Gartner's (IT) CEO Eugene Hall on Q2 2014 Results - Earnings Call Transcript

Aug. 5.14 | About: Gartner Inc. (IT)

Gartner, Inc. (NYSE:IT)

Q2 2014 Results Earnings Conference Call

August 05, 2014, 08:30 AM ET

Executives

Brian Shipman - Group VP, IR

Eugene A. Hall - CFO

Craig Safian - Senior Vice President and Chief Financial Officer

Analysts

Jeffrey Meuler - Robert W. Baird & Co.

Peter P. Appert - Piper Jaffray

Timothy McHugh - William Blair & Company

Hamzah Mazari - Credit Suisse

Joseph D. Foresi - Janney Montgomery Scott

Andre Benjamin - Goldman Sachs

William A. Warmington - Wells Fargo Securities

Jerry R. Herman - Stifel, Nicolaus & Company

Ryan Leonard - Barclays

Jeffrey Silber - BMO Capital Markets

Operator

Good morning, ladies and gentlemen and welcome to Gartner's Earnings Conference Call for the Second Quarter 2014. A replay of this call will be available through August 12, 2014. The replay can be accessed by dialing 888-286-8010 for domestic calls and 617-801-6888 for international calls and by entering the passcode 67989072. This call is being simultaneously webcast and will be archived on Gartner's website at www.gartner.com for approximately 90 days.

I will now turn the conference over to Brian Shipman, Gartner's Group Vice President of Investor Relations for opening remarks and introductions. Please go ahead, sir.

Brian Shipman

Thank you, and good morning, everyone. Welcome to Gartner's Second Quarter 2014 Earnings Call. With me today is our Chief Executive Officer, Gene Hall; and our Chief Financial Officer, Craig Safian.

This call will include a discussion of Q2, 2014 financial results as disclosed in today's press release. 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 and that URL is gartner.com.

Before we begin we need 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 2013 annual report on Form 10-K and 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. The company undertakes no obligation to update any of its forward-looking statements.

With that I'd like to hand the call over to Gartner's Chief Executive Officer, Gene Hall. Gene?

Eugene A. Hall

Thank you, Brian, and good morning, everyone. Welcome to our Q2 2014 earnings call. We had a very strong Q2, with robust performance across all of our businesses. The continued successful execution of our proven strategy drove another quarter of double-digit growth in revenue, EBITDA, earnings per share and contract value.

Research is our largest and most profitable segment. And our Research contract value grew 13%, FX neutral continuing at an accelerated pace compared to 2013. As we have done consistently for the past two years we drove double-digit contract value growth in every region, every client size and in every industry segment.

We also achieved strong retention rates. The second quarter of 2014, enterprise client retention was at 84%, up from 2013, enterprise wallet retention was 105%, also up from Q2 2013.

In Consulting we drove terrific performance for the quarter, led by our Contract Optimization business. Consulting revenues increased 9% compared to Q1, 2013, and backlog was up 11%. Our Events business also delivered great performance with revenues up 39% compared to Q2 last year On a same-events basis, revenue growth was strong, with a revenue increase of 21%, year-over-year.

These results illustrate the sustained success of our strategy and the tremendous value we bring to our clients. As we discussed with your last quarter we are deploying our capital strategically. This year we repurchased more than 300 million of our shares and expect to spend a total of at least $400 million in 2014.

Looking forward our sales pipeline is robust with a solid backlog in our Consulting business and advance events bookings are strong. I couldn’t be more excited about our future.

The successful execution of our strategy drives our consistent performance. The fundamentals of our strategy are to create extraordinary research insight, develop strong sales capability to deliver high value differentiated offerings to provide world-class service and to continually improve our operational effectiveness. And we believe this strategy will allow us to sustain double-digit growth into the future.

We are living in remarkable times. Technology is transforming the world and driving change in every industry and enterprise in the world in a scale seldom seen. IT is transforming how we work and what we do and Gartner is at the heart of it.

Every company whether for-profit or not-for-profit, large, mini or small and any government agency in the world is a potential client, giving us a vast untapped market opportunity for our services. Gartner is the best source of help for enterprise leaders watching critical initiatives within this technology revolution. Our systems often make the difference between success and failure of our clients and were relevant for their institutions growing while facing economic challenges.

I recently met with more than a 100 of our top sales leaders from around the world. They see the impact technology is having on our clients first hand. They've proud of the incredible insights generated by our analysts and inspired by the tremendous value we provide. We always had an incredible energized sales team but I never seen them so engaged and excited about our market position and opportunity as they are today.

Outstanding operational execution is a core part of our growth strategy and it's our people who drive our execution. We put a lot of energy and investment into hiring the right people and developing great talents. As a result sales productivity of our new hires has been growing and our overall sales force turnover has improved for the third year in a year. And of course our sales associates are just as excited about Gartner as their leaders.

And our focus on developing great people extends beyond sales. Earlier this year we launched a company-wide upward feedback survey that helped our managers become even more effective. Coincidentally the leading third-party company that administrated that survey found that Gartner ranked in the top 5% for associate engagement, among hundreds of companies in their database. So you can see the excitement about our market position and impact we have in our clients is pervasive throughout our company.

In summary, I'd like to leave you three takeaways from today's call. First we consistent delivered double-digit growth in contract value, revenue, EPS, EBITDA and cash flow. Second, the technology revolution is providing enormous future opportunities for Gartner. Finally, we believe that we have a strategy, the leadership team and the operational capabilities to take advantage of these opportunities and deliver sustained, attractive double-digit growth over the long term.

I am extremely excited about the impact we have in clients and our growth prospects over the next several years. I'll now turn the call over to Craig Safian, who took over as CFO in June 3rd. Craig and I have been working together since my first day at Gartner and I am excited to continue working with him in this role.

Craig Safian

Thank you, Gene and good morning everyone. I am very excited to be here with you on my first earnings call since becoming Gartner's CFO two months ago. Over my 12 years at Gartner I’ve worked very closely with Gene and the entire leadership team overseeing global finance, strategic and business planning and corporate development. I’ve had the opportunity to be many of you and look forward to meeting all of you in the near future.

Turning to today's call, during the second quarter Gartner continued its strong start to year with double-digit growth in contract value, revenue and earnings. Year-over-year contract value growth was 13%, consistent with our Q1 2014 performance and an acceleration from Q4 2013. And retention rate ended at or near all-time highs. Our Consulting business grew 8% on a FX-neutral basis for the second quarter on the strength of both our labor base consulting business and our contract optimization practice. And our Events business increased by 21% year-over-year on a same-events and FX-neutral basis.

We saw robust demand for our services across all of our business segments in the second quarter. Our strong top line performance and effective execution in capitalizing on the operating leverage in our business allowed us to once again expand our gross contribution margin. Even as companies around the world face the uncertainties of the current macroeconomic environment, our business continues to grow at double-digit rates quarter-after-quarter, year after year. This is because our products and services provide great value to the IT, supply chain and marketing professionals we work with. We are engaged on their most important initiatives and projects.

Our strong and improving retention metrics clearly demonstrate the value and importance of our products and services and we are finding new IT supply chain and marketing professionals to sell to everyday, in both our existing accounts and new prospect accounts as well. This is why we are confident that we will continue to deliver consistent revenue growth and strong financial performance over the long-term.

I'll now provide a review of our three business segments for the second quarter and will end with the details of our revised outlook for the remainder of 2014 before taking your questions. Starting with research. Research revenue was up 15% on an as-reported basis in the second quarter and grew 13% excluding the impact of foreign exchange and acquisitions. The contribution margin in this segment increased almost 70 basis points over the last year to 69%.

All of our key research business metrics remain strong. Contract value grew to a record level of $1.436 billion, a growth rate of 11% year-over-year on a reported basis and 13% on an FX-neutral basis. Our growth in contract value in Q2 was extremely broad-based with every region, every client size and every industry segment growing at double-digit rates. This has been the case for the past several years.

We'll next cover retention rates in new business. As we discussed last quarter, historically we've reported our retention metrics at the organization level. Organization is our internally defined metric that identifies individual buying centers within the enterprises we sell to. We have found that the number of organizations can fluctuate due to both internal and external factors. This makes the metric less indicative of true business performance. Going forward we are reporting our retention metrics at the more indicative enterprise level.

Our client retention rate at the enterprise level ended the quarter at 84%, up a point versus last year and we've maintained client retention at the enterprise level of roughly 84% for the past two years. Wallet retention at the enterprise level ended at 105% in the second quarter, an uptick of one point from both the prior quarter and last year. Wallet retention is higher than client retention due to a combination of increased spending by retained clients and the fact that we retain a higher percentage of our larger clients. As we have discussed in the past our retention metrics are reported on a four quarter rolling basis in order to eliminate any seasonality.

New business again increased year-over-year. The new business mix is consistent with prior quarters and remains balanced between sales to new clients and sales of additional services and upgrades to existing clients. Our contract value growth also continues to benefit from our disciplined of annual price increases and no discounting. We have increased our prices by 3% to 6% per year since 2005. We implemented a price increase during fourth quarter of 2013 and we expect to do so again this year during the fourth quarter. We also continue to see strong volume growth in our new business. This reflects our success in continuing to grow the business by penetrating our vast market opportunity with both new and existing client enterprises.

As a result we ended the quarter with 9,115 client enterprises, up 7% over last year’s second quarter. Additionally our average spend per enterprise continues to increase as well. To sum up we delivered another strong quarter in research. Our contract value growth accelerated from 2013 as we expected. We grew contract value by $162 million on an FX-neutral basis year-over-year. We continue to see strong demand from clients, our retention rates remain at or near all-time highs and we continue to expect acceleration in contract value and revenue growth over the long term.

Turning now to events; for the quarter our event segment continued a four year trend of extremely strong year-over-year revenue growth. On a reported basis the move of four events out of the first quarter and into the second quarter affected the year-over-year comparison of our operating results. In the second quarter, events revenue increased 39% year-over-year on a reported basis and grew 38% on an FX-neutral basis. During the second quarter we held 28 events with 16,594 attendees compared to 25 events with 12,098 attendees in the second quarter of 2013.

On a same-events basis events revenue was up 21% year-over-year in the second quarter. For the first half events revenue was up 13% over the prior year from 36 events versus 37 events in the same period last year. The gross contribution margin for events was 50% for Q2, increased roughly three percentage points from the second quarter a year ago, again reflecting the move of four events out of the first quarter and into the second quarter. On a year-to-date basis we also improved gross contribution margin by approximately three points to 45%.

Moving on to consulting, revenues in consulting increased 9% on a reported basis and grew 8% on a FX-neutral basis in the second quarter. Our contract optimization practice was the primary driver of the strength in consulting because, as occurred during the first quarter certain deals transacted earlier in the year than we had anticipated. Our labor-based consulting business was also solid, with 6% revenue growth in the second quarter.

As we have discussed in the past our contract optimization practice has more variability than the other parts of our consulting business. We have seen a number of deals that we expected to occur in the second half of year to transact in the first half of the year. The business is performing very well and our expectations for the full year remain unchanged. We believe the first half upside was predominantly related to timing. The overall headcount of 505 was down 3% from second quarter of 2013. Second quarter utilization was 70% and revenue for per billable headcount ended the quarter at $454,000.

We continue to see strong demand for our consulting services and our strategy of investing in managing partners is allowing us to capture that demand. We now have 87 managing partners, an increase of 7% from last year. Backlog the key leading indicator of future revenue growth for our consulting business ended the quarter at $105 million. This represents an 11% growth year-over-year and a healthy four months of backlog, which is an appropriate level for this business. With the current backlog and visibility we have into the pipeline the consulting business is positioned to continue to deliver solid results in 2014.

Moving down the income statement, SG&A increased by $33 million year-over-year during the second quarter, primarily driven by the growth in our sales force. As of June 30 we had 1,787 quota-bearing sales associates, an increase of 238 or 15% from a year ago. We continue to tightly control G&A costs across the entire company. This expense item provides a source of operating leverage as G&A as a percent of revenue declined again in Q2.

Moving on to earnings, we delivered another quarter of solid earnings growth. Normalized EBITDA was $105 million in the second quarter, up 17% year-over-year and GAAP diluted earnings per share was $0.58, up 18% year-over-year. Our Q2, 2014 GAAP diluted earnings per share includes $0.06 in amortization and other costs associated with our acquisitions. Excluding acquisition-related charges our normalized EPS grew 28% to $0.64 in the second quarter.

Turning now to cash, first half operating cash flow increased by 9% to $153 million from the first half of 2013, largely due to higher earnings in the second quarter of 2014 as compared to 2013. We continue to expect to hit the full year guidance we set back in February for cash flow.

During the second quarter we continued to utilize our cash to return capital to shareholders through our share repurchase authorization. During the second quarter we repurchased over 1.5 million shares, and we used approximately $112 million of cash for share repurchases. As of June 30, we had $527 million remaining on our $800 million authorization.

We ended the quarter with a strong balance sheet and cash position, despite the more aggressive pace of share repurchases and acquisitions this year. As of June 30, we had net debt of $57 million. We also deployed another $6 million in Q2, net of cash acquired on two very small acquisitions, Marketvisio and Senexx.

Our credit facility runs through March 2018 and at this time provides us with about $366 million of remaining borrowing capacity. We have ample cash flow and liquidity to continue to grow our business and execute initiatives that drive increased shareholder value. We continue to look for attractive acquisition opportunities as a potential use of cash. We also continue to believe that repurchasing our shares remains a compelling use of our capital. Absent other significant opportunities to deploy cash we still expect to repurchase a total of at least $400 million of our own shares this year.

Turning now to guidance. We are maintaining guidance for most items from our previously issued guidance in May and our expectations are at the midpoint or modestly above the midpoint of our ranges. As you know our normal business trends do show seasonality. Our fourth quarter is typically our largest events quarter, a large consulting quarter and our largest contract value growth quarter. While we are generally at or modestly above where we targeted to be at this point of the year we still have our largest revenue and earnings quarter in front of us.

We are making a modest change to our EPS guidance to account for three adjustments. First, GAAP EPS is impacted by our two additional acquisitions and their related charges. Second, we are now projecting lower equity compensation expense for the full year. And third, we are projecting a lower average share count for the year as well.

Our EPS, excluding acquisition and integration charges are impacted positively by the equity compensation and share count changes just mentioned. We now expect acquisition and integration charges of e approximately $29 to $30 million. We expect equity compensation expenses of between $36 million and $38 million and the share count of approximately 91 million shares for the full year of 2014.

