Good morning, ladies and gentlemen. Welcome to the Gartner investor conference call to discuss the acquisition of CAB. Please note that this event is being recorded. Simultaneously webcast and will be archived at investor. Gartner.com.
All participants will be in a listen only mode. Would now like to turn the conference over to Mr. Sherry Fakhra, Group Vice President, Investor Relations. Please go ahead, sir.
Thank you, Paula, and good morning, everyone. Welcome to Gartner's call to discuss the acquisition of CEB as disclosed in today's press release. With me today in Stanford is our Chief Executive Officer, Gene Hall and our Chief Financial Officer, Craig Safier. After our prepared remarks, you will have an opportunity to ask questions. I would like to remind everyone that the press release and slides accompanying today's call are available on our website at investor.gartner.com.
Now before we begin, I'd like to remind you that certain statements made on this call may constitute forward looking statements. Gartner's actual results in future periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Additional information regarding forward looking statements are detailed on Slide 2 of this webcast presentation. And with that, I'd like to hand the call over to our CEO, Jean Hall. Jean?
Thank you, everyone, and good morning. I'm excited to talk to you about our agreement to acquire CEB and how it's going to advance our strategy to drive long term growth and value for our shareholders. Turning to Slide 3, this transaction has multiple compelling shareholder value drivers. We'll take you through each one of them in detail, but in short, here's what you should take away from this announcement. First, this is a highly complimentary combination The Gartner brand is known for delivering independent objective insights through syndicated research and advisory products to all levels practice and talent management insights to executives in other functions such as HR, sales, finance, and legal.
Together, we create a leading global research and advisory company serving all the major functions in enterprise. In addition to being highly complementary this transaction is immediately accretive to Gartner's adjusted EPS and we expect it to be double digit percent accretive to our adjusted EPS in 2018. We're also targeting double digit contract value growth for CEB by the third full year after closing. We have a proven track record of success with our syndicated research model. And we have a highly experienced interior leadership team with significant breadth and depth.
As many of you know, we have a vast market opportunity. This deal significantly expands that already large opportunity, which further enhances our ability to drive long term growth. Finally, we expect the combined company earnings and free cash flow while maintaining a strong balance sheet and liquidity profile. Turning to Slide 4, Our mission is and has been to provide high value research and insights that address an enterprises mission critical priorities. We work on clients mission critical priorities.
The value we provide is tremendous, and our renewal rates are also very high. This is particularly true because the cost of our services is at least an order of magnitude less expensive than the alternatives. If you turn to Slide 5, you'll see that we are currently achieving our mission in 3 enterprise functions, IT, supply chain and marketing. Gartner's Foundation is an information technology. We've developed this business over time, both organically and through acquisitions such as Meta, Burton, the ideas international.
Other functional areas beyond IT can benefit from the syndicated research approach. And to address this opportunity, we added syndicated research products for supply chain and marketing. We acquired AMR in 2009, to provide the foundation for our supply chain business and just last year, we added supply chain SCM World. In 2013, we organically developed a syndicated research product line to address the mission critical priorities of marketing professionals. We did this without degrading margins.
Both our supply chain and marketing businesses have been highly successful with organic contract value growth rates exceeding 25% with economics similar to our IT business. Turning to Slide 6, We have enormous organic growth opportunities, but acquisitions have always been a core part of our strategy because they can be great way to accelerate growth in ensuring great strategic fit at the appropriate value. All of these acquisitions have been highly successful accelerating our growth rate and or expanding our market opportunity. Having demonstrated the value of providing syndicated research services to IT, supply chain, and marketing professionals, we recognize that other corporate functional areas can also get high value for this model. And this will provide another great growth opportunity for Gartner.
Turning to Slide 7, CEB has built a great business, delivering best practice and talent management insights. They have unique and highly valued expertise in areas of the enterprise we've not traditionally supported, such as HR, sales, finance, and legal. For more than 30 years, CEB has leveraged the world's strongest executive network, created a world class franchise that serves more than 10,000 global enterprises and over 21,000 executives worldwide. In addition to complementing the C level roles and functions that Gartner currently serves, CEP's business model customer CEB is known for their commitment to innovation and outstanding client service. Like Gartner, CEB also has a tremendous brand, great people and world class talents.
At Gartner, we're very familiar with CEB, having studied them closely for more than a decade. The CEP's clients rate their products and services very highly. For example, on slide 8, our summary results third party. Clients rate their products as high quality with high net promoter scores. They see strong and ongoing value from their subscriptions.
They value all components of the offerings and they tend to increase their usage over time. So like Gartner, CEB has great products that are incredibly highly valued by clients. Turning to Slide 9. When you combine the services for IT, supply chain and marketing provided by Gartner, together with CEB's expertise in human resources, sales, finance, and legal, the combined company will address the mission critical priorities businesses, as you can see on Slide 10. Gartner's analyst driven syndicated research services are complementary to CEB's best practices and talent management insights and together provide a comprehensive and differentiated suite of services.
Combining the functional areas covered by Gartner, those covered by CEB will allow us to address the mission critical priorities of virtually all functional leaders across the enterprise. Gartner's strength in serving companies of all sizes gives us the opportunity to expand CV's offerings beyond the current focus on track record of success and consistent double digit growth coupled with CEB's highly valued products and services enables us target double digit contract value growth for CEV by the 3rd full year after closing. Summarizing on Slide 11, the acquisition directly supports Gartner's growth strategy. CEB and Gartner are highly complimentary subscription based information services companies with strong cash flow conversion. Associates strong through the value to clients around the world.
Together, we create a leading global research and advisory company serving all major functions in the enterprise. I'll now turn the call over to Craig to take you through some of the additional details related to the transaction.
Thank you, Jean, and good morning, good afternoon to everyone on the call. This is a very exciting day for both Gartner and CEB and as Gene mentioned, are thrilled to be able to share our news with you today. I'll start on Slide 12, which puts a finer point on Jean's last comment and gives you a snapshot of what 2016 include $3,300,000,000 in adjusted revenue, $693,000,000 in adjusted EBITDA and $463,000,000 in free cash flow. This provides a very strong financial foundation to continue to capture our vast market opportunity. Let me briefly review We have entered into a $6,000,000,000 with an enterprise value of $3,300,000,000, including the assumption and refinancing of CED's existing net debt.
Under the terms of the agreement, CED shareholders will receive $54 in cash and 0 point 2284 shares of Gartner's common stock for each share of CEB common stock they own, implying a 70% cash and 30% stock mix for the offer. The total value of $77.25 per compared to the volume weighted average stock price of CEB over the past 30 days and a 25% premium compared to yesterday's closing price. This provides CED shareholders with immediate and substantial value, while enabling them to benefit from the upside and significant growth prospects of the combined company. Upon completion of this transaction, Gartner's shareholders will own approximately 91% of the combined company and CEB shareholders will own approximately 9%. The transaction has been unanimously approved by the boards of directors of both companies and is expected to close in the first half of twenty seventeen, subject to the approval of CEB shareholders, regulatory approvals, and other customary closing conditions.
In terms of financing the transaction, we plan to fund the issuance of approximately 8,000,000 Gartner shares, cash on hand debt from our existing credit facilities and additionally additional fully committed debt financing, which will ultimately include a new term loan B facility and new high yield notes. Based on our expected mix of debt and current market rates, we estimate that our average borrowing costs will be between 4.25 and 5%. After the completion of the acquisition, we expect our pro form a net leverage to be approximately 4.25 times EBITDA, which still gives us about half a turn of revolver capacity. Consistent with the negative working capital dynamics that are a key characteristic of our subscription based business models, both companies have extremely strong cash flow fundamentals, generating free cash flow well in excess of net income. The primary use of our free cash flow after closing will be to delever and we are targeting to reduce our gross leverage to approximately three times EBITDA within 24 to 36 months.
Turning to Slide 14. Consistent with our target to rapidly de lever, we plan to maintain a strong balance sheet and liquidity profile that will continue to give us the ability to execute further value enhancing initiatives. Our capital deployment priorities are unchanged and once we have reached our targeted leverage ratio, we will resume our focus on executing additional value creating acquisition opportunities and returning capital to shareholders through our share repurchase program. We will continue to execute on initiatives that create the most value for accretion from buybacks. In the case of our agreement to acquire CEB, the acquisition math was clearly significantly more accretive than buying back stock, 18, we believe this is a very attractive deal from a financial perspective, both in the short and long term.
First, the acquisition is expected to be immediately accretive to our adjusted EPS with double digit percentage percentage accretion in 2018. This assumes no cost synergy benefit. Just to underscore that last point, we are targeting double digit accretion percentage in 2018 without any benefit from cost synergies. And while this acquisition is really energies of approximately $25,000,000 to $50,000,000 beginning in 2018. These savings include redundant public company costs, redundant processes, as well as the opportunity to consolidate our real estate portfolios.
As Gene mentioned, by the 3rd year after closing, we target double digit contract value growth for CED, which will expand our base of highly profitable, highly visible recurring subscription based revenue streams. And as you think about the combined business over the long term, we expect to continue while maintaining a strong balance sheet a position of strength. The rate and pace of change of technology is accelerating and our clients rely on us to help them navigate their rapidly changing and complex environments. We continue to deliver tremendous value to our clients every day together with the investments we are making and are focused on innovation and operational excellence We are confident in achieving And as we mentioned on our Q3 earnings call, we expected to see productivity sequentially into Q4. And I'm happy to report that while we are still wrapping up our final numbers, we did in fact accelerate our contract value growth productivity in Q4.
