Good day, everyone, and welcome to Gartner's 4th Quarter 2017 Earnings Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I will turn the call over to Gartner's GVP of Investor Relations David Cohen. Mr. Cohen, please go ahead.
Thank you, Mark, and good morning, everyone. We appreciate you joining us today for Gartner's 4th quarter 2017 earnings call. With me today are Gene Hall, Chief Executive Officer and Craig Safian, Chief Financial Officer. This call will include a discussion of 4th quarter and full year 2017 financial results and our 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 an accompanying presentation as a reference for investors and analysts, which we will reference during our prepared remarks. Both the press release and the presentation are available on our website, investor. Gartner.com. On the call, unless stated otherwise, all references to revenue and contribution margin are for adjusted revenue and adjusted contribution margin, which exclude the deferred revenue purchase accounting adjustments. All references to EBITDA are for adjusted EBITDA, but the adjustments as described in our earnings release.
Reconciliations for all non GAAP numbers we use are available in the Investor Relations section of the gartner.com website. 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 2016 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.
Welcome to our quarterly earnings call. Thanks for joining us. 2017 was a great year for Gartner. We had strong operating results. We closed and largely integrated CEB.
We acquired L2, we took steps to support future growth. I continue to be excited about our business, our prospects for growth, and our strategy to create value for our shareholders over the long term. I'll begin with an update on the CEB acquisition, which has gone extraordinarily well. We announced our acquisition of CEB in January 2017. There's uncertainty as to the time required for due diligence, arranging financing and the required regulatory approvals.
Based on typical timelines, we laid out a plan for completing the acquisition. We satisfied all the requirements and closed the CV acquisition in early April, much faster than typical for this size deal. There is also uncertainty as to how fast we could proceed with integrating CED into Cartna. Through due diligence, we determined that we would be able to pursue an extremely aggressive timeline for integrating CEB and preparing for accelerated growth. Once the acquisition closed, we pursued this aggressive integration.
As of today, we have fully integrated the 2 organizations. Now, this is no simple task as it involved integrating about 5000 Heritage CV Associates with about 10,000 Heritage Gartner Associates. The 2 research organizations have been integrated. The product teams are integrated. The Heritage CEV destination events and Evanta businesses have been integrated into the Heritage Gartner Events business, and the staff functions such as HR, finance, and IT have been integrated.
We have better expectations on capturing synergies, We determined that the talent assessment did not fit strategically, set it up as a standalone business and have reached an agreement to sell the business. We've also accelerated the investments needed to drive future growth in the Heritage CEB Research And Advisory business. Developed a new set of products. We introduced improved commercial terms. We strengthened customer service improving retention.
For the first time in recent CEV history, we accelerated hiring. As of today, we've grown our heritage TV sales territories by approximately 18% year over year. We expanded our sales support positions by more than 20%. All of these actions were in a much faster timeline than we anticipated when we announced the transaction, and they're already having an impact. Heritage CEB contract value grew 2% in 2017, significantly faster than in recent years.
And wallet retention improved by 6 percentage points, a remarkable improvement in a single value of being able to address aggressive integration timeline and accelerated growth investments together with our initial operating results give us a high degree of confidence that we are well on the way to achieving our strategic objectives and delivering consistent double digit growth over the long term. In short, the CEB acquisition is proceeding ahead of our initial expectations. While we're making great progress on CEB, the Heritage Gartner Research business had its best year ever. Contract value growth accelerated to 16%. Once again, we had double digit growth in every region across every size company and in virtually every industry.
Wallet retention was 106%, up one percentage point year over year and client retention was 84%, also up 1 percentage point year over year. These are near our all time highs. We ended the year with almost 12,000 enterprises as clients, up 7% year over year. Our sales force continues to be a critical investment. At the end of Q4, the Heritage Gartner sales force grew 16% year over year.
We identified and hired a large number of highly qualified sales people, allowing us to reduce our number of open sales territories to near record low levels. And this provides a great foundation for future growth. Growing sales productivity remains top priority for us. The past few years, we've implemented a number of programs to improve sales productivity. Those actions are working.
We drove another consecutive quarter of sales productivity improvement. Sales productivity for Q4 2017 improved 15 percent organically over the same quarter last year. And looking forward, our sales pipeline is strong. Certain events allows our clients to interact in person with our analysts and their peers. Revenues for the Heritage Gartner Events business grew 10% during 2017.
Our attendees grew 17% and we hosted more territories in our exhibitor sales force, which impacts our revenues from exhibitors. We believe these are now addressed in our forward bookings for 2018 are up at double digit rates. Gartner Consulting extends the value of our research, providing in-depth expertise on longer term engagements. Our Consulting business grew 3% during 2017, which is below our expectations. We experienced a higher than usual turnover of managing partners in select regions, which impacted our bookings and revenues.
Our contract optimization business has solid year overall, but underperformed our expectations in Q4. Looking forward, we ended the year with backlog As we've discussed in the past, the talent assessment business does not fit strategically with the rest of Gartner. As a result, we announced today that we've reached an agreement to sell our talent assessment business. While not a strategic fit with Gartner, talent assessment is a leader in an attractive market this change will ensure a bright future for this business. During 2017, talent assessment underperformed our expectations.
This was primarily due to an unusually large number of open sales territories from when the business was acquired. We largely filled those territories. With a full sales complement and exciting new products, we believe the business is well positioned for the future. So, summarizing the Heritage Gartner Research business and its best year ever, with accelerated contract value growth, higher retention and improved sales productivity. Aritage Cartner events have strong attendance, exhibitor sales that were below our expectations and a strong forward exhibitor bookings.
Consulting 2017 revenues were below our expectations, but ended with a strong backlog. We acquired CEB for the strong strategic benefits of extending our market to all functions across the enterprise and to enable best of both operational approaches. The rapid growth closing, aggressive integration timeline and accelerated growth investments together with our initial operating results give us a high degree of confidence that we are well on the way to achieving our strategic objectives and delivering consistent double digit growth over the long term. Now hand the call over to Craig Safian, our Chief Financial Officer.
