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Gartner Inc. (NYSE:IT)

Q4 2011 Earnings Call

February 7, 2012 8:30 am ET

Executives

Brian Shipman - VP of IR

Gene Hall - CEO

Chris Lafond - CFO

Analysts

Peter Appert - Piper Jaffray

Dave Lewis - JPMorgan

Robert Riggs - William Blair

William Bird - Lazard

Bill Sutherland - Northland Capital Markets

Brian Karimzad - Goldman Sachs

Dan Leben - Robert W. Baird

Manav Patnaik - Barclays Capital

Operator

Good morning, ladies and gentlemen, and welcome to Gartner's earnings conference call for the fourth quarter and full year 2011. A replay of this call will be available through March 7, 2012. The replay can be accessed by dialing 1-888-286-8010 for domestic calls, and 617-801-6888 for international calls; and by entering the passcode 57406329. 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 fourth quarter and full year 2011 earnings conference call. With me today is our Chief Executive Officer, Gene Hall; and our Chief Financial Officer, Chris Lafond. This call will begin with a discussion of Q4 and full year financial results disclosed in today's press release. We will also discuss our outlook for the company, including our newly issued guidance for 2012, followed by an opportunity for you to ask questions. I'd like to remind everyone that the press release is available on our website, that url is www.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 2010 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.

I would also like to take the opportunity to remind everyone that we will be hosting our Annual Investor Day on Thursday, February 16 in New York City, and registration is required in advance. If you haven't done so already, please make sure you contact my assistant Germaine Scott at 203-316-3411 to register for the event and she'll provide you with the logistics.

With that, I would like to hand the call over to Gartner's Chief Financial Officer, Chris Lafond. Chris?

Chris Lafond

Thanks, Brian, and good morning, everyone. We ended 2011 with double-digit growth in revenue, earnings and cash flow. Our results again demonstrate the continued successful execution of our strategy, our ability to consistently deliver on the long-term financial objectives we communicated over the past several years and our overall importance for the strategic IT initiatives of our clients.

We saw a continuation of the strong trends in our key business metrics that we delivered during the first three quarters in the year. Year-over-year contract value growth remained strong and retention rates ended at or near all-time highs. Consulting backlog were 8% since the end of Q3 and both attendees and exhibitors at our events increased by double-digits year-over-year.

Demand for our services was robust across all of our business segments in the fourth quarter. Our strong topline performance and effective execution and capitalizing on the operating leverage in our business allowed us to once again expand, both our growth contribution and EBITDA margin. As a result, we delivered significant growth in earnings, both in Q4 and for full year.

In the fourth quarter normalized EBITDA increased 17% year-over-year and our GAAP diluted earnings per share was up 14%. For the full year, we delivered normalized EBITDA of $279, up 21% from 2010. GAAP diluted earnings per share were $1.39, up 45% from last year. With the strong finish to 2011, we are well-positioned for continued growth in 2012.

I'll now provide a review of our three business segments for the fourth quarter and full year and then conclude with a discussion of our outlook for 2012. Starting with research. Fourth quarter research revenue was up 14% to $263 million with negligible impact in foreign exchange in the quarter. For the full year, research revenue grew 17% to over $1 billion. On an FX neutral basis research revenue grew 14% for the full year in 2011.

The margin in this segment increased 220 basis points year-over-year to 66.9% in the fourth quarter, as our strong execution continues to capitalize on the operating leverage in this business. For the full year the contribution margin in our research business grew by 210 basis points to 67.4%. All of our key research business metrics remains fairly strong in the fourth quarter.

Contract value grew a record level of $1.116 billion, a growth of 14% year-over-year. As was the case throughout 2011, our growth in contract value in Q4 was extremely broad-based with all geographies, client-sizes and industry segments delivering strong growth year-over-year.

New business again increased year-over-year, continuing the trends that we've seen since late 2009. The new business mix was balanced between sales to new clients and sales of additional services and upgrade to existing clients. While our contract value growth continues to benefit from our discipline of annual price increases and no discounting, approximately 85% of our contract value growth came from volume with the balance coming from price increases.

This volume growth reflects our success at continuing to grow the business by penetrating our vast market opportunity with both new and existing clients. As a result, we ended the quarter with 12,427 client organizations, up 7% year-over-year. As for pricing, we've consistently increased our price list by3% to 6% per year on an annual basis since 2005 and we expect to do so again in 2012.

