Good morning, ladies and gentlemen, and welcome to Gartner's earnings conference call for the 1st quarter of 2017. A replay of this call will be available through June 4, 2017. This call is being simultaneously webcast and will be archived on Gartner's website at www.gartner.com for approximately 30 days. I will now turn the conference over to Sherief Bakr, Gartner's Group Vice President of Investor Relations for opening remarks and introductions. Please go ahead, sir.
Thank you, Dave, and good morning, everyone. Welcome to Gartner's first quarter 2017 earnings call. I'm Sherief Bakr, Head of Investor Relations at Gartner. With me today in Stamford is our Chief Executive Officer, Gene Hall, and our Chief Financial Officer, Craig Safian. This call will include a discussion of Q1 2017 financial results as disclosed in today's press release, as well as our updated outlook for 2017. After our prepared remarks, you'll have an opportunity to ask questions. In addition to today's press release, we have provided an accompanying presentation as a reference point for investors and analysts. Both the press release and the presentation are available on our website, investordotgartner.com. Before we begin, I'd like to remind you that 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 report, annual report on Form 10-K and quarterly reports on Form 10-Q, as well as other filings with the SEC. I would encourage all of you to review these risk factors listed in these documents. With that, I would like to hand the call over to Gartner's Chief Executive Officer, Gene Hall. Gene?
Good morning, everyone. Thanks for joining us for our Q1 2017 earnings call. We had a great first quarter in 2017. The positive momentum we had in Q4 continued into Q1, and we continue to deliver incredible value to our clients. We once again delivered double-digit growth in revenues and contract value. In addition, we recently closed our acquisition of CEB, which I'll talk more about in a moment. I remain extremely excited about our business, our prospects for growth, and our strategy to drive long-term growth and value for our shareholders. We do business in more than 90 countries around the world. Because of ongoing currency fluctuations globally, we're gonna talk about our results in FX-neutral terms, so you can have a clear understanding of how we're doing. For the first quarter of 2017, total company revenues increased by 13% and EBITDA increased by 3%.
Research is the core of our business and our largest and most profitable segment. Research revenues grew 15% in the first quarter. These results were driven by strong contract value growth and contributions from our recent acquisitions. Contract value growth for the first quarter of 2017 was also 15%. We achieved a double-digit contract value growth in every region across every size company and in virtually every industry. Client retention was at 83%, and wallet retention was 104%, their all-time highs. In consulting, we continued to deepen our research relationships with our largest clients and deliver great value. For Q1 2017, our consulting business grew 2%. We grew the number of managing partners at 14%, consistent with our long-term growth plan, and we have full four months of backlog, which is in line with our operational targets.
Events drove a strong start to the year with 11% growth in the 1st quarter Of 2017. We hosted more than 9,000 attendees, which is also up 11% year-over-year on the same events basis. Leading indicators for our events are very positive. Advanced bookings continue to grow at strong rates. These results reflect strong demand for our services, the tremendous value we deliver, and the operational excellence we're known for. Operationally, we're the strongest we've ever been, and the CEB acquisition is a perfect example. After announcing our intent to acquire CEB in early January, we completed the acquisition on April 5th, 2017. This aggressive schedule was achieved through operational excellence while simultaneously delivering a very strong quarter in the Gartner business. The combination of Gartner and CEB will create tremendous value. This value will come from three main drivers.
First, CEB expands our ability to help executives deal with unprecedented levels of disruption and change in our rapidly evolving world. Secondly, the addition of CEB will allow us to help clients and functions across the enterprise. In every enterprise, mission-critical priorities are accomplished by teams. To help our clients with their mission-critical priorities, we need to be able to address functions across the business, not just in individual functional silos. CEB has traditionally been strong in areas such as HR, sales, finance, and legal. Gartner's traditionally been strong with IT, supply chain, and marketing. Our combined company will help enterprise-wide cross-functional teams address their mission-critical priorities. Finally, Gartner and CEB together will add more value and provide even more powerful insights than either company could have done alone. Gartner is world-class at analyst-driven research and advice. CEB is world-class at member-based research and best practice case studies.
The combination of member-based research and case studies with analyst-driven research and advice will deliver more value to our clients than what either company could do individually. It's a perfect case of the whole being greater than the sum of its parts. Now that we've owned CEB for about 1 month, I'm excited to report that we continue to be excited about the opportunity for strong value creation. Gartner and CEB associates are equally excited about the incredible opportunity this presents to have a positive impact on our clients' success. 2020 will be the third full year after acquisition. We continue to expect that by 2020, we'll achieve attractive double-digit growth for both the CEB and the Gartner businesses. In addition, as Craig will detail in a moment, this deal is immediately accretive in the first year, and we expect to be double-digit % accretive in 2018.
I'm confident about our future prospects for growth as a combined company, and remain excited about our near-term performance. With that, I'll hand the call over to Craig.
Thank you, Gene, and good morning, everyone. Because of the tremendous value we provide to our clients around the world, the investments we are making to capture our vast market opportunity, our focus on strong operational execution, and our exceptional business model, we delivered yet another quarter of double-digit year-on-year growth. On an FX-neutral basis, our year-over-year financial performance for the quarter included total company revenue growth of 13%, contract value of 15%, research revenue growth of 15%, events revenue growth of 11%, consulting revenue growth of 2%, adjusted EBITDA growth of 1%, and adjusted diluted EPS of $0.60 per share, which was towards the top end of our guidance range for the quarter. Our exceptional business model continues to create a consistently high level of free cash flow conversion.
On a rolling four-quarter basis, our free cash flow conversion was 126% of normalized net income. I'll now discuss our first quarter business segment and P&L in depth before turning to our balance sheet and cash flow dynamics. I'll then provide some high-level comments on CEB's first quarter performance before closing with remarks on our updated 2017 guidance, which includes the expected contribution of CEB for the balance of the year. We will be happy to take your questions. In addition to my comments, today's press release, and our 10-Q, I would encourage you to refer to the presentation posted on our investor relations website. The presentation provides an in-depth overview of our Q1 performance by business segment, covering some of the ground that I normally would cover in my prepared remarks.
Given that I will spend more time covering the CEB acquisition and our updated outlook, this should still allow sufficient time for your questions, as well as providing a useful reference point for investors and analysts. Beginning with research. Research revenue grew 15% on both a reported and FX neutral basis in the first quarter. Acquisitions had a 1-point impact on research revenue growth for the quarter. The gross contribution margin for research was 69%, a 1-point decline compared to the first quarter of 2016. Our other research business metrics also remain very strong, we continue to see robust demand for our services across the globe. Total contract value was $1.95 billion as of the end of Q1, FX neutral growth of 15% versus the prior year.
For reference and comparison, our Q1 2016 total contract value at current year FX rates was $1.7 billion. The Q1 2017 measure includes the contribution of L2, an industry-leading marketing company that benchmarks the digital performance of brands, which we acquired in March. Excluding L2, total contract value growth would have been 14% on an FX neutral basis, consistent with the 14% growth we delivered last quarter. We continue to drive contract value growth through strong retention rates and consistent growth in new business. As Gene mentioned, client retention was 83%, down 40 basis points from the first quarter of 2016, and essentially flat on a sequential basis. Wallet retention ended at 104% for the quarter, down by less than one point year on year and flat on a sequential basis.
Both of our retention figures are close to our historical highs. In Q1, we had an unusually large number of renewals impacted by M&A. Had we experienced a normal level of renewals impacted by M&A, we would have seen an improvement in our retention metrics in Q1. As we look to the balance of the year, we anticipate a more normal level of this type of activity. New business growth remains strong, up 13% year-on-year in Q1. The new business mix is consistent with prior quarters and remains balanced between new clients and sales of additional services and upgrades to existing clients. As always, we also benefit from our consistent price increases. Our new business growth reflects our success in penetrating our vast market opportunity with both new and existing client enterprises.
We ended the first quarter with 11,166 enterprise clients, up 7% compared to Q1 2016. The average spend per enterprise also continues to grow. It now stands at $175,000 per enterprise, up 8% versus prior year on an FX neutral basis. This increase in average spend reflects our ability to drive CV growth through both new and existing enterprises. Turning to sales productivity. Over the rolling four quarters, we delivered $256 million of FX neutral net contract value increase.
When divided by our beginning-of-period headcount, which was our Q1 2016 ending headcount of 2,237, our rolling four-quarter productivity per account executive was $114,000, an increase of 8% year-on-year and 9% sequentially. Excluding the impact of the L2 acquisition, and therefore making the metric directly comparable to the Q4 calculation, sales productivity was essentially flat on both a year-on-year and sequential basis. Q1 productivity was also impacted by the uptick in renewals with M&A that I referenced earlier. With a more normal level of M&A, we would have seen a sequential and year-on-year improvement in our productivity measures. As always, we remain highly focused on improving our sales productivity and remain confident that the initiatives we have implemented to drive productivity will positively impact our results over both the short and long term.
To sum up, it was another strong quarter for our largest and most profitable segment. As you will see from our updated outlook, we continue to target another year of mid-teens growth. Moving to Events. Events revenues were up 11% on an FX-neutral basis in Q1. On a same event and FX-neutral basis, Events revenues increased by 6% year-on-year in the first quarter. Q1 is typically a smaller quarter for our Events business, and we held 11 events in Q1, 1 less than in the prior year quarter. On a same events basis, attendees were up 11% versus last year. Events Q1 gross contribution margin was 38%, down by approximately 200 basis points compared to the first quarter of 2016. This was primarily due to higher year-on-year investments to support our growth strategy in a seasonally light quarter.
In summary, we had a strong Q1 in our Events business. Our outlook remains unchanged. We still expect double-digit revenue growth on a constant currency basis for the full year. Turning to Consulting. On an as-reported basis, first quarter Consulting revenues were flat year-on-year and increased by 2% on an FX-neutral basis coming off a very strong Q1 last year. On the labor-based side, billable headcount of 650 was up 5%, and we had 125 managing partners at the end of Q1, a 14% increase over the year-ago quarter. Backlog, the key leading indicator of future revenue growth for our Consulting business, ended the quarter at $103 million, down 9% year-on-year on an FX-neutral basis.
As we noted last quarter, our Consulting backlog benefited in 2015 and the early part of 2016 from a very large contract booking in a non-target geography, which was a significant driver of backlog improvement in Q1 2016. Excluding this one large contract, Consulting backlog decreased by 4% year-on-year. This represents approximately four months of forward backlog, which is in line with our operational targets for this measure. Consulting gross contribution margin declined by 140 basis points year-on-year, primarily due to a modestly lower utilization, but was up strongly on a sequential basis. For the full year, we continue to target Consulting revenues growth of 2%-7% on an FX-neutral basis, in line with our long-term growth target range of 3%-8%. Moving down the income statement.
SG&A increased by 18% year-over-year in the first quarter. In normalized terms, our SG&A increased by 16% year-over-year. As we detailed on our Q1 2016 call, our Q1 results were positively impacted by lower stock compensation expense related to changes to the executive team. This resulted in approximately $5 million of SG&A savings in Q1 2016. That was a non-recurring benefit. In addition, the phasing of our SG&A investments for 2016 were more back-end loaded, making our Q1 2017 compare a bit tougher. Staying with SG&A, our sales force continues to be our largest investment, and as of the end of the first quarter, we had 2,460 quota-bearing sales associates. This is an increase of 223 or 10% from a year ago.
This is lower than our base level assumption for the full year, primarily due to the timing of our training academies. On a normalized basis, our quota-bearing sales growth was around 11.5%, and we continue to plan for approximately 13% sales headcount growth in 2017. Moving on to EBITDA and earnings. Adjusted EBITDA was $106 million in the first quarter, meeting our Q1 EBITDA expectation. Adjusted EBITDA was up 3% year-over-year on a reported basis and up 1% on an FX-neutral basis, as top line growth was partially offset by the higher SG&A spend I just referenced. Moving down the income statement. Depreciation charges increased year-over-year in the quarter, reflecting capital spending to support our growth, while acquisition and integration charges increased by almost $5 million.
Depreciation charges increased year-over-year in the quarter reflecting capital spending, while acquisition and integration charges increased by almost $5 million, primarily related to the CEB acquisition and to a lesser extent, L2. Sorry about that. Our GAAP tax rate for the quarter was 24.9%, which is approximately 1 point lower than the guidance of approximately 26% we gave 3 months ago. The tax rate was lower than guidance in large part due to a projected favorable impact of earnings mix and the timing of certain costs. Adjusting for acquisition charges, our normalized tax rate for the quarter was 25.7% and is also lower than our previously issued guidance of approximately 27% for largely similar reasons to the reduction in the GAAP rate. GAAP diluted earnings per share was $0.43 in the first quarter.
Our GAAP EPS figure also includes $0.17 worth of acquisition and integration charges, approximately $0.04 higher than we had guided. The higher charges were due to the rapid closing of both of our announced acquisitions. Adjusted EPS was $0.60 per share in Q1, down 10% versus Q1 2016. As mentioned earlier, our adjusted EPS was towards the higher end of our Q1 guidance, so we are right where we targeted to be coming out of Q1. The year-on-year growth rate was obviously impacted by our Q1 2016 adjusted EPS, which as you may recall, was up 65% last year. Turning now to cash. In Q1, operating cash flow was an outflow of $30 million compared to a $13 million inflow in the year ago quarter.
The first quarter is seasonally the lightest quarter for the year in terms of cash flow, given the combination of seasonality in our operations as well as the timing of incentive payments. We announced the CEB deal during the first week of January. It's normal for clients to pause their purchasing cycles when there is M&A amongst their vendors, as they look to see if there are any benefits they can extract. That's what we advise our clients to do in many similar situations. Our new business bookings accelerated over the course of the first quarter, culminating in an exceptionally strong March. Some of the cash that we normally would have collected in Q1 will now be collected in Q2. This impacted our Q1 cash flow figures.
Q1 2017 capital expenditures were $11 million, and Q1 cash acquisition and integration payments were $18 million. This yields free cash outflow of $23 million. This compares to Q1 2016 free cash flow of $18 million. The year-on-year change is primarily driven by the timing of contract value growth in the quarter and the related collections, as I just described, higher incentive payments, higher CapEx, and higher acquisition and integration payments. Turning to the balance sheet. We had a busy quarter related to the CEB acquisition, successfully securing an attractive financing package, which I'll detail a bit later. Given that the acquisition closed just after the end of Q1, I will focus my comments on our post-closing balance sheet rather than the March 31st snapshot.
Relative to the $703 million of gross debt we had at the end of 2016, our gross debt increased by approximately $2.9 billion related to the acquisitions of CEB and L2. In total, we had approximately $3.6 billion of gross debt as of the 5th of April, comprising of the following. $1.485 billion of Term Loan A, $500 million of Term Loan B, $545 million drawn on our revolver, $800 million of high-yield bonds, and $300 million of bridge financing. Slide 11 of the presentation on the investor relations site details our debt schedule and the respective interest rates.
In addition to the new debt instruments, we have also increased the amount of interest rate swaps to lock in the inter-interest rates of a significant portion of our floating debt. In total, we have $1.4 billion of hedges in place. Adding in the $800 million of high-yield bonds, more than 60% of our gross debt has a fixed interest rate. At the time of the announcement of the CEB acquisition in early January, I noted that we expected the average interest rate to be between 4.25% and 5%. Due to a more favorable mix of lower priced debt and better pricing on all debt tranches, our weighted average interest rate, including the cost of hedging, is approximately 4%.
From a net debt perspective, we had approximately $3 billion of net debt upon closing, consistent with what we expected in January, which translates to approximately 4.3 times leverage on a pro forma combined last 12 months of adjusted EBITDA. Turning now to some high-level comments on CEB's Q1 performance. As we didn't own CEB until early Q2, the following results are what CEB would have reported as an independent company for the first quarter of 2017. CEB would have reported total adjusted revenues of $214 million and adjusted EBITDA of $36 million. Using CEB's methodology, constant currency CEB segment contract value growth was down about 1% year-over-year, while constant currency CEB segment wallet retention was 89%, flat year-on-year, but up by more than 1 point sequentially.
As with any large acquisition, we are in the process of harmonizing accounting treatments, calculation methodologies, and purchase accounting. We'll report back to you any changes or adjustments on our Q2 earnings call in August. Turning to guidance. Slide 15 of the presentation gives you our high-level outlook for 2017 based on 12 months of Gartner plus 9 months of contribution from CEB. In addition, the slides detail the most significant below-the-line items to help you with your model. As is our practice, our EPS guidance is on both a GAAP and adjusted basis. However, given that the CEB transaction closed only 1 month ago, please note that our GAAP estimates are likely to be subject to change as we complete purchase accounting and further refine our estimates for other GAAP-related expenses.
We will also be providing you with guidance for both GAAP revenue and adjusted revenue. The only difference is a deferred revenue fair value adjustment as required as a part of purchase accounting for business combinations. Gartner's revenue guidance is largely unchanged. We've adjusted up research revenues modestly to reflect the L2 acquisition. For CEB, we expect GAAP revenues of between $519 million and $549 million for the 9 months of 2017. Excluding the estimated deferred revenue fair value adjustment of $209 million, we expect adjusted revenues of between $728 million and $758 million for the balance of the year. In addition, we expect adjusted EBITDA between $190 million and $205 million.