Thank you, Jean, and good morning, everyone. 2017 was an exciting year for Gartner, The Heritage Gartner business remains an amazing one, driving consistent double digit growth, while delivering tremendous value to our clients around the world. We are addressing our vast market opportunity by building on a compelling client value proposition focusing on strong operational execution, and investing for will market and giving us the ability to provide even more value to our clients. While we are still early in the transformation of CED, we have made meaningful progress which we will discuss today and in more detail at our Investor Day next week. On an FX neutral basis, our year over year financial performance for 2017 included total company revenue growth of 35% Heritage Gartner research revenue growth of 16%, adjusted EBITDA growth of 42%, and diluted adjusted EPS excluding acquisition adjustments and a nonrecurring tax benefit of $3.31 per share or 12% growth.
On a combined rolling 4 quarter basis, free cash flow conversion was 112% of adjusted net income. We continue to see robust demand in our contract value growth along with sequential and year over year improvements in our retention metrics and sales productivity. And as our 2018 outlook demonstrates, we expect to deliver another year of double digit revenue and EBITDA growth with strong cash flow generation. 4th quarter combined adjusted revenue was $1,100,000,000, up 11%. This reflected 15% growth for The deferred revenue purchase accounting adjustment in the quarter was $50,000,000.
Also in the 4th quarter, we delivered adjusted EBITDA of $221,000,000 and adjusted diluted EPS of $1.17 per share. Research had a very strong quarter accelerating across the board with sequential and year over year improvements to contract value growth tension and sales productivity. On a combined basis, research adjusted revenue grew 14% in the 4th quarter. The adjusted gross contribution margin for research was 69%, consistent with the fourth quarter of 2016 on a comparable basis. In the Heritage Gartner Research business, adjusted revenues increased by 19% in the 4th quarter.
Excluding CEB and L2, which we acquired in March, 2017, Heritage Gartner Research adjusted revenues grew 15% on an FX neutral basis in Q4. For the full year 2017, combined research revenues increased by 12% or 16%, excluding the addition of CED. On a full year basis, the 2017 adjusted gross contribution margin for research was 69%, consistent when compared to the full year 2016. Our other metrics for the Heritage Gartner Research business all improved in Q4 and remained very strong. Total Heritage Gartner contract value was $2,200,000,000 at the end of 2017.
FX neutral growth of 16% versus the prior year. Including a one point benefit from the inclusion of L2. This is an improvement from the strong growth we delivered in the third quarter. For reference, our Q4 2016 total contract value for Heritage Gartner at current year FX rates was $1,900,000,000. Total contract value growth for Heritage Gartner Research accelerated 110 basis points from the third quarter of 2017.
From a Heritage Gartner research perspective, client retention was 84%, up 70 basis points versus the fourth quarter of 2016 70 basis points on a sequential basis as well. While retention ended at 106% for the quarter, up by 125 basis points year over year, 120 basis points sequentially. Both retention figures are at 2 year highs and close to our all time highs. New business growth for Heritage Gartner Research was outstanding in the 4th quarter, up 23% year on year. Our highest reported growth rates in 2011.
The new business mix was consistent with prior quarters and remains balanced between new clients, sales of additional services and upgrades to existing clients. And as always, we also benefited from our annual price increases. Our new business growth reflects our success in penetrating We ended the 4th quarter with 11,904 enterprise clients, up 7% compared to Q4 of 2016. The average spend per enterprise also continues to grow. It now stands at $186,000 per enterprise.
Up 8% versus the prior year on an FX neutral basis. This continued and consistent increase in average spend reflects our ability to drive CV growth through both new and existing enterprises. Our investments to improve Salesforce productivity continued to pay off as organic Salesforce productivity was up again this quarter. For the Heritage Gartner sales force, over the last rolling four quarters, we delivered $281,000,000 of organic FX net contract value increase or NCVI. This excludes the impact of the L2 acquisition.
When divided by our beginning period headcount, which was 2423 quota bearing heads, Our rolling 4 quarter organic productivity per account executive was $116,000. Excluding the impact of the L2 acquisition, sales productivity was up 15% year on year and up 10% sequentially. As always, we are focused on continuous improvements in recruiting, training and tools to support higher sales productivity. A key driver percent year on year in Q4, roughly consistent with the performance since the acquisition. We saw many positives with CEB's other research metrics in the quarter.
We ended Q4 with $557,000,000 of heritage CEB research contract value, up 1.5% on a year over year basis. In addition, wallet retention ended the quarter at 96%, up 300 basis points compared to the 3rd quarter. The non technology areas at Ceb accelerated to 3% year over year CV growth. This is a notable contrast to the historical trend in 2015 and 2016 at CEB prior to our acquisition of the business. To summarize our research performance for the quarter, Heritage Gartner organic contract value growth accelerated to 15% in the fourth quarter spurred by new business, sequential improvements to productivity, and both client and wallet retention.
And heritage CEB contract value growth also improved to 1.5%, fueled by improvements to wallet retention. In events, combined adjusted revenues increased by 5% year on year in Q4. Event's 4th quarter gross contribution margin was 51%, down by approximately 300 basis points compared to the year ago quarter. Revenues and margins in the 4th quarter were impacted by softness in exhibitor revenues related to open territories, as Jean mentioned. We've entered 2018 with a significant improvement in our advanced bookings and a significant reduction in our open territories.
CEB events revenue declined 5% year over year. Q4 Heritage Gartner events revenue grew 7 year on year, driven by an 8% increase in same event revenues, partially offset by softer performance in exhibitor revenue. We continue to see solid performance in attendees reporting a 12% increase in same event attendees. FX had a roughly 2 point benefit to our Heritage Gartner events reported revenues in the 4th quarter. On a full year combined basis, events adjusted revenue increased by 10% in 2017 and its adjusted gross margin contribution of 49% was down 330 basis points compared to 2016.
4th quarter consulting revenues increased 5% on a reported Q4 of last year, while the contract optimization business was down 21%. On the labor headcount of 682 was up 8% and we had 137 managing partners at the end of Q4, an 11% increase over the year ago quarter. Backlog, the key leading indicator of future revenue growth for our consulting business ended the quarter at $95,000,000. Up 7% year on year and 9% in FX neutral terms. Consulting gross contribution margin was 26% in the 4th quarter.
