Good morning, and welcome to the Gartner Third Quarter 2018 Earnings Conference Call. All participants will be in listen only mode. After today's presentation there will be an opportunity to ask questions. Please note this event is being recorded. At this time, I would like to turn the conference over to David Cohen, Gartner's GVP of Investor Relations.
Please go ahead, sir.
Thank you, Denise, and good morning, everyone. We appreciate you joining us today for Gartner's third quarter 2018 earnings call. With me today are Gene Hall, Chief Executive Officer and Craig Safian, Chief Financial Officer. This call will include a discussion of third quarter 20 financial results and our current outlook for 2018, as disclosed in today's press release. In addition to today's press release, we have provided an expanded supplemental document for investors and analysts in which we provide a detailed review of our financials and business metrics.
In the supplemental document, we included a full non GAAP P and L, excluding all the divested operations. This table combines Heritage Gartner and Heritage CEB and removes the operating results of the divestitures starting January 1, 2017. For 2018, the table provides results as if we had used the net proceeds from the divestitures to repay debt on December 31, 2017. This gives you a view down to adjusted EPS for 2018 that reflects how we are thinking about the business as we plan for 2019. All growth rates release and supplemental PDF to our website investor.
Gartner.com. Following comments by Jean and Craig, we will open up the call for your questions. On the call, unless stated otherwise, all references to revenue and contribution margin are for adjusted revenue excluding divested operations and adjusted contribution margin, excluding divested operations, accounting adjustment and the recently divested businesses. All references to EBITDA are excluding divested operations with the adjustments as described in our earnings release and excluding the divested operations. All cash flow numbers unless stated otherwise are as reported with no adjustments related to the divested operations.
Reconciliations for all non GAAP numbers we use are available on the Investor Relations section of the gartner.com website. Finally, all contract values and associated growth rates we discuss are based on 2018 foreign exchange rates. In the earnings supplemental, the abbreviation XTO indicates that the metric excludes divested operations. As set forth in more detail in today's earnings release, certain statements made on this call may constitute forward looking statements. Forward looking statements can vary materially from actual results and are subject to a number of risks and uncertainties including those contained in the company's 2017 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 those documents. Now, I will turn the call over to Gartner's Chief Executive Officer, Gene Hall.
Good morning, and welcome to our quarterly earnings call. Thanks for joining us. We drove another strong and EBITDA up 17%. We continue to see strength within each of our 3 businesses, research, consulting and events. Research revenue was up 12% year over year.
Consulting revenue was up 10% year over year, with backlog up 18% on a reported basis. On a same events basis, events revenue was up 21% and the number of attendees was up 17% year over year. We continue to apply the Gartner formula for growth, to both global dent and again delivered double digit growth in every region across every size company and in virtually every industry. We continue to pursue growth opportunity by applying the Gartner formula to GBS. Applying the Gartner formula has required an unusually large amount of change for GBS during 20172018.
We restructured the organization. We eliminated discounting, reconfigured contract terms and conditions. We introduced seat based offerings and made many more changes. These changes put in place the foundation for sustained double digit growth in the future. Change of this magnitude puts everyone affected on a new learning curve and this impacted short term productivity as we expected.
Looking to the future, with much of the foundation in place, we expect our team lookedvance on the learning curve resulting in sustained double digit growth. 1st, our GBS leadership team and sales people understand and are fully bought into the Gartner Formula. They have the will, they are determined to succeed, and they are incredibly excited about the opportunity ahead. With this determination and excitement, their skills in executing the Gartner Formula are getting better every day. Clients appreciate the strong value proposition in our new seat based products.
As a result, over the past three quarters, the proportion of our sales people who have sold their first seat based deal has grown rapidly. And once they've sold their first deal, salespeople quickly accelerate in selling their 2nd, 3rd, and more. As you might expect, the proportion of seat based contract value is also rapidly grown. Our business development salespeople in GBS have already achieved similar levels of productivity to their colleagues in GTS. Our account executives are also accelerating their sales of seat based products.
Account executives also have renewals to process. So their seat based sales are accelerating at a slower rate than the business development salespeople. One of the key elements in the Gartner Formula is advanced analytics based selling tools. These tools are a critical element of the strong performance in GTS. We've recently implemented these tools for GPS and GBS will benefit in the same way.
Retention is critical in our business and we're world class. Throughout 2018, we've added GPS service teams for the Gartner Formula. We're already seeing benefits in the places we've deployed these teams. As we scale other areas of GBS, we expect this will drive further improvements on retention. Focus is another core element of the Gartner Formula, so we've divested businesses that weren't central to our strategy.
And finally, we know from our track record extending more than a decade that if we have more salespeople, we will sell more. We'll close 2018 with substantially more capacity and will add even more during 2019. So in GBS, With much of the foundation in place, we expect the learning curve to accelerate resulting in sustained double digit growth. In closing, we have strengthened all 3 of our business segments. I recently experienced the power of Gartner in helping clients achieve their mission critical priorities, when I attended our Symposium conference in Orlando.