Our client retention rate ended the quarter at 82%, and we've maintained client retention near record highs for six quarters in a row. In addition to retaining our research clients and an impressive rate, the clients we retained continue to increase their spending with Gartner. Wallet retention increased almost 200 basis points year-over-year to 99%. Wallet retention is higher than client retention due to a combination of increased spending by retained clients and the fact that we retained a higher percentage of our larger clients. As we've discussed in the past, our retention metrics are reported on a four-quarter rolling basis in order to eliminate any seasonality.

In summary, our research segment continued its strong performance in the fourth quarter. We grew our contract value by $140 million on an FX neutral basis year-over-year. We continue to see high levels of demand from clients and we expect continued acceleration in revenue and contract value growth over time. We remain confident in our ability to deliver 15% to 20% annual revenue growth in this business over the long term.

Turning now to events. Events revenue in the fourth quarter increased 22% year-over-year on a reported basis and 23% excluding the impact of foreign exchange. During the fourth quarter, we held 12 events with 22,500 attendees compared to 12 events with 18,484 attendees held in the fourth quarter of 2010. Total attendees at our events during Q4 and on a same event basis were up 12% year-over-year and exhibitors were up 25%.

For the full year, revenue for our event business increased 21% year-over-year on an FX neutral basis, at the 60 event held in 2012 versus the 56 event held in 2010, attendees were up 15% and exhibitors were up 19% year-over-year. On a same event basis in 2011, attendees were up 12% and exhibitors were up 17%.

For the full year 2011, the events growth contribution margin was 45% versus 46% in 2010. With our strong revenue growth in 2011, we took the opportunity to make selected investments to further strengthen our events portfolio,

Moving on to consulting, revenues in our consulting business were essentially flat in the fourth quarter with the negligible impact from foreign exchange. For the full year, consulting revenue grew 2% to $308 million and were flat excluding foreign exchange. Backlog, the key leading indicator of future revenue growth for our consulting business, ended the quarter at $101 million, which represents over 8% growth sequentially and a healthy four months' of backlog. Additionally, our pipeline looks equally solid again as we begin with New Year.

Billable headcount of 481 was up 2% fourth quarter of 2010. This reflects our focus on managing resources to demand we saw earlier in 2011. Fourth quarter utilization was over 68%, up 730 basis points from the prior quarter and revenue per billable headcount remained above $400,000 per year, ending the quarter at $454,000.

Moving down to rest of the income statement. During the fourth quarter, our total gross contribution margin increased by one percentage point year-over-year to 58%. For the full year, our total gross contribution margins increased to 140 basis points to 59%. These increases were due primarily to the successful execution of our strategy to capitalize on the high incremental margins and operating leverage inherent in our research business.

SG&A increased by $15 million year-over-year during the fourth quarter. The increase was primarily attributable to the growth in our sales force. As of December 31, we had 1215 quarter-bearing sales associates as compared to 1049 a year ago. For the full year we added 219 sales people which represent 21% growth and were slightly above our long term target referring our sales force by 15% to 20% per year.

Our strong recruiting pipeline and quality of the potential candidates allowed us to be at higher for 2012 during the end of Q4. Finally G&A was essentially flat year-over-year in absolute dollars and dropped 160 basis points as a percent of revenue in Q4. For the full year G&A was up about 4% year-over-year but again dropped to 150 basis points as a percent of revenue. We continue to tightly control G&A costs across the entire company in the fourth quarter and for the full year.

Moving on to earnings, we delivered another strong quarter of solid earnings growth. Normalized EBITDA was $85 million in the fourth quarter, up 17% year-over-year and GAAP diluted earnings per share was $0.46, up 24% year-over-year. Our normalized EBITDA margin increased to 80 basis points to 19.8%. As expected our Q4 2011 GAAP diluted earnings per share includes minimal non-cash amortization costs associated with AMR and Burton. This trend continues to reflect our commitment to improving margins while also investing in the growth of our business.

For the full year Normalized EBITDA was $279 million, up 21% year-over-year and GAAP diluted earnings per share was $1.39, up 45% year-over-year. Diluted EPS for the full-year 2011 included acquisition-related charges of $0.04 per share compared to $0.14 per share in 2010. Our normalized EBITDA margin increased to 110 basis points to 19% consistent with our annual goal of 50 basis points to 150 basis points of normalized EBITDA margin expansion.

Turning now to cash. Our strong performance for the full year translated into an increase in cash flow mainly driven by cash from operations, which increased by 24% to $256 million. This number included certain landlord reimbursement for capital spending on our facilities. Excluding those, cash from operations increased by 18% year-over-year. Over the long-term, we continue to expect to generate free cash flow substantially greater than our net income, given our tight cash management and the negative working capital characteristics of our research business.

