Good morning, ladies and gentlemen. Welcome to the Gartner Investor Conference Call to discuss the acquisition of CEB. 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. Should you need operator assistance, please press star zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press the pound key. I would now like to turn the conference over to Mr. Sherief Bakr , Group Vice President, Investor Relations. Please go ahead, sir.
Thank you, Paula. 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 Stamford is our Chief Executive Officer, Eugene Hall, and our Chief Financial Officer, Craig Safian. 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. 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 two of this webcast presentation. With that, I'd like to hand the call over to our CEO, Gene Hall. Gene.
Thank you, everyone, and good morning. I'm excited to talk to you about our agreement to acquire CEB and how it's gonna advance our strategy to drive long-term growth and value for our shareholders. Turning to slide three, 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 complementary combination. The Gartner brand is known for delivering independent, objective insights through syndicated research and advisory products to all levels of IT, supply chain, and marketing professionals. CEB is widely admired for delivering best practice and talent management insights to executives in other functions, such as HR, sales, finance, and legal. Together, we create the 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 are 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. We know how to operate at scale, and we have a highly experienced and tenured 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 to deliver long-term, double-digit growth in revenues, earnings, and free cash flow while maintaining a strong balance sheet and liquidity profile.
Turning to slide four, our mission is and has been to provide high-value research and insights that address an enterprise's mission-critical priorities. When 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 five, you'll see that we are currently achieving our mission in three enterprise functions: IT, supply chain, and marketing. Gartner's foundation is in information technology. We've developed this business over time, both organically and through acquisitions such as Meta, Burton, and Ideas International. Other functional areas beyond IT can benefit from the syndicated research approach. 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. 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 six, we have enormous organic growth opportunities. Acquisitions have always been a core part of our strategy because they can be a great way to accelerate growth in our target markets and to enter closely adjacent markets. We've always been highly disciplined in our acquisition approach, 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 from this model, this will provide another great growth opportunity for Gartner. Turning to slide seven, 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, creating 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, CEB's business model is a recurring revenue subscription-based model with upfront invoicing and strong cash flow conversion, just like ours. Like Gartner, 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 talent. At Gartner, we're very familiar with CEB, having studied them closely for more than a decade. Now, CEB's clients rate their products and services very highly. For example, on slide eight are summary results of a recent survey by an independent 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.
Like Gartner, CEB has great products that are incredibly highly valued by clients. Turning to slide nine. 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 of key functions across the enterprise. Gartner and CEB are highly complementary 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 and 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 CEB's offerings beyond the current focus on the Fortune 500 and Fortune 2000. Our proven ability to operate on a global scale, track record of success and consistent double-digit growth, coupled with CEB's highly valued products and services, enables us to target double-digit Contract value growth for CEB by the third full year after closing. Summarizing, on slide 11, the acquisition directly supports Gartner's growth strategy. CEB and Gartner are highly complementary, subscription-based information services companies with strong cash flow conversion. We'll be more than 13,000 associates strong, delivering value to clients around the world. Together, we create the 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, Gene, and good morning and good afternoon to everyone on the call. This is a very exciting day for both Gartner and CEB, and as Gene mentioned, we are thrilled to be able to share our news with you today. I'll start on slide 12, which puts a finer point on Gene's last comment and gives you a snapshot of what the combined business looks like. On a pro forma basis, the combined company's reported results for the 12 months ending September 30th, 2016 include $3.3 billion in adjusted revenue, $693 million in adjusted EBITDA, and $463 million in free cash flow. This provides a very strong financial foundation to continue to capture our vast market opportunity. Let me briefly review the key terms of the transaction, which are outlined on slide 13.
We have entered into a definitive agreement to acquire CEB in a cash and stock transaction valued at $2.6 billion, with an enterprise value of $3.3 billion, including the assumption and refinancing of CEB's existing net debt. Under the terms of the agreement, CEB shareholders will receive $54 in cash and 0.2284 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 share represents a premium of 31% 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 CEB 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 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 2017, 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 deal through a combination of the issuance of approximately 8 million Gartner shares, cash on hand-Debt from our existing credit facilities and 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 forma net leverage to be approximately 4.25x 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. This is a trend we expect to continue, which will allow us to quickly de-lever. The primary use of our free cash flow after closing will be to de-lever, we are targeting to reduce our gross leverage to approximately 3x EBITDA within 24- 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 our shareholders, carefully assessing the value we can generate from potential acquisitions relative to the accretion from buybacks. In the case of our agreement to acquire CEB, the acquisition math was clearly significantly more accretive than buying back stock, even on a risk-adjusted basis.
As you can see on slide 15, 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 percent 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. While this acquisition is really about growth and leveraging our complementary assets and business model fundamentals, we do expect to realize annualized cost synergies of approximately $25 million-$50 million 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 third year after closing, we target double-digit contract value growth for CEB, which will expand our base of highly profitable, highly visible, recurring, subscription-based revenue streams. As you think about the combined business over the long term, we expect to continue our trend of delivering sustainable double-digit growth in revenue, earnings, and free cash flow, while maintaining a strong balance sheet and liquidity profile. Turning to slide 16. We are executing this transaction from a position of strength. Our market opportunity in IT, supply chain, and marketing remains vast and untapped. The rate and pace of change of technology is accelerating, and our clients rely on us to help them navigate the rapidly changing and complex environments. We continue to deliver tremendous value to our clients every day.
Together with the investments we are making and our focus on innovation and operational excellence, we are confident in achieving our target of 15%- 20% long-term annual revenue growth for Gartner Research. As we mentioned on our Q3 earnings call, we expected to see acceleration of our CV growth rate and sales productivity sequentially into Q4. I'm happy to report that while we are still wrapping up our final numbers, we did in fact accelerate our contract value growth and productivity in Q4. Turning to slide 17, which outlines the roadmap to completing the transaction. As mentioned earlier, we expect to close the transaction in the first half of 2017, subject to the approval from CEB shareholders and the applicable regulatory bodies. Between signing and closing, proxy materials and a Form S-4 will be filed with the SEC.
We plan to market and complete our new debt financing package. I'll turn the call back to Eugene Hall, who will take you through our plans to accelerate CEB's growth. Gene?
Thanks, Craig. 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. Second, we'll expand distribution of CEB's products, leveraging Gartner's global footprint and market presence. Third, we'll develop new syndicated research products, leveraging CEB's outstanding content, targeting midsize enterprises, which is a Gartner strength. Beyond these three major sources of value creation, we'll also add technology insights to CEB's existing offerings to increase the value to clients from these offerings. In today's world, technology is critical to every function in every enterprise, and Gartner is the world's expert in technology. Finally, with the combination of two public companies, we expect cost synergies of $25 million-$50 million annually. Taken together, these will accelerate CEB's growth and 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 higher than CEB's comparable number. Just closing half this gap with no other improvements would increase CEB's contract value growth rate to high single digits. We're confident that with Gartner's proven practices, CEB's wallet retention can achieve 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, CEB has a smaller share of, the CEB segment revenue is smaller than Gartner outside of the U.S. The same number of Gartner is something like twice as high. Distributing CEB's existing products across Gartner's global footprint will contribute to accelerating growth. The 3rd area of value creation is introducing new products. As you'll see on slide 21, Gartner and CEB have existing functional offerings in the global enterprise and large enterprise space. Gartner also has substantial strength in serving mid-sized enterprises. We plan to create new research and advisory services using CEB's outstanding content and Gartner's expertise and scale in serving mid-sized enterprises. This will also contribute to accelerating growth.
These three strategies, together with adding technology insights to CEB's existing products and capturing cost synergies, are expected to accelerate CEB's growth in contract value, revenue, EBITDA, and cash flow. We're confident in our ability to execute these strategies. As you can see on slide 22, we have a decade-long track record of sustained and consistent success. This was driven by a strong, experienced leadership team that created and executed the playbooks that drove the success. The Gartner leadership team, together with the CEB leadership team, have the bandwidth to take on these strategies that'll accelerate CEB's growth. In addition, Gartner has an extremely strong set of leaders at the level below the leadership team, who will be crucial in driving this growth acceleration. 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 create the leading global research advisory company serving all major functions of the enterprise. In addition, this transaction is immediately accretive to Gartner's adjusted EPS. We expect it to be double-digit percent accretive to our adjusted EPS in 2018. We are also targeting to achieve 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. 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 drive long-term growth.
We expect the combined company to deliver long-term double-digit growth in revenues, earnings, and free cash flow while maintaining a strong balance sheet and liquidity profile. With that, we'll be happy to answer your questions. Operator?
The floor is now open for your questions. To ask a question, please press star then one on your touch tone phone. To withdraw your question, please press the pound key. Your first question comes from Anjaneya Singh of Credit Suisse.
Hi. Good morning. Thanks for taking my questions. Gene, 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 to 10 years. I would just love any thoughts around that.
Ladies and gentlemen, please stand by. Today's conference will resume momentarily. We do apologize for the delay. You may now resume your conference. Questioner, please repeat your question.
Hi. Good morning. Can you guys hear me?
Yeah, we can. Sorry about that.
No, no problem. Thanks for taking my questions. I guess first off, Gene, in light of your comments that you've been studying the organization for close to 10 years, could you just talk a little bit about what drove timing for the deal?
Sure. Basically, what we have, as, like you said, we've studied the company for more than a decade. Over that time period, we've done things like move from just IT into things like supply chain and with marketing. We've also substantially strengthened our management team. We're at a point today where we think we are ready for this combination, and we've shown and have confidence that, you know, our syndicated research model works well in areas outside of IT. The, in a sense, the stars kind of aligned.
Okay. Got it. You know, with regards to your target on accelerating Contract Value growth at CEB to the double-digit level, in three years after closing, it seems like CEB has been struggling to do this for the past couple years. You know, I guess could you just give us a high-level overview of what gives you confidence that you can do this in the three-year mark?
Sure. First, as I mentioned on the call, the CEB has great products. You know, we, as I said, we studied them for a long period of time. We did 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. If you look at Gartner, we've developed all of the sort of playbooks, processes, tools that really support sustained growth over a long period of time.
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 expertise and sustained growth, we think that gives us a lot of confidence. I gotta say also, as I mentioned a moment ago, that this is in a really good spot for Gartner today. We have a leadership team that's been very stable. They have developed all these playbooks. They know them well and have the bandwidth today to take on a lot more than if you looked back like, you know, seven or eight years ago.
Anj, it's Craig. You know, as Gene mentioned on the prepared remarks, you can see the fairly large gap between their wallet retention and our wallet retention. As Gene mentioned, even closing half the gap gets you almost to double-digit growth without hitting any of the other elements that Gene just discussed.
As we look at the different metrics of the business, that's the easiest one to communicate, is that we know how to drive great retention. 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 as you guys look 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, you know, choppiness in the macro or a less than ideal macro backdrop, where CEB seems to have had a little bit more of a struggle in this regard. Any thoughts on your ability to sustain double-digit growth, despite a less than favorable macro environment? Thanks.
Yeah. Great question. We have developed playbooks for doing that as well. It's not kind of built into the system or automatic. We've developed playbooks for doing that. At the heart of it is, when you're working on a client's mission-critical priorities, the things that really are, they're gonna get fired over the things that are most important in their business, they have those same priorities, whether it's good times or bad. That's true whether it's IT, whether it's marketing, whether it's supply chain, you know, whether it's HR. If you're working on mission-critical priorities, they have those in good times or bad. That's the, that's kind of the thing that, when we work on those things, that's what drives the stability of our business. We've done that very well.
We know how to do that with CEB's business as well, and we'll build that in.
Okay. Thanks so much. I'll hop back in the queue.
Your next question comes from Manav Patnaik of Barclays.
Yeah. Thank you. Good morning, gentlemen. You know, I guess we'll get a lot of the details once the proxy with the merger background comes out. It sounds like, you know, 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 was something you've been targeting for a while or, you know, 'cause there were some other assets out there, at least in the press, that we thought would be the ones you guys would go after. 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 a go-shop provision with customary terms and conditions for a transaction of this nature. The details of the go-shop you'll see in the merger agreement that we file, probably later today, actually. When the proxy's filed, you'll see all the details related to the timing at that point.
Just to follow up on the point, we didn't do this because it was the only one available. We did it because it's a great strategic fit, and it's gonna add a tremendous amount of value.
Okay. I mean, okay, fine. Just maybe some color on the decision to use stock. I mean, I guess you guys didn't really need to do that. Just was that a requirement from CEB's side or just some color there?
Manav, you know, the way we thought about it was, if you recall, last spring, we put in place a new, significantly larger credit facility, we did that contemplating potentially larger deals where we would flex up. It's a great facility with really great terms and great pricing. You know, I'd say two 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, then expand it. Us being able to keep that very good facility in place is very important for us. Number two, as we talked about the combination, because the strategic rationale was so compelling, it made sense on both sides for
The combined company or the CEB shareholders rather, to participate in the upside. It was a really strong balancing of those two factors that led us to the mix that you're seeing today.
Okay. Just one last one from me, which is, you know, what we refer to as the core CEB side, I can understand that. I was just curious on their talent measurement side, the SHL acquisition that they had done. You know, that model and that, you know, target there is completely different from your subscription side. Is that something you intend on keeping and maybe transitioning to subscription? How should we think about that?
Yeah. The CEB has already been in a process of transitioning that to a subscription-based business, and that has actually been going very well. You know, I think it's met their expectations in terms of how fast that transition's been happening. We think that, you know, 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.
Okay. All right, thanks guys.
Your next question comes from Tim McHugh of William Blair & Company.
Hi, guys. Just a question on the CIO-focused part of CEB where there's overlap directly with Gartner. What's the plan for that, I guess?
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. Even within that part, the Gartner offerings and the CEB offerings are very different. I'll give you an example. Most people you think of Gartner think of things like Magic Quadrant or vendor ratings. You know, we help, IT departments make decisions on kind of what products and services to buy, how to deploy them, things like that. If you look at CEB's 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, what are the right technology choices to make.
It's a bit more about the softer side of how you run an IT department. You know, even in IT, it's actually very complementary 'cause our products are actually very different in terms of what the value that we provide to clients.
Okay. Would that stay as two, I guess, almost competing or separate products for clients then? Would you integrate those?
I think they're gonna stay as separate products, 'cause again, they hit different kinds of value. I think it lets us have, you know, an offering that is a broader and provides a different kind of value than we would provide just with the traditional Gartner offerings. Again, I think you can see. Again, we've studied the CEB offerings extensively, and including IT, they are highly differentiated from Gartner and add a lot of value to clients in a very different way.
All right. Maybe just one question on a higher level. You, 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. You know, it's a question actually I think investors have debated with CEB for a while, whether it's just an execution issue or if there's something with the addressable market and/or, I guess the value proposition that clients are getting from the product. 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.
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. You know, we've studied this extensively, again, over a decade, with the most recent study being, I think, last summer. 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 first or 12 years ago, when I first joined, Gartner was kind of a similar situation where we still had Magic Quadrant, they had great research, but Gartner at the time was shrinking and unprofitable. By putting in the right operational practices, combining that with the great underlying products, we got Gartner to great growth. That's the exact same thing here. As 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.
Again, as terms of time for Gartner, our leadership team not only knows how to do it, they have the bandwidth to take this on. We're really confident as we've looked at the details, that 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 to the same level as Gartner's at, 'cause they have a terrific product.
Okay. Thank you.
Your next question comes from Toni Kaplan of Morgan Stanley.
Hey, good morning. 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, you know, how you expect that to progress, I guess, how it's been progressing and how you sort of expect it to accelerate that? Then just on the product opportunities slide, it seems like that's where a lot of the opportunity should come from. Is that the right way to think about it?
Let me address how first, then I'll come back to the slide. First, the CEB has had a larger customer focus, focused 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. In fact, actually, the smaller clients have slightly faster growth than larger clients. Larger still have double-digit growth, have slightly faster growth. It's an enormous market. You have to serve smaller clients differently than you serve mid-size or larger clients. It took us some time to figure this out. Again, when I first joined Gartner, we didn't do very well with small clients. We've developed a whole set of how you serve those clients that we've implemented at Gartner.
Again, that's an extremely well-performing segment for us. When we look at CEB, just like Gartner 10 years ago, they're kinda tuned for the larger clients, as you pointed out. We know how to change their offerings to take the great content they have, but change how that it's sold and how that it's serviced and how you package it, so it's packaged actually targeted at these small and midsize 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 third year. Are there shorter-term milestones that we can look at to sort of just ensure that that's on track and that the cost synergies targets are on track? Anything sort of in the, I guess, nearer term than third year?
Good morning, Toni. You know, when we close the transaction, we'll provide some further transparency there. 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.
Okay.