For the full year, 29% was up 50 basis points compared to 2016. Adjusted revenue in the talent assessment and other segment increased by 2% compared to the year ago quarter. As you saw today's press release, we signed a definitive agreement to divest the biggest part of the talent assessment and other segment following a strategic review. The purchase price is $400,000,000, and we expect to close in the first half of the year. For the full year 2017, business we are divesting had revenues of about $200,000,000 and EBITDA of about $38,000,000.
Assuming we use the proceeds to pay down debt, we anticipate adjusted earnings per share dilution of about $0.17 for 2018 on a full year basis. The actual impact will depend on the timing G and A increased by 17% year over year in fourth quarter. FX had a roughly 1 to 2 point negative impact. We continue to invest in growing sales capacity and sales support areas such as recruiting, technology, facilities and other areas to support our strategy of delivering sustained double digit growth over the long term. Our sales force continues to be our largest investment.
And at the end of the fourth quarter, the Heritage Gartner business had 2800 and 7 quota bearing sales associates. This is an increase of 384 or 16% from a year ago. As we discussed with you last quarter, we have been able to reduce the level of open territories which should help us as we move into 2018. The acquisition of CED added more than 500 frontline quota bearing research sales associates. Practices around recruiting, training and tools to drive accelerated CV growth and improve productivity.
As you analyze SG and A results, please also remember that there is normally a large seasonal increase in our expenses in Q4 as we are supporting of non recurring expenses, which are adjusted out of EBITDA. Separately, we had incremental incentive expenses related to our strong selling finish to the year. With cost synergies, we are on plan. As we discussed in the past quarters and as Jean just detailed, We are also investing in areas that we believe will drive long term growth for both the Heritage CEB and Heritage Gartner Businesses. The benefits of some of these investments will yield returns over Adjusted EBITDA for the fourth quarter was $221,000,000.
On a combined year over year basis, adjusted EBITDA grew 2%. Strong revenue growth, partially offset by 3 primary factors. 1st, continued underperformance of the talent assessment business. 2nd, we performed below our expectations with high margin exhibitor and contract optimization revenues. And third, higher SG and A costs as just discussed.
Depreciation charges increased year over year in the quarter predominantly reflecting the addition of CED, while amortization and integration charges were up significantly, again related to the transaction. Interest expense in the quarter was $36,000,000, up from $6,000,000 in fourth quarter of 2016. The full year interest expense was $125,000,000, up from $25,000,000 in 2016. The higher interest expense relates to additional debt used to fund the CED acquisition. Again, I'll note that we took on the debt early in the second quarter the acquisition closed.
The Tax Cuts and Job Act had a significant impact on both our Q4 and full year effective tax In Q4, we benefited from revaluing our net US deferred tax liabilities at the lower corporate tax rate and utilization of some foreign tax credits. This was partially offset by the one time transition tax on accumulated foreign earnings. The net benefit to our P and L in Q4 from tax reform was $60,000,000 or $0.65 per share. We have normalized this benefit out of adjusted EPS. Excluding the one time net benefit was 32.8% and 30.4%, respectively.
Discuss the 2018 benefits of tax reform during the guidance section of today's call. Adjusted EPS in Q4 was $1.17, excluding the tax law change benefit of $0.65 in the quarter. Our adjusted EPS result for Q4 is about $0.08 short of the low end of our previous guidance and $0.14 below the midpoint. The primary driver was the EBITDA performance I just detailed. This was partially offset by a combination of lower equity compensation expense, a lower adjusted effective tax rate for In Q4, operating cash flow was $22,000,000 compared to $83,000,000 for standalone Gartner in the year ago quarter.
Combined operating cash flow decreased 81 percent year over year. Q4 operating cash flow includes significant acquisition and integration payments, which we adjust out for our free cash flow calculation. Q4 2017 CapEx was $35,000,000, and Q4 cash acquisition and integration payments and other non recurring items were approximately $27,000,000. This yields Q4 free cash flow of $14,000,000. The decrease versus prior year is due to the higher interest and CapEx.
Additionally, there was a one time $40,000,000 impact from the timing of billings. As part of integration, we moved clients from the CEB billing platform to Gartner's. This resulted in temporary delays in sending out invoices. We expect of gross debt we had as a result of the acquisition, we have repaid more than $300,000,000 by the end of Q4. A quarter ending Q4, which translates to approximately 4 times leverage on a combined last 12 months of adjusted EBITDA.
Given the favorable cash flow characteristics of the combined company, the repatriation benefits of US tax reform and recent debt repayments We are tracking ahead of schedule on de levering to reach our long term leverage target of approximately 3 times gross leverage. In January of this year, we repatriated around $250,000,000, which we used to pay down debt. This is factored into our interest expense guidance for 20 team. As mentioned earlier, we intend to use the proceeds from the divestiture of the talent assessment business to pay down additional debt. Once that transaction closes, we will update you on the impact to our guidance.
Turning now to guidance. For 2018, we expect adjusted revenues of approximately $4,100,000,000 to $4,200,000,000. This reflects growth of 10% For research, we expect combined adjusted revenues of between $3,100,000,000 $3,150,000,000. This reflects combined reported growth of 12% to 14%, supported by the very strong contract value growth we just delivered. For consulting, we expect revenues of between $340,000,000 $355,000,000.
This reflects growth of 4% to 8%. For events, we expect adjusted revenues of between $380,000,000 $400,000,000. This reflects growth of 10% to 16% on a combined basis. And for TA and Other, we expect adjusted revenue of between 285 and $305,000,000. The signed divestiture agreement is not reflected in this guidance.
After the deal closes, we will update For 2018, we expect adjusted EBITDA of $750,000,000 to $800,000,000. This reflects growth of current understanding of the new tax law is an effective adjusted rate of around 26%. We estimate
of the law.
Finally, our EPS guidance is based on a weighted average fully diluted share count of approximately 93,000,000 shares for the full year $3.71 $4.11 per share. On a reported basis, that's 12% to 24% growth. Had we owned CED for all of 2017, the 2018 adjusted EPS growth would be over 300 basis points higher. For free cash flow in 2018, we expect free cash flow of $451,000,000 At the midpoint, the conversion from adjusted net income is about 130%. For the first quarter of 2018, we expect GAAP EPS between negative $0.44 and negative $0.40 per share.