During the fourth quarter, we utilized our cash to return to capital to shareholders through our share repurchase program. We repurchased over 2 million shares at a total cost of almost $71 million, including our repurchase of ValueAct's remaining shares on December 13. We ended the quarter with a strong balance sheet and cash position with net debt of $57 million.

Our current credit facility runs through December 2015, and at this time provides us with over $375 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 opportunity as a potential use of cash. In absence of appropriate acquisition opportunities, we believe that repurchasing our shares remains a compelling use of our capital. We have $293 million remaining under our Board authorization.

Now, let me turn to our business outlook for 2012. Based on the strong business trends, we experienced in 2011 and the expectation of a reasonable economic environment in 2012, we believe our businesses are well-positioned for another year of strong growth. For the full year 2012, we expect total revenues will grow by 9% to 12% to approximately $1.6 billion to $1.65 billion on a reported basis. Excluding the impact of foreign exchange, we expect total revenue growth of 11% to 15%.

Projected revenues by segment can be found in our press release, but would note that we expect growth in each of our three segments during 2012, with research revenue expected to be up 12% to 14%, consulting revenue up 1% to 7% and events revenue up 8% to 14%. I would point out that this guidance includes a 2 point to 3 point negative impact from foreign exchange.

On an FX neutral basis, our projected growth rates for each segment are as follows. In research, we expect 14% to 16% revenue growth, as you know research revenue is primarily driven by the prior year's contract value growth. In consulting, we expect revenue growth to be between 3% and 10%, which would return this segment to our long-term expectations. And finally in events, we expect FX neutral revenue growth of 10% to 17%, this would be another strong year for events with revenue growth above our long-term targets for the third straight year.

In terms of foreign exchange impacts on revenues, our guidance is based on the spot rates in early January. We've made no attempts in our guidance to anticipate any strengthening or weakening of the dollar from the actual foreign exchange rates in early January.

Moving down to income statement, we expect normalized EBITDA for the full year 2012 to be between $315 million and $335 million, an increase of 13% to 20% over 2011. And we expect our normalized EBITDA margin to again increase between 50 basis points and 150 basis points in the coming year.

In 2012, we expect the cost associated with stock-based compensation expense to be approximately $35 million to $36 million. Total deprecation and amortization should be approximately $29 million to $30 million, inclusive of the amortization of acquisition intangible assets. The intangible amortization associated with the acquisition of AMR Burton will equate to approximately $0.02 per share for 2012.

We expect interest expense of approximately $10 million to $11 million and other expense of $2 million to $3 million, and we're projecting an annual effective tax rate between 32% and 33%. And our guidance is based on average fully diluted shares outstanding of between 97 million and 98 million shares for the year. Note that our tax rate may vary from quarter-to-quarter due to the timing of discrete items.

Our GAAP earnings guidance for 2012, as per EPS, will be between $1.63 and $1.79 per share. We also expect to grow our cash flow as we drive growth in our research business. In 2012, we expect cash from operations of $285 million to $305 million, capital expenditures of $46 million to $48 million and free cash flow of $239 million to $257 million. Thus, we expect to grow our free cash flow by 12% to 20% in 2012, and generate free cash flow per share of $2.41 to $2.62 substantially above our income per share.

I'd like to note that cash from operations include $16 million, to be received as a tenant improvement allowance in connection with the previously disclosed lease arrangements on our Stamford headquarter. And the $16 million in the related cost of these improvements are also reflected in our capital expenditures, despite being reimbursed by the landlord. These amounts are not expected to have any impact on free cash flow during the life of the renovation project, which should end in late 2012 and are not expected to recur.

While our policies provide annual, but not quarterly guidance, I'd like to provide some additional information to allow for an understanding of the seasonality and other factors that will impact our revenue and earnings on a quarterly basis. Full year research revenue will be fairly evenly distributed across each quarter of 2012, and approximately 24% of the full year revenue in Q1.

Consulting revenue will be lowest in Q1 with 23% of the full year revenue, and highest in Q4 with 28%. For events more than 50% of the full revenue will be recognized in Q4, because our Fall Symposium series will be held in that quarter. At this point, we're trying to hold 62 to 65 events in 2012 as compared 60 in 2011.

The phasing of our events calendar will be similar to 2011 in Q1 and Q3. Each representing approximately 10% of the full year revenue for this segment, given the seasonality of our events and consulting business, we expect earnings per share in each of Q1 and Q3 to be roughly 20% of the full year EPS respectively. We also expect to earn roughly 35% of the annual EPS in Q4, again primarily due to the timing of our events.

