much better way, which we're transitioning to. There's some short-term pain, but it's basically we're changing how we're selling those companies to make a specialized team that just focuses on those companies And it's tuned so that we get the right economics. And so that's what we're doing there is we've actually set up a dedicated team, tweaked the sales processes for those smaller companies, et cetera. In the case of Germany and India, as I mentioned, in Germany, I mentioned this a couple of calls ago, we had two key leaders, a sales leader and a service leader, who basically got promoted and wanted to take other jobs. One went to GBS, one went to another place in our service organization. Very strong leaders had led Germany, the two top leaders in Germany had great growth there. For their own careers, they wanted other jobs, which we want to encourage that. Their successors were more junior. Think about them as being the tenured people but five years earlier in their career. So it takes a little time to get up to speed. The performance of those two leaders is doing great. The new replacement leaders in Germany are doing really well. If we look at leading indicators like pipeline development and things like that, client engagement. They're doing really well. So the leading indicators are good. And so we've made the right changes. We're giving them appropriate leadership development support and the leading indicators are strong. So those are kind of the changes.

Got it.

And then again, I guess I'll go back to China as well. We talk about China where we have a new leader there. We feel very good about that leader. It's a tough situation economically and we're giving them support. We are going to not be adding a lot of territories in China but that solves two problems. One is Because of the challenges there, fewer territory growth means it's easier to manage, so it actually helps them and will also help them with their leadership development as well.

Got it. That's helpful. You've previously guided to GBS CV growth of at least 12% in 2020. Can you discuss why you're choosing to withdraw GBS guidance, even though visibility into CV growth is higher now than it was last year? I guess what's changed structurally here? in GBS from when you previously guided to 12% plus CV growth?

Good morning, George. It's Craig. I think now that we're a few years past the acquisition, now that we've seen really nice acceleration over the course of 2019, we're reverting to our general philosophy, which is we don't provide contract value guidance. you know, for either of our businesses. But, you know, again, you've got the medium-term objectives that we are marching towards. And so those are unchanged. And, you know, we will continue to focus on, you know, driving growth, contract value growth in both GTS and GBS. And as we talked about earlier, the way we're going to get that growth is by continuing to invest in growing the sales force and focus on improving the productivity of the sales force.

Thank you.

Thank you. Our next question comes from the line of Joe Ferresi with Cantor Fitzgerald. Your line is now open.

Hi, this is Stephen Chang coming on for Joe. I just wanted to touch more on the medium-term GBS-CV guidance. I understand you are expecting a lot of help from the GXL transition and maybe updates on the Salesforce, but I was just wondering if there are any other additions to that growth that will help hit that range, or should we expect most of it to come from those two sources?

Good morning, Stephen. Yeah, I think, I mean, the way to think about it is we've, over the last couple of years, We've invested in growing the sales force, in the new products, in service teams to make sure we drive great engagement and value. And we're going to continue to invest in those areas more in line with top line growth. But those are the things that are going to continue to drive the contract value growth of GBS. Again, think of it as really very similar to the way we run the GTS business. It's, again, great products, drive great value, really strong retention rates, and then grow through both finding new enterprises or new functional areas with enterprises and then penetrating them. And so it's really the same playbook. in GBS that we've run in GTS for a really long time.

Okay, thank you. And also, maybe just switching it up a little, I was just wondering if you had any seen changes or changes or kind of increased adoption in other specific industries or verticals that are gaining traction, especially in the conference section where you're, for example, you're bringing in analytics, you're bringing in more data-focused conferences. I was seeing if there's any updates on that.

So in our conferences, you know, obviously our conferences are growing at really attractive rates. So, you know, most of the conferences are doing really well. To your point, I think overall things like security and, you know, overall, again, it varies by geography because sometimes you hold these things in multiple geographies, but things like security and analytics tend to be even faster growing than some of the others.

And the other thing I'd add, Stephen, is just, you know, as we build out the conference portfolio support on GBS, we've seen really nice pickup traction and growth. in those conferences, you know, the ones that have existed. We've driven really great growth in them. And then as we've talked about in the past, we've launched a few new ones like a finance executive summit, et cetera, where we've done really well and we think it sets up a really nice platform for growth into the future. Okay, great. Thank you.

Thank you. Our next question comes from the line of Hamza Mazzari with Jefferies. Your line is now open.

Hi, this is Mario Cordolacci on for Hamza. I know we talked about China and what's going on there, but just curious to know what your Salesforce productivity looks like in other regions, and specifically maybe Europe, and whether there's any variation there versus what you're seeing in the U.S.

So Europe's sales productivity actually varies quite a bit by country. So we have some countries in Europe that have very high productivity and others that are not as good as we'd like. And so there's not kind of one answer for all of Europe. It actually varies quite a bit by country. And it's really correlated to how mature our sales team is there and our level of operational execution.

And Mario, just to double click on that for a sec, as Gene mentioned, we manage and measure at a very granular level from a productivity perspective. And so we are looking at it almost essentially at the sales manager level, and that's what helps us determine where we're going to invest more and where we need to sometimes take a pause on growth And so you've got wide variability of productivity across the board. But we are looking at it very, very deeply. And, again, in the places where we're seeing strength, those are the places that we tend to grow a little bit faster from a headcount growth perspective. And in places that are challenging, we tend to, you know, take a little bit of pause so that we can get people up the tenure curve, whether it's the frontline sellers, the sales manager, or what have you.

Great. And just one more, and I'll turn it over. Just regarding the three to five points you're going to get from the optimization, I guess that looks great this year, but I guess is there any additional work that you guys can do next year to optimize more, or does growth ramp after you guys lap this change?

So the first thing I'd say is we're committed to continuous innovation and continuous improvement. And so I'll never say we won't come up with more innovations next year. And also some of these changes will take place over the two years. But we won't get the full impact this year. It will take the 2021 to get the full impact of the changes I discussed. And we're going to continue to innovate. Our planning is that we're going to get three to five points this year, and then in 2021 we'll go back to kind of the normal headcount growth that you've seen in the past.

Great. Thank you so much.

Thank you. This concludes today's question and answer session. I would now like to turn the call back to Gene Hall for closing remarks.

Well, as you heard today, we once again delivered strong performances across all three of our businesses, research, consulting, and conferences. The Gartner formula for sustained long-term growth continues to drive success in our research business. Our GTS organization continues to deliver strong performance. GBS accelerated and is on a path to sustained long-term double-digit growth. We deliver incredible value to every major function in the enterprise. We have a vast market opportunity. We've made investments over the past few years that position us well to capture that market opportunity. We're aligning our cost growth with revenue growth. With the great strategic positioning of GTS and GVS, together with leveraging the investments we've made, we are well positioned for sustained long-term double-digit growth. Thanks for joining us today, and I look forward to updating you again next quarter.

Ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect.