Good morning, ladies and gentlemen, and welcome to Kartner's earnings conference call for the second quarter of 2016. A replay of this call will be available through September 4, 2016. The replay can be accessed by dialing 88 82868010 for domestic calls and 6178 016888 for international calls and by entering passcode 219 46131. This call is being simultaneously webcast and will be archived on Gartner's website at www.gartner.com for approximately 30 days. I will now turn the conference over to Sharif Bakra, Gartner's Group Vice President of Investor Relations for opening remarks and introductions.
Please go ahead, sir.
Thank you, Sue, and good morning, everyone. Welcome to Gartner's 2nd quarter 2016 earnings call. With me today in Stanford is our Chief Executive Officer, Gene Hall and our Chief Financial Officer, Craig Safian. This call will include a discussion of Q2 2016 financial results as disclosed in today's press release as well as our outlook for 2016. After our prepared remarks, you will have an opportunity to ask questions.
I'd like to remind everyone that the press release is available on our website, investor. Gartner.com Before we begin, I'd like to remind you that certain statements made on this call may constitute forward looking statements Forward looking statements can vary materially from actual results and are subject to a number of risks and uncertainties, including those contained in the company's 2015 annual report on Form Ten K and 2016 quarterly reports on Form 10 Q as well as in other filings with the SEC. I would encourage all of you to review the risk factors listed in these documents. With that, I'd like to hand the call over to Gartner's Chief Executive Officer, Gene Hole.
Good morning, everyone, and welcome to our quarterly earnings call. Q2 was a robust quarter with strong performances across our business. As on prior calls, I'll review our key operating metrics on an FX neutral basis. We do business in more than 90 countries around the world. And with ongoing currency fluctuations, that's the best way to understand the underlying health of our business.
For the second quarter of 2016, total company revenues grew 12% and we continue to see robust demand for our products and services. Research, which is our largest and most profitable segment, achieved 17% revenue growth over the same quarter last year. These results were driven by double digit contract value growth and contributions from our recent acquisitions. Our contract value grew 13% with the double digit growth in every region across every client size and in virtually every industry. Plant retention and wallet retention were strong at 83% and 104%, respectively, while down modestly from our recent all time highs.
Our Consulting segment deepens relationships with our largest clients, And for Q2, our consulting business achieved 6% revenue growth with utilization up one point over the same quarter last year. Backlog, which is a leading indicator of future revenue growth for this business segment, grew 15% over this time last year. Our VIN segment continues to drive strong growth for extending our brand. For the second quarter of 2016, Evin revenues were up 16% on a same events basis. We hosted more than 15,000 attendees across 25 events that we held in the quarter.
Our results reflect the tremendous value we deliver to our clients. Technology is critical for every enterprise around the world. Every enterprise has cyber security risks. Every enterprise is worried about technology disruption and technology is the key to fueling whether enterprises funding new growth initiatives or improving margins. Enterprises know they need help and Gartner is the best and most cost effective source for that health.
Our clients rely on us for independent objective, fact based insights when making critical technology decisions. Our services deliver tremendous value and in most cases payback many times over. There are a number of factors in the global economy today that impact our clients. Economic growth has slowed in countries around the world. Oil and other commodity prices have fallen dramatically.
Exchange rates are at levels that challenge U. S. Exporters and challenge non U. S. Importers.
And most recently there's Brexit. As a result of these factors, we see a higher proportion of our clients with financial challenges compared to the past few years. In the U S, the S and P 500 is having its 4th consecutive quarter of negative earnings growth. In Europe, the S and P 350 expected to have negative earnings growth this year. In any of our markets, we always have clients who are doing great, clients who are doing okay, clients who are in economic distress.
We know how to be successful with all clients, whether they're thriving or in financial distress. Which is why we've consistently delivered double digit growth in every geography in virtually every industry and across every client side segment. However, when clients are in distress, decision cycles can get extended as they scrutinize every expense. Because of the pervasive Criticality technology and the incredibly strong value we deliver, we win with these clients. The decision cycles can take longer, which has led to a modest reduction in our growth rate.
Whether enterprises threatening or facing economic challenges, Gartner has the insight and advice our clients need to achieve a success in their mission critical priorities. So summarizing, with a very robust Q2 with strong performances across our business. Our client base is highly diversified with more than 10,000 client enterprises in every size for the largest in the world of the smallest in more than 90 countries and across every industry. We had double digit contract value growth in all geographies, all client sizes in virtually all industries. With a huge untapped market opportunity, we have robust demand for offerings and our pipeline is strong.
And we're not standing still. We attract the best talent in the industry. We continue to invest in innovations to improve our content, products, hiring, training and tools to drive continued improvement in our operational effectiveness. We're committed to enhancing shareholder value through investment in our business, strategic acquisitions and share repurchases. Our 2016 and long term outlook is strong.
And with that, I'll hand the call over to Craig.
Thank you, Jean, and good morning, everyone. Gartner's 2nd quarter performance continues our long term trend of double digit growth. Despite challenges in the economic environment, we see robust demand for our products and services and our sales pipeline is strong. The combination of the tremendous value we provide to our clients around the world, the investments we are making to capture our vast market opportunity and our exceptional business model allows us to consistently deliver double digit revenue, earnings and free cash flow growth. Our first half performance combined with our expectations for the balance of the year indicate that we are well on track to continue that trend for the full year twenty 16.
On an FX neutral basis, our year on year financial performance for the second quarter 2016 included contract value growth of 13% and research revenue growth of 17%, events revenue growth of 16% on a same events basis, consulting revenue growth of 6% with backlog growth of 15%, normalized EBITDA growth of 5% or 14% when adjusted for the shift in the timing of events and diluted EPS excluding acquisition adjustments of $0.71 per share. This compares to $0.65 per share in the second quarter of 2015 and our guidance range of $0.66 to $0.70. In addition, On a rolling 4 quarter basis, our free cash flow conversion was 142% of normalized net income. For the first half of the year, which normalizes for the calendar shifts and events, our year over year FX neutral performance highlights are as follow. Total revenue growth of 16%, research revenue growth of 18%, consulting revenue growth of 9%, events revenue growth of 14%, normalized EBITDA growth of 16% and diluted earnings per share, excluding acquisition adjustments, of $1.32 per share.
This compares to $1.02 per share in the first half of twenty fifteen an increase of 29% on a reported basis. I'll now discuss our 2nd quarter business segment performance in-depth and then turn options. Beginning with research. Research revenue grew 16% on an as reported basis and 17% on an FX neutral basis in the 2nd quarter. Excluding the impact of our newest acquisitions and FX, research revenues were up organically by over 12%.
Our recently acquired businesses continue to perform strongly. Second quarter of 2015. $54,000,000,000 as of the end of Q2, FX neutral growth of 13% versus the prior year. For reference in comparison, our Q2 2015 total contract value at current year FX rates was $1,549,000,000. We have a highly diversified business.
We serve clients in and we serve the largest enterprises strength as it helps us to mitigate against problems in any one region, any one industry, or any one size of client. Consistent with this, our growth in contract value continues to be broad based. Every region, every client size, and virtually every industry segment grew at double digit rates. As Gene mentioned, client retention was 83% for Q2. Down two points from the second quarter of 2015, while retention ended at 104% for the quarter, also down two points year on year.
As Gene mentioned earlier, we are seeing a higher proportion of our clients experiencing financial challenges. These challenges impact our retention and productivity metrics. For example, decision cycles can lengthen and if those decisions stretch over a quarter, it can impact retention and productivity. That said, we still offer our clients great value and know how to operate successfully whether our clients are in growth mode or are facing challenges. New business increased 11% year on balance between sales to new clients and sales of additional services and upgrades to existing clients.
And as always, we continue to benefit from our consistent price increases and discipline around pricing. Our new business growth reflects our success in penetrating our vast market opportunity with both new and existing client enterprises. We ended the 2nd quarter with 10,477 enterprise clients up 5% compared to Q2 2015. The average spend per enterprise also continues to grow. It now stands at $167,000 per enterprise, up 7% versus prior year on an FX neutral basis.
This increase in average spend reflects our ability to drive CV growth through both Turning to sales productivity. As we have detailed in the past, we calculate sales productivity as the net contract value increase what we call NCVI per account executive. We look at it on a rolling 4 quarter basis to eliminate seasonality and we use opening sales headcount as the period denominator. Over the last 12 months, we grew our contract value by $205,000,000 in FX neutral terms. Using our Q2 2015 ending sales headcount of 20.70, as our beginning of period denominator yields Nick Vee per AE of $98,000 on a rolling 4 quarter basis.
Or a 14% decline over the second quarter last year when the comparable figure was $114,000 per account executive at constant currency rates. As always we remain highly focused on improving our sales productivity and remain confident that the initiatives we have implemented to drive productivity will positively impact our results over the long on investing to capture the vast market opportunity ahead of us and to drive long term earnings and cash flow growth for our shareholders. We continually evaluate and adjust the pace of these investments, taking a highly analytical approach to how and where we allocate sales resources all the way down to the individual team if we are seeing strong CV growth and good productivity trends in a team or region, then we would plan to increase headcount faster than the average in those areas. Similarly, if we were We will continue to make quarter in research with 13% contract value growth and strong growth from our most recent acquisitions. While sales productivity declined in the quarter, We are confident that the productivity initiatives we have in place will positively impact contract value growth in 2016 and ultimately, revenue research revenue growth over the long term.
Moving to events. On a same event in FX neutral basis, events revenues increased 16% year on year in Q2. As noted last quarter, we moved 3 larger events that occurred in Q2 2015 into the first quarter of 2016, which impacted the reported results in both Q1 and Q2 of this year. In the second quarter, we held 25 events, with 15,451 attendees compared to 26 events and 17,107 attendees in second quarter of 2015. On a same events basis, we had a 5% increase in attendees.
