Good day, ladies and gentlemen, and welcome to the Gartner Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, there will be a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to David Cohen, GVP of Investor Relations.
Sir, you may begin.
Thank you, Shannon, and good morning, everyone. We appreciate you joining us today for Gartner's second 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 second quarter 2018 financial results and our current outlook for 2018 as disclosed in today's press release. Following comments by Gene and Craig, we will open up the call for your questions.
In addition to today's press release, we have provided a supplemental deck as a reference for investors and analysts. We have posted a press release in the deck to our website, investor. Gartner.com. On the call, unless stated otherwise, all references to revenue and contribution margin are for adjusted excluding divested operations and adjusted contribution margin, excluding divested operations, which exclude the deferred revenue purchase accounting adjustment and the recently divested businesses. All references to EBITDA are for adjusted EBITDA excluding divested operations, with the adjustments as described in our earnings release and excluding the recently divested businesses.
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 2018 foreign exchange rates. In the earnings deck, the abbreviation XDO indicates that the metric excludes divested operations. To forward looking statements. Forward looking statements can vary materially from actual results and are subject to a number of the risks and uncertainties, including those contained in the company's 2017 annual report on Form 10 K and quarterly reports on Form Ten 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.
Well, thanks for joining us today. At our Investor Day earlier this year, we laid out a plan to continue driving double digit profitable growth at Gartner's traditional business, while planning the Gartner formula to accelerate the former CEB business. Today, you'll hear how we continue to be on track on both objectives. We delivered another great quarter of double digit growth in Q2 of 2018. Our revenue grew 14% and EBITDA 11%.
EPS grew 17% compared to last year. We generated more than $210,000,000 of free cash Once again, our Research segment had strong performance with revenue growth of 14% and contract value growth of 12%. As we previously discussed, we now manage the research sales force by Global Technology Sales, or GTS, which is sales to users and providers of technology and global business sales or GBS, which includes sales to all other functions. GTS had another strong quarter. GTS contract value accelerated from Q1 and grew 14% with a double digit the year over year and we expect this to accelerate in Even as we've expanded the GTS team, productivity has improved, up 10% in Q2 to $111,000 per salesperson.
As we've discussed, we have enormous growth opportunity by applying the Gartnerwood formula to GBS. We developed an aggressive blueprint to capture this opportunity and accelerate GBS to sustained double digit growth. We are executing well and meeting or exceeding our expectations on implementing this blueprint. In the quarter after we closed this EV acquisition, we eliminated including Gartner for HR leaders, Gartner for finance leaders and others. In Q4 of 2017, we pilot tested these new products, with great feedback from clients and salespeople.
We pilot tested service elements from the Gartner Formula. Retention of these pilot clients were several percentage points higher than comparable clients without these service improvements. During that time, we also expanded our sales recruiting organization and began accelerated hiring. In the first quarter of 2018, We trained GBS salespeople on these great new products. Our sales hiring continued and by the end of Q2, our GBS sales force had grown by 24%.
All of the new products, including this include the service elements of the Gartner Formula, and we're rolling out service elements with the remaining legacy products. All these changes are proceeding
as
goal. As expected, these changes had some short term impact with GBS contract value growth of 4% in Q2. There were 2 primary things that impacted GBS contract value growth in Q2. First, to grow the GBS sales force 24% we needed a sizable number of additional managers. As is our usual practice, the promoted managers were selected from our highest performing salespeople, The new manager's former positions were then backfilled with new hires.
New sales hires, particularly in the 1st few months, on average have low sales productivity. As new salespeople get experienced, their productivity rapidly accelerates. 2nd, GBS salespeople are very early in the learning curve transitioning from the legacy products to the new seat based products. As I just discussed, GBS salespeople were trained on the new products in Q1. So most had their first opportunity to make a sale during Q2.
And selling cycles are often longer than that they'll come up the learning curve quickly. Even with the GBS sales force having a much lower average tenure, being early on the learning curve selling seat based products, leading indicators are strong. Total sales to new clients increased by more than Sales of our seat based products to existing clients grew about 80% in Q2 compared to Q1 and were about 1 third of total sales to existing clients. We developed a blueprint to implement the Gartner Formula in GBS. And with the changes we've already made, we're well positioned for future sustained double digit growth.