This event is the most important gathering of CIOs and senior IT executives in North America. The executives were inspired and empowered to succeed as a result of the insights we delivered at this important event. Our associates were equally inspired and excited about the incredible value we deliver to our clients. I encourage all of you to attend at least one of these events experience the power of Gartner for yourself. We have an incredibly large market opportunity know the right things to do to drive success in our business by applying the Gartner Formula, and we're on track to achieve sustained double digit growth in revenues, earnings and cash flows for years to come.
With that, I'll now turn the call over to Craig Safian, our Chief Financial Officer.
Thank you, Jean, and good morning, everyone. Demand for our services remains robust around the world. And in the third quarter, we delivered excellent financial results across 3 primary operating segments. As our fourth quarter 2018 outlook demonstrates, we expect to deliver another year of double digit revenue and EBITDA growth with strong cash flow generation. Divestiture activity.
Once assessing which assets were non core to our business, we set in motion a process to divest those businesses. In Q2, we sold CEB talent assessment for about $400,000,000 and CEB workforce surveys for about $28,000,000. We sold Challenger sales training for about $120,000,000 in Q3 and we closed on metrics that matter yesterday for about 15,000,000 divesting these non core businesses allows us to increase our focus on the core as well as utilizing the proceeds to rapidly de lever our balance sheet. On our website, we have provided a full normalized to give you for 2019. 3rd quarter revenue was 13% on an FX neutral basis.
The purchase accounting adjustment for deferred revenue was down to about $250,000,
for the quarter. We also
EBITDA of $149,000,000, up 15% year over year and 17% FX neutral, and adjusted EPS excluding divested operations of $0.83 per share. The divested operations amount we excluded was about $2 per share in the quarter. Free cash flow in the quarter was $251,000,000. Research had another excellent quarter with significant Research revenue grew 11% in the 3rd quarter and 12% on an FX neutral basis. The contribution margin for research was 69%.
Total contract value was $3,000,000,000 at September 30, growth of 12% versus the prior year. We always report contract value growth in FX terms. I'll now review the details of our performance for both GTS and GBS. In the third quarter, GTS contract value increased 14% versus the prior year. GTS now has contract value of $2,400,000,000.
Client retention for GTS remained strong at 83%. While retention for GTS was 105 percent for the quarter, up 120 basis points year over year and the high level we've reported since measuring GTS. GTS wallet retention rates reflect of greater spending 8% versus the third quarter of last year. We had a number of new business deals flipped out of the third quarter that have since closed in October, and the pipeline for Q4 remains very strong. And sales of additional services and upgrades to existing clients.
We ended the 3rd quarter with 12,477 GTS clients up 6% compared to Q3 2017. The average contract value per enterprise also continues to grow. Now stands at $192,000 per enterprise in GTS, up 8% year over year. We This continued and consistent increase in average spend reflects our ability to drive CV growth both through Our investments to improve sales force productivity continued to pay off with an increase again this quarter. For GTS, the year over year net contract value increase or NCVI divided by the beginning period quota bearing headcount was $112,000 for salesperson, up 11% versus the third quarter of last year.
Is the 4th consecutive quarter of year over year productivity improvement. Turning to Global Business Sales. As of September 30, GBS had contract value of $615,000,000, representing year over year growth of 4%. Note that some of the historical GBS numbers have changed to reflect the divestitures of the challenger sales training and metrics that matter businesses. We continue to make progress with GBS retention points from the prior up more than 100 basis points versus the prior year and up about 40 basis points sequentially.
New business declined by 6% in the quarter versus the prior year as the growing sales of seat based products wasn't yet enough to offset the lower sales of legacy products. We ended the 3rd quarter with 5675 GBS clients, up 2% versus the prior year period. For GBS, productivity was relatively stable compared with both second quarter of 2018 third quarter 2017. The year over year net contract value increase or NCVI divided by the beginning period quota bearing headcount was $38,000, down a few $1000 compared to both the third quarter last year 2nd quarter of this year. The productivity reflects the operational shift we have the sales team making to the new Gartner seat based products.
Our data and analytics show that as our sellers gain more experience with the new products, their productivity improves. The average contract value for enterprise at GBS increased about 2% to $108,000. This increase reflects our ability to drive CV growth both through new and existing enterprises at GBS as well as GTS. Since third quarter of last year, we have made a number of changes and operational improvements to the GBS business to follow the Gartner growth formula and we detail that investor day. All of these changes and the improvements Gene highlighted earlier provide the foundation for sustained long term double digit growth.
Our Research business performance in Q3 was very strong. GTS was outstanding with increases in wallet retention and sales productivity. For GBS, the early indications reinforce our outlook for double digit contract value growth next year and 12 plus percent growth in 2020. In events, revenues increased by 27 percent year on year in Q3 to $57,000,000. FX neutral growth was 30%.