Events' Q2 gross contribution margin was 54%, up slightly compared to the lighter year ago quarter. As I mentioned earlier, events revenue increased by 14% on an FX neutral basis in the first half of twenty sixteen. Consulting had a strong quarter generating a 6% year on year FX neutral increase in revenues The labor based business was up 10% versus Q2 of last year on an FX neutral basis with broad based growth. The contract optimization practice declined for Q2 versus 2015, Clut has showed growth on a year to date basis. The underlying operating metrics of our consulting business remains strong.
On the labor based side, billable headcount of 626 was up 11% from the year ago quarter and 2nd quarter annualized revenue per billable headcount ended at $408,000 which was approximately flat year on year on an FX neutral basis. Our ongoing investment in managing partner continues to drive demand for our services and we had 112 managing partners at the end of Q2, a 12% increase over the year ago quarter. Related to this, backlog, the key leading indicator of future revenue growth for our consulting business ended the quarter at $109,000,000, up 15% year on year on an FX neutral basis. This represents over 4 months of forward backlog. Moving down the income statement.
SG and A increased by 14% year over year in the second quarter, primarily driven by the growth associates, an increase of 2.27 or 11 percent from a year ago. At June 30, we had a large number of new sales associates who are still in training and thus not in the final count. If we normalize for the timing of these hires, our year on year sales headcount growth 14% for the up 7% year on year on a reported basis and up 5% on an FX neutral basis. Excluding the shift in events I mentioned earlier, normalized EBITDA would have been up approximately 14% in the quarter. On a year to date basis, normalized EBITDA is up 16% versus the prior year on depreciation, amortization and acquisition and integration charges support our growth as well as the impact of our recent acquisitions.
Net interest expense was $7,000,000 Our GAAP tax rate for the quarter was 37.9 percent, which is higher than our full year GAAP tax rate guidance of approximately 36% due to Q2 timing of tax costs. Adjusting for acquisition charges, our normalized tax rate for the quarter was 35.1%. Is in line with our full year normalized tax rate guidance of approximately 35%. GAAP diluted earnings per share was $0.57 in Q2 Our GAAP EPS included and integration charges was $0.71 per share in Q2, up 9% versus Q2 of 2015. On a year to date basis, EPS excluding acquisition and integration charges is up 29% year over year.
Turning now to cash. For Q2, operating cash flow was $145,000,000, approximately flat on a year on year basis We defined free cash flow as operating cash flow less capital expenditures with cash acquisition and integration payments added back. In the second quarter, free cash flow was $127,000,000 compared to $132,000,000 in Q2 2015. Managing our business to generate strong cash flow is one of our top priorities. Year to 1st, the modest deceleration of our CV growth rate second, the timing of bookings across all of our businesses and third, modestly higher capital expenditures to support the growth of the business.
Our full year outlook still shows free cash flow growth of 11% to 19%. Consistent with the negative working capital dynamics that are a key characteristic of our subscription based business model, We continue to generate free the end of Q2, this equated to rolling 4 quarter free cash flow of $320,000,000. This represents a net income to free cash flow conversion of 140 percent. Strategic acquisitions and share repurchases continued to be the primary uses of our free cash flow and available capital. Our number one priority remains executing on value creating acquisition opportunities and our M and A pipeline remains active.
At the end of the second quarter, we announced and closed the acquisition of SCM World, a leading cross industry peer network and learning community providing subscription based research and conferences for supply chain executives, spending $29,000,000 in Q2. As you'll see in our 10 Q, there are other contingent payments associated with this deal based upon employment and performance criteria. We were able to use our overseas cash to fund On a year to date basis, we've repurchased 52,000,000 of shares. As of June 30, we had approximately $1,100,000,000 available under our share repurchase authorization. We ended the quarter with As of June 30, we had gross debt of $835,000,000.
When combined with our cash balance of $445,000,000, it represents a up. In June, we closed on a new $1,800,000,000 secured credit facility consisting of a $600,000,000 term loan a $1,200,000,000 revolver. As we assessed our projected growth, our potential future needs, as well as the attractiveness As of June 30, we have an additional $966,000,000 of revolver capacity. That and our ongoing free cash flow generation gives us ample liquidity to continue to grow Before discussing our guidance, I did want to mention Brexit, as I know that many of you have been asking questions related to it and our exposure in the UK. We generate approximately 7% of our execute in times of uncertainty.
By staying focused on our customers' mission critical priorities, we are confident that we can continue to provide value whether our clients are thriving or under financial stress. Turning now to guidance. Except for some modest changes to reflect the impact of our most recent acquisition, our guidance is unchanged from May. If you recall, we raised our guidance in May and our Q2 performance is consistent with that outlook. All of the guidance information is contained in our press release.