Turning to Slide 17, which outlines the roadmap to completing the transaction. As mentioned regulatory bodies. Between signing and closing, proxy materials and a Form S4 will be filed with the SEC. We then plan to market and complete our Cev's growth. Jean?
Thanks, Craig. So please join me on Slide 18. The combined company will create value from several sources, First, we're going to combine CEB's great products with Gartner's proven operating practices to improve retention and new business growth. 2nd, we'll expand distribution of CEB's products leveraging Gartner's global footprint and market presence. 3rd, we'll develop new syndicated research products leveraging CEB's outstanding content targeting midsize enterprises, which is a Gartner's strength.
And beyond these three major sources value creation, We'll also add technology insights to CEB's existing offerings to increase the value declines from these offerings. In today's world, technology is critical to every function, every enterprise, and Gartner is the world's expert in technology. And finally, the combination of 2 public companies, we expect cost synergies of $25,000,000 to $50,000,000 annually. Taken together, These will accelerate CV's growth in contract value, revenue and EBITDA. Let me give you a couple of examples.
Turning to Slide 19, Gartner has developed a set of best practices in areas such as retention that's allowed us to have world class wallet retention of approximately 104 This is about 16 percentage points with no other improvements would increase the EV's contract value growth rate to high single digits. And we're confident that Gartner's proven practices CEB's Walt retention colleagues achieved similar levels to Gartner. In addition, we have proven practices in areas beyond retention, such as sales recruiting, training and tools, customer service processes and product management. The secondary value creation is expanding distribution of CEB's products, Leveraging Gartner's global footprint and market presence. As you can see on Slide 20, today, only Today, CEP has a smaller share of CEP segment revenue is smaller than Gartner outside of the U.
S. The center with Gartner is something like twice as high. Distributing seed in these existing products across Gartner's global footprint will contribute to accelerating growth. The 3rd area value creation is introducing new products. As you'll see on Slide 21, Gartner and CED have existing functional offerings in the global enterprise and large enterprise space.
The Gartner also has substantial strength in serving midsized enterprises. We plan to This will also contribute to accelerating growth. These 3 strategies to go to adding technology insights to CEB's existing products and capturing cost synergies are expected to accelerate CB's growth in contract value, revenue, EBITDA and cash flow. We're confident in system success. This was driven by a strong experienced leadership team that created and executed the playbooks that drove success.
The Gartner leadership team, together with the Ceb leadership team, have the bandwidth to take on these strategies that will accelerate Ceb's growth. In addition, Gartner has an extremely strong set of leaders at the level below the leadership team will be crucial in driving this growth acceleration. So we have the breadth, depth and leadership capacity to execute these strategies. Turning to page 23, Here's what you should take away from today's discussion. This is a highly complementary combination.
Together, we at the leading global research advisory company serving all major functions in the enterprise. In addition, this transaction is immediately accretive to Gartner's adjusted EPS, and we expect it to be double digit percent accretive to our adjusted EPS in 2018. We're also targeting to achieve double digit contract we have a proven track record of success with our syndicated research model. We know how to operate at scale, and we have a highly experienced leadership team with significant breadth and depth. As many of you may know, we have a vast market opportunity.
This deal significantly expands that already large opportunity. Which further enhances our ability to in revenues, earnings and free cash flow will maintain a strong balance sheet and liquidity profile. With that, we'll be happy to answer your questions. Operator.
Your first question comes from Aung Singh of Credit Suisse.
Hi, good morning. Thanks for taking my questions. Jean, I guess first off, could you just talk a little bit about what drove timing for the deal. It seems like you guys have been studying it for close 10 years. So I would just love any thoughts around that.
Ladies and gentlemen, please standby today's conference or zoom momentarily. We do apologize for the delay. Your question.
Hi, good morning. Can you guys hear me?
Yes, we can. Sorry about that.
No problem. So, thanks for taking my questions. I guess first off, Jean, in light of your comments that you've been studying the organization for close to 10 years, could you just a little bit about what drove timing for the deal?
Have, as you said, we've studied the company for more than a decade. Over that time period, we've done things like moved from just IT into things like supply chain and with marketing, we've also substantially strengthened our management team and So, we're at a point today where we think this we are ready for this combination and we've shown a confidence that our syndicated research model works well in areas outside of So, in a sense, the star is kind of aligned.
Okay, got it. And, with regard to your target on accelerating contract value growth at CED to the double digit level, in 3 years after closing, it seems like CAB has been struggling to do this for the past couple of years. And I guess could you just give a high level overview of what gives you confidence that you can do this in the 3 year mark?
Sure. So first, as I mentioned on the call, the CEB has great products. You know, we, as I said, we've studied them for a long period of time. We do customer research on them. They have great products that are very highly regarded by their clients.