Our normalized EPS guidance of $2.18 to $2.35 per share is $0.03 higher than the EPS guidance we gave you in May. Additionally we now expect GAAP EPS to be between $1.97 and $2.14 per share, a $0.01 improvement from our previous guidance, again reflecting the three adjustments just discussed. We still expect that on December 31, 2014 we will have fewer than 9 million fully diluted shares outstanding. All other items related to our guidance remain unchanged. For further information and details you can always consult our press release and most recent 10-Q.

Based on what we see today we expect EPS, excluding acquisition and integration charges to range between $0.37 and $0.39 per share for the seasonally light third quarter of 2014. Acquisition and integration charges are expected to be approximately $0.06 per share in Q3. The third quarter is historically one of our smaller revenue and earnings quarters. That will again be true in 2014.

We are also planning three fewer events for Q3, 2014 than Q3 2013 which further impacts our projected results and a timing issue we already highlighted with respect to contract optimization will also further impact the seasonality of our third quarter results.

So before taking your questions let me summarize. We delivered another strong quarter in Q2. Demand for our services is robust and as a result we generated double-digit revenue growth. Our key business metrics remain strong and in fact many improved in the second quarter. Our initiatives to improve operational effectiveness, coupled with the positive operating leverage inherent in our businesses, delivered solid earnings and cash flow growth for first six months of the year and we continue to actively explore strategic alternative for deploying our cash.

We will continue to invest in our business organically and through acquisitions and return capital to shareholders through our share repurchase program going forward. Finally, with double-digit growth in contract value in the second quarter of 2014 we remained well positioned to deliver another solid year of revenue and earnings growth for the full year 2014.

Now I'll turn the call back to the operator and we will be happy to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question comes from the line of Jeffrey Meuler from Baird. Please proceed.

Jeffrey Meuler - Robert W. Baird & Co.

Yeah, thank you. Could you maybe talk about the research contract margin that continues to drift higher, seems like it’s approaching your targets? Any planned investments that we should be thinking about in that segment or maybe if you can just comment relative to your longer term targets?

Eugene A. Hall

Hi, Jeff. Thanks, great question. As you have noted appropriately we are approaching that 70% incremental gross margin target that we have for research. We believe it’s really important that we continue to invest in the right analysts, the right executive partners and other service delivery people, and that is reflected in that target of 70%. And so there is nothing new that I would discuss in terms of that 70% but we just believe to continue to maintain the right level of retention rates, the right level of client engagement and the right level of support for our growth. That 70% is still that appropriate target.

Jeffrey Meuler - Robert W. Baird & Co.

Okay, and then just want to make sure, I didn’t see it in the press release or hear it, is 13% to 14% constant currency contract value growth still what we should be thinking about for this year and Gene you’ve I think closed out your comments by talking about sales force productivity of new hires continuing to improve, turnover continuing to improve and you guys have been, I think at 15% to 16% sales force growth in the last two quarters. Just wondering, one you would be hoping to kind of close the gap between the sales force growth and the contract vale growth.

Craig Safian

Hey, Jeff. So as we said in the beginning of the year with our headcount growth and flat productivity to 2013 we expected our CV growth to accelerate from what we delivered in 2012, up into the 13% to 14% range. We still believe that is absolutely what is going to happen in 2014. In fact you have seen that in the first two quarters of the year we accelerated from the 12% we delivered in Q4 of 2013 up to 13% in both Q1 and Q2.

Eugene A. Hall

And it’s Gene on the second part of your question we expect, if our sales force headcount growth stays in the 15% to 20% range which is what we expect and our productivity is higher we expect we will start to see our CV growth accelerate over time.

Jeffrey Meuler - Robert W. Baird & Co.

Okay, and then just one final housekeeping one. The three fewer events in Q3 are those moved into Q4?

Eugene A. Hall

So, as always Jeff we are constantly looking at our portfolio and moving stuff around based on the calendar, adding events, trimming events, moving events. So we are three lower in Q3 than what we did last year. Some of them moved into -- one of them moved into Q2, a couple of them moved out into Q4. We have added a few, we have trimmed a few. So it’s our general trimming practice, our general portfolio management practice around the event portfolio.

Jeffrey Meuler - Robert W. Baird & Co.

Okay, thanks. Good quarter and Craig welcome to active participation in the calls.

Craig Safian

Thanks, Jeff.

Operator

Okay, thank you. And our next question comes from the line of Peter Appert from Piper Jaffray. Please proceed.

Peter P. Appert - Piper Jaffray

Thanks. So Craig if I have done this calculation correctly it looks like the normalized EBITDA margin is down just a fraction on a year-to-year basis. Is that just a function of mix with the consulting faster, is there anything you’d call out?

Craig Safian

No, I think, you have got it right, Peter. I think it’s driven largely by mix. We have had stronger consulting performance then we have had in the past and the margins have been roughly flattish for the last several quarters so pretty consistent with that.

Peter P. Appert - Piper Jaffray

Got it. And then as you’ve gotten deeper into your new role how are you thinking about the prospects for margins over the next several years?

