Gartner Q1 2009 Earnings Call Transcript

May. 8.09 | About: Gartner Inc. (IT)

Gartner, Inc. (NYSE:IT)

Q1 2009 Earnings Call

May 8, 2009 10:00 am ET

Executives

Hank Diamond - Group Vice President Investor Relations

Eugene A. Hall - Chief Executive Officer, Director

Christopher J. Lafond - Chief Financial Officer, Executive Vice President

Analysts

Peter P. Appert - Piper Jaffray & Co.

William Sutherland - Boenning & Scattergood

David Lewis - JP Morgan

Brian Murphy - Sidoti & Company

Laura Lederman - William Blair

Operator

Good morning, ladies and gentlemen. Welcome to Gartner Inc.’s earnings conference call for the first quarter of 2009. (Operator Instructions) I will now turn the conference over to Hank Diamond, Group Vice President of Investor Relations and Corporate Finance for opening remarks and introductions. Please go ahead, sir.

Hank Diamond

Good morning, everyone and thank you all for joining us. On the call with me today are Gartner's CEO, Gene Hall and CFO, Chris Lafond. Before we discuss our results, I would like to remind everyone of four things.

First, the rebroadcast, reproduction, and retransmission of this conference call or webcast without the expression written consent of Gartner are strictly prohibited.

Second, if you did not receive a copy of our press release it is available on our website at www.gartner.com, or on the first call system.

Third, the company will be making statements about its future results and other forward-looking statements during this call. Statements about future results made during the call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations in the current economic environment. Forward-looking statements and projections are inherently subject to significant economic, competitive and other uncertainties and contingencies which are beyond the control of management. The company cautions that these statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements. Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements and projections are specified in the company’s filings with the SEC, including in its annual report on Form 10-K for fiscal year 2008.

Finally, during the call the company will be using certain non-GAAP financial measures as defined under SEC rules. Where required, we have provided a reconciliation of those measures to the most direct comparable GAAP measures in the tables and the press release.

Before I turn the call over to our CEO, let me briefly review the highlights of our first quarter 2009 financial results. Starting with earnings, EPS from continuing operations increased 50% year over year to $0.21, net income was $20 million, and normalized EBITDA increased 20% year over year to $48.3 million.

At March 31, 2009, contract value, which is a key leading indicator for Gartner's research business, was $760.7 million. Excluding the impact of foreign exchange, contract value increased 2% year over year.

Revenue increased 1% year over year excluding the impact of foreign exchange and was $273.5 million for the first quarter. Cash from operations increased 4% year over year to $14.8 million and capital expenditures were $4.5 million.

Finally, on the balance sheet, as of March 31, 2009, the company had total debt of $338 million and cash of $70.3 million.

In addition to announcing first quarter earnings, we raised the low end of our full year 2009 guidance for EPS from continuing operations in normalized EBITDA and we reiterated our guidance for revenue and cash flow from operations. Now, I would like to turn the call over to Gartner's Chief Executive Officer, Gene Hall.

Eugene A. Hall

Thanks, Hank. Good morning, everyone. Thanks for joining us. There are four key points that I would like you all to take away from our call today. First, our results last quarter continue to demonstrate the value our research provides in supporting the critical need to run effective and cost efficient IT operations and programs. As a result, we are well-positioned to succeed in both good economies and bad.

Second, we are effectively executing a strategy to both control expenses and maximize profitability during the current downturn, while at the same time positioning the company for long-term growth.

Third, our businesses are performing well. Revenue trends are in line with our expectations and our focus on controlling costs allowed us to generate substantial earnings growth and solid cash flow in the first quarter.

And fourth, we are well-positioned to quickly return to double-digit revenue and earnings growth as the global economy returns to more normal activity levels and we remain confident in our long-term outlook.

Now let me now address each of these points in more detail. Starting with point one, Gartner's well-positioned to succeed in the current economic environment. Our three businesses -- research, consulting, and events -- have strong synergies with a clear focus on IT cost optimization and effectiveness.

This portfolio of products provides a comprehensive suite of offerings that support critical operational and strategic decisions that IT leaders must make to run effective and cost-efficient IT programs. Our research provides our clients with tremendous value at relatively small cost and in fact is often self-funding.

Our size and scale is a significant competitive advantage at a time when companies are scrutinizing every expense to ensure that value is being delivered. With almost 1,200 analysts and consultants, we continue to demonstrate that our research offerings are differentiated in this market.

Importantly, the extremely low single-digit turnover in our analyst community means that our clients will build relationships and work with the same analysts over many years.

In addition, the role-based research approach that we pioneered back in 2005 provides a strong foundation for our continued product enhancement [inaudible].

The breadth and depth of our research, coupled with this leading position allows us to be the most capable partner for our four target client segments -- CIOs and their organization, technology companies, professional service firms, and investors.