As you said, they've had a little bit of struggle with growth. And so, if you look at Gartner, we've developed all of the of playbooks, processes, tools that really support sustained growth over a long period of time. And so the thought there is by combining our both, all of the, playbooks we have for growth with their great products that are really highly viewed by their clients. And again, if you think about the leadership team capabilities they have in terms of providing great products with our leadership team's capability in providing great operational per cheese and sustained growth, we think that gives us a lot of confidence. And I've got to say also, as I mentioned a moment ago, that the, this is in a really good spot for Carter today.
We have a leadership team that's been very stable. They have developed all playbooks. They know them well and have the bandwidth today take on a lot more. They need to look back like 7 or 8 years ago.
And on Craig, as Jean mentioned in the prepared remarks, you can see the fairly large gap between their wallet retention and our wallet retention. As Jean mentioned, even closing half the gap gets you almost a double digit growth without hitting any of the other elements that Jean just discussed.
Yes, so if you look at as we look at the different measures of the business, that's the easiest one to communicate is that we know how to drive great retention and closing that gap alone. Just that single thing can get us into double digit growth that's just one of our playbooks. That's not all of our playbooks.
Okay, got it. That's super helpful. I'd like to sneak in one quick one. I guess guys looked at the combined entity longer term. Do you envision one that's just as mission critical and resilient as a standalone Gartner today?
I think one of the things investors have always appreciated about your company as it relates to the IT levered end market is your ability to grow double digits despite choppiness in the macro or less than ideal macro backdrop up where CEB seems to have had a little bit more of a struggle in this regard. So any thoughts on your ability to sustain double digit growth despite a less than favorable macro environment? Thanks.
Have developed playbooks for doing that as well. So, it's not kind of built into the system or autopay. We've developed playbooks for doing that. And at the heart of it is, when you're working on a client's mission critical priorities, the things that really are they're going to get fired over, the things that are most important in their business, they have those same priorities, whether it's good times or bad. And that's true whether it's IT, whether it's marketing, whether it's supply chain, whether it's HR, if you're working on mission critical priorities, they have those in good times or bad.
And that's the that's kind of the thing that when we work on those things, that's what drives the civilian business. We've done that very well. We know how to do that with CEV's business as well and we'll build that in.
Your next question comes from Manav Patnaik of Barclays.
I guess we'll get a lot
of the details once the proxy of the merger background comes out, but it sounds like with the go shop period and stuff that's been included, this deal came together more quickly than something that you were working on historically. Is that fair? I was just hoping for some background on whether this is something you've been targeting for a while or because there were some other assets out there at least in the press that we thought would be the ones you guys would go after. And so just curious if this came down to the only one that was available.
Hey, Manav, good morning. It's Craig. As you mentioned, the definitive agreement does contain, go shop provision with customary terms and conditions for a transaction of this nature. There's the details of the go shop you'll see in the merger agreement that we file, probably later today actually. And when the proxy is filed, you'll see all the details related to the timing, at that point.
And just to follow-up, we didn't do this because it was the only one available. We did it because it's a great strategic fit going to add tremendous amount of value.
Okay. I mean, okay, fine. And then just maybe some color on the decision to use stock? I mean, I guess, you guys didn't really need to do that. So just, was that a requirement from CEB side or just some color there?
The way we thought about it was, and if you recall last spring, we put in place a new significantly larger credit facility and we did that contemplating potentially larger deals where we would flex up. And it's a great facility with really great terms and great pricing. And I'd say 2 things. One is that, we're able to structure the deal with a 70% cash 30% stock mix, we're actually able to keep that credit facility in place and then expand it. But being able for us being able to keep that very good facility in place is very important for us.
Number 2, as we've talked about the combination and because the strategic rationale was so compelling. It made sense on both sides for the combined company or the CV shareholders rather to participate in the upside. And so it was a really strong balancing those two factors that led us to the mix that you're seeing today.
Okay. And then just one last one from me, which is the So I guess on the what we've referred to as the core CD side, I think I can understand that. I was just curious on their Talent Measurement side, the SHL acquisition that they had done, that model in that target there is is completely different from your subscription side. So is that something you intend on keeping and maybe transitioning to subscription? How should we think about that?
Yes, so the CEP has already been in a process of transitioning that to a subscription based business. And that has been, that has actually been going very well. I think it's met their expectation in terms of how fast that transition has been happening. And so we think that as you transition that to a subscription based business, it can be done and clients like that. And then it does fit very well in that portfolio.
Your next question comes from Jim McHugh of William Blair And Company.
Hi, guys. Just question on on the CIO focus part of CB, where there's overlap directly with Gartner? What's the plan for that, I guess?
So, if you look at CEB, the entire IT part of CEB is a relatively small part, I think less than 15% of the entire company. And then even within that parts, our the Gartner offerings and the CEP offerings are very different. And I'll give you an example. Most people you think of rather, think of things like Magic Quadrant. Or vendor ratings.