Our new Seapace products provide much greater value to clients, which will drive both accelerated new business and stronger retention. Our sales force expansion will allow us to enter 2019 with a sales force that is about 24% larger than we had in 2017. This expanded sales force will be more tenured, trained and experienced in selling these great new products. All the new products as well as a significant amount of the legacy products will have service support for the Gartner Formula, which will drive improved retention. With our aggressive implementation of the Gartner formula, we continue to expect double digit growth in GBS contract value next year and at least 12% growth in 2020.
Our Vince segment combines the outstanding value of research the immersive experience of live events, making every conference we produce, the most important gathering for the executives we serve. Our events segment had another strong quarter. Revenues grew 17%. During the quarter, we held 24 destination events with attendance growing 13% compared to Q2 last year. On a same event basis, attendance grew 16% year over year.
Revenue for Evanta continues to see double digit growth and the forward looking metrics for our Events segment remains strong. The Gartner Consulting segment is an extension of Gartner Research and provides clients a deeper level of involvement through extended project based work to help them execute on their most strategic initiatives. Our Consulting segment had a solid quarter with Q2 Consulting revenues growing 5%. Our labor based business had a strong performance growing 13%. Our contract optimization business had the 2nd highest quarter for the business in the past 5 years, although down 17% year over year because we had our strongest quarter a year ago.
Q2 consulting bookings remained strong with backlog up 16%. In summary, I continue to be excited about our business our prospects for growth and our strategy to drive long term value for our shareholders. Our strong Q2 results demonstrate that we know the right things to do drive success in our business by applying the Gartner formula. With the capability to address critical client needs in technology and in business, across every major function in the enterprise. We remain an outstanding position to provide sustained double digit growth across all our key metrics.
And with that introduction, I'll now turn over the call to Craig Safian, our Chief Financial Officer.
Thank you, Jean, and good morning, everyone. We continue to see robust demand for and very good financial results across our 3 primary operating segments. And as our 2018 outlook continues to demonstrate we expect to deliver another year 2nd quarter revenue was $1,000,000,000, up 14% and up 12% on an FX neutral basis. The purchase accounting adjustment for deferred revenue was down to $1,000,000 for the quarter. Also in the second quarter, we delivered contribution margins of 63 percent, up modestly from the prior year, EBITDA of $191,000,000, up 11% year over year, and adjusted EPS of Free cash flow in the quarter with significant on an FX neutral total contract value was $2,900,000,000 at June 30, growth of 12% versus the prior year.
We always report contract value growth in FX neutral terms. New business growth was very strong in Global Technology Sales. We continue to see a healthy mix The average contract value for enterprise also continues to grow. It now stands at $195,000 per enterprise. Up 6% versus the prior year.
This continued and consistent increase in average spend reflects our ability to drive CV growth both through new and existing enterprises. I'll now review the details of our performance for both GTS and GBS In the second quarter, GTS contract value growth accelerated to 14%. GTS now has contract value of $2,300,000,000 client retention for GTS remains strong at 82%. While retention for GTS was 105 percent for the quarter, up almost 80 basis points year over year and at an all time high. These retention rates reflect a combination of greater spending and greater retention rates with GTS growth in new business was 16% in the 2nd quarter, an acceleration from the 1st quarter as our sales team continues to execute very well.
We ended the second quarter with 12,375 GTS clients, up 6% compared to Q2 2017. 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 $111,000 turning to global business sales. As of June 30th, GBS had contract value of $611,000,000, representing year over year growth 4%. Since the third quarter of last year, we have made a number of changes and operational improvements to follow the Gartner growth formula that we detailed at Investor Day.
All these changes and improvements position us for sustained long term double digit growth. We continue to make good progress with GBS retention metrics and for deals up for renewal in the quarter we saw significant improvement both year over year and sequentially. GBS client retention was 83%. Up more than 3 seventy basis points from the prior year. GBS wallet retention was 97% up ten basis points versus the prior year and down sequentially.
The sequential decline in wallet retention was due to lower new business sales to existing clients. New business declined by 19% in the quarter versus the prior year, primarily due to declines in legacy product sales. As Jean detailed, we are seeing a number of positive trends within our new business results. 1st, new business to new clients was up more than 20 percent sequentially, driven by significant growth in seat based products. The seat based products made up greater than 50% of new business sales to new clients in seat based new business to existing clients was up 80% sequentially.
Though that growth wasn't fast enough to compensate for the decline in new business of the legacy products, The uptake of the new seat based products are trending in the right direction. These seat based product results are particularly encouraging given the context that Gene described around the GBS sales forces lower tenure and coming up the learning curve on selling seat based products. We ended the 2nd quarter with 5650 9 GBS Enterprise clients, up 1% versus the prior year period. For GBS, the year over year net contract value increase or NCVI divided by the beginning period quota bearing headcount was $37,000 down shifts we have the sales team making to the new Gartner seat based products. The operational changes we've made are all part of the Gartner formula for growth.