So I will only focus on the highlights and the items that changed. Our 2016 guidance still expects total revenues of $2,405,000,000 to $2,465,000,000. This is FX neutral growth of 13% to 15%. We continue to expect to deliver between 450 $480,000,000 of normalized EBITDA or 11% to 19% growth on an FX neutral basis. To account for additional amortization and acquisition and integration charges from the SCM World deal, we now expect approximately $0.05 more of acquisition and integration charges in 2016.
As a result, we are updating our GAAP EPS guidance and now expect $2.22 to $2.44 per share in 2016. This includes $0.45 per share of acquisition related charges. Excluding acquisition integration charges, our guidance for EPS remains at $2.67 to $2.89 per share. In 2016. This represents FX neutral growth of approximately 13% to 22%.
For the full year 2016. For the third quarter of 2016, we expect GAAP EPS of 36 to $0.40 per share, including $0.11 per share of acquisition and integration charges. This yields EPS, excluding acquisition and integration charges, of $0.47 to $0.51 per share. Q3 is historically one of our smallest quarters, and that is the case again in 2016. In summary, Gartner delivered another very strong quarter in Q2, with all three of our businesses performing well.
Despite some challenges in the economic environment, demand for our products and services continues to be robust and our sales pipeline is strong. We continue to provide value to technology, supply chain and digital marketing initiatives, whether they are in growth mode or are facing challenges. Our strategic priority continues to be on investing organically and through value enhancing initiatives to capture while also returning capital to shareholders. Our recent acquisitions and execution of our ongoing share repurchase program is consistent with this We remain highly focused on driving sales force productivity, and we are confident that the initiatives we have implemented to drive productivity will positively impact the results over the long term. We had a very strong first half of twenty sixteen and our full year 2016 outlook is for double digit growth in revenue, earnings and cash flow.
And finally, we continue to leverage our powerful business model which consistently delivers free cash operator.
Questions.
And your first question comes from the line of Timothy McHugh from William Blair. Please proceed.
Thank you. I guess first just want to ask on your comment about the little bit longer sales cycle. I guess it's understandable in this environment, but can you maybe elaborate, I guess, I know you grew double digits in every kind of region and client size, but were there areas of the world where you saw this more and less? And I guess was it any more pronounced later in quarter surrounding Brexit and some of that volatility then, I guess, earlier in the quarter?
Hi, Jim, it's Jean. So, to the last part first, we didn't see in the quarter anything we could directly trace to Brexit on anything. So within Q2, I'd say we couldn't pick up any direct impact of Brexit. The with regard to sort of elaborate a little, if you think about selling, I'll use Brazil as an example. If you're selling to an enterprise in Brazil, whether it's public sector or private sector, the economy is just terrible.
It's shrinking They have a lot of problems and they still buy. We get we actually growing in Brazil still, but it's a lot lower than it was before. And so what happens is a client may want to in fact, this happens in the public sector frequently. A client will want to renew because the government revenues are down so much There's a lot of scrutiny and sometimes that renewal will extend for, call it, 3 months, longer than we would have normally had where it renews run on time. That's an example of what the kind of thing you see going on.
And it's in the areas that you'd expect, which is like where oil and gas has been really affected be in oil and gas, by the way, in aggregate, we're growing. Brazil, we're growing, but it's a lot slower growth than it used to be. And the that's kind of an example of the extended decision making cycles. So it's exactly where you'd expect it.
Are you surprised though it was kind of a volatile world in the first quarter as well. And I guess, so what feels different, I guess, in 2Q than 1Q that you're highlighting it a little bit more?
I think it's not that, that there's a dramatic change between first quarter 2nd quarter. I think that the it's kind of an incremental change where these when things get fed, companies hope that they're going to get better. And then when they say that, I've got to use it for Zelle's example when it becomes clear and clear that there's problems, you know, incrementally things could go worse. By the way, my sense in Brazil is it's bottomed out, but I do think that it was worse it was a little worse in Q2 than it was in Q1 and Q1 was a little worse than it was in Q4. So that's just an example.
Okay. Thanks. And Greg, just a quick numbers. 1, can you give us any sense for the contract value or revenue for SCM?
Hey, Tim. Good morning. Yeah, it's, it's small. It's a relatively small acquisition as you seem seen from the purchase price, it doesn't contribute all that much to the overall and we typically don't break out the contract value from small businesses or from small acquisitions. But suffice to say, we think it's a great deal for us.
Really helps us and enhances our supply chain business selling into, the key executives from a supply chain perspective, but relatively small from a contract value perspective.
Thank you. And your next question comes from the line of Jeff Meuler from Baird.
Metrics on a rolling LTM basis, but given all of the commentary in the prepared remarks, just to confirm, it does sound like if you just look at quarterly metrics, things are trending, I guess, a little bit worse or a little bit slower growth in Q2 just on a quarterly metric basis than they were 3, 4 quarters ago. Is that an accurate interpretation?
