Good day, ladies and gentlemen, and welcome to the First Quarter 2018 Gartner Earnings Conference Call. My name is Jeneta and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to David Cohen, GVP of Investor Relations. Please proceed.
Thank you, Jeneta, and good morning, everyone. We appreciate you joining us today for Gartner first 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 first 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 an accompanying 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 in combined adjusted contribution margin, which exclude the deferred revenue purchase accounting adjustments. All references to EBITDA are for combined adjusted CEB acquisition.
These combined measures include the results of both Gartner and CEB. All revenue, contribution margins and EBITDA include the divested business Reconciliations for all non GAAP numbers we use are available in the Investor Relations section of the gartner.com website. Finally, our contract values and associated growth rates we discuss are based on 2018 foreign exchange rates. 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 these documents. Now, I will turn the call over to Gartner's Chief Executive Officer, Gene Hall.
Well, thanks for joining us today. Last year, and on our recent Investor Day, we laid out a plan for continuing double digit profitable growth with Gartner's traditional business, while applying the Gartner formula to accelerate the former CEB business. Today, you'll hear we are on track on both objectives. With a strong Q1 exceeding our expectations. Our revenue grew 16% and EBITDA 14%.
EPS grew 20% compared to standalone Gartner for Q1 2017. Research is our largest and most profitable segment. Once again, our Research segment had strong performance with revenue growth of 17% and contract value growth of 12%. As we discussed on Investor Day, we now report contract value for Global Technology Sales, or GTS, which is sales to users and providers of Technology, in Global Business Sales, or GBS, which includes sales to all other functions. GTS had another strong quarter, GTS contract value grew 13% with double digit growth in every region, every size client, and in virtually every industry.
GTS client retention increased to 83% and wallet retention to 104%, both near all time highs. Our GTS sales headcount grew 13% year over year, providing a foundation for continued sustained double digit growth. Global Business Sales, or GBS, also had a strong quarter. GBS contract value growth accelerated to 7%. GBS client retention increased more than 400 basis points to 82% and wallet retention increased more than 200 basis points to 99%.
These retention improvements are remarkable in such a short time period. Our integration of CB is largely complete with an integrated organizational structure, have introduced new seat based products and have moved to standard Gartner commercial terms. As planned, we've invested to grow GPS headcount 20% year over year, providing a foundation for sustained accelerating contract value growth. Our forward looking metrics for both GTS and GBS remained strong. Our Events segment combines the outstanding value of our research, the immersive experience of live events, making every conference we produce the most important gathering for the executives we serve.
Our Vince segment had another strong quarter. Revenues grew 26% and same events revenues on an FX neutral basis grew 19%. During the quarter, we held 14 destination events with attendance growing 29% compared to Q1 last year. On the same events business, destination event attendance grew 21% year over year. While Q1 is a seasonally is seasonally small for our event events.
Revenue for this business accelerated to double digit growth. And this compares to flat to declining revenue from before the CED acquisition. The forward looking metrics for our mid segment remained strong. The Gartner Consulting segment is an extension of Gartner Research and provides clients a deeper level of involvement through extended project based work help them execute on their most strategic initiatives. Our consulting segment had a solid quarter with Q1 consulting revenues growing 5%.
Our labor based business had strong performance growing 14%. Our contract optimization business, which also can vary between quarters, down 35% year over year. Q1 consulting bookings were strong with backlog up 17%. Previously, we discussed we'd be divesting businesses, which are not a strong strategic fit with Gartner. We divested Cebital assessment in early April for about $100,000,000 and CEV worked for surveys at the end of April for about $29,000,000.
We used the proceeds to reduce our debt. Our future Gartner is the brightest ever. I recently met with many of our salespeople from around the world. Was inspired by the energy, passion, selling skills and knowledge of our clients in our GTS and GBS sales team. The former CEB salespeople who are now mostly in GBS have embraced in a rapidly implementing the Cartner Formula to accelerate GBS.
We provide incredible value by helping our more than 15 1000 enterprise clients with their most important initiatives. Combination of Gartner and CEB allows us to address every role across the enterprise, giving us a huge unpenetrated market opportunity. We've largely completed the CEB integration. We know the right things to do to drive sustained, profitable, double digit growth. The Gartner Formula.
Our business economics allows to drive strong double digit growth in all our key metrics, including cash flow. And we have an incredibly talented team across the business. Our future has never been brighter. 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 our services across the globe. During the first quarter, we saw a year over year acceleration in our contract value growth, along with improvements in our retention metrics and sales productivity. And as our 2018 outlook continues to demonstrate, we expect to deliver another year of double digit revenue and EBITDA growth with strong cash flow generation. First quarter adjusted revenue was $973,000,000, up 16%.