More than anyone else, we have the credibility, capability, and resources to deliver value and effectively support our clients in any economic environment.

The benefits of all of this can be seen by the fact that during the first quarter, our client retention rate remained within two points of its all-time high. Both our client and wallet retention rates remain the highest in the industry and we are now doing business with almost 250 enterprises that we were not working with at the end of last year.

Another statistic that we track closely is research client inquiries, which increased 27% in the first quarter of 2009, versus the first quarter last year, as clients look to us for advice during these difficult times.

Our first quarter results demonstrate that clients need us now as much as ever to help them deliver real hard dollar cost savings across their IT environments.

Turning to point two, we are executing the appropriate strategy to control expenses and maximize profitability during the current downturn, while at the same time positioning the company for long-term growth.

At investor day in March, we reiterated our focus on continuing to execute the successful strategy we implemented in 2005. The strong financial performance we have delivered over the past three years reinforces our commitment to this strategy. Our approach to managing the business in today’s economic environment is based on experience and our proven track record of success during this time.

In anticipation of the potential impact of the economic downturn, during the fourth quarter of 2008 we implemented a set of extremely rigorous expense controls across the entire company. In early January, we took a number of actions to reduce costs, including the elimination of 120 positions, the cancellation of 18 events, the reduction of many other expenses, and significantly lower capital spending from our 2008 levels.

Our focus on tightly managing and prioritizing expenses provided us with the ability to deliver the result we reported today.

After assessing Gartner's past performance, it is clear to me that maintaining both sales and research analyst capacity is critical to client satisfaction, retention, and long-term growth. As a result, we have held sales territories and research headcount flat. Total headcount is down approximately 2.5% from last quarter as we are focused on replacing only critical client-facing positions.

We are also making a number of operational enhancements to improve performance in the current environment. For example, we’ve armed our sales force with the tools to demonstrate the positive return on investment that our research can generate, which of course makes our services a more attractive investment for our clients.

These actions and others should increase the effectiveness of our sales force and ultimately drive improved retention and higher new business over time.

With regard to our product portfolio, continuous innovation and enhancement is critical over the long-term. In this environment, we are very selectively investing in those product enhancements that will possibly impact our results in 2009.

We also continue to maintain our pricing discipline of selling the differentiated value of our offerings and not discounting.

We are prudently and tightly managing our business during this economic environment. We will continue to make the hard decisions to reduce cost and prioritize our spending, if necessary, while at the same time making selective investments to ensure that we are positioned for long-term growth.

Turning to point three, the revenue trends in our businesses are in line with expectations and our focus on controlling costs allowed us to exceed earnings expectations in the first quarter. As a result, we have increased the low end of our full year 2009 guidance for EPS from continuing operations and normalize EBITDA, and reiterated our guidance for revenue and cash flow.

We continue to see good demand in our research business. We delivered year over year revenue and contract value growth during the first quarter, excluding the impact of foreign exchange.

Our consulting business modestly exceeded our expectations in the first quarter as we continued to see particular strength in our contract optimization business, which generates direct, hard dollar cost savings for our clients.

Looking ahead, backlog ended the quarter at around four months, consistent with last quarter and our expectations, and we continued to see good demand for our consulting services in April.

Finally, events is performing as we expected in this environment. We are seeing good demand but tight corporate travel restrictions are hampering the ability of clients to attend our events. Even so, we had almost 3,000 attendees at our 12 events during the first quarter and importantly, the number of CIOs attending increased from last year. In addition, we are starting to see improvement in advanced exhibitor sales.

On the cost side, the savings we have achieved, coupled with the top line performance of each of our three businesses in the first quarter, enabled us to grow our EPS from continuing operations by 50% year over year and to increase our cash flow as well.

Based on these results and the trends we are seeing in our businesses today, we are well-positioned to achieve our full-year guidance for revenue, earnings, and cash flow.

And to the fourth point, we are as excited today as we have ever been about our long-term prospects and are well-positioned to resume growth quickly as the economy returns to more normal levels.

Our results since 2005 give us confidence we have the right strategy and have built a strong foundation to deliver double-digit growth in revenue and earnings over the long-term. Nothing we are seeing in the current economic environment has caused us to change our view of the growth opportunities for any of our businesses.

Many of the strengths that will allow us to succeed in 2009 also provide the foundation for a quick return to growth if the economy improves. First, Gartner is the premier brand in IT advisory services and our base of 1,200 analysts and consultants are the thought leaders in the industry.

Second, our research is vital to help the IT leaders make the operational and strategic decisions that are required to run effective and cost-efficient IT programs.

And third, we benefit from having a vast, untapped market opportunity to sell our research to enterprises that have never before used Gartner services, as well as to sell additional services to our current base of client enterprises.