And our data and analytics show that as our sellers gain more experience with the new products, their productivity improves. Our research business performance in Q2 was strong. GTS was outstanding with increases in wallet retention and sales productivity and an acceleration in contract value growth. For GBS, the early indications reinforce our outlook for double digit contract value growth next year and 12 plus $111,000,000. FX neutral growth was 16%.
Event 2nd quarter gross contribution margin was 57%. Stable with last year's quarter. 2nd quarter is typically our 2nd largest quarter of the year after the 4th quarter. We had 2 fewer destination events than last year. On a same event, FX neutral basis, revenues were up 15% with a 16% increase in same event attendees.
Q2 was strong for our events business and the forward looking metrics also remain robust. 2nd quarter consulting revenues increased by 5 percent to $96,000,000. FX neutral growth was about 2%. Labor based revenues were $77,000,000. In the labor based business, revenues increased 13% versus Q2 of last year or 9% on an FX neutral basis.
On the labor based side, billable headcount of 710 was up 7% and we had 135 managing partners at the end of Q2 up about 5% 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 Consult business. Backlog ended the quarter at $106,000,000, up 16% year over year and 11% in FX neutral terms. Our booking performance remains strong and our 2018 pipeline is encouraging. The contract optimization business was down 17% versus the prior year quarter due to a very tough compare.
Overall, consulting gross contribution margin was 35% in the second quarter. Revenue in the Other segment increased by 29 percent compared to the year ago quarter to $22,000,000. Gross contribution margin was 68%. Early in the second quarter, we divested CEB talent assessment for about $400,000,000 and CEB workforce surveys for $28,000,000. On a GAAP basis, SG and A increased by 13% year over year in the second quarter and 11% on an FX neutral basis.
Adjusting for the divestitures and other non recurring items, SG And A increased 14% year over year on an FX neutral basis. We continue to grow sales capacity and the enabling infrastructure to support our strategy of delivering sustained double digit growth over the long Enabling infrastructure includes investments in human resources functions like recruiting and real estate to support the increased number of associates around the world. Our sales force continues to be our largest investment. And at the end of the second quarter, we had 3595 quota bearing associates across Gartner in GTS and GBS. This includes 2801 in GTS and 7.94 in GBS, or growth of 9% 24%, respectively.
The GTS growth will increase in the 2nd half as we still expect mid teens growth for GTS headcount for 2018. EBITDA for the second quarter was $191,000,000, up in
the
as we're down year over year as we get past the 1 year anniversary of the CEB acquisition and as a result of the recent divestitures. Interest expense in the quarter was $38,000,000 down from $44,000,000 in the second quarter of 2017. The lower interest expense relates to paying down debt over the past year. Our tax rate which we used for the calculation of adjusted net income was 27.9 percent for the quarter. As we'll discuss in the outlook section, we still expect our adjusted tax rate to be about 26% for the full year.
Adjusted EPS in Q2 was $1.03 with upside relative to our expectations primarily from a few items below compared to $112,000,000 last year. The increase in operating cash flow was driven by strong operating results lower interest expense and improvements and catch up in working capital. Q2 2018 CapEx was $22,000,000, and Q2 cash acquisition and integration payments and other non recurring items were approximately $31,000,000. This yields Q2 free cash flow of $183,000,000, which is up over 40% versus the prior year quarter. In the second quarter, we resumed our share repurchase program, buying about 500,000 shares for $68,000,000.
We have over $1,000,000,000 remaining on our repurchase authorization. During the second quarter of 20 18, we repaid $554,000,000 worth of debt, leaving our June 30th debt balance at about $2,500,000,000. That's down more than $1,100,000,000 since the acquisition a little more than a year ago. Adjusting EBITDA for the divestitures our gross leverage ratio is now about 3.6 times EBITDA and we are tracking to our target of about 3 times, which we continue to expect to see by the end Revenue, adjusted EBITDA, free cash flow and adjusted EPS guidance remain the same. The only updates we are making are to our GAAP EPS guidance range reflect the modest changes arising from the divestitures, use of divestiture proceeds and some updates to other expenses.
With the strengthening of the U. S. Dollar that we saw over the course of the second quarter, we do expect to see our top line reported results impacted modestly in the second half of the year by foreign exchange. As you update your models for Q3 and 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 annual guidance are as follows. For 2018, we continue to expect adjusted revenues of approximately 3.9 to $4,000,000,000.