The weaker U. S. Dollar contributed about four points to the growth rate. Purchase accounting adjustment for deferred revenue was down to a $10,000,000 impact the quarter. Also in the 1st quarter, we delivered adjusted EBITDA of $161,000,000, up 14% adjusted diluted earnings per share of Research had another excellent quarter with significant year over year growth in revenue and improvements in contribution margin, contract value growth, retention and sales productivity.
On a combined basis, research adjusted revenue grew 17% in the 1st quarter. With about 3 to 4 points from foreign exchange. The adjusted gross contribution margin for research was 70%, up from last year's 69%. Total contract value was $2,900,000,000 at March 31st. FX neutral growth of 12% versus the prior year.
New business growth was consistent with prior quarters and remained balanced among new clients, sales of additional services, The average spend for enterprise also continues to grow. It now stands at $191,000 per enterprise. Up 5% to drive CV growth both through new and existing enterprises. As we discussed at our Investor Day, are now going to market with 2 distinct sales forces. Global Technology Sales or GTS serves technology end users, investors, professional services firms and technology providers.
Global Business Sales or GBS serves all the other functional areas in the enterprise outside technology. We will be reporting the key operational metrics like contract value, retention rates and sales productivity for both GTS and GPS. I'll start with a review of global technology sales for the first quarter. GTS had contract value of $2,300,000,000 at March 31, representing FX neutral growth of 13%. GTS client retention was 83 percent, up 60 basis points versus the first quarter of 2017.
While retention for GTS was 104 percent for the quarter, up 90 basis points year over year. Both retention rates for GTS are close to our including the Heritage CEB Technology business was about 12% in the first quarter. It's tough to compare GTS new business to Q1 2017, due to the full integration of We ended the 1st quarter with 12,363 GTS clients, up 7% compared to Q1 2017. About 75% of our GTS clients don't buy GBS services yet, giving us ample room to expand our client relationships across additional functional areas. 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 of period quota bearing headcount was $110,000 per salesperson, up 14% versus first quarter last year. Turning to global business sales results for the first quarter. GBS had contract value of $13,000,000 at March 31, representing FX neutral growth of 7%. As you know, contract value reflects the amount of annualized contracted revenue at a point in time. It is an important forward looking measure for Gartner After we closed the CEB deal, we aligned their CV reporting with the Heritage Gartner methodology.
Our first priority was ensuring got the reporting 100 percent accurate for the periods that we own them. For transparency purposes, we also wanted to provide historical figures so that our investors could track the progress we are making. In March of this year, we went back and reviewed every transaction that occurred during 2017. From both before and after the acquisition closed. As a result of that review, we identified roughly $14,000,000 of additional contract value that belonged in the year end 2016 number.
The adjustment arose because these contracts renewed after the Gartner year end cutoff point but with a contract start date of January 1st. In our investor materials, we've adjusted the Q4 2016 CV number up by $14,000,000, majority falling in GBS. The result is that 4Q 2017 growth for GBS was 6% rather than 8%. Other than that, in calculating all values of 2018 FX rates, there are no further adjustments. Perhaps most important, there is no change to the outlook for future GBS CV growth.
We are also making good progress with GBS retention metrics. GBS client retention was 82%, up more than 400 basis points from the prior year. GBS wallet retention was 99%, up more than 200 basis points versus the prior year. New business growth for GBS was 13%. Up 1% versus the prior year period.
About 50% of GBS clients don't buy GTS services. Creating an opportunity for us For GBS, the year over year net contract value increase or NCVI divided by the beginning period quota bearing headcount was $61,000, up 13% versus first quarter last year. Our research business performance in Q1 was very strong across both GTS and GBS. GTS measures all improved on a year over year basis. Including CV growth, both retention measures and sales productivity.
The GBS business also improved significantly, similar year over year improvements to key operating measures and a sequential improvement in contract value growth from the fourth quarter on an adjusted basis. As always, we remain focused on continuous improvement in recruiting, training, and tools to support higher sales productivity, a key driver of our short and long term results. In events, adjusted revenues increased by 26% year on year in Q1 to $46,000,000 with about a 7 point benefit from foreign exchange. Events first quarter gross contribution margin was 35%, up by 3 seventy basis points compared to the year ago quarter. The first quarter is a seasonally small quarter, but the results were excellent.