This equates to a combined company adjusted revenue range of $3.4 billion-$3.5 billion and an adjusted EBITDA range of $685 million-$735 million for 2017. I'd remind you that these figures are for 9 months of CEB results. To arrive at the relevant full year adjusted revenue and EBITDA figures for 2017, you can just add the 1st quarter performance numbers that CEB would have reported, which I detailed earlier. On a GAAP basis, our 2017 earnings per share is expected to be significantly impacted by acquisition-related accounting and integration charges, of which the vast majority are non-cash in nature. Slide 16 of the presentation reconciles the per share differences between our updated GAAP and adjusted EPS guidance ranges.
The after-tax impact of acquisition and integration adjustments, such as the fair value deferred revenue adjustment and incremental amortization and integration charges, totals approximately $4.42 per share at the midpoint and is detailed on slide 16 as well. Putting this all together, we expect adjusted EPS of between $3.32 and $3.60 per share. When compared to our previous standalone adjusted EPS guidance range of $3.15 to $3.35 per share, this represents between 5% and 7% accretion for 2017. While it's too early to provide specific 2018 guidance, we continue to target double-digit accretion for our adjusted EPS. Slide 22 details the key assumptions below EBITDA that we have used to calculate our updated adjusted EPS outlook.
We expect the total cost associated with stock-based compensation expense in 2017 to be approximately $67 million-$68 million. Total depreciation should be approximately $69 million-$70 million, and amortization should be approximately $196 million, inclusive of the amortization of acquired intangible assets. In addition, net interest expense is expected to be approximately $112 million, which includes approximately $90 million of incremental expense for the balance of the year. For our tax rate, we are projecting an annual effective rate for GAAP of approximately 33%-34% and for adjusted earnings of approximately 32%-33%. Please note that our full year GAAP actual tax rate may also change based upon final purchase accounting.
Our tax rate may also vary from quarter to quarter due to the projected geographic mix of earnings, the impact of ASU 2016-09 related to stock-based awards, as well as the timing of certain items. Finally, our EPS guidance is based on a weighted average fully diluted share count of approximately 89.5 to 90.5 million shares for the full year of 2017. This incorporates the additional 7.4 million shares issued in conjunction with the transaction. The 89.5 to 90.5 million share estimate is a weighted average fully diluted share count, which has 1 quarter pre-acquisition and 3 quarters post-acquisition. We'd expect to exit 2017 with approximately 92 million shares outstanding. Turning to our cash flow guidance.
Similar to GAAP EPS, our 2017 operating cash flow is expected to be significantly impacted by charges related to the CEB acquisition as well as incremental interest expense. The details and components of our cash flow guidance are also contained on slide 15. For free cash flow, we now expect to generate between $335 million and $365 million in 2017. Free cash flow is based on operating cash flow guidance of $315 million-$345 million, capital expenditures of $95 million-$105 million, and cash acquisition and integration payments of $115 million-$125 million. Again, this is assuming 12 months of Gartner and 9 months of CEB.
This also obviously has the impact of significantly higher cash acquisition charges and interest expense payments. It is worth noting that CEB's strongest free cash flow quarter has historically been Q1. This was true in 2017 as well. What you see in our combined free cash flow guidance reflects 12 months of Gartner and 9 months of CEB, but excluding CEB's strongest quarter. If we looked at free cash flow on a pro forma combined 12-month basis, we estimate that the guidance range would be $415 million-$445 million, an adjusted net income to free cash flow conversion rate of approximately 140%.
While the timing of the deal has impacted the 2017 cash flow guidance, we did acquire a larger cash balance than we anticipated, which we are able to utilize for our strategic initiative. Turning to our Q2 guidance. For the second quarter of 2017, we expect GAAP EPS of between negative $1.12 and negative $1.04. This includes approximately $1.91 per share of non-GAAP adjustments. On an adjusted basis, we expect adjusted EPS of between $0.80 and $0.85 for the second quarter of 2017. In closing, we had a strong start to the year, and we expect this performance to continue throughout the balance of 2017. Our research business delivered another quarter of mid-teens growth and contract value growth was 15%.
Our events business is back on track to deliver double-digit growth in 2017. Consulting delivered another quarter of growth following a very strong year-ago quarter. From a standalone Gartner perspective, our 2017 revenue and adjusted EBITDA outlook is largely unchanged. We expect to continue our trend of double-digit growth. The addition of CEB further strengthens our ability to capture the vast market opportunity ahead of us, as we are now able to address the mission-critical priorities of virtually all functional business leaders across every industry and size of enterprise worldwide. On an adjusted basis, the acquisition of CEB is expected to be immediately accretive, with between 5% and 7% accretion in 2017.
We also continue to expect double-digit % adjusted EPS accretion in 2018 and remain confident in our ability to generate long-term double-digit growth with strong free cash flow conversion. I'll now turn the call back over to the operator, and we'll be happy to take your questions. Operator?
Thank you. Ladies and gentlemen, please limit yourself to one question and then rejoin the queue should you have a follow-up. If you wish to ask a question, please press star followed by one on your telephone. If your question has been answered or you wish to withdraw your question, press star followed by two. Press star one to begin, and please stand by for your first question. This comes from the line of Anjelo Singh at CSG. Please go ahead.
Hi. Good morning. Thanks for taking my questions, and congrats on closing the deal. For the first question, I'm just hoping you can discuss some of the assumptions underlying your projections of CEB. It seems like you're not baking in too much of an improvement in revenue versus say where consensus was, perhaps a little lighter on EBITDA. It would just be helpful to get some context of how you're thinking about the changes you may be making under the hood this year.