We are still in the first inning of penetrating this opportunity by growing our sales coverage. There are almost 80,000 enterprises that could potentially use Gartner research, yet we only have sales executives assigned to a minority of these and only 9% are currently clients.

In the first quarter we were able to sell research to 249 new client enterprises as we continue to capture this market opportunity. The actions we are taking now position us to return to growth quickly as the economy improves. Our efforts to improve sales capabilities over the past few years will result in a more tenured and highly trained sales team as we move through 2009.

We know how to effectively recruit and train new sales executives and can rapidly return to sales force expansion as soon as we see signs of improvement in our sales productivity.

Importantly, we have a very strong sales management team. In fact, this is the best sales team that I have worked with throughout my career.

In our events business, we continue to attract a high quality audience of CIOs and senior IT leaders. The number of CIOs attending our events during the first quarter increased from the prior year. It is clear that our events offer a strong value proposition that is relevant to the most senior executives and IT organizations, even in times where every expense is under intense scrutiny. There are no other IT events that offer the same quality content, interact with technology providers, and opportunities to network with peers.

There’s pent-up demand to attend our events, which will be released once travel restrictions ease, as we expect that our events business can quickly return to levels of growth that it experienced for many years prior to the economic downturn.

And in consulting, our first quarter performance is proof that clients see the value in our offerings. With a focus on driving significant cost reduction, our bench marking and contract optimization services continue to remain in demand and our core consulting will quickly return to growth once the environment improves.

So to sum things up, we were able to generate modest FX neutral revenue growth, 50% growth in EPS from continuing operations, and solid cash flow during the first quarter. Our services remain highly valued by our clients and we are taking all the right steps to improve sales effectiveness, control costs, and invest for the long-term.

Our businesses are performing in line with our 2009 expectations and we are well-positioned to achieve our full-year 2009 guidance.

In fact, over the past few weeks, I have met with many members of our sales force around the world and they are more energized and more optimistic about the sales environment than they have been in many months. Most importantly, with our premier brand, services that remain critical tools to IT professionals and vast market opportunity, we are as excited as we have ever been about our prospects for sustained double-digit growth in revenue and earnings over the long-term.

With that, I will turn it over to Chris for additional details on our results and our 2009 outlook.

Christopher J. Lafond

Thanks, Gene and good morning, everyone. Our first quarter results demonstrate that we are taking the actions necessary to deliver strong results during a challenging economic environment. During the first quarter, total revenue increased 1% year over year on an FX neutral basis, driven by the 4% increase in our research segment. This revenue growth, coupled with tight cost controls and continued efforts to improve operational efficiency, enabled us to increase income from continuing operations by over 35%, expand profit margins, and generate solid cash flow.

The execution of our share repurchase program over the past year resulted in a 6% reduction in the fully diluted share count and contributed to a 50% increase in EPS from continuing operations over last year.

Our Q1 EPS is better than the estimated quarterly phasing we provided at investor day due to better than expected revenue in our consulting segment and lower expenses across the company resulting from our tight cost controls. With these first quarter results, we have increased the low end of our EBITDA and EPS guidance and now expect full year normalized EBITDA to be between $170 million and $200 million and EPS from continuing operations to be between $0.66 and $0.87.

Let me now discuss each of our three business segments in more detail. In research, revenue growth was 4% year over year on an FX neutral basis during the first quarter. This growth, coupled with the operating leverage in the business and tight cost controls, delivered a gross margin increase of three percentage points to 66%. The research segment accounted for almost 70% of our total revenue in Q1, up from 66% in Q1 2008. Given the high margins and strong cash flow profile of the research business, we have focused on growing this segment and increasing it as a percentage of our total revenue. That strategy has worked as research was only 54% of total revenues back in 2005.

Contract value increased 2% versus Q108 on an FX neutral basis. As expected, and as we communicated on our last earnings call, changes in foreign exchange rates impacted reported contract value. I would like to remind you that research contract value is reported on an FX neutral basis within each fiscal year.

We do this so you can understand the true organic growth in our research segment. In January of each year, we restate the opening contract value to current and foreign exchange rates. This year our contract value as reported was reduced by 5% versus Q108 on the same volume of business solely due to the strengthening dollar.

From a product perspective, our year-over-year contract value growth continues to be driven by the success of our [inaudible] base offerings. As of March 31st, Gartner for IT Leaders, our role-based product for the end user market, accounted for $188 million of contract value, up 19% year over year excluding the impact of foreign exchange. Gartner for business leaders, our role-based products for the technology market, represented $101 million of contract value, up 50% year over year, excluding foreign exchange.

Collectively, these two products were up 28% year over year FX neutral and accounted for 38% of our total contract value. We expect continued growth in these products from both new clients and migrations of existing clients for the foreseeable future.