This includes approximately $1 per share of non Therefore, on an adjusted basis, we All of the details of our guidance are available in the presentation available on the Gartner investor website. 2017 was a pivotal year in the Gartner journey. We delivered outstanding performance in the Heritage Gartner Research business, with strong top line growth and some of the best operational metrics we have posted in many years. We acquired CEB NL2 and have been executing ahead of plan on the integration, cost synergies, and investments to support future revenue growth. We saw recently signed an agreement to divest a non core business and have positioned ourselves for a strong 2018, a year in which we expect to drive double digit top and bottom line growth and further strengthen our balance sheet.
Now I'll turn the call back over to the operator and we'll be happy to take your questions.
Operator?
Your first question comes from the line of Geoff Muller. Please proceed.
Yes, thank you. So I guess an order of magnitude question on the margins and the margin headwinds. Fully get that you're investing to support growth and obviously see it in the key metrics. But I guess what I'm wondering is just given the 2018 implied margin guidance, is there Anything else in terms of like wage inflation picking up or paying people more because of the tax savings or anything along those lines? Or is it is this like, I guess, a one time step up as you accelerate headcount growth And then 2019, there should be better, better margin flowing through.
Hey, good morning, Jeff. So on the on the opening part of your question, the from a planning perspective related to wages and and things of that nature. It looks very much like we've seen in previous years, so really no change to report there. In terms of the margins, you're spot on. We are investing to support and drive future revenue growth.
And as you've followed us for many years, that's been our strategy. You can see it bearing out on the Heritage Gartner Research side with our productivity accelerating, contract value growth accelerating, etcetera. And again, our plan is on the CEV side to make sure that we are fortifying that business appropriately. And also as Jean mentioned, investing to drive future growth. So the way we're thinking about it is This is a growth game, and we are investing to make sure that we can drive sustainable long term double digit top line growth.
Okay. And I guess with the gross synergies on plan, you're investing more sooner. Is it a timing issue and you still expect to realize the net OpEx synergies from the deal at some point or is there a change in the targeted net OpEx synergy realization figure?
Hey, Jeff, it's Jean. 2, I think the first part of the question, which is the, as I mentioned in my prepared remarks, The both the acquisition closed and the acquisition integration has gone much faster than we had originally planned for. We had kind of a middle of the road plan And we wanted to be aggressive and it turned out we could be aggressive both with the closing and also with the additional integration. And so we're much further ahead than we had in our original plan. Because of that, we pulled forward some growth investments that we might have made 6 or 12 months down the road, because we believe that it will allow growth to accelerate faster as well.
So fundamentally what's going on is we went faster than we had originally expected both closing and integration. That allows for these growth investments forward, things like increased the number of sales people, it increasing sales support, increasing customer service, new products that we've developed, closing open roles like with Evanta, for example, All those things are things that are going to have great payoff and growth and that we believe that growth we forward.
I just was going to finally ask on cash flow. I understand the premium over adjusted net income is growth rate. Dependent in your at the front end of it, hopefully accelerating the CEB growth. But if I out the $40,000,000 timing hit to 2017, which I would think is a benefit to 2018. It looks like the free cash flow premium is quite a bit lower than historically Gartner generated.
So any reason, why you can't get back to like 100 and 40, 150 percent premium over adjusted net income over time?
That's a great question, Jeff. And I think you're spot on and you're upfront assertion. It really does have to do with reaccelerating the contract value growth. At Heritage CEB. And once we do that, there's no reason why the overall conversion of adjusted net income to free cash flow can't be similar to what Gartner looked like prior to the acquisition.
So that is absolutely the goal. And fundamentally, the business model supports that.
Okay. Thank you.
Your next question comes from the line of Gary Bisbee, RBC. Please proceed.
Hi, guys. So it's an interesting result because all the revenue and all the operating metrics look terrific and yet the SG and A spend and the acceleration there and the margins being hurt by that all are a lot worse than anyone expected. I guess a 2 part question from me. So clearly with the guidance, you're not going to achieve the double digit accretion Bogi that you set out when you announced the CEB acquisition. So help us think through just how you think about investing relative to delivery of profits?
And really, the second part of that is, why be so aggressive with CEB, the 18% sales headcount growth is like almost double the CV target that you've laid out for that business. It just seems like you've gone so aggressively that you're pushing out profits quite a while and I'm trying to understand how you think about those 2 things. Thank you.
Let me start with the second one first. Gary, the, as you know, historically with the Gartner sales we determined how fast to expand the sales force based on assessing each individual first level manager and what their capability was to absorb growth. What we did is the same thing on the CEP side. And so we went through and looked at what's the capability of expanding and having more sales people with each of the individual managers and, with the total number of area managers we've had. And that's how we got the number of sales territories that we have.
So, is what we think is operationally feasible. And for sure, the, as you know, the thing that has driven our growth over time is making sure the sales capacity to actually address this enormous market opportunity that we have. So that's why we have. So we've set the growth rate base to what we believe is operationally feasible. Again, as we go forward, if we see that too fast or too slow, we'll adjust based on our actual results.
And again, and in terms of the, as you know, with our business, you are the sales people you then, they start selling, they sell things, they get contract value and then it turns into revenue.
Yes. Thank you. And good morning, Gary. So, I guess some context around the double digit accretion question. So, and how we'll actually measure success.
So just from a starting point, CEV, the acquired business, great research, great products, great content, great methodologies, and the combination of Gartner and CEB is unequivocally better either company would have been alone. One of the things we have learned though is that, and you knew this too from following them, that they had under invested significantly, and particularly areas that actually we know drive future growth. Since making the acquisition and actually getting in there, we've learned really 2 critical things. 1, the strategic rationale for the acquisition is actually even more compelling than we thought. And 2, there are actually more operational areas that needed fixing and significant under investment in areas that we know drive retention and growth.
And when we entered into the deal, and again, this was January of 2017 when we announced, We couldn't be certain around how long it would take us to close, how long it would take us to integrate. As Gene mentioned, we closed quicker than expected, and are executing ahead of our plan on the integration. And so those things were going really well, and that allowed us to do 2 things. 1, actually start addressing the operational issues sooner or more quickly and 2, pull forward growth investments to more aggressively with a higher degree of confidence. And so, where we are today is we understand the operational issues know how to fix them.