Yes, Jeff, that's 100% accurate. And again, I think a lot of it relates to what Jean just described both in his prepared remarks. And in the Q And A as the sales cycles lengthen and things crossover quarters, as I described, we will often take down business that will impact the renewal rate. We stay in touch with the client. The client still really needs our value.
We win that we win back that business over subsequent months and quarters. But your assertion is correct that Q2, you would see a slowdown in the contract value growth rate as well as the retention measures.
So, go ahead, Jeff.
No, please add what you were going to.
So, I was going to say, keep in mind, again, we had great double digit contract value growth I don't want to overplay the point, which is we have tremendous market opportunity. Clients love our products. We had great double digit growth I mentioned our retention metric was down a little bit, but it's still at great you compared to any metric externally, it's a terrific measure and it's down slightly from our all time high. So the, actually we're seeing great demand for our products, just a little, as you said, a little different than it was a year ago.
Okay.
And these are the places you should expect.
Understood. And then on capital deployment, asking this question in the context of slower first half share repurchases coupled with the increased credit line Anything that should be read into putting those two things together in terms of appetite for a larger deal or is there something about the credit facility that will help you help facilitate more aggressive share repurchases that was not obstacle in the first half or anything like that?
Hey, Jeff. It's Craig. I think when we look at capital deployment. There's really no change to how we think about the approach. We're, as always, we remain very focused on ensuring that we deploy our cash change.
We have 2 priorities. Our number one priority is shareholder value enhancing strategic M and A. And we've proven over the last 2 years, two and a half years that we've been able to do that and get really great properties and bring them into Gartner and drive really great growth and really great value for our shareholders. In absence of those, value enhancing M and A, we still believe that return of capital to shareholders through share repurchase program, is a great way to do that. And those remain the 2 top priorities, but number 1 is still that value enhancing strategic M and A.
From a credit facility perspective, It's one of those things where when you look at our growth and where we're going and making sure that we have access to capital to do value enhancing things we want to do. We looked at the markets and we just wanted to make sure we took advantage of being able to upsize the credit facility, push out the term at extraordinarily attractive rates. So It's really a combination of we're growing and we want to make sure we have the right size credit facility and then also being strategically opportunistic around making sure we locked in at very, very attractive pricing.
Okay. And then finally for me. Can you remind us, how you calculate retention? And specifically, I'm wondering, is there some sort of adjustment made for when a client drops out for a 2 or 3 month period or is it just a pure mathematical calculation with no adjustment made for factors like that? Thank you.
It varies, Jeff, it's kind of situational, depending on the client situation. But generally speaking, if we take the business down, so if the client does not renew on time, generally speaking, that will come out of the retention in that given quarter. And then as we work it back, it goes back into the contract value base, when we, when they resume their services.
Thank you. And your next question comes from the line of Gary Bisbee from RBC Capital Markets. Please proceed.
Hey guys, good morning. This is Connor Hansen in for Gary. Gene, you mentioned just some of the post brexit comment that 2Q wasn't impacted now that we're kind of a month or a little over a month beyond the vote. Has there been any incremental kind of headwind or slowness there in that region that you want to mention?
Well, I'd say it's too early to tell. So again, the, it's too early to tell.
Okay. Fair enough. And I guess, Craig, just with the sales force hiring, and I obviously said that there's a big class, I guess, toward the end of the month in June. Is it still the expectations, I guess, any updated commentary on the guidance for the sales headcount for the year? It seems like that it is likely to be touch below kind of the 15% you guys were guiding for early on.
Is that fair?
Yes, Connor, good morning. We're still targeting in that 15% range. Give or take. As I mentioned, if you normalize for the timing of that class, we're at 14% and we were at 16%. In Q1 and 16% for full year last year.
So based on everything we're looking at, and again, as I mentioned, we are looking at the growth at a team by team level, but based on everything we're looking at now, we would expect to be in that 15% range.
Okay. And then just last one, on a positive note, I'll move away from some of the other challenge sectors, but Any regions or sectors or industries that you guys want to highlight that had particular strength in the quarter? Maybe something along the lines of productivity has improved and where you are making incremental additions to the sales force there?
So, it's Gene. So, yeah, we have lots of areas that are doing well. First, if you look at like Asia is doing well, very well for us sort of not every country in Asia, but Asia overall is doing very well for us. A lot of the emerging markets are doing very well for us. If you look within the U.
S, there are certain industries that are doing very well. I don't want to break it out, but there are certain industries that are doing very well. And in Europe, again, there are certain countries that well.
And your next question comes from the line of Manav Patnaik from Barclays. Please go ahead.
Thank you. Good morning, gentlemen. So I think obviously the deceleration in some of the markets and so forth. It's probably not surprising given the macro challenges out there. But I guess going forward, is the way we should think about it is given all the positive commentary you had to say, Jean and the hiring still on track for 15% that irrespective of a deceleration, you guys will still just power on with the 15% sales headcount headcount growth even if that impacts productivity?