Event's 3rd quarter gross contribution margin was 44%. Gross contribution increased 55% from last year's quarter. We had 17 destination events in Q3 consistent with last year. On a same event, FX neutral basis, revenues were up 21% with a 17% increase in same event attendees. 3rd quarter consulting revenues increased by 9% to $79,000,000.
FX neutral growth was about 10%. Labor based revenues were $70,000,000. In the labor based business, revenues increased 8% versus Q3 of last year or 9% on an FX neutral base this. On the labor base side, billable headcount of 727 was up 7% and we had 135 managing partners at the end of Q3, about flat versus the prior year. Backlog, which measures labor based projects under contract where there is more work to be done is the key leading indicator of future revenue growth for our consulting business.
Backlog ended the quarter at $108,000,000, up 18% year over year. Our bookings performance remains strong and our Q4 pipeline is encouraging. Was up 19% versus Overall, consulting gross contribution margin was 23% in the third quarter. With the divestitures we discussed earlier, there is essentially no revenue left in the other segment. Going forward, we will be reporting our business in 3 segments: research, consulting and events.
The small percent year over year in G and A increased 13% year over year on an FX neutral basis. We continue to grow sales capacity and the enabling infrastructure support our strategy of delivering sustained double digit growth over the and real estate to support the increased number of associates around the world. End of the third quarter, we had 3720 quota bearing associates in research. This includes 2955 in GTS, and 765 in GBS, or growth of 13% 20%, respectively. EBITDA for the third quarter was $149,000,000, up 15%.
FX neutral growth in EBITDA was 17%. Depreciation and amortization were about flat with last year, while integration expenses were down year over year as we have moved past the biggest part of the integration work. Interest expense in the quarter was $27,000,000 down from $39,000,000 in third quarter of 2017. The lower interest net income was 20% for the quarter. The rate for the quarter was lower than anticipated due in the expiration of certain statutes of limitation and excess tax benefits attributable to stock based compensation.
Adjusted EPS including the divested operations in Q3 was $0.85, with upside relative to our expectations driven by strong operating performance, which includes some costs that slipped into the 4th quarter as well as benefits from a number of below the line items. Excluding the divested operations, adjusted EPS in Q3 was $0.83 per share. In Q3, operating cash flow was $249,000,000 compared to $150,000,000 last year. The increase in operating cash flow was driven by strong q33 2018 CapEx was $25,000,000 and Q3 cash acquisition and integration payments and other nonrecurring items were approximately $26,000,000. We had some planned Q3 CapEx slipped into the 4th quarter.
This yields Q3 free cash flow of $251,000,000, which is up more than 70% versus the prior year quarter. On a rolling 4 quarter basis, our free cash flow conversion was 137 percent of adjusted net income, including divested operations. While free cash flow conversion on a trailing 12 month basis is very strong, we expect a modest Q4 for free cash flow which will temporarily reduce that measure again. GBS business has the same working capital characteristics as our GTS business. And as we see acceleration in GBS contract value, we would expect to see a corresponding 18, we repaid $262,000,000 of debt, leaving our September 30th debt balance at about $2,200,000,000.
That's down more than $1,400,000,000 since the acquisition. As of the end of Q3, all of our debt is fixed Our gross leverage on a reported three times EBITDA and with strong EBITDA in the fourth quarter, we are in range of our leverage target. Our capital allocation strategy remains the same. We deploy our free cash flow and balance sheet flexibility on strategic value enhancing M and A and returning capital to our shareholders through our buyback programs. During the month of October, we took advantage of the lower stock price to repurchase over $60,000,000 worth of our stock.
Turning to the outlook for 2018. The business on the basis we will have going forward. In the supplemental document available on our website we provide a walk from the original guidance provided in February to the guidance we're giving now. With all the moving parts related to divestitures, we are providing guidance for the fourth quarter rather than for the full year. Our operating expectations for the full year are tracking to what we first outlined in February.
Our adjusted EPS outlook is stronger now as below the line upside from depreciation, equity compensation and tax flows through. With the strengthening of the U. S. Dollar that we saw over the course of the third quarter, we expect to see our top line reported results impacted again in the fourth quarter by FX. As you update your models for Q4, please keep in mind that our original estimates for reported revenues, reported expenses, and reported EBITDA will be impacted by about The highlights of our fourth quarter $1,070,000,000 to $1,115,000,000.
We expect adjusted EBITDA of $211,000,000 to $231,000,000. Amortization will see a noticeable step down from about $51,000,000 in Q3 to about $35,000,000 in Q4. We expect an adjusted implying a tax effect on the add backs in the 4th quarter is about 21%. We expect 4th quarter 2018 adjusted EPS excluding divested operations of between $1.18 $1.34 per share. For the full year without adjusting for the divestitures, we expect free cash flow of $440,000,000 to $460,000,000 At the midpoint, the conversion from the comparable basis adjusted net income is almost 130%.