Hi, good morning. It's Gene. With CEB, for, you know, we closed the deal about a month ago. During 2017, what we'll be focused on is making operational improvements that are gonna accelerate growth in 2018 and beyond. I think that's kind of what you can expect for our basic plan. Those operational improvements are things like new seat-based products that combine the best of both research that I talked about earlier. Things like accelerating sales force growth, things like integrating service processes, or sorry, improving service processes to strengthen retention, and of course, integrating our back-office processes, like how people get paid and things like that, the basic of business. 2017 is really gonna be focused on building the foundation we need for accelerated growth in 2018 and beyond.
Anj, you know, as you know, a large portion of CEB's revenues are subscription-related. The revenue, you know, in a sense, it doesn't get locked, but it gets close to locked based on where they finish 2016. 2017 is really a transition year, is the way to think about it. As Gene mentioned, we're laying all the groundwork so that we can accelerate growth in years beyond. We, you know, we won't be satisfied if we don't see operational improvements over the course of the year. Given the revenue recognition nature, we'll probably see those benefits flow through in 2018 and beyond.
Understood. That's helpful. As a follow-up, with regards to standalone Gartner, could you speak to the selling environment as it relates to the productivity? Is it having any dampening impact that you would call out? Perhaps if you can just give a sense of what the improvement in productivity may have been if you had to adjust for that M&A impact. I may have missed it, but what is your expectation for how long the M&A activity may impact from your KPI?
Yeah. The selling environment has been, I'd say, the same over the last couple of quarters. We've seen very robust demand for our products. As we mentioned last year, we saw an acceleration in Q4 in demand for our products. That's continued into Q1. You know, contracts come up for renewal based on when the client originally bought. Companies do get acquired. This happens all the time for us. It's normal. It just happened that an unusually large number of contracts came up for renewal where there were large M&A. I'm not gonna name the companies, but it's names you would know, so that came up for renewal. You know, so we have visibility of these. As we look to the rest of the year, we don't see that happening.
To the point that Craig, Mr. Lynch, you mentioned, you know, our sales all of our key metrics would have been up modestly if we had had a normal quarter for M&A.
Okay. Thank you.
Thank you. The next question is from the line of Gary Bisbee at RBC Capital Markets. Please go ahead.
Hey, guys. Good morning. I wanted to ask about two of the strategies that you've, you know, talked about in terms of how you can improve the operations at CEB. First of all, on the client engagement and retention process that you've used, you know, what's a realistic timeline as to when or how quickly you can implement some of those processes and how you think about, you know, when that might actually show up in their numbers. The second one, as part of that, you know, Gene, I think one of the critical decisions you made in your early years in Gartner was to move the company forcefully to the seat license model. Is that an opportunity throughout big portions of CEB's business in the next couple of years?
Is the business different enough that just maybe more no discounting is the way we should think about the price discipline you can implement here? Thank you.
On the client engagement and retention, you know, we have developed a set of automated tools as well as people-based approaches designed to strengthen retention. As we look at CEB, you know, we've done analysis that helps us understand the impact those can have, and it'll have the exact same impact with Gartner as we look at those. We're gonna be not implementing those tools in a big bang, but in an iterative process over a period of time that we've already started with. This process has started, and we'll keep doing that. As such, you know, I'd say you can start, and then you implement the tools, and then the renewal has to come up. The clients that we're gonna be affecting, their renewals are gonna come up next year.
They're not gonna come up this year. You can sort of see we'll be making the improvements in engagement now. Those tools and new people processes will be implemented over time, but you'll start to see the impact as we get renewals really in 2018 and beyond. With regard to the seat model, it's our intention to introduce, as I mentioned in my comments, a whole set of new products that are seat-based. Over a period of time, we expect that all of CEB's product line for new clients will be transitioned to a seat-based product. The first of those seat-based products is due to be introduced, again, for new clients in midsummer.
Then we will again, on an iterative basis, keep upgrading all of their products to be seat-based products, which we think add more value to clients than kind of an enterprise kind of product. You'll see those products, especially, like I said, first for new clients, and then we're gonna go back to these products will be better than the existing products because it'll have kind of the best of both those CEB and Gartner. That'll be the only thing new clients will be able to buy. We will also, we did this with Gartner as well, go back to existing clients and say, "Hey, you can keep the old product if you really like it, but we have this new product that has additional more value to it.
If you want to upgrade, you can upgrade to that, and it'll have the new terms. You know, it won't be discounted. The pricing, it'll be seat-based, et cetera. Given what I just said, both the client engagement improvement as well as the transition to the new seat-based products with the best of both research will start, you know, this summer and will continue on. You'll see the impact over time, really beginning and throughout 2018.
Thank you very much.
Thank you. The next question is from the line of Timothy McHugh at William Blair. Please go ahead.
Yes, thanks. Just on CEB again, two questions, I guess. One is can you give us some comments on turnover and I guess how, you know, is there any noise that's been created in that regard kinda since the merger or leading up to the merger to the best you can tell? Secondly, just Craig, maybe on the EBITDA, I guess, for Q1, it would seem to be down quite a bit for CEB versus what they at least reported last year. I don't know if it's comparable or not, but can you give any color on that? Thanks.
Kevin, it's Gene. Were you talking about associate turnover?
Well, all levels I guess, other than planned kinda cost synergies, retention of.
As opposed to clients.
Yes. Yeah, no, internal staff. Yes.
Internal staff turnover at CEB is substantially higher than Gartner's has been, you know, before the acquisition was announced. It hasn't accelerated since then, one of our objectives is to get that turnover to Gartner levels. As I mentioned in my comments, you know, the associates at CEB overall are extremely excited about joining Gartner. You know, it's a growth company. They know the brand. They know the company really well. It's not something they don't know. We have a great reputation in the market, you know, in the marketplace for hiring, et cetera.