So, where we start from is this. We, as you know, we have this incredibly large untapped market opportunity. And, you know, we approach our business for the long term, which is we want to make sure we continue to market opportunity and position ourselves well for double digit growth every single year. Having said that, as you know, we also then take that and we look at each individual sales team, we go down to an individual manager level and say based on the macroeconomic environment they're facing, effect actions in macroeconomic. Based on the industry specifics they're facing and based on the bandwidth of that particular manager, can we add capacity there?
So, again, if I looked at, I'll go back to Brazil, most of our managers in Brazil, we are not adding headcount to because they have their hands full dealing with the economic issues there. Again, we're still growing Brazil. So just I'll make sure I reinforce that. The, and so we'd be adding a lot less headcount there, people unusual to add a lot and sometimes like Brazil. On the other hand, we do have areas that are growing very rapidly, like Asia where we might be growing our headcount as much as 25% on those teams.
And so the 15% is not kind of a 15% target at a kind of macro level. We look at the individual teams and say based on the market condition that team is facing and based on the capability of that manager to take on additional headcount and additional opportunity, how does that work out historically that's worked out kind of around the 15 between product trucks, say, 13% to 17% range. And going forward, we're going to do the exact same thing. And so if we if for some reason we see more teams that are challenged, you might see that toward the lower end of that range. And if you see fewer teams toward the higher end of that range, but it's not through set macro level, it's set based on bottoms up level that gets us that.
Okay, fair enough. Thanks for that color. And then, Craig, did you say that 27 percent of your revenues is UK or is that Europe as well? Because I guess I think in the past, you guys have said all your country exposures mirror GDP and that seemed a little outsized. So maybe you can just help us there.
Yes, I'm sorry, Manav, I said 7, not like in front of the 7. So yeah, just 7% of our revenue is in the UK.
Got it. And then just, since you guys are calling out Brazil and oil and gas, any sense of what those exposures are?
Yes, we've talked about them in the past. I think, both are well below 5% of total contract value or total revenue. So they still represent a very small exposures for us. That said, they were before they had those macro challenges were 2 very fast growing areas for us. Little bit of an overlap with oil and gas in Brazil.
But they had been very fast growing. And as Jean mentioned, they are continuing to grow just not at the same rate that they had been growing previously.
Thank you. And your next question comes from the line of Toni Kaplan, Morgan Stanley.
Good morning. Thanks for taking my questions. Just regarding the elongated sales cycle, I just want to make sure I understand correctly, it it's just taking a little bit longer to close the sales, but you are still closing the deals, meaning the pipeline isn't dramatically reduced. It's just that it's taking longer to actually close the sales. Is that correct?
The, many, most of our clients are doing fine and our sales cycle has not extended or anything. It's just, it's normal business. There are a few areas like I picked on Brazil, but like Brazil, oil and gas, where they're under stress, they're looking at every expense and it does take a little longer. We do actually it's very unusual, even if it takes longer, we get the we do get the sale. And so, yeah, your question is right, we actually do get the sale.
Again, that's just for this piece of our business that's under more distress, which is most of our business. And then, our pipeline actually is way up compared to this time last year. It's way higher than our growth rate. And that's purposeful. We've purposely built a very strong pipeline.
And so our pipeline is very, very robust.
Okay, great. And then I think you mentioned sort of adjusting head down in different areas, when you are seeing either really strong growth or really weak growth, adjusting it up and down. And so how often are you doing that continuously? Do you do it sort of once a quarter? How quickly sort of can you adjust that?
And I guess if you're adjusting up, maybe it takes a little bit of time for people to get to full productivity, but So how should we think about that?
So we have a we actually have a team that looks at that. We have a territory planning team that looks at that and they do this on a continuous space And so we make real time adjustments through the year. So it's not like we sort of plan upfront for the year and then it doesn't change based on what's going on what's going on that we actually experienced. We actually, look at it at an ongoing basis and we have the hiring plan each quarter for how we want to hire. And we make real time adjustments based on what we're really seeing.
Okay, great. And just lastly, Evinced margins actually looked really good this quarter. I know you had the three large events that moved into first quarter. So I was actually thinking year over year margins would be down. Anything to call out in terms of the strength there?
Thanks.
Hey, Tony, it's Craig. We continue to grow that business really well. I think the right way to look at it is look at it on a first half basis to judge the margin. We're actually up two points, year over year, on the year to date gross margin. And that's because we're driving really nice growth, organic growth into those events.
And when we're able to do that, it does flow through at the margin level.
Thanks a lot. I appreciate it.
Thank you. And your next question comes from the line of Aners Singh from Credit Suisse. Please go ahead.
Hi, good morning. Thanks for taking my questions. Jean, first off, I wanted to touch on your commentary that a larger portion of your client base is having problems versus a few years ago. So on broad strokes, would you be able to characterize what that proportion looks like today versus a few years ago? And would you characterize the pressure you're seeing being higher on the new sales front or is it more on the retention end?