Finally, I'd like to spend a moment on the impact of foreign exchange, as it relates to our reported contract value. As we have communicated to you in the past, research contract value is reported on an FX neutral basis throughout each 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 and current foreign exchange rates. As a result of the strengthening of the U.S. dollar in 2011, contract value at January 1, 2012, is approximately $8 million lower than the $1.116 billion reported on December 31. As a result, $1.108 billion is the baseline figure you should use for this comparison purpose, when judging contract value growth in 2012.

So to summarize, we delivered great results for both the fourth quarter and the full year 2011. Demand for our services is strong and as a result we generated double-digit revenue growth, and our key business metric remained strong throughout 2011. Our initiatives to improve operational effectiveness coupled with positive operating leverage inherent by businesses delivered strong margin expansion and we generated substantial cash flow.

As always, we are actively exploring strategic alternatives for deploying our cash. We will continue to invest in our business and return capital to shareholders through our share repurchase program, and we expect to repurchase shares throughout 2012. Finally, with double-digit growth in contract value in 2011, we established a solid foundation for delivering another strong year for revenue and earnings growth in 2012. We are well-positioned for double-digit revenue and earnings growth and increasing return to our shareholders over the long-term.

Now, I'll turn the call over to Gene, who will share his thoughts on the outlook for the coming year. Gene?

Gene Hall

Good morning, everyone. As Chris has discussed, we achieved strong 2011 performance. Our 2011 results continue the positive trend of growth that we delivered since early 2009 with a successful and consistent execution of our strategy. We had strong growth across all geographies, all client-sizes and all industry segments.

IT is one of the most important drivers of growth and comparative advantage for virtually every institution in the world, but IT is also complex and continuously evolving. As a result, IT professionals need expert assistance and insight, to help to make the critical business decisions that they face virtually every day. This includes advice on managing IT for business success as well as how to best purchase the $3.8 trillion that they're expected to buy during 2012. The same is true for supply chain professionals.

Gartner is the best and most cost-effective resource that IT and supply chain professionals can turn to for that help. Our assistance often makes the difference between success and failure for our clients. At the same time, we benefit from having a vast untapped market opportunity for our services, which we estimate at $45 billion.

There are hundreds of thousands of IT and supply chain professionals, who could potentially be Gartner clients, but have never been educated on the values that we can provide. We have the right strategy to capture this opportunity. As some of you know, the fundamental to our strategy are to create extraordinary research insight, to build strong sales capability, to deliver high-value differentiated offerings, to provide world-class service and to continually improve our operational effectiveness. This consistent strategy is driving our growth and will allow us to maintain sustained double-digit growth overtime.

During the fourth quarter, more than 5,000 CIOs attended our symposium events and I had the opportunity to meet with many of our clients there. These technology leaders are looking for solutions for mobile, for social, for cloud, for bid data and of course for traditional areas such as cost optimization. These leaders are driving the performance of their organizations and they see Gartner is central to their success. As a result, attendance at our events has been growing as well as the value that client see in Gartner.

During January, I had the opportunity to meet with our sales leaders from around the world at our 2012 Kickoff Meeting. Our sales leaders, representing clients from all geographies, all industries and all sizes had an incredible level of enthusiasm. They're excited about Gartner, the value we provide our clients and our vast market opportunity.

I've never been more confident or excited about our prospects for accelerated and sustained growth that I am today. Gartner is a strongest company it's ever been. The Gartner brand is into classify itself. Our products, services and people are superior to the competition and we have a great business model. We delivered double-digit growth in 2011 and we're placed for even greater success in 2012 and beyond.

So to summarize, there are three points I'd like you to take away from today's call. First, our business performance was strong during Q4 and throughout 2011, providing great momentum as we enter 2012. The selling environment is great and we delivered double-digit contract value growth.

Our research business added more net new organizations than ever before. Our events attendance was up 13% and the quality of our attendees has never been better. In consulting, we generated strong backlog across all geographies and industries. With the continued focus on our proven strategy, we will continue our positive momentum for the coming year and beyond.

Second, our business model is attractive with high renewal rates, strong cash flow and great incremental margins. Third, we are well positioned to accelerate the growth of our research business and achieve 15% to 20% annual growth in that segment over the long-term, as well as growth in our events and consulting businesses consistent with our long-term targets.

We have the leading brand in IT and supply chain research, a strong value proposition for our clients, great operational capabilities and a vast untapped market opportunity. We're in a strong position to continue generating double-digit revenue growth and expanding margins during 2012 and over the long-term.

With that, we'll now take questions.