We expect adjusted EBITDA of $710,000,000 to $760,000,000. Amortization will take a noticeable step down from about $49,000,000 in Q3 to about $35,000,000 in Q4. We continue to expect an adjusted tax The rate for We expect full year 2018 adjusted EPS of between $3.51 $3.91 per share. We expect free cash flow of $416,000,000 to $456,000,000. At the midpoint, the conversion from adjusted net income And lastly, for the third quarter of 2018, we expect adjusted EPS of between $0.58 $0.62 per share.
All the details of our guidance are included in the press release and our quarterly earnings deck, both of which are available on our Investor Relations site. We've had a great start to the year with strength across all of our operating segments and improvements in most of our key operating measures. Notably, GTS contract value growth accelerated to 14% in the 2nd quarter and sales of our new seat based products and GBS continue to scale. Free cash flow also improved significantly in the quarter. We've also divested a number of non core assets and use those proceeds to rapidly delever.
We have reduced our debt balance by more than $800,000,000 in 20.18. The trends going into the third quarter are strong and our teams are working hard to execute 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 revenues, EBITDA and free cash flow. With that, I'll turn the call back over to the operator
for questions. Our first question comes from Tim McHugh with William Blair. Your line is open.
Just want to ask, I guess a little more color on the GBS side. I know you gave some explanation, but just what I guess what caused those headwinds to get bigger in Q2 versus Q1, especially I guess it relates to promotions and so forth. Any more color there would be helpful. Thanks.
Hey, Tim, it's Jean. So, as I mentioned earlier, there were two things that really hit in Q2. So first, we hired a bunch of sales people beginning in Q4 Those people actually came on board and went through training in Q1. And then we identified when they came on board, we had to have some managers for them. We didn't really promote our managers from our highest performing sales people, which we did.
And so what you'd imagine is if you take your highest performing sales people and then promoting managers. So they're not selling anymore. They're managers. Replace them with somebody that just got through training. Someone just through training doesn't sell nearly as much as somebody who has been one of our highest performers.
And it can be it's a big delta. And so if you look at comparisons, again, you take your highest performers, you replace with brand new people, that's one factor. The second factor is that as we mentioned, we had developed these new seat based products. We piloted them in Q4 last year. They did very well.
We rolled them out in Q1 and Q2. In Q1, our sales force GBS source was getting trained. So they were still mostly selling legacy products. Because they were getting trained on the new products. In Q2, they could actually start selling the new products.
Again, I guess a few of them made sales in Q1 right after training, most didn't until Q2. And so as they made the transition, obviously, with a new product at seat based opposed to enterprise agreements, and a different kind of a product, there's a learning curve for it. And so those are the 2 primary factors that impacted us. So first, We promoted some of our highest performers to be managers and replaced them with brand new people. And secondly, we made the transition from mostly legacy product sales to actually now the CPA sales and there's a bit of a learning curve there.
As Craig and I both highlighted, the initial results on selling the new CPA products are
very strong and very we're very happy about that.
Good morning, Steve.
Okay. Thanks. And then just on the Q3 guidance, I guess, in profit margins, I'm not sure if the exact margin implied by the Q3 guide, but think given year to date results plus that EPS guidance. I guess unless margins are up a lot in Q4 is the indication that lower end of the the margin guide is more likely at this point, any color on that?
Good morning, Tim. Thanks for the question. I think the way to think about it is as we talked about, I think, last year post the acquisition, there's a little more seasonality in our revenue particularly driven by events and consulting since the acquisition with Q2 and Q4 now by far being our largest revenue and profit quarters in Q4 by a long way. And so when we have a relatively fixed SG and A base, across each of the four quarters when the revenue spikes, as it does in Q2 and Q4, the margins look better than the average. And when the revenue is lower a little bit in the smaller quarters for us Q1 and Q3, the margins are down.
And so I think the way we're thinking about it is, we're still if you look at the midpoint of our annual guidance, it still calls for stable margins for the full year and that's essentially the way we are thinking about
Thank
you. Our next question comes from Jeff Meuler with Baird. Your line is open.
Yes. So I think I'm a little confused on the GBS selling activity, so that salespeople are used to selling enterprise wide and it sounds like that's what's taken a hit and they're doing well with the new seat based sales. But I guess, what's the message or the incentive structure to the sales force? Like are you I think you're allowing them to still sell both either seat based or enterprise wide, but how are you incenting it or how are you messaging it? Like are you still allowing them to sell it, but you're paying more incentive for seat based?