We're fixing them and making really good progress on that. We've also moved to significantly simplify the business and obviously the announcement on the divestiture of the CV Talent Assessment business is a big step towards simplification. And so the transaction or the net result transaction is still accretive in 2017 in 2018, although less than we originally thought of, but our view is we've made the right trade off for investors because we get to have a much stronger, better positioned business sooner than we otherwise would have. And then the other thing I'd say just to kind of close is we now have an even higher inviction in our ability to deliver that double digit CV growth in 2020 than we did when we announced the deal.
Great. Thanks. If I could ask just one quick much quicker follow-up. You mentioned some investments to fortify places they'd under invested, but obviously the sales headcount is really proactive investment for growth. Can you give us a sense how much is in each bucket and what's the timeline for that CV to accelerate.
It seems to me it's got to be a lot faster than 2020 given how aggressively you've done the integration and hired the sales head. Thank you very much.
Yes, Gary, the, it's 2 things. One is on the fortifying areas, I can give you couple of examples. Probably the most notable one that has an impact or had an impact on their results were open territories. And so when we acquired the business, there were significant amount of open territories in the talent assessment business, significant amount of territories in the Heritage CV Research business, frontline sellers and a significant amount of open territories in all the sales support functions, to name a few. And obviously, we know this from fact, you sell less when you have open territories than when you actually have people in the territory.
And so those are some examples of fortification of the core. In terms of the goals for the future, we're not adjusting that long term, expectation. That said, as I just mentioned, and I think, as Jean mentioned in his prepared remarks, all the things we're doing are drive a stronger business that can grow faster and potentially sooner. We're still targeting that 2020 date for double digit contract value growth, but we are putting in place all the things that should allow us to grow this business really, really fast have a lot of strength and set us up for future sustained double digit growth.
Thank you. Your next question comes from the line of Tim McHugh, William Blair. Please proceed.
Thanks. Just a follow-up on the margin question. I guess, to ask it a little different way. I guess, you commented it before that CEB essentially kind of was over earning and under invested in a few areas. When we look at the 2018 margins, as you think about kind of given what you now know about CEB and the overall company, I guess, what I'd like to try and understand, are we under earning here in this year given the margins and In other words, I guess, are your margins depressed more so than normal?
Or as we look at this 2018 outlook, is this more consistent with kind of the the long term margin structure as you see what's necessary to grow the kind of combined business?
Hey, Tim. Good morning. I'd say, it's a little bit of both if you think about it. And so, as you know, our business model around hiring new sales people, there is a lag in terms of the performance they deliver. And we've gone through this, over the years where it takes a few years for a new salesperson to get up to full productivity.
And what that means is, in year 1, we're paying full cost, but they're delivering half the productivity in year 2, we're paying full costs, but they're not delivering all the productivity. And then by year 3, they look like a normal tenured salesperson. And so what you're seeing on the CEB side a little bit in 2018 is we've got the full cost of the territory expansion, but very little benefit baked into the P and L because it's a subscription based model, even if they sell a lot of stuff, it'll likely be weighted to the back end of the year. Therefore, not really flowing through from, a revenue perspective in 2018, and then we start seeing the benefit in 2019, etcetera. That said, what Gartner has done is we've got that, that, a virtuous cycle, if you will, of we hire new salespeople.
They graduate in tenure, but because we're about the long term play here and driving sustained double digit growth, we continue to invest in new people who then come in at, as new salespeople, then graduate into the 10 year bands and get more productive over time.
And, Timothy, in addition to that, for the heritage CB sales people, there were some differences in how they sold, so they use discounting heavily. We don't use discounting. They sold enterprise agreements and we sell seat based products. The content of the product is different than it was before. And so even the existing CB salespeople in the short term, I've got to learn different skills to be able to be as effective as they will be, you know, when they get up to speed on these.
We're hoping that's a few months. But it definitely takes time to do that. And so it's a combination of both the transition of the existing heritage CV sales people have to do to this new world. Which we're well along and the elderly indicators are good, but we're not there yet, combined with when we hire new sales people, it takes a little bit of time for them to get the speed.
Okay. Thanks. And then just on the exhibitors, can you just ask a different topic here? The open sales territories there, I guess, that was something you had talked about a while ago. Is it just harder to find salespeople or did you what was the issue?
I guess why were the territories open than you expected?
Yes, great question. So what happened is we had We've had very, very, very low turnover in our exhibitor sales force over long period of time. We then had a surge, and it's a combination of things. So It just happened all at the same time, different careers, performance, whatever, that all happened at the same time. We didn't have enough recruiting capacity to match all the other territories we had.
So basically, It took a little while to get the speed. We now have the recruiting capacity to deal with it. We have the territories filled and there's 2 very good things looking forward to the business. The first is that, our advanced bookings for 2018. In other words, the exhibitor bookings in 2020 that will be realized in 2018, I'm sorry, the revenues that we 2018, the bookings for those were up at substantial double digit rates in 2017.
So, we'll see those revenues. So, we're, we go into 20 18 with a great, call it, backlog of exhibitor bookings. And then secondly, our our, and this is important as well. Our attendees last year, as I mentioned in my remarks, were up 17% year over year, which is an acceleration that's actually greater attendee performance, exhibitor revenues follow attendee revenues. When attendees are growing, exhibitors want to exhibit those events.
When attendees aren't going to do it, when they're declining, exhibitors don't like so much going to those And so I think, you know, the combination of we have the recruiting capacity, the territories are filled. Our advanced bookings are looking are up substantially and the fact that, the growth in attendees drives future exhibitor revenues gives us confidence that we're in a good track for 2018 and beyond with our with our events business.
Your next
question comes from
guys. First question, just on free cash flow. Again, I think you said the conversion in 2018 would be 130% after backing out those charges. So just a two part question. 1, like, once you sell TA, I guess, does that automatically help that conversion, I would think.
And then the $126,000,000 of charges that you have in 2018, like maybe just some color on how that breaks down. It sounds similar to the 2017 number?
Yes, sure. Good morning, Manav. So just a clarifying point. So the 130 percent was just taking the 2018 free cash flow guidance midpoint, over our adjusted net income free cash flow guidance. If you back out the $40,000,000 reversal, if you will, it's called sort of 120 percent conversion, just to clarify.