Craig Safian

So as we have thought about it and looked at it the key to continuing to improve margins is improving sales productivity and getting contract value growth in the 14%, 15%,16% range and so as we continue to drive our productivity we do believe that margin expansion will follow that.

Peter P. Appert - Piper Jaffray

Okay. And then the pace of buyback activity, obviously you’re running above the $400 million level through the first-half of the year. Any thought in terms of acceleration of the $800 million program?

Craig Safian

You know Peter as we talked about at the beginning of the year, when we put the $800 million program in place we would look to run through that in a two-year period which is about 2x the rate of what we have done previously. So we are still comfortable maintaining doing at least $400 million this year and that would leave another $400 million for next year. And so we are committed to running though the $800 million program over the next two years.

Peter P. Appert - Piper Jaffray

Okay, so don’t read anything into the fact that you did significantly more than you know a $100 million in the quarter in the first-half?

Craig Safian

Think of it in the context of a two year program that we are going to run through.

Peter P. Appert - Piper Jaffray

Got it. Okay, good. Thanks so much.

Operator

Okay, thank you. And our next question comes from the line of Timothy McHugh from William Blair. Please proceed.

Timothy McHugh - William Blair & Company

Yes, thanks. I guess just on the contract value growth, I know you said it was fairly broad-based but I think the last you know six months-12 months the government channel has been a bit of drag for you guys. Have you seen a change there, has that turned around at all?

Eugene A. Hall

Hey, Tim it’s Gene. So there is a no change in the public sector globally and so it’s exactly the same as it’s has been for last 18 months or so.

Timothy McHugh - William Blair & Company

Okay, and then events, can you talk about what you have -- I guess what you are seeing or what you are doing then I guess is driving the strength. I know it’s been a couple of years but is there anything different that you're doing this year, anything, any changes you made that's helping drive the growth.

Eugene A. Hall

It's two things. First, the content developed by our analysts. We aim to have it better every year and it is particularly engaging to our clients and prospects and so we got great content. The second piece is that we have great operational execution with our events team. They're doing a just a tremendous job ranging from the event marketing, meaning marketing the content to prospects to actually great execution on-site. So it's a combination of both, terrific fundamental research by our analysts and great execution by our events teams is what’s -- again we've see fabulous execution on these two fronts reflect in our events performance. We had great double-digit growth over the last three years or so and it's a modest acceleration but I think it's you can think about as being those two things.

Timothy McHugh - William Blair & Company

Okay, and I'm sorry, the impact or the acquisition-related charges, what was the number you said do you expect now for the full year?

Craig Safian

For the full year Tim, we're looking at $29 million to $30 million and that's a combination of the amortization of the acquisition intangibles, professional fees associated with doing each of those acquisitions and the ratable expensing of the hold back on the Software Advice transaction.

Timothy McHugh - William Blair & Company

You mean the hold back, meaning the deferred revenue?

Craig Safian

The deferred consideration.

Timothy McHugh - William Blair & Company

Okay. All right. Thank you very much.

Operator

Okay. Thank you. And our next question comes from the line of Hamzah Mazari from Credit Suisse.

Hamzah Mazari - Credit Suisse

Good morning. Thank you. A question on sales force productivity. Maybe if you could just update us on your numbers how Q2 looked like on a standalone basis and whether you believe your mix of net new business versus existing business accounting for about half, each of your growth whether that changes as you grow the sales force and productivity begins to improve, do you see that mix changing longer term.

Eugene A. Hall

Good morning. How are you? On the sales force productivity, the way I’d characterize it is if you look at both Q2 standalone, in Q2 standalone we are roughly flat to last year from a productivity perspective. If you look at the first half standalone we're actually up nicely compared to first half of last year and if you look at the rolling 12 quarter, rolling four quarter metric we’re roughly flat to where we were when we ended the year last year. And so we're pretty pleased with where we are on a productivity perspective, particularly when looking at the first half performance compared to first half of last year.

In terms of your question on the mix, our belief when you look at that market opportunity is that it is enormous and it isn't both existing enterprises and enterprises that currently don't do business with us. And as we deploy our new sales people and create new sales territory we're going after both of those opportunities with gusto and with force. So I don't expect the mix to change significantly overtime because the opportunity is just so enormous in both pockets.

Hamzah Mazari - Credit Suisse

Got it, thank you. And just a follow up question on the balance sheet could you give us a sense of what you believe optimal leverage should look like on our balance sheet given double-digit growth in your business, most of the acquisition pipeline looking like a smaller to mid-sized deals and then given what you said on the buyback with $400 million annually. Could you help us understand how you think about leverage? Thank you.

Eugene A. Hall

Sure. In terms of leverage I mean you laid out the case for why we can take on leverage. We're growing well, great cash flow generation, predictable revenues free cash flow well in excess of net income. And so we have the profile where we can take on more leverage and obviously taking on two to three times leverage is not something that we would be too afraid about doing. It actually is fairly comfortable and given our cash flow profile we could, if needed to be pay that down relatively quickly.