And those are, you know, we help people, we help, IT departments make decisions on kind of what products and service to buy, how to deploy them, things like that. If you look at these offerings, they don't have any of those. There's nothing equivalent to a Magic Quadrant or a vendor rating or how to make, you know, one of the right technology choices to make. It's a bit more about the softer side of how you run IT departments. And so the, you know, they're actually even in IT, it's actually very complimentary because our products are actually very different in terms of what the value that we provide to clients.
Okay.
Would that stay as to, I guess, almost competing or separate products clients then or would you integrate those?
So the I think they're going to stay as separate products because again, they hit different kinds of value. I think it lets us have an offering that is a broader and provides a different kind of value than we provide just with the traditional Gartner offerings. Again, I think you can see, we've studied the CD offerings extensively and including IT, they are highly differentiated from Gartner and at a lot of value clients in a very different way.
Maybe just one question on a higher level. I guess one of the statements you've made is that you're very comfortable with the quality of the products from CEB and it's really about executing on the sales force. And It's a question actually, I think investors have debated with CV for a while, whether it's it is just that clients are getting from the product. So can you elaborate how you got comfortable with that question? I guess in that topic, that it is there are really just things you can do with the sales force that aren't being done and there's nothing I guess broader that's causing the slowdown in their growth.
Yes. So, as I mentioned, we have studied, we've gone to clients and asked them how they use these products and how they value them, why they renew, why they don't renew. We've studied this extensively, again, over a decade, with the most recent study being, I think, last summer. And so, you know, we understand the products and the clients get tremendous value out of these products. You can have great products and then if you don't have the right kind of service and sales process, that support them, you won't get great renewal rates.
You know, if I look back at Gartner a decade ago, when I 1st or 12 years ago, when I first Gartner was kind of a similar situation where we still had Magic Quadrant Research. The Gartner at the time was shrinking and unprofitable. And by putting in the right operational practices, combine that with the great underlying products, we got Gartner to great growth. That's exact thing here is we look at it that the issue is not that the products aren't great. They actually are terrific.
It's a matter of it's all the operational pieces around it. That again, we've developed those playbooks for now a decade and our leadership team has tremendous depth in how to do them. And again, as in terms of time for Gartner, our leadership not only knows how to do it, they have the bandwidth to take this on. And so, we're really confident as we look at the details, the biased by applying some of the same playbooks that we did within Gartner over the last decade, we can get their retention and new business growth up the same levels partners at because they have a terrific product.
Your next question comes from Tommy Kaplan of Morgan Stanley.
CEB has been more tilted towards a larger size customer base, similar to Gartner, but has been trying to expand in the middle market for, I believe it's a few years. Could you just give us a sense of how you expect that to progress I guess how it's been progressing and how you sort of expect it to accelerate that? And then just on the product opportunities slide, it seems like that's where a lot of the opportunity should come from. And is that the right way to think about it?
So, let me address how first then I'll come back to the side. So first, the, CB has had a larger, a larger customer focused focusing on larger clients. You know, Gartner, as you know, we serve all size clients and we have double digit growth in all of the size ranges. And in fact, actually the smaller lines have slightly faster growth than larger clients. Larger still have double digit growth but have slightly faster growth and to Norris market.
You have to serve smaller clients differently than you serve midsize our larger clients. It took us some time to figure this out. Again, when I first joined Gartner, we didn't do very well small client. We've developed a whole set of how you serve those clients that we've implemented Gartner. Again, that's a, an extremely, extremely well performing segment for us.
When we look at CED, just like Gardner 10 years ago, they're kind of tuned for the larger clients as you pointed out. We know how to change their offerings to take the great content they have to change how that it's sold and how that it's serviced and how you package it. So, this package actually targeted at these small and midsized enterprises which gives us a lot of confidence we can accelerate that growth rate.
Okay, great. Then, you mentioned that you're targeting the double digit contract value growth for CEB in the 3rd year. Are there shorter term milestones that we can look at to sort of just ensure that, that that's on track and that the cost synergies targets are on track. Anything sort of in the, I guess, nearer term than 3rd year? Hey,
good morning, Tony. So So when we close the transaction, we'll provide some further transparency there. And then as we get into reporting quarter after quarter, we'll also make sure that we're providing the appropriate amount of transparency so that our investors can measure progress.
And I would add too that the think about the things that I laid out, some of them are you can execute shorter term, some will take longer to do. So, for example, achieving the cost synergies by and large, we think you can do pretty quickly. Secondly, then on the kind of timing list, achieving improvements in retention, and kind of the wall of retention rates. We think that's sort of in the second kind of timeframe. Again, all this is going to parallel, but just sort of time to impact.
Then by the time we introduce new products, obviously, from developing new product to get it and have it be meaningful in a large CV contract value base will take a little longer. We're expecting to see that CV growth accelerate over time as each of these things kick in, which is why we're saying over a 3 year period.