Then on top of that, you know, since we closed the deal, and even before, we've been going out and making sure that all the associates at CEB understand this is about growth and turning CEB into an exciting growth company, which will provide great career opportunities for all of the CEB associates. That message is getting out there. While, you know, one of the things that happens when you have an acquisition is recruiters go after the associates of the company being acquired, telling them all the bad stuff that's gonna happen. I think so far we've been very successful in fighting that. I would expect that as we go into, again, 2018, we'll see that associate turnover drop down to more like Gartner levels.
Thanks, Gene. Tim, on the Q1 performance question, I'd note a couple of things. Number 1, it's a pretty light quarter from a revenue perspective. You know, you have situations like Evanta, which is a double impact, so really no revenues in Q1, but their expense base is there. Also last year, the acquisition of Evanta didn't happen until Q2, so we've got the grow-over problem of expenses that weren't in there last year, plus the revenue doesn't really start coming in until Q2. There's also, as you can probably see from the revenue, a decline year-over-year on revenues of about $9 million.
That's also flowing through, that's really based upon the contract value performance that you saw over the course of 2016 now feathering into the revenue recognition. Lastly, they did a little bit of harmonization with our expense approval methodologies, and that also had an impact on profitability. You know, what I'd say is they landed where we expected them to land in the first quarter. The other thing I'd say is operationally, you know, it was encouraging to see sequential improvement, albeit modest, but sequential improvement in wallet retention on that core CEB segment CV.
Okay. Thank you.
Thanks. The next question is from the line of Manav Patnaik at Barclays. Please go ahead.
Thank you. Good morning, gentlemen, congrats on closing the deal as well. My first question was, you know, Gene, you talked about all those retention tools you're gonna put in place, you also talked about how the strategic value, you know, gives you those synergies across the enterprise functions, providing change insight, et cetera. I guess what I'm trying to get at is you guys have always been good at the wallet retention metric. Does the combination potentially help improve, you know, that client retention that, you know, has been 83%-84%, you know, which feels like should be a lot higher?
Yes. I think, yes, it will improve. You know, again, over time, it will improve our client retention. The reason is that, again, we'll be in more functions in each of the businesses. If you're, you know, companies, enterprises get things done by teams, across functional teams. If you can help across those teams, that's gonna give you higher client retention. The other thing I'd just mention too, though, to keep in mind is our client retention, you know, you know, there's a couple things that affect client retention that are kind of structural. One is, there's a, you know, we count a big company and a little company with client retention the same. Gene's Pizza Parlor and ExxonMobil are both counted as one enterprise.
The smaller companies like Gene's Pizza Parlor go out of business a lot more. There's a portion, we've talked about this in the past, there's a portion of our client retention, which is the Gene's Pizza Parlors of the world, the smaller companies that are going out of business. The second thing is M&A. If Exxon buys Mobil, we lose 1 enterprise there. Well, and, you know, and there may be an impact on us in terms of our, of our contract value, but we definitely lose an enterprise in those terms. If you look at M&A and out of business, the M&A across all size companies, and there's a lot of it in the economy, and then out of business, there's a lot of small enterprises that go out of business.
That's kind of the biggest part of our, of the clients we lose. Those are things that are kind of just a structural part of the market.
Okay. Thank you.
Again, and Manav, you know.
Yes.
That's why the wallet retention measure is so important because, again, it's putting a dollar value on those clients as opposed to, you know, the client retention where Gene's Pizza Parlor is created equal to the ExxonMobils of this world. It points to us retaining higher spending clients at a better rate, and it also points to those clients that stay with us spending more and more each and every year. You know, again, that's why we give both measures. They're both important measures. Again, we're not satisfied at 83% or 84%.
We do think there's, you know, a little bit of room for improvement there, but there are the structural things Gene mentioned, which, you know, are there and we'll have to deal with, for forever.
Okay. The new products that you talked about, Gene, I guess, you know, maybe it's a little quicker than we expected, but that's good to hear. Is that new product which you said, I guess, the best of IT and CEB, that's gonna be targeted just to the CEB clients? Maybe just some more color then, you know, what, like, how many products and so forth we should be expecting.
You can think about the new products in having two big differences from CEB's products today. One is it'll be seat-based rather than an enterprise license, so it's for the use of a specific individual. The second thing is it'll have more research content, that provides more value. The third thing is that it will be combined, not just more content, but also, as I mentioned, the type of content that CEB had and the type of content Gartner had, which are highly complementary. Clients love both of those. We're gonna have these new products that will provide a lot more value because you've got both it's seat-based, so it's for that individual user, and it's got this incredible additional content.
As I mentioned before, we're gonna have a new product for each of the areas of CEB's business. Think about, you know, they were in areas like finance, sales, HR, et cetera. We will introduce new products in each of those areas, you know, in a not all at once. We're gonna do, you know, as I mentioned, the first one we'll be introducing will be in the summertime frame, this summer timeframe. We expect to follow others. You think of others meaning like 1 of those roles will go first, then another role, then another role, then another role over time. We're, you know, planning to get all of the new products introduced, you know, think about over a 12-month period.
Okay.
once introduced, that's what we'll be selling.
Got it. Just one last clarification question for Craig. The 2017 guidance and the double-digit accretion that you expect in 2018, does that include or not or exclude, you know, the $50 million of cost synergies that you talked about prior?
Manav, consistent with what we talked about, when we, when we did the announcement, the 2018 is exclusive of cost synergies. Again, the target that we've talked about, you know, ranging up to $50 million, you know, we're working very diligently to be in a place where we can harvest as much of that in 2018. That said, given when contracts run through or the timing of, you know, when we can reduce or eliminate certain costs, may roll into 2018. Think of that more on a run rate basis or an annualized basis, as opposed to all coming through in 2018. That said, we're gonna, you know, do our best to harvest as much of that as possible in 2018.
All right. Thanks a lot, guys.