Just trying to understand why something they're more comfortable with is where we're seeing the bigger hit.
So, Jeff, it's Jean. So, During Q1 and Q2, we allowed our sales force to sell both the legacy product and the new seat based product. The reason we did that is they were only trained on the new Seapace products in Q1. And so they had to have something to sell in the meantime. And then we let them keep selling the legacy brand in Q2 because they had pipelines where they had already introduced the product, the legacy products to clients.
In the middle of a selling cycle, we did want to have them change. So again, so we for those reasons allowed them to sell both products during Q1 and Q2. As I mentioned, Q1 was mostly the legacy products because they hadn't yet been trimming the new products in general. In Q2, we saw a steep ramp up to material shares as we talked about of our new business, in Q2. The incentives are exactly the same, meaning that if you sell the legacy product or you sell the new C Bix product, the commission structure and the incentive structure is exactly the same as the difference.
So a salesperson on an economic basis is indifferent, which one they sell If you're a salesperson, it's a lot better to sell the new seat based products because we believe they're going to have better retention because they provide fair value to clients and they provide better growth opportunities for the future. So even though they're incented to saying, our salespeople understand why the new products provide more value to our clients And once they got trained on it, that would be the preference for selling. Beginning, July 1st for where we have the new in the majority of our salespeople, they'll be selling just the C PACE products.
Okay. So was it basically that sometime in the during the first half of the year, as your sales force was developing pipeline, they were developing it with the intention of Seapay sales and that was the conversation. So the pipeline started to dry up previously for enterprise wide sales and that why it's taking the hit. Is that the fair characterization?
That's a piece of it. I think a bigger piece is you're selling enterprise agreement, the value property of the client is more along the lines of if you buy this, everyone in the organization can use this, that's a different value proposition than I'm selling this to you individually for your personal use. And by the way, the personal use product has many more features and content than the enterprise wide product. So it's a different sale. And so there's a combination of once you start talking to a client about what I want to sell you.
You have a pipeline for that product. If you then change from you don't want to change that same client from enterprise to seat. So they started at the beginning of the year, they had been trained on seats, so they had a pipeline that was mostly for the legacy products. Once they got trained, then they started developing pipelines for the new products. And so there's the pipeline change in addition, as I mentioned, there's a learning curve.
What we've seen from experiences the first sale is the one that is the most important, because once our sales people make their first sale, they develop confidence about how to talk about it with clients. And then the second sale is easier than the 3rd sale is even easier than that. And what we saw in Q2 is, a very large portion of sales force making their first sale of a based products, GBS.
Got it. Thank you.
Thank you. Our next question comes from Manav Patnaik with Barclays. Your line is open.
Yes, thank you. Good morning, guys. So maybe just ask a different way. I guess, these changes you're making seed based hiring they were all sort of what you planned, but was this deceleration in 2Q like pretty much in line with what you were expecting or did it go a little worse than maybe what you had planned? I know you reiterated the full year guidance.
So they be like a catch up towards the end of the year in your expectations?
So the we made the changes we expect to make and the impact had the impact we expected. I'd sort of leave it at that. In terms of, I don't know how to think about a catch up, but it's kind of like we're on plan with what we expected. We wanted to make these changes. We had an aggressive plan.
We made them exactly as we expected. They are going to at least as well they're going as well or better than we expect in terms of making these changes. In fact, I had a one of the things that really made me feel good about these things is we had a meeting with our senior leaders in July. I got together with the senior GBS leaders from around the world, senior sales leaders. And their level of enthusiasm about the new products and how much value they had to clients in their future was extremely high.
And it's great. Yeah, when you have your senior sales leaders, they're all very excited about this transition of new products. Makes me feel very confident we're on the right track.
Got it.
And then maybe, Craig, just for you, I mean, a small repurchase this quarter, When do you think we get back to sort of the level of activity you guys used to do before the deal?
Yeah, good morning, Manav. Thanks. The way, the way that we think about, deployment of capital is As we get down to our overall leverage target, which as we've talked about, is about three times EBITDA on a gross leverage basis. We're going to deploy our capital in two ways. Number 1, looking at strategic value enhancing M and A that either fills in gaps or can accrete our top line and bottom line or things like that.
And return of capital to shareholders through share repurchasing. As I mentioned on, in my prepared remarks, We have over $1,000,000,000 of authorization remaining. The way we think about it is we will play our capital very similar to the way we did prior to the acquisition as we reduce our leverage and get down to our target levels.