Operator

Question-and-Answer Session

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

Peter Appert - Piper Jaffray

So, Gene, can you talk a little bit more about the 15% to 20% long-term revenue growth target within research? I mean, obviously, you haven't been in that range or even been in the high-end of that range certainly for a while. And what gets you to the higher-end of that range?

Gene Hall

So I think what gets us to the higher end of that range is focusing on increasing sales force productivity and also making sure that we grow our sales force in the kind of the range we talked about is those two things. The market opportunity is clearly there and our operational performance is clearly there, so it's really focused on that sales productivity and the growth of our sales force.

And as you know, the sales productivity is one of the big focuses that we have. And as you saw, we actually in terms of sales force growth, grew a little bit of a top-end of our range last year, as we saw a lot of really good talent that we'll bring onboard a little bit early for 2012.

Peter Appert - Piper Jaffray

Would you then not expect to see an acceleration of research revenue growth in 2012?

Gene Hall

So, Peter, as you know, the way our revenue recognition works is that the sales people sell a contract and then we recognize that revenue ratably for that contract. So in a simple level, the way I think about it is the contract buy in 2011 turns into revenues in 2012, what we sell in 2012 in terms of contract value, turns into revenues in 2013. And so the kind of research revenues for 2012 are based on the contract value brought in 2011. So what we sell in contract value during 2012 will really affect the research revenues in 2013.

Peter Appert - Piper Jaffray

Right. And so therefore, logically we might expect to see an acceleration in contract value growth in '12, would that be fair?

Gene Hall

We certainly would like to see that.

Peter Appert - Piper Jaffray

In terms of hiring plans for 2012, same level, same percentage growth rate that we saw last year?

Gene Hall

Again, we're expecting during 2012 to have a sales force growth in 15% to 20% range. So it's exactly in target of late last year.

Peter Appert - Piper Jaffray

But not committing to be at the higher-end of the range?

Gene Hall

No.

Peter Appert - Piper Jaffray

And then, Chris, this will be the last question. More to do on the G&A line, you've had a lot of success in terms of holding those across and getting the margin leverage from that. So I guess, how much more is there to do on that front? And then beyond that, where does the margin leverage going forward come from?

Chris Lafond

Yes, Peter, good question I think. As you've seen over the years we've done a good job of being able to maintain, in some cases the absolute dollars we spent, but certainly in every case as a percent of revenue continue to come down. Our expectation for the foreseeable future is that G&A cost will grow slower than overall revenue, so as a percent of revenue you'll continue to see G&A continue to fall. So we still think there's ample opportunity to do that over the next few years and you should continue to see similar trends you've seen over the past few years.

Operator

Your next question comes from the line our Dave Lewis with JPMorgan.

Dave Lewis - JPMorgan

First question is with the events business, can you guys provide a little more detail on what's driving the strong growth there. And is there an opportunity or is there any chance for that up sell there into research business, could pick up going forward. I know about 50% of those clients or attendees do not have a research subscription. But what are your thoughts there?

Gene Hall

So basically what's driving the growth our events business is two things, one is just the fundamental value proposition that we have at Gartner which is IT people and supply chain people, having similar issues. And I mentioned some of the things earlier today, things like: How do I deal with global computing? What I'll do with cloud computing? How does the social computing apply to my business? Can I use big data and business intelligence?

As well as again there is always a focus on cost production and things like that. And same thing is with supply chain. And so you have people that have these problems they want to debate, need to solve. They're being charged by the business to solve and they need help. And they see Gartner as a great source that helps. And they see events as a source that help just like the see research and consulting. And that's one piece that's driving our events business growth. It's just the kind of market needs.

The second one is that we're executing very well. We basically have done a great job in terms of marketing our events business to prospects. And so it's the combination of this need to be adoptive with our clients. And the fact they see that we have a strong value preposition with them and that we've been executing very well in terms of getting those clients to our events.

I'll add to that too. We've actually getting them to the events and when they're actually at the events, we ask people to score how we're dealing with them. And the value that clients place in our events, it's never been higher. It's been growing up year after year. And in 2011, it's the highest its ever been. So now we are getting there. But they're seeing great value.

And that ties into your last point which is this not an up sell in opportunity? Absolutely, as you mentioned there is a sizable fraction of our event clients who are not Gartner research clients. But they can do our event, they learn more about Gartner and it is a great opportunity when they learn more about Gartner to sell them research services as well.