Consistent with typical seasonality and some capital expenditures, some capital expenditures that slipped into the 4th quarter we expect free cash flow Our strong 2018 financial and operating performance across all of our operating segments continued in the third quarter. Notably, we sustained strong GTS contract value growth of 14% for the quarter and sales of our new seat based products and GBS continue to scale. Free cash flow improved significantly in the quarter. We have divested and use those proceeds to rapidly de lever. We've reduced our debt balance by more than $1,400,000,000 since the acquisition in 2017.
The trends going into the fourth quarter are strong and our teams are executing the 2018 plan. As we shared with you at Investor Day, we are applying the Gartner growth formula across the combined business to drive sustained long term double digit growth to revenue, earnings, and free cash flow.
We will now begin Your first question will be from Timothy McHugh of William Blair. Please go ahead.
Hi, thank you. I guess just wanted to follow-up on the GBS productivity kind of discussion. And I guess one comment was you made I think it was that the business development staff was at the same productivity as GTS, but the account executives aren't. So can you help us understand, I guess, how much of the business activity from each of those. And I guess, if one is already at the productivity level of GTS, simplification, as account executives are, are, I guess, superiorly lower than the comparable role at GTS.
So can you talk at all about that?
Hey, Tim, it's Dean. Let me I'll get started and then Craig can follow-up. So basically, we have 2 kinds of sales people, business developers that have a set of prospects that aren't buying anything from us today. And so that's one kind of a selling cycle. We have different sign of Salesforce, which we call account executives who actually have existing clients and their job is to renew those existing clients and to sell additional business to those existing clients.
And as you mentioned, one of the things that we've been very, that has gone very well is that the sales productivity of our as developers, at this point, is roughly comparable to the sales productivity of business developers, both between GTS and GBS. On the account executive side, the what's going on is 2 things. The sales people, first of all, so let me go back to BD's. Business developers, all they have to do is to sell new clients with this new product. They don't have to renew all this.
And so the learning curve they have is a lot simpler. If you're just selling the new product, then if you have to sell after renew the old one, and also maybe have clients that sort of say I have the old product kind of extended or whatever versus selling all new clients. And so what's really going on is the business developers have a much faster learning curve and they've gone up that learning curve nicely because it's a much simpler selling task. On the account executives, The first, they have a more complicated learning curve as I mentioned because they have to go through all the renewals. In addition, the amount of renewals that they have to do is quite high relative to the GTS account executives.
We are changing over time. So over time, we're reducing the amount of renewals that each of account executives has to do. For the short term, they have substantially more renewals than the GTS account executives. That limits so their time available to sell the new products is limited because of that relative to a TTS account executive. And so as a result, they're learning for run selling new products is slower.
They're actually doing quite well. So if you look at it, Each quarter, the proportion of account executives that have sold at least one sale that's in the new seat based products has been growing sequentially quarter over quarter. And it's now a substantial part of our total sales force. In addition, if you look at those that sold 1, 3 quarters ago, now they're selling, they have continued selling that pace has accelerated. The same for those who are so tooled to accelerate again, but had a slower acceleration to business developers for the reason I just talked about.
And so, the have a slower learning curve, but they're credit that learning curve quite nicely given the additional workload they have from all the renewals they have to do.
And then, Tim, the other thing worth mentioning to add on to Jean's point is around the legacy leadership councils and the account executives largely having that in their territory to renew and or migrate. And then all the business that the business developers are selling, which is seat based, will then be covered by account executives going forward. But inherently, those account executive territories will have more opportunity because we haven't sold a enterprise license leadership council will actually have seat based products in there, which will allow us to further penetrate the organization, the buying center of the function in the same way that we do on the GTS side.
Okay. Thank you. And then I guess just more broadly, I think one of the biggest questions people have is just trying to, I guess, share the confidence you express on GBS's growth rate improving. So is this the metric that you focus the most on that that kind of account executive productivity. I guess what are you seeing that besides this maybe that you would point to that, I guess, reinforces the confidence that it'll get better from here?
Yes, Tim. It's the set of things, so it's not like single metric. Actually, there's a set of things that I talk through in my prepared remarks. And what it is really are, we know, from our experience in GTS, the foundational elements that lead to double digit growth. And so, we've been putting those foundational elements in place.
And the things I talked about in my opening remarks, that we know will pay up over time. So the first, I'll give you some examples. So we switched products to a seat based product. And we know if Seabash product is corrected, gives you both higher retention rates and also gives you more growth opportunities to it. Now one of the questions then is will industry based products do HR professionals or finance professionals get as much value as the IT professional?
One of the things we're seeing actually is, yes, they get just as much value. So, we've been very successful in, we've introduced those new products and the uptake has been very good And as I mentioned, the updates accelerate. So we've got is the legacy products in the pipeline that had already been also has been printed to clients, so we let those follow through. Those have been falling off. What's been rising is sales of the seat based products and it's been rising at a good rate.