In terms of the charges, there is a, a run out of, of, of charges as you'd expect with a large transaction. There is, the timing of retention bonuses when people actually, exit the business and get paid severance We've got charges in there related to the decoupling of the talent assessment business. And so while it looks like roughly the same level of cash on a year over year basis, it makes sense and again, is related to carryover from stuff from the CEB deal, and then a lot of stuff related to the the talent assessment, divestiture as well.
Is it fair to assume though that the TA, it pulls down that conversion? So like one to sell it, it should help improve that?
Yes, it's a great point. Absolutely. And I think the interesting thing and we'll rerun all these numbers once we close the deal. But obviously, with that roughly $200,000,000 of TA revenue no longer a part of Gartner, it makes the subscription, based portion of the business and even larger piece of the pie. Your 100% right, that will help the free cash flow conversion rate on a go forward basis.
Okay. And then Jean, you talked about all the new products and commercial terms and the success you're seeing there. I was hoping you could just elaborate a little bit more on maybe some anecdotal points on what like how far you are along in that transition to the commercial terms and how many new products more you have in the pipeline and so forth?
Yes, great question. So in terms of the commercial terms, we introduced the new commercial terms last year. So, all of our sales people 100% of the Gartner and sales people have been selling into commercial terms since last year. So, we're well on the way there. And again, some people have switched to media are doing great.
Others have had to learn and it's a different talk track answering questions like why you can't get a discount and why you can't get an enterprise agreement, things like that. Everyone's been doing that and I feel like we're making great progress on that. In terms of new products, we, have, all the new products have been developed We introduced a few of them last year, a lot have been introduced in January, and the last ones will be gonna continue we have a continuous new product development, but of the combined Gartner plus EV content with a seat based product, in the first half, we will have most of those out. Now, we're going to continue innovating because as you know, on the, on the Gartner side, We have, you know, products for the C level, a different product for their reports to the C level, etcetera. And over time, we'll be rolling those kinds of products out as well throughout each of the CEB, the former, the Heritage roles like HR, finance, etcetera.
Okay, got it. Thanks guys. Thank
you. Your next question comes from the line of Anjana Singh, Gartner. Please proceed.
Hi, good morning. Thanks for taking my questions. A follow-up on the margins, asked another way, have you guys fully captured the investments that may be required at CEB? It seems in the three quarters you've reported since acquiring the business. You've had 3 negative EBITDA surprises.
And I realize it's not all attributable to CEB, but fiscal 2018 is also well below EBITDA expectations. So how confident are you that you've identified the speed bumps, etcetera, that you've spoken to in the past?
So, what I would say first is that, the, we feel like we've had TV launch where you understand what the economics are and what the business is going to be like. And over time, there's no reason, it's our expectation economics can be very similar to what Gartner was before, we acquired CEP. And so there's some upfront investments, which we've talked about on the call. And other times. But over time, there's no reason the margin shouldn't be very comfortable to what we've done with Cartner over time.
And Anj, I would just add, terms of the, speed bumps for lack of a better term, a lot of the downside we saw over course of the year related to the talent assessment business. And as we got in there and really analyzed it, it there were a number of things that were causing that most notably a significant amount of open territories. And so we did invest to fortify that, fill open territories. If you look at bookings performance on that business, it was definitely better the second half of twenty seventeen that was in the first half of twenty seventeen. And we got that out of the way.
And again, now, once close that deal, that will no longer be a part of the overall Gartner business. The other thing I'd mention is just in pulling out the TA business, when it does happen, essentially, it's been a low growth to no growth to declining type business. And obviously with it coming out, just the raw Gartner growth rates will improve by 50 or 60 basis points on a comparable basis. And that'll obviously help us on a go forward basis as well. The other areas where we've seen those speed bumps Again, we've seen lots of positive signs after we've identified assess and fix them, whether it be around retention rates, which again, we seen improving over the course of the year, whether it's around the performance, from a bookings perspective on the Avanta business, in terms of their advanced bookings and things of that nature.
So I think we feel good that now with essentially 9 or 10 months CEB under our belt operational A. We've identified all the problem areas. We've actually addressed them as well and should be operating from firmer ground on a go forward basis.
Okay, got it. That's helpful. And as a follow-up, maybe I missed it in prepared remarks, but what sort of CEB growth is implied in your 'eighteen guidance? And if you could just help us with what you're seeing as being most instrumental in the acceleration of and sales force or the new products? Thanks.
Let me give it a second part for us today. So the reason that we saw acceleration, they were in the negative growth category for quite a period of time. And we've seen that uptick. The biggest issue has been the 6 point improvement retention I talked about, which is an enormous amount in 1 year. And that's due to changing operational practices in terms of institutions of the practices that, you know so well from Gartner.
So that's kind of what caused that improvement. We're just at the beginning there, there's no reason that their retention, their wallet retention client retention can't be at the same exact levels as Gartner, and we see that happening over time. And then new business growth again, same levels.
And on the implications within the guidance, we're obviously not breaking that out, but it's safe to assume in line with or a little bit better than reported contract value growth for the heritage CEB contract value. So we said 1.5% on the overall heritage CEB, CEB contract value growth in 2017, that obviously drives the bulk of the revenue as we head into 2018.
Okay, perfect. Thank you.
Thank you. Your next question comes from the line of Toni Keplan, Morgan Stanley. Please Please proceed.
Hi, good morning. Based on the numbers that you gave, Craig, it sounds like there's a business that is not being sold in this transaction. And so hoping you could give us some color on either what part you're keeping or if you're planning on selling that remaining piece as well. And basically, if you are keeping it just what's the growth rate of that piece and will that impact the overall business?
Hi, good morning, Tony. So as we talked about, we're selling about 2 thirds of the talent assessment and other segment. Which consists essentially of the former the business formerly known as SHL that CEB had acquired in 2012. And so that's about, as I mentioned, $200,000,000 of revenue and about $38,000,000 of EBITDA. And that's so that's a little bit different than the contribution margin, because it is inclusive of of SG And A, but on a net basis, about $38,000,000 of EBITDA.