Got it. Thanks guys.
Thank you. Our next question comes from George Tong with Goldman Sachs. Your line is open.
Hi, thanks. Good morning. You've indicated that overall GBS sales force productivity was impacted by the promotion of your highest salespeople to managers and then these people were backfilled with new sales. Can you comment on trends in Salesforce productivity among your non promoted salespeople and how their productivity tracked versus last quarter and your own internal expectations?
So I think one of the best ways to look at it is we had a pilot of the new seed based products last year as I mentioned. And if you look at the productivity of those people who have now introduced it to them in the fourth quarter. They started selling the seed based products. Even though their productivity in the second quarter it is whole numbers better than what then the new people would be. And so it gives us confidence in fact as people get experience with this, they come up with a curve very quickly.
The other thing George that I just to add to that, when we look at our sales to new clients. Sequentially, we saw a really nice increase in the new business. The absolute dollars from Q1 to Q2 of that group of sellers and the mix shifted pretty significantly too with the majority of the Q2 new business to new clients being in our sorry to use new, again, new Seaspase products. So you asked a really good question around the underlying trends. The underlying trends are very positive and everything we see analytically both from experience and what we're seeing now with the current GBS sales force is as they get more time or more tenure, their productivity does improve.
Got it. That's very helpful context. You're obviously in the process now of transitioning enterprise to seat based licensing. Can you talk about generally what the client take rate is on these new contract terms? What proportion of the contracts or clients that you're going out to are converting at under these new terms?
So, as I mentioned earlier, salespeople that have already been talking to a client about enterprise agreements, they can continue those and close those. As we switch and that again, we've we're ending that as of July 1. The, as Craig mentioned earlier, and when we have a new client situation, dollars between Q1 and Q2, our sales to new clients were up 20%, more than 20% year over year, as I mentioned in my remarks, And in Q2, the proportion of new seat based sales was more than half of those sales. So Again, the total actual dollars were up 20% more than 20% year over year. And in Q2 for new clients, the mix was more than half of the new seat based products.
In fact, and the reason there were any legacy products is just they were already in the pipeline we'd already been discussing with clients. So the uptake is very positive.
Got it. I guess the question is more qualitative. Are clients receptive to this new kind of seat based structure in your conversations?
Yes, great question. So, clients love the new Steve based products. And the reason is that they provide a lot more value. And the actual product And as you'll recall, we took research from Heritage Gartner on the technology side. So for example, HR on HR information systems.
And analytics in HR added that to what CEB had already had. And then we actually changed the structure of the product even within the CEB piece So if you look at actually the seed based product, it's a much higher value product than the legacy product we had before. And so when we talked the reason the uptake has been very positive with new clients is when new clients see this and then when we sell it to the individual for their personal use, they really understand the value, then The reception has been very, very positive, which is why you've seen the statistics I mentioned earlier, where our total new business is actually up 20% year over year GBS for new clients.
Very helpful. Thank you.
Thank you. Our next question comes from Toni Kaplan with Morgan Stanley. Your line is open.
Hi, good morning. Jean, you mentioned the July 1st date a couple of times in the last question and earlier, but just so I'm clear, that's when the salespeople are not able to sell the enterprise licenses anymore? Is that how to think about that July 1 change?
So for the largest for our larger products, HR, finance, legal, sales, marketing, etcetera, we gave until July 1st for our sales people close at any deals they have in the pipeline with the legacy products. There's still some very small legacy products but it's a small portion. So it's not literally 0, but the small portion of our projects to legacy, over time those will be converted. The vast majority and all the big important ones will be on the seed based products starting July 1st. That's the only thing we'll sell starting July
1st from a new business.
From a new business. Yes, again, people can renew our global clients renew their legacy product as long as they want to renew them.
Okay. And the fact that the new C PACE product sales are going so well, it shouldn't have you're not expecting a very negative impact on Q3 from like basically this changeover date?
So again, we feel like we're in a very good trajectory where the Salesforce understands that they're getting more experience for new sales to new clients, we actually had great results. And so we're feeling very good about it.
Okay, great. And just my follow is, were there any particular functional areas within GBS that were particularly strong this quarter or any that were particularly slower? That'd be helpful.
I'd say everything was in trend. I don't think there are any differences. You look at the differences between the seat based and the legacy products or even the trend overall, it's kind of in trend with where it's been.
Okay. So nothing to call out on like marketing versus supply chain versus?