The net kind of looks like 0, but under the covers, you see this really rapid rise of the new C based products. And we talked to clients, so we do see them selling well we talk to clients about them, they really understand that there's a lot better value. And just as a recap, the reason there's better value is that first of all, you get the traditional research like an HR that we had, from CEB, but you also then get all the technology stuff that relates to to HR things like how to select products like Workday and how to implement things like that. HR leaders care about and the same history of finance and legal, all the other functions. And then also just there's inherently more value in the seed based product.
And then we look at things like, as I mentioned before, the first, if you've been selling enterprise agreements, the hardest sale you have to make on a Steve based product is that first sale. And the proportion of our sales people in both account executive and developers that have made that first sale is, has been rising every quarter and now is a substantial portion of our sales force. That's another, what I'd say, foundational element that gives us confidence a really good track there. And then beyond that, the ones who've sold 1, then rapidly, then sell 2 or 3 or 4, right in sequence. And so as we would expect, the first one is the hardest.
Once they saw the first one, they understand how to explain the value proposition clients. How to address, objectives the client may have might have for both the seed based products, in fact, we don't discount. Once they get that first sale of those terms and that kind of product, get confidence, they get their talk tracks down and their learning curve accelerates. And so as we look at it, clients love the products, the products are being taken up well the sales people have the proportional sales people that have made their first sales has been growing rapidly. And those that they first sell early on have continued with further accelerate the number of sales they can make, the amount of time it takes to make a sale has improved.
In addition to that, and I mentioned this, we have all the new state based products have the Gartner traditional services support, which has drove great retention. Our legacy leadership councils didn't have kinds of support, we're implementing we implemented that on some of the leadership councils and found that retention went up substantially. We've continued now to add more of that service support to that whole product line. Those people just came on board, but we'd expect to see the same kind of retention improvements that we did in our first pilot groups that we did at the end of last year, as we would with these new ones that we've done throughout this year. That will impact really 2019.
So those are some, I guess, one other thing I would say that's really important is anytime you have a change program, the single most important thing is whether the people that are changing are bought in or not and, our GBS leadership team down to and down to the individual SASperson level are totally bought in. They understand that it gives much more opportunity by having this in this product that provides more value to clients If you're not dealing with discounting, you could be focused on talking about value, which is sort of all of our strategy. They actually understand it and bought in. I spent a lot of time with that team. Understand and they were bought and excited about it.
And so there are others I could go through and went through a couple of others in my talk track, but those are the kinds of things that give us confidence that we're at a really good trajectory.
Okay. All right. Thank you.
And the next question will be from Jeff Meuler of Baird. Please go ahead.
Yes, thank you. You referenced some of the factors, but I'd hope to if we can maybe put some numbers around it. Just in terms of the Q3 upside and then the Q4 guidance, just help us understand on the Q4 guidance, like what is the divestiture impact? You talked about some costs slipping into Q4 are those SG and A or what are they? How much are they?
FX is worse? That was a factor. So just if you can kind of help us bridge the Q3 upside and the Q4 guidance on some of the factors you cited with some maybe some rough numbers?
Good morning, Jeff. So the way to think about the Q3 upside, is the bulk of the upside came from below the line items, most notably depreciation, equity compensation expense, lower tax rate and a little bit of benefit from a shares perspective. And obviously that sticks and there's upside in Q4, which we flowed through into the Q4 guidance on EPS. On the EBITDA side, We beat the top end of our guidance by about $0.06 in the quarter. Probably about half of that was spending that we expected to happen in Q3 that got pushed into Q4.
And so as we think about rolling into Q4 and also marking for foreign exchange rates and things of that nature. When you look at the full year guidance, the Q4 guidance then apply it. So, the first 3 quarters of actuals, ex divested operations. The way to think about it is we tightened the ranges on revenue midpoint is a little bit higher than the initial guidance. We tightened the range on EBITDA.
Midpoint is essentially exactly the same as where we started out and we tightened the range on EPS, but the mid point moved up about $0.20 we talked about. In terms of the divested operations that come out of Q4, it's around $8,000,000 to $10,000,000 worth of EBITDA. That we've, that we will not have now that those two businesses are no longer a part of Gardener.
Okay. Thank you. And then, I guess, Tim asked a variation of this question, but just keying in on the for me, the GBS new business metric being down, I think it was 6%. Just help me understand with all of the headcount growth. I think a lot of headcount growth is occurring in the business development staff where you're seeing a good productivity ramp in on the account executive side, given that they were previously selling enterprise wide deals, I thought that under the CEB model, it was already hard for them to sell a lot of new business.
So I'm just having a hard time reconciling all these these factors with a decline in GBS new business sales? Thank you.
Yes, Jeff. I'll start off and then Jean will we'll wrap up on the question. I think a few things to consider. So number 1, the decline in new business was actually better than what we saw in Q2. So we actually saw an acceleration in performance from Q2 to Q3 on the new business side.