I would add, too, that the, if you think about the things that I laid out, some of them are you can execute shorter term, some will take longer to do. For example, you know, achieving the cost synergies, by and large, we think you can do pretty quickly. Secondly, on the kind of timing list, achieving improvements in retention, and kind of the wallet retention rates, we think that's sort of in the second kind of timeframe. Again, all this is going in parallel, but just sort of time to impact. By the time, you know, we introduce new products, obviously from developing new product to get it and have it be meaningful in a large CEB contract value base will take a little longer.
We're expecting to see that CEB growth accelerate over time as each of these things kick in, which is why we're saying over a three-year period.
Got it. Just lastly, you've mentioned your TAM a number of times in presentations in the past. 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.
It substantially improves our available market. You know, today, we don't have anything in the functions that CEB is in, you know, like HR. There's nothing in our market with HR or with finance. All the areas that CEB's in that we're not in today, that expands that available market. Our available market opportunity is gonna be much larger than it is today. We've not quantified that yet, but, you know, you can just think about adding all these other functions, you know, is a huge opportunity.
Terrific. Thanks a lot.
Your next question comes from Gary Bisbee of RBC Capital Markets.
Hey, guys. Good morning. I guess, when you think about CEB's business, are there investments that you think you're gonna need to make? You talked about handling sales and service differently to improve retention. Should we think that there's gonna be some intermediate term investments that might initially offset the cost synergies or, you know, do you believe that that cost synergy number is net of any major changes in, you know, in how you'd invest to run their business?
The short answer is that that's net. We believe that there are lots of cost synergies. To your point, it's gonna take some investments to do things like put in new service processes, to do things like develop new products, expand the sales force. Those take investments. We believe that there are a lot of cost synergies that we've already identified. When we give you the $25 million-$50 million, that's kind of net of what we expect to see after we've made investments in the business to accelerate growth.
You know, one of the challenges I think that CEB's had in clearly not running their sales business anywhere near as effectively as you have is that they've changed account packages, they've changed the comp model. There's been a lot of change in the last two to three years. I guess how confident are you that as you put through, you know, a whole another series of changes, that there won't be an extended period of disruption or you know, 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? Thank you.
One of the things that we're very focused on is minimizing that kind of disruption. As we think about our implementation plans, you know, kind of rule number one is, let's make sure we don't make things worse as we get things better. 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 when we make changes, 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. Even then we do it out in a phased fashion.
We approach things in a way that's, you know, we call it getting to version one, version two, version three, as opposed to kind of more of a big change. The combination of we know it works in the syndicated research business, we know it works for large companies, for medium companies, for small companies. We know where we wanna get to. We're very cognizant on our path there, we need to do it in a way that is not disruptive and that sort of provides a, I'll call it a constant acceleration as opposed to, you know, a hiccup and then more acceleration. If you look at, again, our track record, the reason that our track record's been so consistent is because that's what we've done at Gartner as well.
Okay, great. Then just one last one. You know, given that they've had challenges with bookings in the last 18 months, you know, if that did not improve in the fourth quarter, key fourth quarter, first quarter period, it, you know, it seems like there's some risk that they could actually see that prepayment, you know, component of the cash flow go negative and have, you know, quite a bit worse cash conversion in the next year. Do you have your arms around that? Is that a risk, that, you know, that could change the economics here? Or are you pretty comfortable that, you know, that in the first year after you close the deal, that the cash flow profile of your combined business will remain as attractive as it's been?
Yeah, Gary, good morning. It's the latter. You know, their model is very consistent with our model. Their model, you know, focuses on upfront invoicing. Their model is negative working capital. Their model has a very high, you know, EBITDA conversion to free cash flow. Their model generates free cash flow well in excess of net income, and we expect that to continue. Again, combined with our grid model, that's what gives us confidence around the rapid deleveraging that we talked about a little earlier. We really do think, you know, as one of the really attractive elements, you know, from a financial or economic perspective, is the cash flow conversion capability of CEB because it is so similar to Gartner.
You know, the combination of those two powerful cash flow models over the long term, is gonna generate significant amounts of free cash flow.
Great. Thanks, and congratulations. I think there's a real opportunity for you to run the business better, so I look forward to seeing you do so.
Thank you, Gary.
Your next question comes from Jeffrey Meuler of Baird.