No, no, I think again, everything I would say is in trend with where it's been historically.
Thank you. Our next question comes from Jeff Silber with BMO Capital Markets. Your line is open.
Sorry to go back to this GBS sales issue. Just one minor question if I look at the GBS sales force today, roughly what percentage of those folks are new versus those that came from CDB?
So, I don't have those numbers right in front of me, but the way to think about it is we grew at 24% year over year. So you know 24% are new. Plus, we promoted a number of people in demand interest like that. So their replacements are new. And plus we had Salesforce turnover, which is in the range of what our Gartner Salesforce turnover has been historically.
So the So I don't know if the numbers in front of you. You think about that we had growth plus we had replacement as we've promoted people plus we had normal turnover so it's a big proportion of people to do. And by the way, we're used to this. This is how Gartner's worked for a decade. And so the we know how to run with how to run that kind of an organization.
And things are going as I said, as we would expect.
Yes, I guess where I was going with the question is, if I look over time, when do you think the GBS sales force will be lives of mostly new folks as opposed to CEB legacy sales?
So, let me give you an illustrative example. Again, I don't have the exact numbers right in front of me. But if you have a business that you want to grow the sales headcount 15% net and you have 15% turnover and 15% promotions. So if I start with 100 people, I lose 15 for turnover, I promote 15 and I want to grow 15, I have to hire 45 people to grow 100 to 115 people. $45,000,000 divided by $115,000,000 is $39,000,000, it's 40%.
So if you had us under the theoretical assumption that I just gave you, 15% growth in net headcount, 50% turnover, 50% promotions, 40% of people are the 1st year all the time. Again, this is how we run Gartner for that gives you sort of a flavor for it.
Okay. Appreciate that. And where are you finding these new GBS sales people?
So, we have a a world class recruiting organization. In fact, I think about our recruiting organization as being a real source of competitive advantage for us. We focused on building it for a number of years. And as you know, the labor markets are quite tight. Despite the fact that labor ones are tight, as you've heard, we're growing our total sales force significantly both GTS and GPS.
And all of our metrics in terms of the quality fit of the people are stronger, stronger than the past. We find our sales people from all overage. As you know, we operate we have clients in 100 countries. We operate in many of those. Directly.
And so we hire people all around the world. So it's all kind of one source because we're operating all these different markets. We sell large clients, medium clients, small clients, those are different sources. And so there's kind of like 1 not one source. It depends on what geography it is and what size clients that we're serving, etcetera.
Okay. Thanks for the color. Thank
you. Our next question comes from Hamzah Mazari with Macquarie. Your line is open.
Hey guys, this is Mario Cortellacci filling in for Hamzah. Does GBS wallet retention any structural changes that would keep it from getting to where GTS is running currently?
No, I think we believe that the wallet retention in GBS, there's no reason why it can't be the same over time as what we see in GTS. And in fact, 2 primary things, we believe will unlock that. Number 1 is, driving the normal Gartner growth formula around engagement and service and all those things have been translating into higher retention rates and there's still room to improve there. And then the second thing is, and this is one of the other benefits of transitioning to seed based products is with an enterprise license. Once you've penetrated the organization, there's really no more growth to go.
Gartner historically has derived about 2 thirds of its gross growth from further penetration of existing sizes. And with the new seat based products, we'll now be able to run that play on the GBS side as well. So that was a long winded answer. To your question, which I could have just said, no, there's no reason why UBS, while retention can't get to the same levels. GTS while retention.
Got you. Perfect. And just a quick follow-up. Given the divestitures, in some of the non core assets, could you walk us through how you think about further portfolio pruning if there maybe is any and how robust does your future pipeline look in terms of M And A? And if that is the case, do you see any do you see yourself adding any or an leg to the portfolio?
Yes, sure. From a divestiture perspective, the biggest one for us was the talent assessment business, which was by far the biggest business within Heritage CEV that we deemed as non core. We worked very quickly to do the analysis to figure out that it was non core and then to market and that asset. And so getting that completed in early April was kind of mission number 1 for us. We continue to look at the portfolio to make sure that everything we have is core and really supports the growth of our research business, which is what all of our other businesses are there to do.
And we'll continue to look at that. From an M and A perspective, we continue to track 100 plus different companies across all the areas that we now participate in. So not just in IT research, but HR research finance research, legal research, etcetera. We continue to track those. We have a corp dev team that is, all over that.