We had 3 more events than last year. On a same event, FX neutral basis, revenues were up 19% with a 21% increase in same event attendees. As Gene mentioned, the forward looking metrics for events remain strong. 1st quarter consulting revenues increased by 5% on a reported basis and about 1% FX neutral. Consulting gross contribution margin was 29% in the first quarter.
In the labor based business, revenues increased 14% versus Q1 of last year with about 6 points from foreign exchange, while the contract optimization business was down 35%. On the labor base side, billable headcount of 6.94 was up 7% and we had 138 managing partners at the end of Q1 up about 10% versus the prior year. Backlog the key leading indicator of future revenue growth for our consulting business ended the quarter at $104,000,000, up 17% year on year and 12% in FX neutral terms. Our bookings performance remains strong and our 2018 pipeline is encouraging. Adjusted revenue in the talent assessment and other segment increased by 8% compared to the year ago quarter to $74,000,000.
Gross contribution margin was 63%. $400,000,000 and CEB workforce surveys on April 30, for $29,000,000. Operating results from businesses was about $54,000,000 On a combined change contributed about to support our strategy at the end of the first quarter, we had 3501 quota bearing associates across Gartner in GTS and GBS. This is an increase of 445 or 15 percent from a year ago. This includes 2746 in GTS, $7.55 in GBS.
The investments in SG And A are in line with our expectations. Adjusted EBITDA for the first quarter was 160 with strong revenue growth Depreciation, amortization and integration expenses were up year over year, driven primarily by the CEB acquisition. Interest expense in the quarter was $35,000,000, up from $6,000,000 on a standalone basis in the first quarter of 2017. The higher interest expense relates to additional debt used to fund the CEB acquisition. Our adjusted tax rate, which we used for the calculation of adjusted net
income
rate, primarily due to equity related excess tax benefits. As we'll discuss in the outlook section, we still expect our adjusted tax rate to be about 26% for the full with upside relative to our expectations from strong top line performance, the timing of some expenses and investments, as well as a lower tax rate, which is also due to timing. In Q1, operating cash flow was $3,000,000 compared to an outflow of $30,000,000 last year on a reported basis. Operating cash flow was affected by the CEB acquisition, which is not in the 2017 number, including acquisition and integration payments, higher interest costs and the billing delays we mentioned last quarter. The billing delays occurred as a result of transitioning heritage CED invoicing into Gartner systems affecting our cash flow to date.
We see no challenges or issues with the collectability of these invoices. We've made good progress in April 1st week of May and expect this to be largely caught up by the end of Q2. Our annual free cash flow q11 2018 CapEx was $18,000,000 and Q1 cash acquisition and integration payments and other nonrecurring items or approximately $42,000,000. This yields Q1 free cash flow of $27,000,000. During the first quarter of 2018, we repaid $300,000,000 worth of debt In April, we paid down an additional $450,000,000 leaving our April 30th debt balance at just under $2,600,000,000.
That's down off for the divestitures, our gross leverage ratio is now about 3.8 times and we are tracking well to our target of around 3 times which we continue to expect to see by the end of 2018. This is factored into our interest expense guidance for 2018. Turning to guidance. Or proceeds. The updated guidance removes the divested businesses starting from the closing dates and reflects the debt repayment we have made through April 30.
Consistent with our historical practice, we I will now summarize the guidance headlines. All the details are available in the press release and our quarterly earnings deck. Both of which are available on our Investor Relations site. $1,000,000,000. The adjusted revenue guidance is lower by $175,000,000, reflecting the divestitures.
For 2018, we expect adjusted EBITDA of $710,000,000 to $760,000,000. The adjusted EBITDA guidance is lower by $40,000,000 reflecting the divestitures. We continue to expect an adjusted tax we continue to expect an adjusted tax rate of around 26%. That implies a higher rate $3.51 $3.91 per share. The adjusted EPS guidance is lower by $0.20 reflecting the divestitures.
We expect free cash flow of $416,000,000 to $456,000,000 at the midpoint conversion from adjusted net income is 126 percent. And lastly, for the second quarter of 2018, we expect adjusted EPS of between $0.92 $0.97 per share. We had a great start the year with first quarter results coming in better than expected. We saw strength across the segments, improvements in key operating measures and we divested non core assets. Since January 1, we have reduced our debt balance by about $750,000,000.
The trends going into the second 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 and are encouraged with the outlook for the rest of the year and into the future. With that, I'll turn the call
Your first question comes from the line of Tim McHugh with William Blair. Please Steve.
Yes, thanks. Just want to first ask on GPS as the improvement in growth. Can you break out for us the marketing piece and supply chain pieces versus, I guess, to the best of your ability kind of some of the legacy CEP pieces how much of the improvement was driven by those different parts of the business?