Our executive programs offerings for CIOs also continued the trend of solid year over year growth in contract value, up 5% FX neutral to $192 million at March 31st.

Continuing to penetrate the vast market opportunity for research services also contributed to our year-over-year contract value growth. As Gene mentioned, we gained 249 enterprises as new clients during the first quarter.

Client retention was 80% and this key metric has remained consistently between 80% and 82% since the first quarter of 2005. Wallet retention was 90% on an FX neutral basis, demonstrating that we are retaining our larger clients and on average, the clients we retain continue to spend more with us. Retention remains a key focus and we have a number of initiatives underway to drive retention rates higher over time.

Overall the results in our research segment demonstrate that our clients recognize the critical value our research delivers, particularly given that our services focus on helping clients reduce cost and operate efficient and effective IT programs. Demand for our research is solid and we continue to retain the majority of our existing clients and penetrate new client enterprises.

Moving on to consulting, revenue for the first quarter was better than our expectations and particularly solid given the economic environment. As we experienced in 2008, our contract optimization business, with its compelling value proposition and [inaudible] dollar ROI showed continued demand and was the primary driver of consulting’s out-performance.

As mentioned on our fourth quarter call, we took the action in January to reduce billable headcount in consulting and as a result, we maintained solid productivity during the first quarter. Utilization for the quarter was 72%, up two points from the fourth quarter and unchanged year over year.

As of March 31st, consulting backlog remained at about four months of revenue and is in line with our expectations. As with research, we continue to see good demand for our consulting services.

Turning now to our event segment, our events are performing roughly in line with our expectations. We held 12 events with over 2,800 attendees in the first quarter. The number of events was unchanged from the first quarter of 2008. The number of attendees and exhibitors at the event that were held in Q1 were in line with our expectations. Moreover, we are starting to see improvement in exhibitor sales, which bodes well for the future performance of this business.

On the cost side, our events business remained solidly profitable with first quarter growth contribution margin of 31%. We’ve maintained profitability in this business as a result of the actions we have taken in the current environment, including holding 54 events this year as compared to 70 in 2008.

Our events are a platform for the delivery of timely relevant research content and therefore have remained valued by both attendees and exhibitors alike. Our results to date are consistent with our guidance for the full year.

Moving down the income statement, our tight focus on cost controls enabled us to decrease cost of service by approximately 4% versus 2008 first quarter on an FX neutral basis. Similarly, we decreased SG&A versus the first quarter last year on both an absolute dollar basis and as a percent of revenue, despite the fact we grew our sales force during this period by over 100 quota bearing associates. SG&A was 42% of revenue during Q109 versus 44% last year. Both sales expense and G&A were down as a percent of revenue.

Turning to cash, for the first quarter of 2009, operating cash flow increased 4% to $14.8 million, driven by our strong operational performance. Keep in mind the first quarter is always our seasonally weakest for cash flow, primarily due to the payment of annual bonuses and year-end sales commissions. Our accounts receivable aging position is extremely strong with all past due and over 90 amounts at their lowest levels in many years, both in total dollar and percentage terms.

Our cash collection effectiveness remains solid, given the environment. We are on track to achieve our full-year guidance for cash flow from operations of between $100 million and $125 million, which is substantially above our net income, given the working capital characteristics of our research segment.

The impact of our tight expense controls across the company is also reflected in the year over year reduction of capital expenditures in Q1 by 40% to $4.5 million. We expect capital expenditures to be at the lower end of our guidance range of $15 million to $20 million for the year, down from $24 million in 2008. We are reviewing every item of spend for opportunities to reduce cost in this environment.

During the quarter, we deployed our cash to reduce the outstanding balance on our revolving credit facility in order to reduce our interest expense. As of March 31st, our balance sheet and liquidity position is strong, with total debt of $338 million and cash of $70 million. Our credit facility runs through January 2012 and it provides us with $250 million of available borrowing capacity. We have ample cash flow and liquidity to continue to grow our business and execute initiatives that drive shareholder value.

Over the long-term, we continue to believe that repurchasing our stock remains a compelling use of our capital and we have over $80 million remaining under our existing share repurchase program. In the near-term, we are prudently managing and maintaining a strong balance sheet and liquidity position in light of the uncertain economic environment and credit markets.

Now on to our financial outlook for 2009 -- we have increased the low-end of our 2009 full year EBITDA and EPS guidance and now expect full-year normalized EBITDA to be between $170 million and $200 million, and EPS from continuing operations to be between $0.66 and $0.87.

The details of our guidance can be found in our earnings press release issued today. Note that the guidance reflects the elimination of the other segment, which is now consolidated into the research segment.

Let me discuss a few of the highlights -- for our research business, we continue to retain the majority of our clients and to sign new business for both new and existing clients. Moreover, as Gene mentioned, our sales force is optimistic about the sales environment. We expect research revenue to be roughly flat in 2009 on an FX neutral basis and over the long-term, we still expect to grow research revenues at 15% to 20% per year per our long-term financial roadmap.