So that will leave us around $100,000,000 of other, if you will. And those are predominantly training businesses and a few other smaller acquisitions that, CEB had done over time. And, again, now representing postdoc post divestiture, $100,000,000 on a $4,000,000,000 business. So a really, really small part of the overall business. With what I would say are kind of average CEV growth rates, associated with it.
So that's what will be left again, a really small part of the overall total Gartner revenue portfolio.
Okay, great. And We've seen a couple of data points recently indicating that IT spend should be strong this year and accelerating from last year. Sounds like just based on the guidance, you've had some strong growth rates for each of the segments there. How are you thinking about the overall environment? Would you be able to maybe raise prices faster this year or just see greater demand for services.
It just sounds like the environment's really good. And so just wanted to get some color on what you're seeing.
Hey, Tony. It's Jean. So, first, I'd like to kind of just address the one point, which is that our growth is not really IT spending. I mean, when, we clients use us and need us when they're spending is higher, even when they're spending is lower, they're still spending an awful lot of money on IT. And whether it's growing at 3% or 4% or 1% or shrinking 1%, they still need a lot of help.
And so that's not been a big factor for us. Having said that the selling environment, I would characterize today as being a normal selling environment, meaning there are clients that are booming, there are clients that are okay and clients in trouble if you look around the world in the different markets that we're in. So I characterize the kind of normal selling environment.
Thank you. Your next question comes from the line of hamzah Mazari Macquarie. Please proceed.
Hi. This is Kevan Rabaughn filling in for Hamzik. Post tax reform, could you give us an update on how you're thinking about capital allocation parties in the M and A pipeline?
Sure. Great question. So, obviously, the one other benefit of tax reform, that isn't really factored in is the ability to, repatriate foreign accumulated earnings. And obviously, as we talked about during the prepared remarks, we've been knocking down our debt levels. And again, we view the optimal cash structure to have something in the neighborhood of 3 times gross leverage.
And, we're moving in that direction pretty rapid Lee and when we close the talent assessment divestiture, it accelerates our ability to get there. And then of course, we have the great free cash flow generation of the combined business globally on a go forward basis. So again, our view is about three times gross leverage is the right, permanent fixture on our balance sheet. And then once we get there, we return back to what our previous capital allocation strategy was, which was a combination of strategic value enhancing M and A, which, more likely than that means smaller to midsize type acquisitions and or in absence of that return to capital shareholders through our buyback programs. And so Once we get back down to those rough levels of around 3 times gross, we'll then revert back to our stated tried and true capital allocation strategy around M And A and return of capital through buybacks.
And just a quick follow-up, anything from your customers in terms of spend? Are you hearing anything?
Again, as I, what I'd say is I characterize it as a kind of normal environment, which is that spending is, again, there are companies that are doing really well that are kind of spending money, all kinds of things, companies that are doing okay. Companies that are trouble, they need help figuring out how to allocate their funds even better. And so I'd characterize kind of a normal selling environment, not especially good and not especially bad.
Okay. Thank you.
Thank you. Your next question comes from the line of Michael Reed Kantor Fitzgerald. Please proceed.
Hi guys. Thanks for taking the question. I wanted to hop over to consulting, where there was a couple issues last quarter, but it looks like you kind of progressed in moving past those with the update Do you think this improvement will continue? And did the strong pipeline that you talked about in the last period continue?
Yes, great question, Michael. I mean, we, the, as I mentioned, consulting, we had, again, some open territories there among our managing partners for different reasons. Health career change, etcetera, and not across the board, but it's the selected areas. Those are dub and filled and we, had a really good backlog. Backlog was up 9% year over year, which is great.
And we feel very good about the strategy for consulting fit with company. And our investor, I'll put a play for investor day next week. We'll talk more about how that strategy is evolving to make it even more important in contributing to the company.
And Michael, you're right. And I just I'd point out a couple of facts. One is the labor based of the business was up 12% in the 4th quarter, which is a really nice improvement from what we had seen, particularly in the first half of the year. That was offset a little bit by weakness or softness in the contract optimization business in the quarter. What I'd say is the contract optimization business actually had a very strong year, really super strong in the first half.
And then below our expectations a little bit in the second half. But overall, deliver nice growth for us for the year. So I think your observations, right, labor base was very strong in the fourth quarter. And again, the backlog position we're in is probably the best or one of the best backlog positions we've been in entering a year in a while.
Okay. And then with the integration kind of said to be ahead of track in the synergies definitely being met. Can you remind us again where some of these cost synergy savings are coming from and maybe where you expect them to come from moving forward?
Yes, sure. On the cost synergy side, I guess, I'd start with, when we assess the deal upfront and look for cost synergy opportunities, we did not look in research because that was really the most important asset and we wanted to maintain that. And we didn't look in sales because again, as we know, the more sales people you have, the more you generally sell. And we didn't want to touch service either. So the cost synergy opportunities really fall in the G and A lines.
And I put them in a handful of buckets. So One is around redundant people, redundant functions, redundant processes. So, in finance, as an example, We only needed one CFO. And so there was a savings opportunity there. You know, we're solidating everything into Gartner's accounting systems, Gartner's billing systems, Gartner's HR systems, Gartner's IT systems, etcetera.
And so as we do those consolidations and integrations, costs will go away. So it's really around first the people and leveraging our centers of excellence and eliminating redundant roles 2 would be around eliminating redundant, external spends, whether they be on consultants, on software applications, on data centers, on things like that. And the one caution there is we're moving really well and rapidly there are certain elements of those spends that due to contract terms or due to needing to run dual or parallel platforms some point of time, those don't get turned off until maybe 2019. And then the 3rd major category is probably around facilities. And consolidation of facilities.
And so we've started that in 2017, in some of our smaller City locations around the world. We're doing it much more aggressively in 2018, and there will remain opportunities to do that. 2019 and beyond. So really focused on the G and A side and really focused around, leveraging our scale whether it be on personnel, on external spend or on facilities.
Thank you. Your next question comes from the line of Jeff Silva, BMO Capital Markets. Please proceed.
Thanks so much. I
hate to go back the accelerated spending, but I'm going to. I'm just curious when these decisions were made. I don't remember you talking plans on doing this on the last quarter's call? Hey, Jeff, good morning. So we we've tried to be or we've been, I think, transparent on this.