Good morning, Tim, and thank you. So GBS is performing really well. The leading indicators are all good. The sales teams are ramping up. And we remain really confident in the outlook we provided as you know, we're now going to market separately as GTS EBS, and that's how we manage and measure the business.
To maximize the performance of the combined company, we integrated our research teams, our products and our sales teams, in a number of enterprise functions we serve, we had overlaps and it's really impractical to separate out the heritage businesses But what we can say is both the heritage CEP and heritage Gartner components of GBS, they both contributed sequential improvement in GBS contract value growth.
Okay. Thank you. The 20% growth in, I guess, the sales force for GBS side, did you ramp that up? Thought you had talked about after kind of ramping it up last year kind of watching the productivity of the initial cohort, kind of mature and see how it progresses. So Did you hit your expectations at all around sales and bagging for that type of business?
Yes, Tim, it's Jean. So it's exactly what we expected. So as we mentioned before, because integration was going so well, we moved up our timeframe compared to before we did the acquisition. And our plan all along was to grow the sales force by about 20%. A lot of sales force growth happens January 1st.
And so the it actually happens in the first quarter because that's when we do a lot of promotions like from individual contributor salesperson to a sales manager. And also, we had people in training in Q4 that actually became sales, quota carrying sales bill in Q1. So we are right in our plan and 20% exact growth rate that we had planned on. I'm very excited about it because the, as you know, our aspiration is to have a really solid double digit growth in GBS. And we have now we have the products to do it, we have the right commercial terms, and we have the sales capacity.
So, getting that sales capacity there really is one of the assistive opponents and makes me very excited about our future there.
Okay, great. And one last one and I'll hand it off, but just Craig, the guidance, the $0.20, I guess, reduction, I think you had said $0.17 annually, previously. So you is there a way to bridge that, I guess, in terms of, the impact of the divestitures?
Yes, absolutely, Tim. So the, the way to think about it is the initial guidance we gave on because we didn't know when the business would actually close. In addition, now we've removed the workforce survey and analytics business which we closed off. So in April, and that was about on an annualized basis, about $0.05 dilutive impact. So 22 in total.
Q1 is the lightest profit quarter. And so we're looking at a $0.20 impact based on talent assessment being out of the business as of April 1st, essentially, and workforce surveys being out as of April 30th. So in line with what we told you originally, you have to add in that the impact from workforce surveys divestiture.
Great. Thank you.
Your next question comes from the line of Jeff Meuler with Baird. Please proceed.
Yes, thank you. I guess I just want to ask about the line that you included that I think you said consistent with our practice, that you were consider revising the full year guidance later in the year. I guess just given the magnitude of the Q1 upside, and I know we're only a quarter in to the year here. But are there any offsetting factors that you're seeing that temper the enthusiasm from the Q1 upside? Or I guess if you could just revisit your practice with us and if you just would not adjust Q1 guidance no matter what the magnitude of the upside would be?
Good morning, Jeff, and thanks for the question. I'd say a few things about Q1 and then we can talk about our posture and philosophy as well. If you look at the Q1 result, there are timing elements, particularly the lower tax rate for the quarter. Which that will normalize itself over the course of the year. We definitely had upside.
We had strong performance in Q1, but as you referenced, correctly. It is a small quarter. It is only the 1st quarter and it is a small quarter for us as well. And as we look at our forecast, we're still well within the guidance ranges we provided at the beginning of the year. And so we saw no reason or need to update or adjust our annual outlook.
So save for the updates on related to the divestitures. As we progress through the year and have more visibility into Q2, Q3, Q4, we'll continue to relook at where our forecasts are landing us and we will adjust accordingly if we need to.
Okay. And then just given the way that your calculation works for sales productivity dividing by beginning A. E, I would think there would be some small distribution from the new hires and the accelerated sales force headcount growth. So with that long preamble, on the GBS side, or the CEP heritage, I guess, what are you seeing in terms of sales productivity trends if you could break it out between how are the new users ramping? And then if you look at the established salespeople that came over with CB or on the GBS side, Are they through the period of disruption, with all of the change that you pushed through over the last 12 months and started to see improvement there as well?
Hey, Geoff, it's Jean. So, the sales force in the GBSI is doing great. As you saw from Craig's numbers, their current productivity is substantially less than GTS Salesforce. There's no reason it shouldn't be at the same level. And to your point, most of the disruptive change has we've done now.
So we've reorganized. Everybody knows what their territory is, what their job is, what their boss is. We've introduced the new products. People know what their new products are. They're, you know, they've got those We changed commercial terms.