As we continue to look at the future in terms of capital deployment we are still focused on acquisitions as a great strategic way to deploy capital and quite in fact our acquisition pipeline is as robust as it's ever been since I have been at Gartner and we continue to look at lots of opportunities there, both small, medium and large size type acquisitions. And then additionally we believe we can continue to do that and also look at returning capital to shareholders through our share repurchase program.

So the net is, from an optimal leverage perspective, probably two to three times as optimal and again as we continue to look at the acquisition pipeline and acquisition opportunity market and a combination of share repurchases we move to that over time. For now we continue to look for acquisitions and we continue to return capital to shareholders.

Hamzah Mazari - Credit Suisse

Great, thanks a lot.

Operator

Okay, thank you. And our next question comes from the line of Joseph Foresi from Janney Montgomery Scott. Please proceed.

Joseph D. Foresi - Janney Montgomery Scott

Hi, I think you mentioned in your prepared remarks and you talked about the new sales hires’ productivity. Can you give us some color on what changes you have made there and any metrics associated with it, so that we can maybe track the progress there?

Eugene A. Hall

Hey it's Gene. So there is two changes we have made. First we have done a number of improvements to our recruiting process to make sure that we are identifying people that are mostly likely to be successful at Gartner and that's the first thing. So we are better hiring people that are really good fit and obviously they will do better, we’ll have better sales productivity.

The second thing we have done is we have completely revamped our training programs for our new sales hires. And those training programs also -- you have the right people and then you got great development and they are going to be successful. And those are the two pieces of it. As we look to kind of the forward-looking metrics like time to first sale and stuff like that we see that the people we have been hiring in to these new programs are doing measurably better than we have done in the past.

Joseph D. Foresi - Janney Montgomery Scott

Okay and how should we think you mentioned that as you added new sales hires and they become more productive you expect the contract value to increase. How should we think about the pace of acceleration in contract value, just so we don't get ahead of our ourselves? Is there a formula that we can combine that with any other percentage of new sales hires to come up with, what might happen in any particular year?

Eugene A. Hall

Yeah, Joseph the simple way and if you go back to what we showed at investor day I think that was the simplest way to kind of model it, which is looking at average productivity and the growth in the number of sales people. When we are growing at roughly call 15%, 16% per year on the sales force headcount growth and we are doing that consistently, the mix of new hires looks roughly the same year-over-year from a proportional perspective.

And so I think the way to think about modeling CV growth is what's the pace of sales force capacity growth and then what is your assumption of average productivity and then the math should be relatively simple. But baked into that obviously it's more complicated than that, with new hires and new hire productivity but again proportionately we are roughly the same. So I was just trying to look at it from an average perspective.

Joseph D. Foresi - Janney Montgomery Scott

Okay, that's helpful, and then the last one for me, can you just give us a quick lay of the land. Is anything tweaking up or down that is helping or hurting the business on the margin globally and I’m thinking about Europe versus North America and you already talked about the public sector. I just want to get a sense if anything’s really moving within the demand base that's affecting the numbers.

Eugene A. Hall

Yes, it’s Gene. I don't think there is material movement. The global economy different parts are marginally better or marginally worse. I think our demand has really been driven by what's going on in the technology world where technology have an accelerating impact on businesses and that's really what's driving it. If you look at across the world first is that the aggregate macroeconomic situation hasn't changed materially. But we do really well in some economies where the GDP is shrinking and it's because the companies and people sector institutions see how technology is affecting them.

Joseph D. Foresi - Janney Montgomery Scott

Thank you.

Operator

Okay, thank you. And our next question comes from the line of Gary Bisbee from RBC Capital Markets. Please proceed.

Unidentified Analyst

Hi. Good morning guys. This is [Garner Hanson] in for Gary Bisbee. Just a quick question, with the acquisitions, how much did they contribute to research revenue and what impact did they have on gross margin?

Eugene A. Hall

Sure, from a research revenue perspective for the quarter it was less than a two point impact on the growth rate related to Software Advice and the other two were immaterial on the quarter. And from a total revenue perspective it was around a one point impact on total revenue for the quarter and from an earnings perspective, roughly immaterial.

Unidentified Analyst

Great, okay. And then just going back to the contract optimization business, obviously had been strong in the first half. And you guys kind of narrowed that before but I mean, is it just the timing or was there anything else kind of driving the increased demand for the service?

Eugene A. Hall

So it's a great business and we expect it to perform kind of at the rate annually that we built into our guidance there. As Craig mentioned some of the deals came in earlier in the year. So we expected a great year but some of them came earlier in the year than we expected. It’s kind of as simple as that.

Unidentified Analyst

Fair enough. And then lastly, are you guys still guiding toward the low end of 15%, 20% sales headcount growth for the year?

Eugene A. Hall

So as we said, our goal is to grow 15% to 20%. We were at 16% first quarter, 15% second quarter. So will probably be to the lower to middle point of the range for the full year.