Our consulting business entered the year with about four months of backlog and our first quarter revenue exceeded our expectations, due primarily to continued strength in our contract optimization business. We are encouraged by the fact that the strength we experienced in this area during 2008 continued in the first quarter and we expect this [inaudible] will continue to perform well for the balance of the year.

We ended the first quarter with backlog at about the same four-month level we saw at year-end 2008, and therefore remain comfortable with our guidance for this segment. Over the long-term, we still expect to grow this business 3% to 8% per year.

For our events business, the attendee and exhibitor volumes are trending as we expected. As we discussed in our fourth quarter call, in order to maximize profitability of this business in the current environment, we expect to hold a total of 54 events in 2009 versus 70 in 2008. We remain comfortable with our guidance for this segment and over the long-term we still expect events revenues to grow at a rate consistent with our long-term target of 5% to 10% annually.

With regard to expenses, as we discussed on the fourth quarter call, we took numerous actions to reduce and control costs in 2009. These actions contributed to the strong results we reported today.

With our confidence in the market opportunity and growth prospects, we have executed these changes while maintaining the size of our sales force. We will also continue key product development efforts like enhancing existing and launching new products, and we will maintain the current level of analysts to ensure we deliver on our client commitments.

While our policy is to provide annual but not quarterly earnings guidance, I wanted to provide an update on the seasonality of our revenues and earnings. Our first quarter earnings were higher than the quarterly phasing we provided at investor day for two reasons -- first, revenues from our contract optimization business and consulting remain strong in Q1, continuing the strength we saw in Q4, and our cost control efforts yielded greater savings in Q1 sooner than we originally anticipated. And as a result, we are increasing the low-end of our earnings guidance.

I would also like to remind everyone that we decided not to hold our spring symposium events in 2009. These two events were held in Q2 of 2008 and so the seasonal pattern of events revenue will be different this year than last. As we discussed at investor day, we expect events revenue in Q2 to be approximately 17% of the full-year revenue for this segment. This was 34% in 2008.

Before I turn the call over to Q&A, let me summarize. We are taking all the right actions to both manage our cost structure in the short-term while at the same time investing for accelerated growth once the economy returns to more normal levels. With our premier brand, services that are critical to our clients, and vast market opportunity, we are confident that we will resume the double-digit revenue and earnings growth that we consistently delivered from 2005 through 2008.

And with that, we will open up the call for questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Peter Appert with Piper Jaffray.

Peter P. Appert - Piper Jaffray & Co.

Good morning. Thanks. Chris and Gene, the margin performance is certainly particularly impressive and I am wondering -- I guess this is for Chris -- how much does it cost do you think could come back as the revenue growth improves? How much is permanent reduction? And I guess the real question is does this make you feel perhaps a little more optimistically about the potential margin target over the next couple of years?

Christopher J. Lafond

So a couple of things -- I think in order to understand that, you have to look at each of the three segments separately. So for example, in consulting, we are managing very tightly the resources in consulting to match the demand, so as we see backlog improve over time, we’ll match the resources with that backlog and visa versa as we’ve said earlier, if the backlog declined, we would adjust our resources appropriately.

On the event side, it is a function again of the number of events we decide to hold and the attendees at the events. There are certainly some variable costs related to who attends the events and on the flip side, we also have a lot of fixed costs. So once you decide to have an event, all the venue costs are fixed, so there’s some leverage there on the upside as we continue to grow there.

On the research side, I think what you’ve seen over time is that business has a significant amount of operating leverage inherent to the business, and so -- in fact, probably for the past three or four years, we’ve been relatively flat in terms of the research analyst base, and so I think we’ve done a really good job of finding ways to leverage and improve the productivity of our analysts and drive that. So that’s kind of each of the three segments.

I think when you look at some of the G&A and other costs, I think some of the costs we’ve taken out are clearly things that don’t have to return. We are being very focused on things that improve our operational effectiveness and so we feel pretty good that some of the costs that we have taken out are things that can remain out of the cost structure.

In terms of our longer term, which is the last part of your question, as we’ve said many times, we’ve been driving towards an EBITDA, or a normalized EBITDA margin of about 20% and driving into that range, we still feel very comfortable over the long-term that that’s very achievable. In fact, as you’ve mentioned, some of the cost actions we are taking certainly are things that we feel will help us get there over time.

So all in all, I think we still feel very good about that expectation.

Peter P. Appert - Piper Jaffray & Co.

Okay, great. Thank you. And then Gene, I think you mentioned some initiatives to drive retention rate improvement. Can you dig into that a little further?