That's all done. So what it is now is just people getting in the groove and getting more experience with all these changes. So we've made the changes I think they've accepted it's exceeded my expectations. They've been gone over very, very well, both with our salespeople as well as with our clients and prospects And so now that we've made all the changes, now it's a matter of just, if you're a salesperson and it's the first time you've sold a new product, not as good on the first time as you are on the second, 3rd, 4th. And so what I expect to see, over the coming, period of time is that, they will get used to these new products, new commercial terms, and the new organization.
And we should see productivity. We expect productivity to be the same kind of rates as we have for TTS over time.
Okay. And then just finally for me, I don't know the name of the metric, but I know you measure everything gene. So I'm sure you have Ametric. The client engagement or usage on the GBS or heritage CEB side, how are you doing in terms of getting it up?
So you're exactly right, Geoff. The usage is really important. Our products can provide a lot of value, but aren't using them, they don't actually realize that value. We know it's really important. One of the ways that we've driven the great retention we have on the GTS side has been through driving increased usage of our products.
We're aware of that. The usage historically was lower on the GBS side And so we have programs in place. It's part of the Gartner Formula. We have programs in place, again, that we have implemented will take time to fully kick in, but we've implemented that we believe will drive retention to the same levels as we have at GTS again over time.
Your next question comes from the line of Manav Patnaik with Barclays. Please proceed.
My first question is, I guess, I understand you guys are going to market in these 2 different segments on the research side. Just to try and help us though, I mean, how should we think about the progress for total CEB relative to your target of getting them to double digit growth in 3 years that you had set out when you came in? Like, how is that looking today? And I guess going forward, I don't it doesn't sound you'll be able to give us that. So how should we measure how that's tracking?
So, and this is your first question. We're tracking really well. Things that are going to get, GBS up to the same levels as GTS are things like do we have the right products. Yes, we have the right products. Do we have the right commercial terms?
Yes, we have the right commercial terms. Have we expanded the sales force and are we hiring the right people, giving them the right training and the right tools? All those things are in place. And so as I mentioned earlier, I think the, now it's a matter of, okay, they've got the new tools, they've got the new products, It's a matter of there's a learning curve. And as they go as our sales people and their leaders go up that learning curve, you'll see great improvements in productivity and that's what's going to accelerate the growth.
But the great thing is, which I'm really excited about is all the foundational pieces are there. So again, like I said, if you've got the right products, you've got the right service support, you've got the right tools, you've hired the right people, you've grown the sales for 20%. It's a matter of when, not if, in my opinion.
And Manav, the other thing I would add is that as we talked about at Investor Day of the GBS portfolio, 75% of the contract value that we put in there to constitute that portfolio, 75% related to Heritage CEB contract value, 20 5 roughly 25% to the Heritage Gartner stuff we moved over there. And as I just mentioned, previously, both pieces contributed to our acceleration in the first quarter. And so as GBS, accelerates and again meets the targets we laid out at Investor Day, 75% we're not going to be able to do that. Without the former heritage CEB products contributing might lead to that.
Okay. And I guess just maybe can you just help clarify then in GTS how much of that was the legacy CIB and what was that growing?
So in GTS, it was really a de minimis amount compared to the overall, I think, in, at investor day, it was less than $100,000,000. And that was following the typical CED contract value trend prior to the acquisition, so declining. But again, a very small portion of the GTS portfolio.
Okay. And then just on the guidance as well to clarify, I think you said you updated that for the lower interest expense as well, right? So I'm just trying to think the $0.20 reduction in the, in the EPS, I guess does that factor in that, you said? Or
Yes, Manav, it does. So what we factored in is the all in removal or all out removal of all the expenses and revenues and profits related to the talent assessment business and the workforce surveys business with the corresponding offset or lowering of interest expense as we've used those proceeds to reduce our debt balances.
Your next question comes from the line of Toni Kaplan with Morgan Stanley. Please proceed.
You talked a couple of times about the 20% increase in headcount growth in the GBS business. How should we think about growth for the rest of the year in that business going forward? Are you sort of done in terms of ramping up or is there a little bit more to go?
So Toni, we're going to follow the same path with GBS that we'd always follow with GTS, which is We've increased our sales headcount by 20%. For 2019, we're going to want to grow our sales headcount again. And so we'll start we, in fact, we've got the recruiters in place already. And the programs, we'll start recruiting so that a year from now, we'll grow our sales versus at GBS at we haven't finalized the number yet, but just think in double digit rates, so that we can sustain the double digit growth in contract value over time. If we, as always, if between now and then, productivity is improving as we expect or there's some problem like that.