Unidentified Analyst

Great, thanks so much.

Operator

Okay. Thank you. And our next question comes from the line of Andre Benjamin from Goldman Sachs. Please proceed.

Andre Benjamin - Goldman Sachs

Hi. Good morning. I was just wondering if you can maybe give a little color on how your sales force is spread around the globe and maybe where you're adding faster, that's perfectly mirroring the contract value growth globally or are there particular areas that you are looking to add ahead of maybe some acceleration next year?

Eugene A. Hall

Hey, Andre, it's Gene. So our sales force is -- if you look at between -- I don't have the exact numbers but you can think about it as Americas is little less than half. Europe is something like a third and the rest is in Asia. And we're kind growing it, there's pockets we are growing a little faster or little slower but all of them are growing at pretty good double-digit rates. So I wouldn't -- there is no kind of distinguishing factor there. Thing that really distinguishes more is in a more micro level where we think we’ve got a manager, who is at a point of their career where they can handle faster growth or slower growth as opposed to it’s based on the big geographies or something like that. It’s really based on the tactics of where individual managers are in their career developments.

Andre Benjamin - Goldman Sachs

Thanks. And a similar question, is there any particular level of seat that you're seeing more growth in the last quarter to, relative to say a few years ago for example, are the mid-level manager seats potentially growing faster than CIOs, wondering where your customers are seeing more demand for your service these days?

Eugene A. Hall

As you may recall we have products from -- in the IT world everyone from a CIO all the way down in the line, we had those for a few years and the mix really is very consistent. So we're selling to CIOs. We're selling to the guy [inaudible] and we are selling to guys in front of them and then we are selling to the front line IT folks as well. And so there is no material change in the last few years in terms of that mix.

Andre Benjamin - Goldman Sachs

Thank you.

Operator

Okay. Thank you. And our next question comes from the line of Bill Warmington from Wells Fargo. Please proceed.

William A. Warmington - Wells Fargo Securities

Good morning everyone. So, a question for you on the guidance, you beat consensus on the bottom line by $0.06 but you raised the full year guidance by $0.03. So based on what you said about $0.03 coming from the shift and the consulting side, should we think about the other $0.03 as coming from the core business, is that a fair way to look at that?

Craig Safian

Hey Bill. I think in terms of guidance, what we said in the prepared remarks, is it's pretty immature to really look at raising it significantly. So we're halfway through the year. As I mentioned we have -- fourth quarter is historically our largest quarter and where we sit today, everything looks pretty good as we discussed but we're still early in the year and not ready to raise anything.

On the contract optimization side, as Gene discussed, it really is a timing thing and so we have the same expectation that we had entering the year for the revenues that will be generated by contract optimization. For the full year, we just have seen more transactions or transactions that we had expected in the second half of the year coming in the first half of the year and that's driving the timing there.

William A. Warmington - Wells Fargo Securities

Got you. And then it's early but I wanted to ask how Software Advice is performing versus what your expectations were?

Eugene A. Hall

It's Gene. Software Advice is a great business and it’s performing so far according to our expectation. So it's been kind of right in line with what we expected, which is terrific.

William A. Warmington - Wells Fargo Securities

And then one housekeeping question, you have been buying back a lot of shares so I just want to ask for fully diluted share count exiting Q2?

Craig Safian

Sure thing, that would be 90.1 million shares.

William A. Warmington - Wells Fargo Securities

Great, all right. Thank you very much.

Operator

Okay, thank you. And our next question comes from the line of Jerry Herman from Stifel. Please proceed.

Jerry R. Herman - Stifel, Nicolaus & Company

Good morning everybody. Guys, just a question on the sales force growth. You had a sequential decline there. I know it's a very small decline but I am wondering if there is anything that you are seeing in the ability to higher folks given what appears to be a strengthening economy?

Eugene A. Hall

It's Gene. So, I would take it as noise as opposed to anything meaningful. We have certain classes of, when we hire people, in some situation we hire classes of people and that can make for a little bit of swing from time to time. And so I wouldn't -- there is -- it's really noise. In terms of our ability to hire people actually, it's great. We are a place that professional sales people want to be at. It's a very hot -- we are [well in] company, hot area and we don't have any trouble finding people and as I mentioned despite the fact the economy is growing as you are saying and on the hiring, the job market is hotter. Our actual -- we our retaining of sales people is actually getting better.

So our average retention of sales people is improving even in an environment where the job market is increasingly hot. So we don't have any trouble around hiring great sales people.

Jerry R. Herman - Stifel, Nicolaus & Company

Okay, And then Craig you mentioned the contribution from acquisitions in the quarter. Those numbers are probably pretty good representation for the full year, i.e. research about 2% and total about 1%, is that fair?

Craig Safian

Yeah, the only think I’d caution a little bit is we’ve only had -- we did not have Software Advice for the full first quarter. It was only on stream for about three weeks in Q1 and then a full Q2. Last quarter when we updated our guidance we did update it on the research side by about $20 million on the low and high end and that was done to account for having Software Advice for nine and two-third months of the year.