Yeah. Thank you. What is the initial thoughts on what the plan's going to be for how the sales force is going to be structured and what vertical products they're gonna be selling?
You know, 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 of 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. We know how to structure sales force to be successful in those environments. I guess what I'd say is we're gonna 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.
I'm sure we'll lay more of this out over time.
Okay. Thank you.
Your next question comes from Joseph Foresi of Cantor Fitzgerald.
Hi. CEB has become or has been very economically sensitive, or their business has been in the past. 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. You know, we've essentially assumed, you know, the economic environment we're dealing with today continues. Again, our view on the improvement or acceleration is really based upon the three value sources that Gene laid out earlier around, number one, you know, really focusing on our best practices and operational execution. Number two, expanding the geographic footprint. Then number three, over time, launching new products that really go after the mid-market. Again, we've assumed no better, no worse, from an economic perspective.
As far as how the opportunity was created, did you approach CEB, or 'cause they're actually obviously going through some transitions on the CEO level and have had some short-term issues here? I'm wondering just how the conversations got started.
You know, as I mentioned earlier on the call, you know, we've known CEB for a very long period of time. You know, this isn't something that just happened in a, you know, in 30 days or anything like that. You know, for this particular deal, we've been in discussions with Tom, their CEO, and their board over the last several months. That's kind of how it got started.
Okay. Then the last one from me, I know you wanted to reserve how you were going to discuss the changes in the sales function for a larger call, but maybe you could just pull out for us, you know, the number one area where you see the opportunity and, you know, how you think about that going forward? Thanks.
We've, you know, based on our analysis, both before we engaged 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 first year. You know, we plan to implement those. There's a set of other things like how you organize sales event that will be a little more slowly on. I think there's two categories are kind of the operational changes that we think we can make pretty quickly, and then more structural things will go more slowly on. It'll 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, you know, of takeaway there. Thanks.
I guess the thing to think about is, you know, as we look at it, the single biggest opportunity, in the short term is closing that 16-point retention gap between where they are and where we are today in wallet retention.
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, you know, they understand what to use and get in the habit of using it. We start to develop those habits. Those are some examples of the kinds of things. It's very, it's very operational and playbook-oriented.
Got it. Thank you.
Your next question comes from Hamzah Mazari of Macquarie Capital.
Hi. Good morning. Thank you. Just a question for Craig first. Craig, could you maybe talk about comfort with taking on leverage, maybe at a time where there's some tax reform uncertainty, particularly around interest rate deductibility issues? Any color around that?
Sure. Good morning, Hamzah. You know, as we've discussed in the past, you know, we, in analyzing our capital structure, had targeted, you know, 2.5x- 3x gross leverage as kind of, our rough long-term target. As we've talked about, we would have no problem flexing up, you know, for the right value-enhancing initiative. This, in fact, is that the right time to flex up for a great, you know, we believe significant value-enhancing initiative. I can't comment on corporate tax policy. You know, we don't know what that's going to look like.
Given everything we know, you know, about the debt markets, current corporate tax policy, and potential changes, you know, we felt like this was a great time for us to do this transaction for all the reasons that Gene mentioned. Also because of the prevailing market rates, we're actually able to borrow at very competitive levels, as we talked about. Again, we can de-lever very quickly, which also then, you know, takes a lot of pressure off of the P&L and off of our leverage ratios.
Okay, great. Just to follow up, on the net $25 million-$50 million, maybe if you could add some color as to the difference between the high end and the low end of the synergy guidance. Secondly, just on revenue synergies, I know you're not quantifying them, but order of magnitude, what's bigger? You know, 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. I'll start on the on the revenue synergy side. I mean, they are all significant, obviously. You know, our goal to get that business growing at double-digit rates, you know, I think Gene laid out very well in terms of the timing and phasing, which is, you know, the retention rate stuff is the quickest that we can implement. That will come first, that will, you know, create, you know, significant uplifts. Again, you know, just closing half that gap, as Gene talked about, could take the company from, you know, very low single-digit rate growth, all other things equal, you know, 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 CEB segment. There's a great opportunity there. You know, I think over the long term, that mid-market opportunity with new products and services across multiple functions, you know, potentially has the opportunity to be the largest opportunity. I mean, it's enormous, and it's very consistent with the way we think about, you know, the Gartner technology opportunity as well. Again, it's each of them represent pretty significant chunks. 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 third.