Eugene A. Hall

Peter, basically in terms of retention, we are very focused on it and we have both initiatives with our sales force and with our service people, and with our analysts to focus on retention. And the thing that is most important in terms of retaining our clients is really making sure that they use the services that they get the most value out of. So we are really focusing all three of the segments I mentioned -- the sales force, our analysts, and our service people, on making sure that clients are aware of and utilize the things that are most important to them.

An example is we have a number of ways to help clients save costs in their IT operations and actually through their business, and not all clients may be aware of that and so we are making sure that clients are aware of those services and utilize them. When they -- we know that when they utilize those things, our renewal rates are very high. So that’s the essence of it.

Peter P. Appert - Piper Jaffray & Co.

Okay, so not necessarily changes in the [inaudible] structure or the pricing?

Eugene A. Hall

No, we’re not seeing -- with pricing, we are seeing very stable. We don’t see any issues with pricing at all and feel like our account structure is working fine as well. It’s really making sure -- we have a vast array of services and it is making sure that we match what clients have the most value to the services that we have and that they are aware of it. And again, because there is such a vast array, they are not always aware of it and so we are getting I think much better at making sure clients get connected to the services they get the most value out of.

Peter P. Appert - Piper Jaffray & Co.

Got it. And I know you haven’t felt this to be a significant issue in the past, but I am just wondering in the context of the macro environment, I’ve got to think some of the competitors are more aggressive from a pricing standpoint. Do you hear back anything from the sales force on that?

Eugene A. Hall

Again, our pricing has been very stable. We don’t see any issues with pricing at all.

Peter P. Appert - Piper Jaffray & Co.

Right, okay. And then the last thing, Gene, I see that Tim Noble is departing as head of sales. And I am -- you know, he’s been there a while. I’m just wondering how disruptive to the sales organization that change is.

Eugene A. Hall

That’s a great question. It’s not disruptive at all. Tim’s departure was not a surprise to us. I mean, Tim’s been a terrific sales leader with us over the past three years and built a great organization. But he lives in London and as you know, we are headquartered in Stanford, Connecticut. He has two young children and he is -- you know, he was leading a global sales organization and the travel being based in London and running a global sales organization took him away from home a lot, and so he has opted to take a job that has very limited travel. In his new job, he will only have responsibility for the U.K. and Ireland, so it won’t be global at all, and so he will have a lot less travel.

We knew that this a -- we weren’t surprised with this at all and we have good succession planning in Gartner. In sales, we are -- as you know, we focused on building our sales team over the last four years. We have a great sales team with a very deep bench and we have actually a cadre of successors. The new person we have is a lady named Diane Julian who is going to take over from Tim. She has been at Gartner for 19 years, so she understand Gartner extremely well. She has held a series of increasingly significant leadership roles over time. She has a great team record. She has a fabulous record of success and it will be a very smooth transition. You know, she and the whole sales team -- and the rest of the sales team is stable, and so we’ve got a deep bench, a new leader who was part of our succession planning, and is a very -- in a very orderly way and she has a great track record.

Peter P. Appert - Piper Jaffray & Co.

Thanks, Gene. Let me just sneak one other thing in -- what was the sales count at the end of the quarter, and still looking to hold that flat through the year?

Eugene A. Hall

Yeah, Peter the sales, the quarter bearing sales headcount was 930. It ended last year at 928, so essentially flat. What we said we were going to do throughout this year is maintain the current number of territories we have, so there are a few open positions, so if we do a good job of retaining, that number might go up a little bit but net of it is it is going to stay relatively flat for the year. At this point, our expectation would be that as we start to see sales productivity improve back to the levels that we had been experiencing prior to the downturn, that’s when we would start to ramp up the sales organization again.

Peter P. Appert - Piper Jaffray & Co.

Thanks very much.

Operator

Our next question comes from the line of William Sutherland with Boenning & Scattergood.

William Sutherland - Boenning & Scattergood

Good morning and thanks for taking the questions. Chris, do you have a deferred revenue number at 331? I don’t have a balance sheet in my press release.

Christopher J. Lafond

Deferred revenue ended the first quarter at $374 million.

William Sutherland - Boenning & Scattergood

Okay. Thank you.

Christopher J. Lafond

And did you indicate that you -- I know that you directed a lot of the positive cash flow to debt reduction in Q1. Do you think that’s kind of the program for the rest of the year, primarily?

William Sutherland - Boenning & Scattergood

Well, what we did in the first quarter, as you rightly pointed out, we did use about $70 million to pay down a part of the revolver. We have about $50 million outstanding on the revolver and total debt I think outstanding of about $338 million at this point. For the balance of the year, we do have some scheduled payments on the term portion. I think that’s about $50 million for the remainder of the year so some portion of our cash will go towards our normal term payments.