It seems your new business growth continues to be steady in the quarter despite the tough comp from a year ago. So just wanted to get a better sense of where the pressure may be.
So, in terms of proportion, I'm not going to break it out in terms of 8% because it's really a spectrum. It's not kind of they're either enrolled or not. The, my point is just if you look at things like oil and gas or Brazil or the major commodity producers, for example, that there are no more stress they were in the and that's a different selling environment. Yes, we do well there, but it's just a different selling environment. In terms of new versus renewal, the same thing true, which is we have a very large market opportunity.
We are making sales in all kinds of industries. We already have sales teams, for example, in Brazil. We want them to sell new business. That new business in Brazil is harder just like renewals are harder. If I looked at some of the industries that are not under such stress, like I'll pick health care as an example, the, you see both new business and retention being easier in those industries.
So it's a matter of where the industries are challenged, you have it's tougher news business and tougher renewals where it's not as much, it's easier. And again, we get back to even in these areas where I've characterized being tougher, as Craig said, take Brazil, it used to be much higher growth than average, in the past, and now it's a bit lower than average. And so that big swing is what's going on. We're still growing there. We still get good returns compared to most of the world and to do business.
Understood. And then with regards to your SCM acquisition, could you talk about perhaps how big your supply chain related business today. I realize it's probably tiny and you've spoken to, I think, a $4,000,000,000 addressable market there. But hoping you can talk a bit about where you're having success today where you see the low hanging fruit on that front?
Hey, Eans, good morning. It's Craig. So, as we've talked about in the past, our supply chain business which is a great business. It is growing well faster than the average. We think it's a really big market opportunity.
With the combination now of what we had here at Gartner Plus ESCM World Capabilities And Client Bay We think it's a really great business on a go forward basis. We believe that we can continue to grow that business at an accelerated rate It is as underpenetrated as we are in the overall IT market. I think that over the long term, because we can continue to grow our IT business, which is the bulk of it at such a rapid rate, supply chain will continue to be a small piece of the overall portfolio. But clearly, it's a place where we think we can drive really great growth and drive really amazing value for our clients. It's the same business model as our research business.
It has high renewal rates. We the same cash flow dynamics, etcetera. So we're excited about it, but it still represents a small piece of the portfolio.
Okay, got it. And one final one for me. I apologize if I'd this, but you guys have had 2 quarters of strong backlog growth in consulting. And I realize you guys increased your guidance last quarter. Is there a reason why you didn't tweak it this quarter and you're flattish year over year outlook for the second half?
Yes. We, the business continues to form really well, particularly on the labor based side of the business, which is what the backlog supports what I would say is the range represents the relevant range of outcomes. As we look at things today, the outlook reflects that. And so We didn't feel the need to update the guidance based on that. That said, the business continues to perform really, really well.
And based on our managing partner investments and based on the backlog, it's really more about the long term sustainability, of the business and we're investing for that future growth as well.
Okay. Thanks a lot.
Thank you. And your next question comes from the line of Joseph Marucci from Cantor Fitzgerald.
I was hoping you could help us kind of reconcile some of the metrics around the sales per enterprise. It looks like that number has been moving up pretty consistently, but the number of enterprises that you're adding is kind of decelerating. And maybe you could just help us understand how you're able to kind of cross sell into those areas, because it seems like it's going actually pretty well, and that versus the commentary about the elongated sales cycles?
Yes, Joe. Good morning. It's Craig. So I think when we think about our market opportunity, we think about it really is in 2 primary places. 1 is obviously those 100,000 enterprises in our market space that we're currently not doing any business with.
And we've made really good progress over the last several years of going from probably 6 1000 enterprises to almost or over 10,000 enterprises today. On top of that, when you look at the average contract value per enterprise. And even today at $167,000 per enterprise, that is really low penetration. And as we look across our client base, we know that there are opportunities to drive significantly greater penetration within each of those existing enterprises. And we do that in a variety of ways.
We have a tier of services So we can upgrade clients once we're in there. We find additional users within the clients and buying centers that we're doing business with And then we find new buying centers as well within the clients. On top of that, our supply chain business and our marketing business allows us to even further penetrate those clients. So again, when we think about that market opportunity, it is the combination of further penetration of existing enterprises, which we think that is an enormous opportunity, plus all that greenfield opportunity with the enterprises we currently don't do business
Okay. But do you feel like that's going to be more difficult in the present environment given the sales cycle that trend to continue? Have you seen any disruption there?
No, I don't see it as being more difficult at all. The again, think about our clients in different segments, which is we have clients that are doing just great, that are, again, figuratively speaking not in Brazil. And it's kind of difficult. I think we have clients that are figuratively speaking in Brazil, which are a little tougher. And so I think the you wouldn't want to characterize the sales cycle all over at worst.