In terms of the cost synergy, range, you know, the range has a lot to do with, you know, 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. We're absolutely committed to that $25 million-$50 million net. Again, you know, we expect to deliver that full year 2018, and that sticks on an ongoing and recurring basis as well.
Okay, great. 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. There's the bulk of it looks a lot like our research business. There are events, you know, core events as a part of the CEB portfolio, plus the Evanta acquisition that CEB completed earlier this year. There's probably a little bit of consulting, but the bulk of the business looks and feels a lot like our research business.
Great. Thank you. Good luck with the deal. Thanks.
Thank you, Hamzah.
Your next question comes from Peter Appert of Piper Jaffray.
Thanks. so Gene, don't take this as an insult, please, but it seems to me that you're taking a great business, which is Gartner, combining it with a much less great business, which is CEB. The net result is an entity that probably grows at a slower pace going forward than what Gartner could have previously. How do you respond to that?
First, Gartner is a great business. I agree with that. Secondly, CEB actually is a great business. There are a lot of things that are going really well at CEB. Their products provide a lot of value to clients. You know, 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, you know, we are the best in the world at running those kind 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 as we're growing the great Gartner business that you talked about.
There is, you know, their growth rate is not very good today, so it's going to take some time to accelerate. In the next couple years, they will, you know, we expect that CEB will be growing slower than Gartner. Again, as you heard, by the third year, we're expecting to have double-digit growth. You know, frankly, we're hoping that that double-digit growth is more like Gartner's double-digit growth.
I hope for two. We're aiming is what I should say. I think it'd be wrong to think that this will be dilutive to Gartner's growth over the long term.
Okay.
I think that's it.
Okay. Fair, fair enough. Thank you. You've talked already, I apologize, I got on a little late on the call on this, but you talked already about, you know, retention improvement being such a critical part of the story. I guess the part I'm having trouble with is, you know, 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 of the fundamental differences in the relative importance of the products. You know, any more color in terms of specifics of what you think they've missed in terms of driving retention improvement?
I talked about some of this earlier, Peter. First, we have playbooks on how to improve retention, keep it sustained, even in tough situations, even in tough times. As we looked at them, they don't use those playbooks. One of the things that we know is really important is driving usage. We have a whole organization at Gartner that drives usage of our products, 'cause we know that the more clients use our products, the more the retention goes up. Another example is I talked of mission-critical priorities. When you're working on a client's mission-critical priorities, by definition, they need you.
You know, 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, if you're working on something that's not very important, then what happens is when it comes time to renew, they don't renew it. When you're in the selling cycle, in the servicing cycle, those are just two examples. If you're focused on, again, what we call mission-critical priorities, things that are the top three 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 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 collectively drive very high rates of retention.
Got it. Thank you, Gene.
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?
In terms of same enterprises buying CEB services and buying Gartner services, in the Global 500, there's a substantial overlap as you'd expect, 'cause we both sell to the Global 500. If you look at what we actually sell to, who we sell to, there's very little overlap. Meaning at an individual user level, there's almost no overlap, whatever size company. You know, at an enterprise level, there's dollars from both, but at a who's actually buying, who the buying center is, you know, to be, you know, to be specific, you know, the head of HR may be buying CEB services at any given company, and the CIO may be buying Gartner services at any given company, but there's not much overlap.
As I mentioned earlier, even in IT, if we're both selling into IT, it's typically not to the same person within IT. That would be unusual. At a who actually does the buying, there's very little overlap. Yeah.
Great. From a branding perspective, do you plan on maintaining the CEB brand, or are you thinking of rebranding under Gartner? Thanks.
I'd say that we don't have a final decision on that. However, I will say that we think the CEB brand is very powerful. If you look at Gartner, we have more than one brand at Gartner. For example, our CIO products are EXP. That's the brand for our CIO products. Our current thinking is CEB would be a brand under Gartner. It'd be a brand for a set of products. Take that as a, you know, a stake in the ground, as opposed to the final answer. Again, it's because they have a great brand. You know, it's very widely respected, yeah.
All right, great. Thanks so much.
Thank you. This concludes today's question-and-answer session. I would now like to turn the floor back over to Mr. Eugene Hall for any additional or closing remarks.
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 the 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.