We, of course, will slow down, figure out what the problem is. So we're not going to do it just blindly, but with the great now and the, you know, great, acceleration. The path we're on now is that we'd hire, you know, toward the late, you think about getting people into training in Q3 and Q4 so that they go live in territory in Q1 in GBS, just like we would always do in GTS.
Got it. And, Craig, just given potential for rising interest rates, would you consider hedging some of your floating rate debt, just given that there is still a lot of it left?
Good morning, Tony. Thanks for the question. Yeah, we've actually if you look at our debt balances, got $800,000,000 in high yield, which is fixed at $508,000,000. And then we've got $1,400,000,000 of interest rate swaps to essentially hedge the floating portion of our revolver, term loan A and term loan B. And so as we continue to de lever, we've got the vast majority of our debt instruments now essentially locked in with interest rates due to the nature of the instruments and the hedging we put in place.
The 1.4 hedges. Thank you.
Your next question comes from the line of George Tong with Goldman Sachs. Please proceed.
Hi, thanks. Good morning. There's a widespread in sales force productivity between your GTS and GBS segments, when do you expect NCVI per salesperson of GBS to approach GTS levels? And are there any structural barriers such as contract pricing or terms that can impact that convergence? So, George, it's Jean.
We expect, to answer the second question, the second part of your question first, which is We expect, GTS productivity to continue to improve. So we're not, we're not stopped there. And GPS, as you point out, is half or less of, GTS, We intend to close that gap as quickly as we can. As I said earlier in the call, we really have all the pieces in place to do that. So now it's a matter of our salespeople, again, we're learning there's no structural reason why GBS sales productivity shouldn't be at the same level as GTS.
And that's certainly what we aspire to over time. Got it. That's helpful. You indicated that some of the margin performance this quarter reflected the timing of certain expenses. Can you quantify this timing and what your remaining investment priorities are for the for this year?
Good morning, George. Yes, I think it less about timing. This just happens to be a lighter revenue quarter for us. So the margin can be a little more sensitive to our investing. As I mentioned, during the SG and A portion of our prepared remarks, the investment profile and investments are kind of right where we expected them to be.
We'll continue to make the right investments that we think can drive and support long term sustainable double digit growth, but through Q1, we're pretty much on plan with where we thought we were going to be from an investment perspective.
Your next question comes from the line of Hamzah Mazari with Macquarie Capital.
Good morning. Thank you. The first question is just on cross selling. You had thrown some statistics around on And correct me if I'm wrong, 75% of GTS, not buying from GBS, 50% of GBS, not buying from GTS. Maybe if you could just frame for us, is the customer base buying these products from someone else?
Or is this going to be a completely new product sale for them. So that they're not buying from anybody right now in order to drive cross selling this would be essentially net new business?
So in general, when we sell a new individual client, they are not using someone else for another syndicated research service, whether it be in technology and HR or legal finance in whatever function. And so it's really going in and explained to them a product that they have never bought before and may not understand, in general, don't really understand the value, which is why sales is so important is because they go in, they explain the value that clients can get from it. And we do that, they buy and they renew at high rates. And so that's that's really what's going on there. It is a new sale.
In terms of the cross sell, the fact that this is a sale that most people that haven't are not clients haven't used syndicated research. Obviously, it's helpful if you're one client and we're selling to the head of HR, an HR product, but the CIO doesn't know about syndicated research. If you have the head of HR say, Hey, you should try this and do a referral, that obviously helpful compared to just plain cold call. And so we have in our just our existing client base, We have a huge opportunity, both with GTS selling into clients that are only GBS today. And GBS selling into clients that are only GTS did.
In fact, I can tell you that both sales forces are incredibly excited about the prospect that now they can go into these companies where they are these functional areas where they may not be buying from Gartner's day, but their references from some other part of Gartner that can both help both refer individual people, but also help them understand the client context, which makes our which helps with sales productivity at close rates.
That's very helpful. And then maybe just to follow-up, any color you can give us what you're seeing regionally, North America, Europe, any changes there, anything to call out, any trends there would be helpful?
So I would say that, every region in the world is performing kind of what I would call it in normal terms, meaning that there are companies that have troubles. There are some cases, governments that have trouble. But it's kind of a normal selling environment. So, and again, we know how to sell whether companies are, economies are doing well or not doing well. And we just take whichever approach it was needed in those.