Dave Lewis - JPMorgan

And last one from me, can you just comment on the Legacy Burton and now Gartner supply chain business. Would you be able to tell us that they are outperforming the Legacy business? And the second half of the question on supply chain is that business expanded market opportunities significantly? I believe when it was acquired you had about a third-year sales reps that had relationship in the adjacent CIO office. How should we think about penetration there in terms of the growth opportunity going forward?

Gene Hall

After we acquired AMR, we launched a new set of products that are more consistent with what we do in our IT space. Those products have been extremely well received. Basically the clients of the Legacy products that are happy with them are doing great and we're happy with that. But in terms of future growth, we really focus on these new products which are doing very, very well. Overall, that business is just doing great. It's going really nicely.

And in terms of penetration, it has a very, very small tiny penetration in terms of the total market opportunities. So we have a real huge opportunity there. And again, it's getting terrific growth and if anything we should see the growth accelerating.

Operator

Your next question comes from the line of Robert Riggs with William Blair.

Robert Riggs - William Blair

Just a follow-up on the sales force. It sounds like you're able to hire a little more people than you had anticipated that there is a lot of good talent out there. Is attrition kind of trending as expected, and have you made any changes in programs that are onboard in retention to drive that sales force productivity higher?

Gene Hall

Basically as you said, what we're seeing is a lot of great talent out there and we've been very successful in tracking that talent to Gartner which is why we are ahead of our plan in sales hiring. And if people are going out to the door hiring more, you can't get ahead of the game. So we've actually had a very good retention. It's been very consistent over the years in terms of our sales people.

Now we're working on that. We continue to work on getting that down because again we want to retain sales people. And so even though we think we have very good retention today, we'd think we can that even better which would just help in terms of our hiring and the tenure sales force. So we're working at the issue and we have done things like you've said. So we do have good on board products, we have great recruiting products to identify people that are we think are highly likely to be successful in our environment and then strong on boarding and development programs for those folks who want to get to on board.

But I think our on boarding and professional development programs are as good as or better than any other company I have ever seen. And we get that feed routinely when our sales people come on board.

Robert Riggs - William Blair

And then as for the consulting business, you've been working through this managing partner strategy for a while a now. Could you give us an update for that piece of the business are you finding the people that you want there and is that kind of going in line with expectations?

Gene Hall

So as you pointed out in consulting, one of our major issue in consulting is to have a team of managing partners that sort of drive that business. We started basically with none of those peoples several years ago and we've been adding up and we're up to approximately 70 of those managing partners today. And that's been a tremendous successful program.

We've been able to identify great people. Those people come on board and there their productivity has been exactly what we'd expect. And in fact as we did, we actually want to full complement of those managing partners on board that will really help the overall performance of the consulting business. And so real challenge is we went from zero to now 17, we need to get to quite a few more before we're at the full capacity there.

Operator

Your next question comes from the line of William Bird with Lazard.

William Bird - Lazard

Gene, I was wondering, if you could just talk about what you're seeing in Europe right now?

Gene Hall

So as Chris and I both mentioned, we saw strong double-digit growth across all of our geographies, all of our industries and all client sizes. And so that's what we are seeing.

William Bird - Lazard

And have you seen any change in tone of business as you've rolled into 2012?

Gene Hall

Basically, as you can see from our guidance, we're very enthusiastic about the prospects for 2012. So that applies everywhere.

William Bird - Lazard

And what were your diluted shares at yearend and given the guidance it seems like $97 million, $98 million shares, are you just assuming that you built cash and it's not deployed?

Chris Lafond

Diluted shares for the fourth quarter were about $97 million. And what we have traditionally said over the time is that at a bear minimum we shares back to offset the impact of our equity programs. And we will continue to do that at a minimum. We, as you know, will continue to generate significant cash.

And we look to two things for that cash; one would be acquisitions where they make sense. And as you know we are pretty thoughtful about acquisitions and we'll continue to be that way. But if we find them we will use them there, and if not we will continue to buy shares back in the open market. And so the guidance we gave is to kind of remain roughly where we are. But should we get more aggressive that number could come down over the time.

William Bird - Lazard

So just to clarify that $97 million, I know that was your weighted average was that also the quarter end number?

Chris Lafond

Hold on for one second Bill and I will get that for you. Why don't we go and do another question.

William Bird - Lazard

And just a follow-on Gene, how do you think about the prospective growth in research client organizations and how you deploy the sales force in effect?

Gene Hall

So there is huge growth opportunity in client organizations. We think there is more than 100,000 actual client organizations out there, and we have a tiny fraction of those today. So we think there is growth in both number of organizations, like you saw in 2011. We also think that there is a huge opportunity to penetrate the existing organizations much deeper as well.