Jerry R. Herman - Stifel, Nicolaus & Company

Okay, great and then just a follow-up question on the guidance. With regard to the third quarter you guys have sort of guided towards a down year-over-year comparison and I want to make sure, I understand that, that’s predominantly relating to the timing in the events business?

Eugene A. Hall

Yes, it's predominantly timing of events and also timing of contract optimization and so those two trends that we are seeing coupled with the fact that it is historically a very small quarter is causing that swing.

Jerry R. Herman - Stifel, Nicolaus & Company

Great thanks guys, I will turn it over.

Operator

Okay, thank you. And our next question comes from the line of Manav Patnaik from Barclays. Please proceed

Ryan Leonard - Barclays

Hi good morning guys this is Ryan Leonard filling for Manav. Just wanted to hit on the contract optimization again, we obviously had another solid quarter but also the backlog is still up pretty solid. So I was just wondering if you could comment on kind of the relationship between the two and whether or not that kind of speaks to better a second half?

Eugene A. Hall

That's a good question Ryan. So two things I’ll tell you, one is that the contract optimization business, very little of it actually ends up in backlog. And so the transactions on contract optimization typically book and recognize revenue when those deals that we advise on are actually closed. The point on backlog though is underlying our labor base consulting business has performed pretty strongly. As I mentioned up 6% year-over-year in the second quarter and based on the backlog and based on the number of managing partners, and based on the pipeline, we believe that trend will roughly continue on the labor base business for the balance of the year.

So we got some nice strength on labor base. Contract optimization as Gene mentioned is performing really, really well. We just saw more of the revenue and deals happen in the first half of the year.

Ryan Leonard - Barclays

Got it, perfect. And Craig, given your background in business development and some of your comments on a robust M&A pipeline. I was wondering if you had a commentary either kind of a change in M&A strategy or just a change in the overall market that makes you more open to deals or at least you're seeing more opportunity out there?

Craig Safian

No, so no change in the strategy, no change in the overall environment. I think just that as a company we’ve got a much more honed approach to what we're looking at. And therefore we're looking at and seeing more things than we’ve seen in the past and there are a lot more exciting opportunities out there than we seen in anytime on the past several years.

Ryan Leonard - Barclays

Great, thanks.

Operator

Okay. Thank you. And our next question comes from Jeff Silber from BMO Capital Markets. Please proceed.

Jeffrey Silber - BMO Capital Markets

Thank you so much. And just looking at the number of consultants that seems to have been a trending down a little bit over the past year and a half. Is that because of move to the managing partner model there or is there something else going on?

Eugene A. Hall

Hi Jeff, it's Gene. So I would take again as noise as opposed to -- there is no strategy for reduce the number of consultants or anything like that. Overtime as the demand for consulting shifts you have to shift the mix of people a little bit that it’s just has to be with mix of specific skills. We are quite, as Craig said early we are quite optimistic about the business and did not aim to have fewer people, it’s just kind of where we wound up with the change in mix we talked about.

Craig Safian

And Jeff, the good news there also is that the billable headcount actually includes the managing partners in it. So that's all-in number. And then the other thing I mentioned is, what it implies or actually more than implies is that those 505 people billable heads were much more productive than what we seen in the past as well. So we're driving utilization up as well.

Jeffrey Silber - BMO Capital Markets

Okay, that's great to hear. And then just a couple of quick number questions. In prior quarters you’ve actually given us a number for the average [NCVI] per accounting. I was wondering if you get that again. And then you the guidance you gave for EPS is $0.37 to $0.39 this quarter. That was a GAAP number, is that correct?

Craig Safian

No. I'll tackle the second one first. So the $0.37 to $0.39 is excluding acquisition integration charges number, and then we expect about $0.06 of acquisition integration charges in the quarter.

On the productivity side, again what I’d say is what I said mentioned earlier in the call during the Q&A, on a first half standalone we're up nicely year-over-year in terms of productivity. On a Q2 standalone we're roughly flat to last year on productivity and on a rolling four quarter basis we're roughly flat to where we were at the end of the year.

Jeffrey Silber - BMO Capital Markets

All right. Thanks so much.

Operator

Okay. Thank you. So, ladies and gentlemen that concludes your Q&A for today and I'd like to hand back to Brian Shipman for any closing remarks. Please proceed.

Brian Shipman

Thank you everyone for being with us on today's Q2 2014 earnings call. If you have any further questions please don't hesitate to contact us. We'll speak with you again on our 3Q conference call in early November. Have a great day.

Operator

Thank you, ladies and gentlemen. That concludes your conference call for today. Thank you for joining us and you may now disconnect. Thank you.

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Gartner Inc. (NYSE:IT): Q2 EPS of $0.64 beats by $0.09. Revenue of $520M (+16.6% Y/Y) beats by $18.13M.