Got it. And then just lastly, you've mentioned your TAM a number of times and presentations in the past. And just wondering if this expands the TAM or just gives you a better position within the ancillary functions outside of core IT supply chain and marketing?
So it substantially improves our available market. Today, we don't have anything in the functions that CEB is in like HR, there's nothing in our market with HR or with finance. And so all the areas that CEB is in that we're not in today. That expands that available market. So, our available market opportunity is going to be much larger than this today.
Say. We've not quantified that yet, but you can just think about adding all these other functions, is a huge opportunity.
Next question comes from Gary Bisbee of RBC Capital Markets.
Hey guys, good morning. So I guess when you think about CEB's business, are there investments that you think you're going to need to make? You talked about handling sales and service differently to improve retention. Should we think is going to be some intermediate term investments that might initially offset the cost synergies? Or do you believe that cost synergy number is net of any major changes in how you invest to run their business?
So, the short answer is that's net. So, we believe that there are lots of cost synergies and we're going to and to your point, it's going to take some investments to do things like put in new service process new things like new develop new product, expand the sales force, those take investments. But we believe that there are a lot of cost synergies that we've already identified. And so we gave you the 25 to 50 that's kind of net of what we expect to see after we've made investments in the business to accelerate growth.
And then, one of the challenges I think that CEBs had in clearly not running their sales business anywhere near as effectively as you have is that they've changed the account packages. They've changed the comp model. There's been a lot of change in the last 2 to 3 years. I guess, how confident are you that as you put through whole another series of changes that there won't be an extended period of disruption or you might even face more turnover that would make it take longer to really drive improvement. Is that something you just have to get in there to really understand or how do you think about that?
So, one of the things that we are very focused on is minimizing that kind of disruption. So, as we think about our implementation plans. You know, kind of rule number 1 is let's make sure we don't make things worse as we get things better. And the way that one of the things that we've done at Gartner, that may not be, as obvious, but we've talked about it a little in the past is we make is we don't do big bangs. In general, what we do is, we go out, we try things, we test it, we make sure it works, and then we roll it out.
And even though we do it on a phased fashion, So, we approach things in a way that's, we call it getting to version 1, version 2, version 3, as opposed to kind of more of a big change. And so the combination of, we know it works in a syndicated research business. In order for large companies, for medium companies, for small companies, So we know where we want to get to. We're very cog zone. When we in our path there, we need to do it in a way that is not disruptive and sort of provides a, I'll call it, a constant acceleration as opposed to a hiccup and then more acceleration.
If you look at getting our track record, the reason that our track record has been so consistent is because we have that's what we've done at Gartner as well.
Okay, great. And then just one last one, given that they've had challenges of bookings in the last 18 months, if that did not improve in the fourth quarter, key 4th quarter, 1st quarter period. It seems like there's some risk that they could actually see that prepayment component of the cash flow go negative and have quite a bit worse cash conversion in the next year. Do you have your arms around that? Is that a risk, that could change the economics here?
Or are you pretty comfortable that in the 1st year after you close the deal that the cash flow profile of your combined business will remain as attractive as it's been. Hey, Gary, good morning. It's the latter. Their model is very consistent with our model. Their model, focuses on upfront invoicing.
Their model is negative working capital. Their model has a very high EBITDA conversion to free cash flow. Their model generates free cash flow well in excess of net income. And we that to continue. And again, combined with our grade model, that's what gives us confidence around the rapid deleveraging that we talked about a little earlier.
So, really do think as one of the really attractive elements, from a financial or economic perspective is the cash flow conversion capability of CEB because it is so similar to Gartner and the combination of those 2 powerful cash flow models over the long
term
business better. So I look forward to seeing you do so. Thank you, Gary.
Your next question comes from Jeff Meuler of Baird.
Yes, thank you. What is the initial thoughts on what the plan is going to be for how the sales force is going to be structured and what vertical products they're gonna be selling?
So so
we have thoughts on how we're going to organize the sales force. I don't think this is the right forum to go through those level detail, but I'll leave it at this, which is, you know, today we at Gartner, as you know, sell to IT supply chain marketing and we sell to the Global 500, the Global 2000 and then the 100,000 companies beyond that. And we know how to structure sales force to be successful in those environments. And so I guess what it says, we're going to duplicate that kind of model and those playbooks with CEB. As to the details of that, it would take longer to explain than we have on the call.
And we'll, I'm sure we'll lay more of this out over time.
Your next question comes from Joseph Foresi of Cantor Fitzgerald.
Hi. So CED has become or has been very economically sensitive or their business has been in the past So I'm wondering what assumptions, about the demand backdrop you've built into your revenue growth accelerations for the CEB business?