So we're trying to have growth opportunity everywhere we look, and we're still looking for shares.

Chris Lafond

We might have to get back to you on that share count for the end of the quarter.

Operator

Your next question comes from the line of Bill Sutherland with Northland Capital Markets.

Bill Sutherland - Northland Capital Markets

I'm curious about your outlook on consulting and your confidence of a real pickup and momentum there. I see the backlog, obviously strong. But there was somewhat of a strong at the end of '10. So I'm just wondering if there is anything in addition just to the backlog trend that gives you confidence for the consulting guidance.

Gene Hall

I guess there are two things. One is that the convert kind of looking at what's going on in operation of the business and we feel very comfortable with the guidance we gave in terms of operationally. The second thing is the point we mentioned earlier about managing partners. We added a number of managing partners through the last year.

Again, as we look at it, the productivity of those people has been very good. We've been able to attract people and get them up to speed. And we kind of extrapolate into '12, the performance that we'd expect from the few we brought on Board in 2011, we see we have performance right in the range to be what we had in our guidance.

Bill Sutherland - Northland Capital Markets

I know you don't want to say there is an endpoint as far as the number of managing partners as a percent of your total headcount there. But are you a quarter of the way there or 70 or half way?

Gene Hall

Just to give you a flavor for it, we are at about 70 today and we are looking something like 110 to 120 eventually. So we've still got ways to go, which is why you see there mid-to-low single-digit growth in consulting expectations.

Bill Sutherland - Northland Capital Markets

And then one last one on the events. On the new events, is that just a total add or are there anything dropped and then roughly size-wise what are the expectations?

Chris Lafond

There is a couple of them that will be dropped. So there is probably a net five in, a couple out to get your kind of the three delta. If you think about where we're positioned now with the portfolio, we have a pretty solid portfolio in many of the mature markets like the U.S. where we still have plenty of opportunities to launch more around the world. That's the strategy we will have over time to continue to launch existing events in other parts of the world.

Operator

Your next question comes from the line of Brian Karimzad with Goldman Sachs.

Brian Karimzad - Goldman Sachs

On the sales force ramp, can you, Gene, give us a sense for when a great salesperson starts on day one, how many quarters do you expect for them to ramp before they become accretive to the overall productivity?

Gene Hall

So the way you can think about our sales force is when we hire somebody in their first year, they have less than average productivity. In their second year, they have average productivity. So their selling is up to average by the time they are in their second full year. And again, that then will get reflected in contract value, which then in the next year actually turns into revenue.

So if we hire somebody today, their first year will be below average productivity. Their second year's average productivity that will be next year and then that turns to contract value in that year. And in the third year, it actually translates into revenue for the business.

So because of the pro-rated recognition of revenue that we use, it takes a while after you sell it, but we feel really good about the fact that we get our people, we hire new people, they do sell in the first year, but they are full average productivity by the time they're in their second full year.

Brian Karimzad - Goldman Sachs

So theoretically, if you start hitting that high-teens growth rate in the sales force third quarter, it wouldn't be until third or fourth quarter this year that you will see that start to flow through in contract value growth.

Gene Hall

That would be consistent with what I just described, yes. That's a good way to think about it.

Brian Karimzad - Goldman Sachs

Chris, on the free cash flow for '11, you finished the year with the operating metrics kind of towards the high end of your outlook. The free cash flow came in a bit closer to low end. Can you just walk through what the delta was?

Chris Lafond

Just on the free cash flow, when you look free cash flow, there are a couple of things. The cash taxes in the time of cash taxes affect that a bit. What we have over the past few years is, if you look back over four, five years, very little cash taxes and in some cases refunds and slowly that's creeping up in terms of become a cash tax payer. It's certainly nowhere near at the level that we have on the face of the P&L. So our effective tax rate is obviously much higher than our cash tax rate. But having said that, it creeped up a little bit and that's probably the vast majority of the real delta that we see.

The other thing that we've talked about over time that you will continue to see in our cash is that over the past four or five years we've done a really good job of continuing to improve the effectiveness of our cash collection efforts. And we've got a lot of benefit out of that over the past few years. We're starting to see that stabilized now, we're at a very nice high level in terms of how quickly to collect cash and so we're not seeing the continued one-time benefits of improving. We're starting to see it kind of get to a normal run rate.

So those are the few things that are starting to affect the cash flow a little bit in terms of how much additional year-over-year growth we get. But as I mentioned earlier, we're still expecting good strong cash flow growth, well in the double-digit and again significantly higher than net income over time.