We have been, as we mentioned earlier, very thoughtful and careful about managing our balance sheet and liquidity position in light of the uncertainty, both in the economic environment and the credit markets. But we still do believe that share repurchases are an attractive use of our cash over the longer term and as we start to feel more comfortable both with the environment and the credit markets, we’ll make some decisions as to when to resume under that program and be more aggressive in repurchasing shares.

William Sutherland - Boenning & Scattergood

Thanks. Gene, how do you -- as you look at the potential acquisition marketplace, any thoughts on that for us at this point?

Eugene A. Hall

Great question. So we have a business development group. We look at acquisitions all the time and it’s an important part of our strategy but I can’t really comment on any specific targets or timing.

William Sutherland - Boenning & Scattergood

But does the -- does it feel like it’s more constructive kind of environment to be looking in at this point, or is it not anymore interesting?

Eugene A. Hall

I think it is a constructive time to be looking.

William Sutherland - Boenning & Scattergood

Okay, good. Thank you, all.

Operator

Our next question comes from the line of David Lewis with JP Morgan.

David Lewis - JP Morgan

Good morning, guys. I just wanted to see if you could talk about the sales pipeline. It sounds like from your comments, you guys have described the sales feedback as optimistic and is it fair to say that the pipeline, I know it’s [inaudible] during 4Q, it’s recovered in Q1 and it’s better than what you perhaps thought at the end of Q4?

Eugene A. Hall

I guess I would characterize it as being kind of in line with our expectations, the sales pipeline. And again -- actually, the pipeline is in line with our expectations and the -- as I said earlier, I met with sales people around the world over the last three weeks and their level of optimism about the marketplace is more positive than it’s been in months -- definitely an up-tick trend there.

David Lewis - JP Morgan

Okay, great. Thanks. And the second question, the growth in IT Leaders and business leaders has been tremendous. Can you just give us a sense for where that is coming from, primarily? Is it coming more from new clients or is it existing clients? And is the pricing different between the two of them that’s perhaps driving that?

Eugene A. Hall

So basically the growth in those -- both those products is from both new and existing clients and it’s kind of proportional to the amount of overall growth we get from those two different segments, so it’s not just one or the other. The pricing on those products is -- you know, we have a policy on those products that every client pays the same amount. So we have legacy products where people bought over the last 10 or 15 years even where pricing is not all the same, necessarily. On all the new products and sales to new clients even of the old products, we have constant pricing so it’s the same for everybody. It’s just kind of a fair market for all of our clients there.

But the growth rate is not being driven by any price differences or something like that. It’s being driven by we’re selling new clients on these products, or new individuals in existing clients.

David Lewis - JP Morgan

Okay, that’s great. Thanks, guys.

Operator

Our next question comes from the line of Brian Murphy with Sidoti & Company.

Brian Murphy - Sidoti & Company

Thanks for taking my question. Chris, I may have missed this, but could you just remind us what was in the other revenue line and why it makes sense to include that on the research revenue line now?

Christopher J. Lafond

Sure. The other revenue line, if you’ve been paying attention, one of the things we’ve done over the last few years is kind of rationalized our -- some of our other products, which kind of didn’t fit neatly into our three segments. We’ve reduced those over time. The other segment this year, the revenue line was expected to be somewhere in the $7 million range for the full year, which had come down consistently. The only thing that really remained in that segment was reprints of research notes, which some clients like to buy and distribute, and so as a result of looking at that, looking at how immaterial it had become to the overall segment reporting and that it was focused on research reprints, we decided to consolidate it into the research segment.

Brian Murphy - Sidoti & Company

That makes sense. Chris, also, deferred revenue, down about 17% year over year -- how much of that was FX and how do we think about the decline in deferred revenue relative to the 3% to 6% decline in research revenue implied by your guidance for the balance of the year?

Christopher J. Lafond

The first thing is that the deferred revenue includes all three segments, so if you look at each segment separately, first consulting with a 25% decline in backlog, you would expect a corresponding and possibly more decline in the deferred because there is some lumpiness in deferred as we had bookings come in and out at different times during the quarters.

Events -- obviously we didn’t have or, as I mentioned earlier, not going to have a spring symposium where we would have had at the end of Q1 of ’08 a pretty significant deferred revenue balance related to that both on the attendees that were going to attend as well as the exhibitor, so that was another significant portion of the decline.

Foreign exchange had a pretty significant impact -- if you think about the foreign exchange impact on total revenues, it was pretty sizable and that similar impact also affected the deferred revenue, so when you add all those pieces together, you can kind of understand why the deferred revenue balance trended the way it did in the quarter.

Brian Murphy - Sidoti & Company

Got it. That’s very helpful. Just one more -- Chris, could you just give us some color on sort of the difference between the modest decline in client retention and the sharper decline in wallet retention? I mean, are clients maybe scaling down their research consumption there, or is there less sort of up-sell? Just any color would be helpful, and that’s it for me, thanks.