Hey, good morning, Joe. It's Craig. We've essentially assumed the economic environment we're dealing with today continues. And again, our view on the improvement or acceleration is really based upon the 3 value sources that Gene laid out earlier around number 1, really focusing on our best practices and operational execution. Number 2, expanding geographic footprint.
And then number 3, over time launching new products that really go after the mid market. And so again, we've assumed no better, no worse from an economic perspective.
Okay. And then as far as how the opportunity was created, did you approach CEB or obviously going through some transitions with, on the CEO level and have had some short term issues here. I'm wondering just how the the conversations got started?
So, as I mentioned earlier on the call, we've known CED for a very long period of time. And so this isn't something that just happened in 30 days or anything like that. So we've and in this for this particular deal, we've been in discussions with Tom, their CEO and their board over the last several months. And so that's kind of how it got started.
Okay. And then the last one for me, I know you wanted to reserve how you're going to discuss the changes in the sales function for a larger call. But maybe you could just pull out for us the number one area where you see the opportunity and how you think about that going forward? Thanks.
So, we've identified, based on our analysis, both before we engage in this and also as we've done due diligence, we've identified some specific operational areas that we think we could change and have an impact over a pretty short term, you know, certainly in the 1st year. And so, you know, we plan to implement those. Then there's a set of other things like how you organize the event that will be a little more slowly on. So, I think there's 2 categories to kind of the operational changes that we think we can make pretty quickly. And then more structural things, we'll go will take more time.
Anything that you could point out though operationally? I mean, is there one specific area where you're going to hit right away? I'm just looking for a little bit of takeaway there? Thanks.
I guess the thing to think about is, as we look at it, the single biggest opportunity in the short term is getting that closing that 16 point retention gap between where they are and where we are today and wallet retention. And so, and as you know, we have a retention playbook that has to do with things like making sure people are fully utilizing the services making sure that when we sell a new client that we do a service kickoff with them so that they understand what they use and get in the habit of using it, we start to develop those habits So those are some examples of the kinds of things. So it's very operational in Playtech oriented.
Your next question comes from hamzah Mazari of Macquarie Capital.
Just a question for Craig first. Craig, could you maybe talk about comfort we're taking on leverage, maybe at a time where there's some tax reform on certainty, particularly around interest rate deductibility issues. Any color around that?
As we've discussed in the past, we in analyzing our capital structure had targeted 2.5x to 3x gross leverage as kind of our rough long term target. But as we've talked about, we would have no problem flexing up, for the right value enhancing initiative. And this, in fact, Is that the right time to flex up for a great, we believe significant value enhancing initiative I can't comment on corporate tax policy. We don't know what that's going to look like, but given everything we know, about the debt markets, current corporate tax policy and potential changes. We felt like this was a great time for us to do this transaction for all the reasons that that Jean mentioned.
And also because of the prevailing market rates, we're actually able to borrow at very competitive levels as we talked about. And then again, we can de lever very quickly which also then takes a lot of pressure off of the P and L and off of our leverage ratios.
Okay, great. And just a follow-up on the net $25,000,000 to $50,000,000. Maybe if you could add some color as to the difference between the high end and the low end of the synergy guidance And then secondly, just on revenue synergies, I know you're not quantifying them, but order of magnitude, what's bigger, new products, leveraging your global footprint. If you could just bucket what's more significant or are they all sort of the same? Thank you.
Well, sure. So I'll start on the revenue synergy side. I mean, they are all significant, obviously. And So our goal to get that business growing at double digit rates I think Jean laid out very well in terms of the timing and phasing, which is the retention rate stuff is the quickest that we can implement. That will come first and that will create significant uplift.
Again, just closing half that gap, as Jean talked about, could take the company from very low single digit rate growth, all our things equal up to 8% or 9% or 10% growth. The geographic footprint, again, you know, another really big opportunity you can see, from our Materials, just how much more global Gartner's business is as compared to the core CEV segment. And there's a great opportunity there. And then I think over the long term that mid market opportunity with new products and services across multiple functions, potentially has the opportunity to be the largest opportunity. I mean, it's enormous.
As very consistent with the way we think about the Gartner Technology opportunity as well. And so again, it Each of them represent pretty significant chunks. But again, I would think about it in terms of a phased approach with retention first. And again, that has long term flow through impact geographic expansion second and then new products and acceleration in the mid market. 3rd.
In terms of the cost synergy range, the range has a lot to do with we haven't, we need to get in there and really understand everything at a really detailed level. Some of it will be governed by how much we determine we want to reinvest, to actually pull forward some of that accelerated growth. But we're at committed to that $25,000,000 to $50,000,000 net. And again, we expect to deliver that full year 2018 and that sticks on an ongoing and recurring basis. Well.
Okay, great. And just lastly, just one more question. How much of this business falls into your consulting bucket or is it all research given the way you guys define both research and consulting? Thanks a lot.