As a reminder, ladies and gentlemen, please limit yourself to one question and then rejoin the queue if you have a follow-up. Your next question comes from the line of Jeffrey Meuler at Baird. Please go ahead.
Yeah, thanks. Gene, any more short thoughts that you're willing to share at this point in terms of how you're planning to structure and combine the sales forces and facilitate cross sales across the non-overlapping client base?
we're gonna structure the sales force in a very similar way to what we had or the way Gartner had been structured. As you know, you know, we sold to different client segments. Our biggest segment was being like CIOs and IT departments. We also though sold to Chief Supply Chain Officers and their teams, as well as Chief Marketing Officers and their teams. Those, you know, for each of those areas, we had a dedicated sales force, really. You can think about a sales force that sold to CIOs and their teams, a different sales force. Part of our overall global sales force with a different dedicated team selling to, you know, Marketing Leaders and different teams selling to Supply Chain Leaders. CEB actually followed a very similar approach, and we're gonna continue that.
You can think about the structure as being, there will be within our global sales force, there will be teams focused, on each of the functional areas of the business: IT, marketing, supply chain, HR, finance, sales, product development, et cetera.
Okay. The facilitation of non-overlapping clients cross-sales?
You know, we've had this opportunity for us before, and basically, we have a sales force set up so that if there's two Gartner salespeople in the account, you know, one selling to the CIO, one selling to the chief supply chain officer, which again, we have today, we encourage and, you know, train our salespeople to help each other out because, you know, I help you today and then someone else helps me tomorrow. They all kind of get that and wanna collaborate in the accounts. That's for all accounts. For larger accounts, we have a more senior salesperson that would coordinate sales across the account. That's what we've already been doing. We've been doing that historically.
Jeff, just to add to that. The way we think about it is, you know, the best way for us to drive growth and penetrate accounts is for the people who specialize in selling IT, supply chain, HR, whatever it might be, to actually go do that and talk to, you know, the HR professionals, supply chain professionals, marketing professionals, kind of direct. You know, there is coordination as Gene talked about, but again, the way we drive productivity and the way we drive growth is by actually having those salespeople specialize in those functions, going after those functions.
Yeah, yeah. Just add 1 more piece to that. The way to think about it is not so much that the IT person refers you to the supply chain person, but it's more if you understand what the most important mission-critical priorities are that the IT person is working on, you know, if it's a corporate mission-critical priority, which that's what we wanna be helping on, it's not just the IT department that's working on that. The people in finance are, the people in HR, the people in sales are, the people in HR are. We have a very good process for making sure that whatever salespeople are calling on an individual enterprise, When we learn about what their, what the enterprise's mission-critical priorities are, each of the salespeople understands that.
To Craig's point then, they can apply that in their functional discipline, whether it be marketing, HR, finance, et cetera.
Okay. Thank you.
Thank you. The next question is from the line of Toni Sacconaghi at Morgan Stanley. Go ahead, please.
Hi. Craig, you mentioned strengthening bookings trends throughout the quarter in your prepared remarks. I'm wondering if that strength carried over into the first few weeks of the second quarter, and whether relatedly you would expect to see an acceleration in organic constant currency CEB growth in the second quarter.
Hey, Patrick. Yeah. We did see an acceleration, you know, from January to February and from February to March. Again, part of that we attribute to some of the announcement noise, as clients looked to see if there was something to be gained from waiting. When they found out that there wasn't, you know, they went ahead and bought. You know, we obviously can't comment on Q2. You know, we're obviously a couple days into May. We're in the process of closing our books for April. You know, again, what we feel good about is we've had, you know, really strong performance, you know, Q3, Q4 into Q1, and we expect that to continue.
Thank you.
Thank you. The next question is from the line of Peter Appert at Piper Jaffray. Please proceed.
Thank you. Good morning. Gene, the growth in the sales force, you've dialed it back a little bit in the last year or so from the pace of, you know, the prior several years. This is for the obviously-core Gartner business. Can you just talk about your thought process around that? Might that have positive implications from a margin perspective? Because it is translating into a little bit of improvement, it seems, in sales productivity.
Peter, you know, we remain committed to having double-digit growth in our sales force. You know, from time to time, there's things that affect how fast it shows. As Craig said, this particular quarter, 2 things happened. 1 is we had a particularly large growth into 1 of last year. Secondly, there was a bit of a timing. You know, we train our sales people in classes. It happens that, you know, the people that graduate in 2016, they graduated earlier than those people graduating in 2017, flows into Q2 as opposed to Q1. That made it look a little lower than it is. We're still committed to the kind of double-digit sales force growth we've had historically.
Yeah. It's still below the sort of the 15%-ish number you've been doing. It feels like it's at its lower pace.
You know, Peter, as I said before, as you've heard me say before, the way that we develop, we target, you know, growth in that kind of time, in that kind of range. What we actually deliver is based on looking, you know, as you know, we develop our sales territories bottoms up based on what each individual manager, sales manager has the ability to manage. At any given point in time, we have some sales leaders that can add a lot more people, and we have other sales leaders, perhaps they're new to the role, and they need a little more time to get their feet on the ground, can't grow quite as quickly.
The number we end up with, if you equalize for timing, like we had this quarter, the number we wind up with, whether it's 13, 17, whatever, is basically given by the bottoms-up readiness for individual managers to take additional growth. That's why we don't forecast a specific number. We look at what the ability of the individual managers are, but we're confident it's gonna be in that kind of double digit range.
Peter, you know, we also, as we've talked about, you know, we go faster in places where we have the management capability to handle and very strong productivity, and we obviously slow down in areas that may be impacted by macro things and have lower productivity. For example, you know, about a year and a half ago, we talked about challenges in Brazil, challenges in oil and gas. We were not growing the sales force in those areas when we were having those challenges. Now that we've come out of those and, you know, oil and gas or the energy and utility sector rather, you know, is back growing at double digit rates, you know, we're now growing in that sector again.