Eugene A. Hall

Basically what’s going on there is we are seeing clients stay with us but where they have had, you know, for example, lay-offs if they have laid off a bunch of people in their organizations that used to be seat holders, they don’t keep those seats. And so what we are really seeing is that clients stay with us but where they have had dislocations and things like that, they are cutting back. And so that’s really the difference. There’s a bit of a reduction for the same reason in new business to existing clients as well, and so it’s the combination of those two factors. The clients see their value in our services so they stay with us but if they have fewer people that would have been using our services, then obviously they don’t keep those things in place.

Operator

Our next question comes from the line of Laura Lederman with William Blair.

Laura Lederman - William Blair

Thank you for taking my question and nice job in a very difficult environment. Following up on the pricing question, you mentioned that the pricing is holding up. Can you talk a little bit about competitive actions and are they pricing more? And separately, are customers coming to you saying will you give us a better price and you simply say no? And have customers walked from that? So just a little bit more around the pricing environment.

Eugene A. Hall

Basically we’ve not seen, anymore than any other time, clients coming and saying we are going to leave if you don’t reduce our price, or whatever. I mean, we always have a very minor level of noise on that stuff but at the end of the day, people don’t decide to buy our services or not buy our services because again, our average price is $18,000 for research, as an example, per user. And so if it’s $19,000 versus $18,000 versus $17,000 is not the swing factor -- it’s how much value they get out of the services. And our services are highly differentiated from competitive offerings and clients understand that they are very different offerings. And so we don’t really -- again, at a very tiny level, we might get once in a while someone coming back with something like that but it’s not any different than in the past.

Laura Lederman - William Blair

Following up on the pricing, what about pricing actions of others, or is the market, since there’s not that many players -- you, AMR, Jupiter, Forester -- what are you seeing in general out of the competition?

Eugene A. Hall

Again, our services are pretty highly differentiated and so the -- we are sort of focused on the deals we are doing and haven’t seen that as an issue.

Laura Lederman - William Blair

Okay. Moving on, you mentioned that -- or Chris mentioned that this is a better time for acquisitions. Have pricings come down materially or potential acquisition targets still expecting prices that don’t make any sense and haven’t reflected the change in the environment?

Eugene A. Hall

Well, public company prices have come down quite a bit and --

Laura Lederman - William Blair

That’s true. I meant the private, yeah.

Eugene A. Hall

Yeah, the private, I think it’s a whole mix of people. People, it depends on the individual target and different companies have different expectations and different, frankly, levels of need to do a deal and so it’s a matter of finding the right strategic fit with the right pricing.

Laura Lederman - William Blair

And would they more likely be international, U.S., product additions -- can you give us sort of a high level view of the type of things that you would be looking at?

Eugene A. Hall

We would mostly be looking at acquisitions that are related to and would add to our core IT advisory service business.

Laura Lederman - William Blair

More in the U.S. or international?

Eugene A. Hall

In either -- both, basically. As you know, we are a global company. We are in 80 countries and we like both opportunities domestically as well as around the world.

Laura Lederman - William Blair

And final question for me and then I’ll pass it on -- could you talk a little bit about what you are hearing out of CIOs? I know collectively you spend a lot of time with tech people. Are they feeling in generally better? Are they planning to kind of hold their budgets more in the first half and spend more in the second half? If you just give us a little bit of color on what you are hearing out there from the IT world?

Eugene A. Hall

There’s a lot of distress in the economy and the CIOs feel that distress and it is -- we look at this by industry, by size of company, by geography around the world and what we have seen is that it is -- it is sort of -- the high level of distress is relatively uniform around the world in terms of what the companies are feeling and CIOs feel that as well. And so if you look at it, the -- this level of distress, my sense of it is, consistent with what I said about our sales forces, as we went through Q1, people kind of are figuring out where they are and getting more comfortable and more comfortable with making decisions than they were at the beginning of Q1.

In terms of sort of the specifics, we are expecting IT spending to decline about 3.8% during 2009 at this point, so that’s kind of the quantitative version of that.

The good news is things have -- despite all the chaos, things have settled down. I think people are more comfortable making decisions because they’ve got their ’09 budgets, they know what they can do, what they can’t do.

Laura Lederman - William Blair

And a lot of the vendors say that Europe is weaker than the U.S. -- you don’t see any difference between the two markets at U.S. and EMEA?

Eugene A. Hall

In terms of our business, we’ve seen kind of the same level of impact across geographies.

Laura Lederman - William Blair

Interesting. Thank you so much.

Operator

At this time, I would now like to turn the call back over to Mr. Gene Hall for closing remarks.

Eugene A. Hall

I want to thank everyone for joining us today and we look forward to reviewing our results next quarter with you. Thank you.

Operator

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you and have a good day.

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