Sure. So there's, the bulk of it, looks a lot like our research business. There are, events core events as a part of the CEB portfolio plus the Avanta acquisition, that CEB completed earlier this year. And there's probably a little bit of consulting, but the bulk of the business looks and feels a lot like Harley's business.
Great. Thank you. Good luck with the deal. Thanks.
Thank you, Hal.
Your next question comes from Peter Appert of Piper Jaffray.
Thanks. So Jean, don't take this as an insult, please. But it seems to me that you're taking a great business which is Gartner and combining with a much less great business, which is CEB, and the net result is an entity that probably grows a slower pace going forward than what Gartner could have previously. How do you respond to that?
So, 1st Gartner is a great I agree with that. Secondly, CEB actually is a great business. There are a lot of things that are going really well at CEB. So their products provide a lot of value to clients. If you look at their margins, they have great margins, they're just not growing that great.
We know how in a subscription based information services business, we are the best in the world in writing those kinds of businesses. As I said, and we've looked at this in detail. We know what to do with this business. So, we're confident that we can grow CEB at the same rate we're growing the great Gartner business that you talked about. Now, their growth rate is not very good today.
So, it's going to take some time to accelerate. So, in the next couple of years, they will, we expect that CEB will be growing slower than Gartner. But again, as you heard, by the 3rd year, we're expecting to have double double digit growth. And, you know, frankly, we're hoping that that double digit growth is more like Gartner's double digit growth. And so, I hope that you, we're aiming is what I should say.
And so, I think it'd be wrong to think that, this will be dilutive to Gartner's growth over the long term.
Okay. Fair enough. Thank you. And the, you've talked already and I apologize. I got on a little late on the call on this you've talked already about retention improvement being such a critical part of the story.
And, I guess the part I'm having trouble with is the CEB guys aren't dopes. They've been working on this for a while. You've been successful in having higher retention, but that could just be a function the fundamental differences and the relative importance of the products. So any more color in terms of specifics of of what you think they've missed in terms of driving retention improvement?
So I talked to some of this earlier, Peter. So the, so first we have playbooks on how to improve retention, keep is sustained, even in tough situation, even in tough times. And as we look to don't use those playbooks. So, in terms of things like, one of the things that we know is really important is driving usage. So, we have a whole organization at Gartner.
That drives usage of our products. As we know that if we the more clients use our products, the more the retention goes up. Another example is I talk of mission critical priorities. When you're working on a client's mission critical priorities, by definition, they need you. When I first got to Gartner, one of the problems we had is that we would work on anything that they wanted, whether it was important or not.
Well, as you're working on this thing, it's not very then what happens is when it comes time to renew, they don't renew it. And so when you're in the selling cycle and the servicing cycle, those are just two examples. You're focused on, again, what we call mission critical priorities, things that are the top 3 priorities for the enterprise as a whole, you know, if you're doing that and you're following kind of our, playbooks in terms of services, you know, and there's a whole set of other things like service kickoffs. I mean, this is not one thing. It's a combination of, you know, of several things that collective drive very high rates of retention.
We have time for one more question. Your final question comes from Jeff Silber of BMO Capital Markets.
Thanks for sneaking me in. I'll be quick. Can you talk about any type of client overlap either by end market or specific geographic location?
So, the, so in terms of same enterprises buying CEB services, buying Gartner is in the Global 500, there's a substantial overlap issue to expect as we both sell to the Global 500. You look at what we actually sell to, who we sell to, there's very little overlap. Being at an individual user level, there's almost no overlap whatever size company. And so the, at an enterprise level, there's dollars from both, but at a who's actually buying, who the buying center is, to be specific, the head of HR may be buying CV services at any given company. And the CIO may be buying partner services at any given company, but there's not much overlap.
And as I mentioned earlier, even in IT, It's typically not if we're both selling into IT, it's typically not to the same person within IT, that would be unusual. And so at a who actually does the buying, there's very little overlap.
Do you plan on maintaining the CEB brand or are you thinking of rebranding under Gartner? Thanks.
So I'd say that, the, we don't have a final decision on that However, I will say that we think the CEP brand is very powerful. If you look at Gartner, we have more than 1 branded Gartner. So, for example, our CIO products are EXP. That's the brand for our CIO products. And so our current thinking is CEB would be a brand under car would be brand for a set of products, but take that as a, a stake in the ground as opposed to the final answer.
And yes, because they have a great brand, it's very widely respected.
All right, great. Thanks so much.
Thank you. This concludes today's question and answer session. Would now like to turn the floor back over to Mr. Jane Hall for any additional or closing remarks.
So, as you can tell, we are really excited about this combination. There are tremendous value creation opportunities from the five areas I discussed earlier. We have the leadership team in place that has a bandwidth to capture these opportunities. Thanks for joining us today and we look forward to updating you again on our progress.
Thank you. This concludes today's conference. You may now disconnect and have a wonderful day.