The other thing worth mentioning, while there were enterprise licenses, the account executives who covered those businesses still did sell a decent amount of new business. The bulk of the new business was sold by business developers But the account executives did sell some new business at incremental leadership councils or incremental smaller functional areas within the functions that they were selling to. And they're now making the transition to renewing those leadership councils attempting to migrate those accounts if they want to into seed based products and learning all those new seed based products. And so that is taking some time as we expected given all the change that we've implemented with that team. The other thing worth mentioning in terms of the incremental capacity, and we talked about this last quarter is we have such a high of our sellers who are in their 1st year.
They have less than 1 year of experience. And as you know, from your experience with Gartner, the productivity in that 1st year is generally very low or relatively low and we see it improve over time. And so again, the way we think about this is we are doing all the right things. We know the formula to apply and we're essentially really laying the foundation for accelerated growth
Thank you.
The next question will be from Manav Patnaik of Barclays. Please go ahead.
Thank you. Good morning, gentlemen. My first question was I guess I understand your comment on providing a support staff, I guess, for your folk in terms of renewals because of the time they're spending there, but then doesn't that then imply that when they're to go in for the renewals and presumably trying to sell your new seat based offering that the clients are pushing back on on subscribing to that? Like can you just help us understand like maybe how much are switching and how much of choosing not to?
So, it's Gene Manav. So, basically, the philosophy that we've approached with this, if we have a happy client, with an existing product, and they want to keep renewing forever, we're happy with that. And so what we do is we go through with our clients and those that are very satisfied with the legacy products and want to keep renewing and we have a little price increase each year. We let them do it and we're happy to do it. For those that have some questions about value, whatever, we go and we show them the new products, which are priced higher by the way.
So potentially higher and with sell them to new products. So we're actually getting good uptake among the clients that say I'm not necessarily that happy with the existing product. We're actually getting good uptake in conversion and substantial portion of our seat based sales in the account executive channel. And so it would be the other thing about that, we're not actually going, we are happy if a client keeps renewing. We have great incremental margins with our legacy products, We're very happy for them to keep renewing.
It's got a low sales cost, great gross margins and focus on selling the new. And as I mentioned, what's going on is Under the covers, the amount of legacy new product sales has been declining because it didn't stopped in a binary sense because even though we stopped making new proposals, any proposals in the pipeline who let salespeople and clients go ahead and close, In the meantime, we've been they've been switching now to selling the newer products, the seed based products, and that's been rising rapidly. I mean, that has been kind of flat so far, but based on trends, we expect that will change. And also as Craig said, we've added a lot of capacity. As you know, in the 1st year and as Craig said, The 1st year, you hire people, you train them and then they have to get up the curve.
Their selling productivity is the lowest obviously in their 1st year.
Got it. Okay. And then maybe just broadly, I mean, I guess I understand when you go into this detail that I guess you guys get to see, it kind of anecdotally makes sense what's going on there. But in terms of your commitment to get to double digit growth next year and 12% in 2020, like what sort of cadence should we expect in terms of how this growth starts showing up either quarterly or I don't know by midyear, like how long does it take to get there?
Good morning, Manav. The way we think about it is obviously we've laid out the target and we remain as committed to that target as we've been. And hopefully you got a sense for the confidence that Gene expressed in our ability to to nail that target by the end of 2019. Our expectation is we will see or should see progress over the course of 2019. We're not going to commit to a certain percentage rate by quarter.
The baseline is not a huge number. So it is sensitive to a little bit upside or a little bit of downside. But we remain 100 percent committed to being able to hit that double digit CV growth target by the end of next year.
So Manav, we've modeled out what we need to do to get to that target like what quarter by quarter, what sales productivity we need, what renewal rates we need, what rate, what new business productivity need. And so we're it's not a hope and a dream. It's basically we've modeled that. We know we have to do our sales teams and service teams know what they have to do and we think we'll see that accelerate throughout 2019. And it's not going to be, 3 quarters of 0 growth and then all of a sudden it goes to double digit, you'll see the acceleration.
Got it. All right. Thanks guys.
The next question will be from Gary Bisbee of Bank of America Merrill Lynch. Please go ahead.
Guys. So what kind of sales headcount growth would you expect to need to deliver that double digit contract value in GBS? I mean, obviously, it's substantially faster today, but would the pace of hiring, do you think you can hit it while slowing the pace of hiring? In other words, would you expect productivity to step up meaningfully next year? Or should we think that while you're continuing to work through this and season the sales staff that it would likely need continued growth of sales headcount well in excess of the contract value that you plan to deliver?
So, we believe that GBS has the potential to grow faster than GTS on a sustained basis. And so, because the penetration is so low. And so, we're actually increasing our sales headcount not to hit 10%. But to grow our sales headcount to far exceed that. And you I'm not saying the exact number, but just a number bigger than we're getting from GTS, which is very good.