That's not right. There are specific segments in the global economy that are having trouble. Those are we still are growing them, but just not as rapidly as the others. And so in terms of continuing to sell more to our existing clients. We're going to do that.
We're going to have a lot of that. Typically it's been 2 thirds of our growth actually. It's part of our product strategy. We have products and we have products for multiple people in an organization. We keep adding more of those products.
So our sales people have more to sell, which is why it's typically been 2 thirds of our contract value growth.
Got it. And maybe forgive me if I missed this, maybe in the opening remarks, but can you give us some idea of what the impact from currency is And is there any update for that for given kind of Brexit and some of the recent movements?
Sure, Joe. The, we talked about our results and what's happening from a foreign exchange perspective is and you probably see this in most global companies, we're starting to lap the major strengthening of the U. S. Dollar that we saw from the back half of 2014. Into the first half of twenty fifteen.
That's why on the quarter, you don't see that much of a difference between our reported results. In our FX neutral results. They're pretty tight. As we look out for the balance of the year, our outlook reflects where exchange rates are as of earlier this week. And as you know, some are going one way and some are going the other way.
And so, when we look at where we are with our major exchange rates compared to where we were when we started the year and when we did our initial outlook, and then where we were back in May when we updated our outlook. Yeah, the pound is weaker. Maybe there is, maybe the yen is a little bit stronger. But at the same time, there are other currencies that are going in both ways. So the way we look at it right now is we expect back half of the year to look a lot like what we experienced in Q2, from an FX exposure perspective.
Okay. And then the last one for me, I think, just to get away from Brexit for a little bit, sales productivity, maybe you can just give us an update on your latest thoughts there and any way we should start thinking about that within an elongated sales cycle over the, I guess, in the a couple of quarters? Thanks.
So sales productivity is one of our top focus areas We spend a lot of time and effort on it. We're, you know, the things that we're doing, I think, are getting better all the time and it falls into 3 main categories. Recruiting, which is making sure we hire people that are the best possible fit for Gartner, where we're really focused on having the right analytics to help us make sure we get the right people in the right process. The second category is in training where the, we have, I think, what is one of the best training programs for salespeople in the industry, we continue to improve that training all the time, modified. It's not static.
As we example, when things are training our sales people in areas that are a little distressed is how do you deal with those and be very successful in an environment like that, which we know how to do. And then the last one is in tools where we're very focused on productivity enhancing tools for Salesforce. Technologies change in everything, technology will actually allow tools to help our sales people get more, be more productive as well. We've got investors in all three of those areas focused on improving sales productivity. And we feel really good that those are all over time, we're going to have a great impact on our sales productivity.
Thank
you. And your last question comes from the line of Jeff Silber from BMO. Please proceed.
Hey, good morning. It's Henry Chen for Jeff. Just a quick one for me. Thanks. Just looking at your consulting revenues, can you just talk about what's driving some of these quarter to quarter shifts?
It looks like backlog has been pretty strong over the past few quarters. I'm just wondering what's driving some of that deceleration in 2Q.
Yes, Henry, good morning. It's Craig. I think there's 2 things going on. So one is the labor based business, again, which makes up the bulk of the consulting revenue, we've seen pretty consistent performance there. And we had strong bookings and and strong backlog coming out of Q4.
That translated into a strong labor based revenue quarter in Q1. We also replenished that backlog and entered Q2 with a strong backlog position. I think that led to the strong labor based growth, which I talked about earlier, we were up 10% on our labor based revenue in Q2 on an FX neutral basis. Think some of the volatility still comes from the contract optimization business. As I mentioned in my prepared remarks, in Q2, we were actually down on a year over year basis in contract optimization.
In Q1, we were up a little bit. On a year to date basis, we're up modestly on that business, but that's the place that consistently causes some of that volatility. I think if you peel efficiently. And again, that goes back to a lot of the investments we've made around managing partners and a lot of the things that the consulting leadership team has done to make that business more predictable with people relationships, etcetera. And so I think you're starting to see that or you're not starting you're seeing that flow through in our results.
And again, we gives us confidence around Q3 and Q4 given the backlog position we have, entering Q3.
Okay. Fair enough. Thank you.
Thank you for your questions. I'd now like to turn the call over to Gene Hall for closing remarks.
So I'd like to summarize the key points of today's call. So first, we're doing great as a company. We see robust demand for our services and our sales pipelines incredibly strong. With a huge untapped market opportunity. We attract the best talent in the industry.
We continue to invest in improved recruiting capability, training tools that drive sales productivity. We continue to invest in innovations in our content, products, hiring, training and tools to drive continued improvements in our operational effectiveness. We're committed to enhancing shareholder value through investment in our business, strategic acquisitions and share repurchases. We're well on track to deliver another year of double digit growth in contract value revenue and earnings, coupled with strong cash flow conversion. And our long term outlook remains equally strong.
Thanks for joining us today, and we look forward to updating you again next quarter.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.