We talked about, I believe on the Q3 call about our acceleration on the territories, in specific and related support. So recruiting capacity service people, the incremental territories, etcetera. So it's now becoming real because we're actually doing the spending and hiring the people, but we have talked about it on at least last call, and I think the 2 prior calls. Maybe I just missed the order of magnitude. Thanks so much.
Your
next question comes from the line of George Tong, Goldman Sachs. Please proceed.
Hi, thanks. Good morning. Jean, I want to dig deeper into the pull forward of investment spending. Can you discuss the planned timing of investments in 2018 and how your planned heritage Gartner Salesforce growth will compare with Heritage CEB Salesforce growth?
Yes. So, in 2018, the Heritage card sales force growth is going to be typical of past years. So in the same kind of range that we've had of past years. And so, and again, I can't give you an exact number because we, as I talked about. We do it based on what our operational capacity is.
So we look at each individual area manager. And based on the capacity of those individual managers decide, is going to be. But you can think about it as being kind of in the mid teens like it has been historically, for Gartner. For CEB, we're following the same process. What we decided to do, again, was to pull forward and try to go into 2018 as fully staffed as we could on the CB side.
We're now going to see how those investments go. And based on the operational performance, we'll decide much harm we're going to do through the year to prepare us for 2019. But right now, we're kind of we're staffed and we're very happy with where we are in terms of the staffing in sales, in service, in product and sales support.
Got it. And how would you think about the cadence of investments just timing of investment as you move through 2018?
Well, again, for the on the Gartner side, it's going to be what we've done traditionally. Which is we tend to ramp up more sales people at the beginning of the year. It tends to be front loaded. Our biggest selling is in the second half for new business. So we want to get, let people get up to speed.
And so we tend to, we tend to tie more of our hiring, our growth hiring in the 1st half. So, we go to the 2nd half with a full complement. And again, as I mentioned, CEB is sort of a similar kind of a thing, except because it's new, we're going to be even more watching the operational performance.
Got it. And just a follow-up, you discussed the biggest driver of improvement in CED performance has been really due to improving wallet retention rates. Can you elaborate on how much new business is performing? How much growing at CEB and discuss trends around pipeline growth and close rates for CEB?
Yes. So Great point. So retention itself is up significantly, which is what's driving all of retention. New business hasn't performed as well. And the reason is because things we talked about.
All of the changes that the, heritage CB sales people have got to go through in terms of the changing commercial terms, new products and enterprise agreements, all the things that we've talked about there. And so the last year, the new business was weaker than it had been historically.
And George, good morning. It's Craig. This is the, what we've talked about for the last 2 or 3 quarters. We were focused on trying to get as much noise out of the way in 2017. That's when Jean discussed earlier about the speed of our integration, it was really around number 1, we saw the opportunity to go faster Number 2, we wanted to enter 2018 with as much behind us as possible.
And that's why we push forward so much on changing the commercial terms and eliminating discounting and launching these new seed based products. And so there was a lot of change with particularly heritage CEB frontline sellers, which we've managed through. And Jean talked a little bit earlier about adoption and speed of adoption. But again, the goal was to get as much noise, if you will, behind us so that we could enter 2018 in as clean a position as possible.
Got it. Very helpful. Thank you.
Thank you. Your next question comes from the line of Bill Warmington Wells Fargo. Please proceed.
And a welcome to David Cohen, a street name Series D. So,
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question for you on the the open territories, you've mentioned that a number of times as a problem that you've been addressing. And I remember historically, you've a few years back, you spent, a lot of time and effort to try to come up with processes to really reduce the sales force turnover post hire. And so my question is, what are you doing on the front end on the CEB hiring given the strong hiring there to make sure you've got the right people in those territories and that they're going to stay there long enough to get a positive return?
Bill, it's an important area of our, of our focus. And so, over the last several years, actually, we focused on building a recruiting capability that has a great opportunity to identify who are the people that are going to be most successful in selling at Gartner, because we want to harp and when people are successful, they say they don't turn over and we wind up with our average tenure going up. Higher sales results. We've done that through both improvements in our selling process, as well as things like analytics, where we use series of analytics to help us determine who are the people that are most likely to be successful and to sell a recruiting process that actually, is very good identifying those people. That's been very effective on the Gartner side.
We're implementing those that same recruiting, effective to the same recruiting organization with the same processes once they get fully rolled out, the same processes that we'll have with the CB side. And right now, we're partly through the jury. We're probably the majority of the way through the jury, we're not completely there on the CB side. Once we get there, we expect our ability to identify the right people at the higher will be great. Already, capacity wise, we don't have any problem as you can tell from the, growth in sales force that we talked about, and we feel very good about the quality of people who are hiring their fit.
Got it. And then one quick one on the CB talent assessment. You've mentioned the $400,000,000 gross proceeds. How should we think about the net proceeds on that?
Yes, I mean, obviously, there are some fees that go out. Related to bankers and lawyers and all sorts of other associated costs. I think we've modeled in probably 3.50 of that, being available to pay down maybe a little bit more, but in that neighborhood.
Got it. Thank you very much.
Thank you. I'd now like to turn the call back to Gene Hall for closing remarks.
Well, thank you today for your questions and for joining us. So to summarize the key points for today's call, 2017 was a great year for term. In the Heritage Gartner Research business, we accelerated contract value growth, drove higher retention and improved sales productivity, which resulted in its best year ever. Heritage Chartered events had strong attendance, and while exhibitor sales were below our expectations, we have strong forward exhibitor bookings. Consulting 2017 revenues were below expectations, but we ended with a strong backlog there.
We acquired CB for the strong strategic benefits of extending our market to all functions across the enterprise and also to enable best of both operational approaches. The rapid closing, aggressive integration timeline, accelerated growth investments together with our initial operating results give us a high degree of confidence that we are well in the way to achieving our strategic objectives and delivering consistent double digit growth over the long term. We continue to get better, stronger, faster day after day, year after year. We've got today next Thursday, February 15th. We'll review our businesses in more detail and you'll come away with an even better understanding of our strategy and why we're so excited about our prospects for sustained double digit growth.
We look forward to seeing you there and on our earnings call next quarter. Thanks for joining us today.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.