And so, the first part of the question is, we're growing our GBS sales headcount with the anticipation that actually we will not just hit the targets that Greg laid out earlier, but we will go beyond those. As soon as those people get up to speed. In terms of the specific numbers there
Yes, good morning, Gary. The way to think about we're at about 20% year over year headcount in GBS frontline sellers as of the end of Q3. Will be in that neighborhood at the end of 2018. And as Jean mentioned, one of the things that we've observed and learned and executed over the last decade or so is that when we have more sellers, we actually sell more. And so we'll be entering 2019 with the largest army we've ever had, from a GBS perspective out there, we'll have more people or higher percentage of people who have more than 1 year of experience, which will obviously be a help as we roll into 2019 as well.
And you can back into or extrapolate the productivity required based on where you think we're going to enter the year next year in terms of opening sales headcount that would achieve that 10% target that we've laid out. It is more than we are delivering today from a productivity perspective, but it is a fraction of what GCS is currently delivering from a productivity perspective. And as we've said in the past, there's no reason why GBS productivity shouldn't mirror GTS productivity over the long term. And so, it's a combination of, we're not the jeans point. We're not in this game just to hit 10% at the end of next year and 12% at the end of 2020, we believe the market opportunity is vast and enormous and untapped.
And so we're actually driving headcount growth or adding headcount capacity to go after that big market opportunity and accelerate our growth into the future.
Okay, great. And then just a follow-up, Craig, so when I look back at this year, you've beaten the quarterly EPS bogey, you'd set out convincingly, but the full year numbers haven't moved a lot. I realize there's an awful lot of moving parts with the divestitures with tax moving around and some of the below the line below the line items, but your business should be quite predictable. Your spending should be fairly predictable. Are we now through all the divestitures and everything?
Are we now in a place where one might expect you to have some more ability to predict quarter to quarter the financial performance or do you expect these factors that have been moving around to continue to do that going forward? Thank you.
So there's a few things going on. You're right. It has been noisy from a divestiture perspective, and from a plan perspective, we've now executed on the 4 major divestitures that we set out to, which were businesses or assets that came over as a part of the CEB acquisition. And that's why we've in the supplemental document, you'll find on our website. We've gotten great efforts to provide our investors with the excluding divested operations view.
So you can see what the P and L really looks like down to adjusted EPS as if these businesses were never a part of Gartner. And so we're getting into much more of a what I'd call normal operating environment from that perspective. I think Gary, with our businesses, there are different degrees of predictability associated with them. Obviously the subscription research business is a great business and is highly, highly, highly predictable Some of our other businesses have a little bit more variability around them. And on top of that, we haven't exactly been in a 100% stable foreign stains environment either, which can cause numbers to go up or go down compared to what the guidance was even 3 months prior.
So, I think you're right, your assertion is right that with a lot of noise behind us, We're now in a more, I won't call it completely normal, but a more normal operating environment. And the predictability of our businesses remains the same in terms of subscription based revenue, really predictable and some of the other businesses have a little bit more variability. And we'd expect going forward.
The next question will be from Bill Warmington of Wells Fargo. Please go ahead.
Good morning, everyone. So a question for you on the same event growth in revenue attendees and contribution margin, not all look very strong. This is hoping you could comment on what was driving that?
So, Bill, basically, in our events business, we have we base it on the research that we have in our research business. Clients come for that and we've been very effective at marketing those events and obviously clients are seeing a lot of value coming. And it's kind of as simple as that, great content, great marketing, so the clients come and get a lot of value out of it. And that's why you're seeing that growth.
And again, when you see the growth because of the foundation of the business, it's not nearly as leveraged as our research business, but obviously a lot of the costs at an event or conference are fixed to some extent. And so when we have more exhibitors and more attendees, flows through very nicely.
Okay. And then in terms of 4th quarter guidance, without discontinued operations, if you could give us a comment on what the assumption is in that fourth quarter guidance for both GTS CV growth and GBS CV growth to get some sense of that?
Yes, Phil, we don't guide on the CV or CV growth. Essentially the revenue in there is essentially an extrapolation of the Q3 ending contract value and that just kind of runs out in the quarter. But we have historically not guided on contract value growth.
Got it. All right. Well, thank you.
The next question will be from George Tong of Goldman Sachs. Please go ahead.
Hi, thanks. Good morning. Within the GBS segment, you indicated that business development productivity is comparable to ETS levels and that while account execs have had a slower learning curve, the pace of selling has improved from earlier quarters Given those dynamics, can you elaborate on the factors that prevented CV growth from accelerating from the prior quarter?
Hey, George. Just to be clear, so on the, so, the BD Productivity, as it's Judith GTS, they had good BD Productivity before. It wasn't like they had terrible BD activity. And then on the AE side, what's going on is, there's a falloff in sales of legacy product and an uptake in sales of the new products. And the because of the learning curve, again, it, that uptake wasn't as quick as the business developers, but it's proceeding well.