But again, the way we think about M And A going forward is similar to the way we thought about it previously, which was we're going to be really diligent, really plans around how we deploy our capital. If there are assets that can fill in gaps for us or accelerate our growth rate, and drive real shareholder value. We'll deploy our capital that way. Absent that, we'll look to deploy our capital as we talk about earlier on share repurchases.
Perfect. Thank you.
Thank you. Our next question comes from Joseph Foresi with Cantor Fitzgerald. Your line open.
Hi. I was wondering if we could get, as best you can, a breakdown of what the growth drivers are. And what I mean by that is, how much of your growth is coming from new market penetration versus new products versus industry tailwinds?
Hey, Joe, good morning. Because our portfolio is so diverse now, and because technology is ubiquitous, regardless of geography industry or company size. And you can make same comment for all the other functions we serve, like, HR and finance and legal, we tend to look at the market as, obviously, as we've talked about, huge and untapped, and we have a huge opportunity, both from further client penetration perspective and from working with enterprises that currently don't do business with us. And we have ample opportunity on both sides of that equation. And as I think I just mentioned, historically on the Heritage Gartner side, about 2 thirds of our growth has come from existing enterprises through a combination of pricing upgrades of products to higher value, higher priced products, finding new seats within existing buying centers and finding new buying centers within the existing enterprise.
We think that same algorithm or formula applies across GBS as well. And again, it's a combination of of new products, of going after the C level in the organization and then expanding the account below that. All those plays that have worked really well for us on the Heritage Gartner or GTS side, we think we have available for us on the GBS side as well.
Got it. And just as my follow-up, I think we're trying to figure out how much of GBS's sales force versus product. Maybe you could give us some stats. I'm sure Ceb is integrated into the whole business now, but any stats you could share with us around CEB, its products or the changes in wallet retention, that would help us understand the product side of things a little bit better.
Sure, Joe. The way to think about GBS is First, its construction was, it was about 25% supply chain and marketing from the Heritage Gartner side and about 75% of heritage CEV leadership councils. As we talked about, we started this journey now of really converting everything over to Gartner seat based products for each of the major functions that we serve. We're very early innings in that game. Particularly on the functions that came over from Heritage CEB.
But again, similar to the way we've run it historically in Heritage Gartner and GTS, the growth algorithm is a combination of increased selling capacity because the opportunity is there. And then that increased capacity selling the products and services that we have for those particular functions into the function and then expanding within that function. And so again, it's the same algorithm as we've talked about and have managed for the last decade or so on the heritage gardenergTS side.
Thank you.
Thank you. Our next question comes from Peter Appert with Piper Jaffray. Your line is open.
I'm wondering if, you guys see potential for profitability impact from the shift in the GPS GBS, excuse me, product mix. So I'm specifically wondering if, the higher level of support and service on these newer products perhaps, implies a lower level of margin for those products.
Hey, good morning, Peter. Good question. The so a couple of ways to think about it. 1 is we price for that. That's baked into the price.
And two, we fully anticipate higher retention rates on those products as well. And the combination of the pricing, the scale will get and the higher retention rates, we believe that on a combined basis, we can run the overall research segment at 70% gross margins. Both incremental and absolute, with all of that incremental service baked in against support the higher retention rates. But when we build our pricing, we're very cognizant of the elements of the product, service being one of those elements.
Got it. Understood. And then the flip side, I guess, that to that, Craig, is that, you've got all this upfront hiring of Salesforce and GBS this year, presumably the Salesforce growth would slow some next year. I'm wondering if that then, potentially helps the margin.
So Peter, as Jean, as we've talked about in the past in terms of sales force growth, we've increased the GBS sales force growth substantially. Going to look at what happens to sales productivity. If as through the second half of the year, our sales productivity goes up nicely and gets to kind of GTS levels of productivity, then we're going to continue to aggressively grow the GBS sales force. And again, if we believe we can grow it at the same kind of rate we grow it this year. We will do that.
But it's all based on seeing the kind of productivity that we expect, which again, that you can think about as being on par with kind of G TS productivity. And so we haven't decided yet how much we're going to grow in 2019 because we don't know what those productivities look like yet. And we're prepared to go either way.
Okay. Thank you.
Thank you. I'm showing no further questions in the queue. I'd now like to turn the call back over to Gene Hall for closing remarks.
While I continue to be excited about our business, our prospects for growth and our strategy to drive long term value for our shareholders. Our strong Q2 results demonstrate we know the right critical client needs in technology and in business across every function enterprise. And we remain in an outstanding position to provide sustained double digit growth across all our key metrics. For joining us today and I look forward to updating you next quarter.
Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.