It is a bottoms up approach as Gene talked about, and we also, you know, tap the brakes or press on the gas pedal depending on the market situations that we're selling into as well.
What we said for this year was we had on that bottoms up view, we expected around 13% headcount growth. If we do see productivity improving or if we see we can go faster in places, that may go up. If we see challenges, we may pump the brakes on it.
Okay. Understood. Thank you.
Thank you. The next question comes from the line of Bill Warmington at Wells Fargo. Go ahead, please.
Good morning, everyone. A question for you on consulting. You'd mentioned the backlog being down against a tough comp. I wanted to ask when you expect the year-over-year growth to turn positive again there, and also if you could talk about some of the opportunities for synergies there with CEB.
I'll start with the consulting center, the synergies with CEB. You know, our, the way our consulting business works today is it is focused in the IT part of our business, not in marketing and not in supply chain. As you know, it is, helps large clients that want more time, more help from Gartner than they can get from our typical half-hour analyst call. We've not instituted consulting in marketing or supply chain, and, you know, we don't at this point have a plan to do that in any of the CEB functions as well. The primary way there would be some synergy would be things like lead referrals, things like that, as opposed to being an extension of functions like HR, et cetera, like we do in IT traditionally.
Hey, Bill. It's Craig. On the backlog question, your observation is right around the grow-over problem. You know, the way to think about the backlog on a go-forward basis, again, we target having about four months of forward-looking backlog, and we generally feel pretty positive when we have that amount of backlog ready to go. Also remember that we are, you know, booking and burning within a quarter. You know, we may book something in January and actually start working it off in February and March. It doesn't show up in the backlog number at the end of the quarter or a reduced amount shows up in the backlog number at the end of the quarter, but we're actually working and generating revenue and profitability in the quarter.
There's a combination of, you know, wanting to have that 4-month, forward target, which we have, and also there is a fair amount of book and burn, within a quarter as well.
I'd also add one last thing to that, which is we don't really want 6 months of backlog because when the backlog gets too big for our kind of business, clients then, you know, we're not working on their project, and they're unhappy because we have to delay the start of the project. You don't wanna have 2 months of backlog, but we also don't want to have 6 months. 4 months is, you know, again, for our type of consulting business, allows us to meet what, you know, a start time and a work pace that our clients are happy with.
Sometimes it gets a little higher because we might have a little bit larger contracts, whatever, sometimes a little lower, but that four months is what we're really targeting.
Got it. Thank you very much.
Thank you. The next question is from the line of Jeffrey Silber at BMO Capital Markets. Go ahead, please.
Thanks so much. Wanted to focus on the operating cash flow guidance. I know you mentioned a number of issues in terms of, you know, CEB's first quarter doesn't count in the guidance and the fact that you're adding interest expense. On a standalone Gartner basis, did you update or is there any impact to operating cash flow guidance?
Yeah. Hey, hey, Jeff, it's Craig Safian. You know, in essence, if you actually could do a standalone Gartner cash flow, we would've been in the same range where we were. It's really difficult to do that given the interest expense, the timing of it, acquisition integration payments, et cetera, et cetera. On a standalone basis, the way we, you know, the way we thought about it is, as I mentioned, the prime driver of what we saw in Q1 was really the timing of our contract value growth, with more of it coming in March than in January and February. Again, collections that we had anticipated would've come in in the first quarter are actually now coming in in Q2. We'll get the benefit of that in Q2.
If we have timing as we've anticipated with April, May, and June, you know, we'll get back on track. That's the way we thought about the standalone guidance to the effect that we actually could do and model standalone Gartner cash flow guidance.
Okay. I understand that. Thank you for that. I know again, it's only been about a month since the acquisition, but are there any, you know, anecdotes you can share from clients in terms of how receptive they are post-acquisition?
Yeah, I mean, we've gotten a lot of input from clients both, we've spoken to directly or have sent messages to our sales force or in written communications. It has been much even more positive than I would've expected. We had a view that this would be very positive long term, but clients that had been buying CEB, we expected that they might have a little trepidation. Are we, is Gartner going to not deliver the same value? There's some reason they bought the CEB product. Actually it's been quite the opposite. The client reaction has been, the typical client reaction has been they totally get why this, they think it's a great thing to do and are looking forward to the product.
It's been, we expected good reception over time. It has been much more positive even than we'd expected.
All right. Thanks so much for the color.
Thank you. The next question is from the line of Joseph Foresi at Cantor Fitzgerald. Please go ahead.
Hi, guys. Thanks for taking our question. It's Mike Reed for Joe. Did you talk about, sorry, we're a little late to the call, about sort of the deleveraging process post the acquisition? Will that start immediately and kind of what that would look like?
Sure. Good morning, Mike. You know, the way we are thinking about it and modeling it, and it's consistent with what we talked about when we announced the acquisition, is that we are targeting to get down to around 3 times gross leverage over the next 24 to 36 months. You know, we feel given the free cash flow generation capabilities of the combined entity, that we'll be able to do that. You know, we will be looking to do some modest deleveraging over the next few quarters. You know, primarily or next, you know, 3 to 4 quarters, most notably taking out the bridge financing that's sitting on the balance sheet right now.
That will be modest, but I would expect the real delevering to start moving in earnest over the course of 2018 and through 2019. Again, within 24-36 months, we're targeting to get down to 3 times gross leverage.
Okay. Thanks for the detail on the timeline there.
Thank you. I would now like to turn the call back to Mr. Gene Hall for closing remarks.
Great. Thank you. As you heard today, we had a great, a very strong Q1, which we're very excited about the core Gartner business. In addition, we closed on CEB. We've now owned the business for about a month. That is going as planned, and we're thrilled with the opportunities before us there. Thanks for joining us today, and we look forward to updating you on our progress next quarter.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.