So the reason you're not seeing it is beating productivity on the legacy products was good and on the new product is good. On the AE productivity, it's been based so that didn't change a lot. On the AE productivity, what's going on is that the AE net productivity wasn't at GTS levels and it hasn't risen substantially so far because of the falloff of legacy has been made up for just about equally with the increase in Seapace products. And we're encouraged that over time that turnaround because as I mentioned, we're reducing the workload. So the number of renewals that we have to see.
And secondly, for the AEs that have started selling big products, their new business productivity is going up as well. It's a higher priced product and there's more additional sale opportunities. So it's this combination of of with the new seat based products, having higher pricing, having more additional sale opportunities. And then in addition to that, having smaller workload and for renewals, so you have more time to sell. Those are the factors that over time, and it hasn't happened yet, but we can see it in the underlying numbers where we have reduced workload, their productivity has gone up.
We will continue to do that throughout 2019. We're doing it now that we'll continue to do it through 2019. And again, for the people that have already sold their first seat based product, they are now getting acceleration selling in the second, third, 4th, which increases our new business productivity.
Got it. That's helpful. You had indicated that GBS new business was down 6% in the quarter. What was last quarter and how does new business need to trend in order for you to hit your double digit CV growth target by 2019?
Hey, good morning, George. So in Q2, new business was down about 20% compared to the prior year. So as I mentioned on a previous question, we actually saw a nice improvement from Q2 to Q3, which is great. I think that obviously there's 2 simple levers that allow us to will allow us to get to that or 3 simple levers I should say that allow us to get to that double digit contract value growth target for 2019. Number 1 is continuing to work on and improve retention rates and as we talked about earlier, we've seen nice progress on the on the GBS retention rates.
However, you will note that there's still pretty big gap between wallet retention of GBS and wallet retention of GTS, which we are intent on closing over time. So that's number 1. Number 2, we're going to have more significantly more capacity from a selling perspective and obviously that will equate into more sales for us and that will help on that path to double digit growth. And then lastly is really that new business number. And again, you look at what we're doing in GTS and you can kind of use that as a guide in terms of what kinds of new business growth is required support, double digit mid- and mid teen CV growth.
And so I think we would expect to see new business growth growing at double digit rates as well to support double digit contract value growth from a sustainable perspective into the future.
Got it. Very helpful. Thank you.
And ladies and gentlemen, we have time for one additional question and it will be from Jeff Silber of BMO Capital Markets. Please go ahead.
Hey guys, thanks for squeezing me in. It's Henry Chen calling for Jeff. Just wanted to ask about the GPS business. So it seems like well, CV growth is really strong and you were seeing nice gains productivity and seems like things are really going well there. Just curious, is that a satisfying sort of level for you?
Just want to keep that business at steady pace and any upcoming investment cycles in that area that you're thinking about?
So Henry and GTS, we're doing great. The growth rate is terrific. Not satisfied with the growth rate. We'd like to have higher growth and we're we're working all the levers. So we are continuing to work on improving retention and we believe we can continue to improve retention.
And we are continuing to work on improving new business for sales personnel. While it's good, we believe it can get better and we have programs to improve that. And again, we also want to grow the sales force at the rate that we believe we can productively deploy sales people and as we've talked, as I've talked about in the past, the 3rd lever, the rate we grow is set by the number of managers we have, what we think their capacity is manage additional salespeople. And so if we can increase that, meaning the our management team's ability to accept more salespeople, we'd accelerate the growth rate in our headcount as well. And so, we're working all three of those levers.
So, while, as you said, GTS CD growth and productivity is great. We're not satisfied with that. And again, we our aspiration is for significantly better.
Got it. Okay. That's great. And just in terms of the content for GTS, I know that, supply chain and marketing, I know you mentioned in the past, have been good drivers for sort of accelerating that growth. Is is that still the case, or is there any, sort of trends by by the sort of product lines that that you see right now?
Yes, I think we have a tremendous opportunity across all the functional areas we serve. As we accelerate the growth in the GBS business, our expectation is all the functional areas that we serve will be healthy contributors to that acceleration in the growth rate.
And ladies and gentlemen, this will bring us to the end of our Q And A session. I would like to hand the conference back over to Mr. Hall for his closing remarks.
Well, so as you heard today, we had strengthened all three of our businesses, research, consulting and events. Know the right things to do to drive success in our business by applying the Cardinal formula. Our GTS organization continues to deliver strong performance. We put much of the foundation in place that will accelerate the learning curve for GPS resulting in sustained double digit growth there as well. We deliver incredible value to every major function enterprise.
We have a vast market opportunity and we're on track to deliver sustained double digit growth in revenues, earnings and cash flow for years to come. Thanks for joining us today and we look forward to updating you next quarter.
Thank you, sir. Ladies and gentlemen, the conference has now concluded Thank you