But overall, I'd say the it's what I'd characterize as a normal selling environment, not super fantastic good, not bad, but kind of normal that's true for everywhere around the world. There's no particular region that I would say
is,
particularly better or worse than kind of, what I call,
Great. Thank you.
Your next question comes from the line of Bill Warmington with Wells Fargo.
Good morning, everyone. So just a quick question on the contract optimization piece. You mentioned that was down 35%. But then you also mentioned the backlog being relatively strong. I just wanted to ask for some color there?
Yes, Bill. So the, our contract optimization business as, if you follow Gartner, know that it's pretty lumpy. It could be, it's not only contingency, it would be a ACP basis and it can be lumpy from quarter to quarter. It's a great business, provides a lot of value to clients, but it can be somewhat lumpy compared to most to our business. And so that's kind of what's going on with that.
Our backlog was up 17%, 12% FX neutral. So we had great bookings, most of the backlog, the vast majority of the backlog would be in our labor based business. It could happen a deal within contract optimization but mostly it would be, our, labor based business. And so when you look at the backlog, it's saying, in fact, we talked about these results, our labor based business very strong Q1. And the backlog is very strong as well, which says that the future looks pretty good too at kind of double digit rates, which is obviously a big step up where we've been over the past few years.
And contract optimization is fundamentally has some good, higher some quarters lower some other quarters.
I'd also add, Bill, that, and I think you know this, the contract optimization revenues represent typically less than 20% of the segment revenues. So the bulk of the business is the labor based business. And as Jean and I both went through. We had a very good labor based performance in Q1, both from a revenue flow through perspective, from a bookings perspective, and that translated into the strong backlog position as well.
Okay. And one follow-up if I could. The 1F, the to double check your calculation, the first quarter 2018 constant currency revenue growth, if it were including or should I say excluding the divested businesses, just to get a sense for kind of what the ongoing organic revenue growth is going to be post the divestitures?
On a combined basis, reported revenue growth excluding the impact of the divested businesses would have been 17%. We saw 3 to 4 points of foreign exchange. So think in the 12% to 13% range is the the combined revenue growth in Q1, excluding the divested businesses.
Your next question comes from the line of Joseph Flores with Cantor Fitzgerald. Please proceed.
Good morning. This is Drew Kootman on for Joe. You mentioned the integration for CEB is mostly complete. Could you remind us where some of the top synergies are coming from and where you expect them to come from moving forward?
Good morning. In terms of the way we're thinking about the integration, the way we built the business case, it was really about reigniting growth of the heritage CEB contract value now mostly GBS. And the way we were going do that was by, again, as we went through at Investor Day, really leveraging the Gartner formula that we know works to grow that type of business, but that's improving the engagement as Gene talked about earlier, which translates into higher retention rates. Which we are seeing that is increasing sales capacity, which we are doing that is focusing and improving the sales productivity of the GBS sales force, which we are seeing as well. Again, We still have a lot of room to go between the GBS productivity and the GTS productivity, but we're certainly on the right track there.
And then also eliminating or standardizing around what we know to be best practices around contracting terms, and things of that nature. And so we've implemented just about all those things. We are seeing improved retention rates. We are seeing improved productivity. And we have increased the capacity of the sales force pretty significantly.
And that's what we believe will be a driver to getting the GBS contract value to grow similar to what we've historically seen for the GTS business.
Okay. And can you go through some of the factors driving the better performance in events in the last few periods?
Yes. So, Vince has been doing great. And there's 2 pieces of our Vince business. One is attendees and the second is our exhibitor sales, both have been growing at great double digit rates. On the attendees side, it's really about, having the right content and doing great marketing to the events.
And so, again, we've got great content from our research organization. We've got a terrific marketing organization. It's done a really good job of getting that out to our potential attendees, and that's working really well. On the exhibitor side, as we mentioned, last year, we had some problems with open sale territories. And we have discovered you sell less than a territory with no salesperson than you do in one with a salesperson.
We've solved that problem now. We have full sales territories, and so that's why you're seeing our exhibitor sales back on the track that they from most of the time that's been where it been in a very good spot with good double digit exhibitor growth. Sales territories are filled. Our sales productivity there is very good. And so both sides of the business are performing as they have generally done in the past.
And I would just add one other point, which is, and Jean referenced this in his prepared remarks around the acquired Avanta business, which upon acquisition was not in the best shape And we've really focused on making sure we fortified that business and got it back on a good growth trajectory. Q1 was a small quarter, but very positive and that is now contributing to growth as well.
Your next question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed.
Just wanted to go back to your plans for adding to headcount in GBS. I'm just curious, are the type of people that you're looking for adding their different from the type of people that you're recruiting at GTS? And if not, how do you steer them to one division as opposed to the other?