Operator

Your next question comes from the line of Dan Leben with Robert W. Baird.

Dan Leben - Robert W. Baird

Gene, just could you talk in the fourth quarter within the consulting business. What you saw within the contract authorization portion versus the other parts of consulting?

Gene Hall

So basically, in the fourth quarter of '10 the contract optimization business was extremely strong in fourth quarter 2010. In fourth quarter 2011 we had a strong quarter, but relative to the extremely strong performance in 2010, it didn't look like as good.

Dan Leben - Robert W. Baird

So when you look out to the forecast for next year with the utilization coming up nice in the fourth quarter. Is that the high end of the guidance range on consulting, is that essentially normalized utilization of these types of levels, maybe a little higher with a little bit of headcount growth, I just want to understand the dynamics within the range. What the possible outcomes are?

Gene Hall

So utilization would be at the high end. What you said is exactly right which is if the revenues with the high end utilization lookout would be the high end as well in consulting.

Chris Lafond

The range in consulting as we talked about every year is also a factor of our contract optimization business. As you know that business tends to be a little more lumpy. And there is things that happened that don't recur et cetera. So at the various ranges of the guidance there's that business but, Dan, as Gene mentioned that range around the utilization as well.

Operator

Your next question comes from the line of Manav Patnaik with Barclays Capital.

Manav Patnaik - Barclays Capital

So on the sales force growth expectations 15% to 20%. I just wanted to try and tie that in with obviously all that is organic growth. I want to tie that in with what your pipeline looks like on the M&A front? And just trying to understand where the opportunities are in that pipeline that you see? And are there any good opportunities to acquire companies that already have the sales force with the productivity in place?

Gene Hall

So basically first, we believe we can sustainably grow our sales force organically in the 15% to 20% range. So any acquisitions we did would be above and beyond that. And so there are both great organic growth opportunities. In terms of the M&A front, we actively tracked many companies and we think there are lot of opportunities out there. That it has to be the right company at the right price with the right fit. And those have happened in the last few years, we've had three, in fact we had two in one month because it happened at the right time with AMR and Burton. And so basically, as we've said, one of the uses of our cash is for acquisitions but only if the price is right and it fits right.

Manav Patnaik - Barclays Capital

Obviously, you guys have already shown, you guys have managed to grow the sales force pretty nicely in the double-digit range within that long-term guidance. Can you just help us understand again sort of the profile of who these sales people are and where you're hiring them from? Just to trying to get a little more comfort on the ability to continue to hire 15% to 20% additional sales force year-over-year.

Gene Hall

Yes, basically, what we're looking for are basic sales skills. It doesn't take technology. It basically takes great sales skills. There is a essentially unlimited market of people that have great sales skills out there. And we found, if anything we're getting better actually at both identifying the right people and attracting them to Gartner. Our recruiting organization is really terrific and had done a great job with that.

And there is such a vast army of sales people around the world that have great sales skills. And Gartner such a great place to be if you are a sales person. And we have no doubt in our ability to continue to grow our sales force in the 15% to 20% a year for essentially forever.

Manav Patnaik - Barclays Capital

And I guess, what is the churn being like on the sales force. I mean what is the rate relative to historical that you've seen today?

Gene Hall

So basically our churn of the sales to the attrition of sales force has been virtually unchanged over the last few years. It's been very steady. Even with the change in the economy it's been very steady. Again, Gartner is a very attractive place for sales people to be. And people want to be here as your sales person.

Manav Patnaik - Barclays Capital

And just lastly housekeeping question, I apologize if you said it before, what's the tax rate implied in the guidance of '12?

Gene Hall

32% to 33% is what we have in the range of our guidance.

Operator

There are no further questions at this time. I would now like to turn the call over to Brian Shipman for closing remarks.

Brian Shipman

Before I make remark, Chris, wanted to clarify on one question.

Chris Lafond

So just to follow-up on Bill's question on the share count, so let me just share a few data points. Our basic weighted average share count at the end of the Q4 was 94.7 million, our basic ending share count in absolute terms was 93.3 million and our diluted weighted average was 97 million. So those stats should give you a sense of the shares as we ended the quarter and how that will look in 2012. And just another point on shares, remember that we do issue shares for our equity programs during Q1. And as we talked about, we continue to repurchase shares in the open market.

Brian Shipman

Thanks, Chris. And one last plug here for our Investor Day on February 16, in New York City. Registration is required in advance. If you haven't done so already, either contact me directly or my assistant Germaine Scott, her number is 203-316-3411. We look forward to seeing you next week in New York. Take care.

Operator

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect and have a great day.

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