So, Jeff, it's 2 things. 1 is, we have sales forces that sell to smaller companies, midsized companies and larger companies. There's different kind of expectations. So someone who comes in and joins us for our Salesforce is selling to what we call mid to small size enterprises, generally, we don't have a specific background in mind in terms of function. We bring them in and they might have an interest in a particular area.
If not, we kind of to the place where we have the most need. As you get to larger companies, so if you're selling to the CIO of a Fortune Fifty company, They expect the sales person that's calling on them to have some knowledge about the functional area, same for the head of HR, same for their general counsel, And so with our more senior sales force, it would be more likely we'd want to hire somebody that has some expertise in the functional area in which they've been selling.
Okay, that's helpful. And then shifting gears going forward when you report your historical data, Are you going to be excluding the businesses that you've divested, excuse me, that you've divested, or are we going to be comping against, I guess, what the combined company looked like last year?
So, the we're not going to go back and restate prior year, we will attempt to provide enough clarity so that everyone can pull out the appropriate results from the divested businesses. I'm glad to ask Jeff to give you a sense in 2017, these two businesses contributed $223,000,000 worth of revenue and about $47,000,000 of EBITDA. The way to roughly think about it is those were spread roughly evenly over the four quarters. And so that should help in removing those businesses from what would look like ongoing results for 2017. For 2018 in the first quarter, the divested businesses contributed $54,000,000 in revenue and $8,000,000 in EBITDA.
And again, as you saw, we pulled out, from the balance of the year, outlook, $175,000,000 in revenue $40,000,000 in EBITDA. So I apologize. I just threw lots of numbers at all of you, but those are the facts related to the divested businesses.
Your next question comes from Peter Appert with Piper Jaffray. Please proceed.
Thank you. Craig, I think you mentioned in your comments a little bit about the pricing at CEB, but can you remind us where you are in the process of moving to the seat based pricing model? And at this point, are you seeing any year to year increases or what are you doing in terms of pricing year to year at Ceb?
Good morning, Peter. Thanks. Yes, I think the way we're approaching it is twofold. So one is, we've eliminated discounting So our sales people no longer sell on price, they are actually selling on value. So that's one element of the pricing conversation.
The other element is in most of the functional areas that we sell to, we've converted from the previous leadership council model, which was an enterprise price model to a seat based model. And the seat based pricing is very consistent with the way we've historically priced our seat based products. On the heritage Gartner side or now GTS side. So again, we're going at pricing in two ways: 1, eliminating this counting and 2, converting people over to seat based pricing that looks a lot like the way Gartner has always priced their seat based products.
So, Craig, eliminating the discounting, I would think would translate into a fairly significant year to year effective price increase. Is that correct?
So Peter, the one nuance there is that when we say eliminate discount, I'm sorry, I should have been clear on this, that is on new sales. So, if there is a client, who has a discounted leadership council, we are not forcing them to migrate to a different product, and we are not forcing them to significantly uplift their price We have found in our experience that, clients don't like when we do that to them. And so if they are happy with what they have with pricing they have, we are happy to renew them with roughly 3% increase and continue to take their money year after year. And again, and provide value to So the non discounting comment really refers to new business sales.
Got it. Understood. Thank you. And then, Craig, one other thing, on the SG and A give us any more granularity in terms of the composition of costs and what you're seeing in different components of SG and A costs?
Sure. Happy to. Yes, I think, the year over year compare is really messy because of when the combination took place, If you look at it sequentially, we're up about $20,000,000 in SG and A costs. From Q4 to Q4 2017 to Q1 2018 in FX neutral terms, the bulk of that increase relates to the more selling capacity, particularly the significant Jolt. As we've talked about that, we've put into the GBS sales force with that 20% net headcount growth.
Okay, great. Thank you.
This now concludes the Q And A portion for today's call. I would now like to turn the call back over to Ian Hall for any closing remarks.
Yes, so summarizing, we had a very strong Q1 and our future Gartner is the brightest ever. We provide incredible value by helping our more than 15,000 enterprise clients with their most important initiatives. The combination of Gartner and CEP allows us to address every well across the enterprise which gives us a huge unpenetrated market opportunity. We've largely completed the CEB integration. We know the right things to do to drive sustained profitable double digit growth, which we call the Gartner Formula.
Our business economic cloud is to drive strong double digit growth in all our key metrics, including cash flow, and we have an incredibly talented team across the business. I want to thank you for joining us today, and I look forward to updating you again next quarter.
Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.