Gartner, Inc. (NYSE:IT)
Q4 2007 Earnings Call
February 7, 2008 10:00 am ET
Gene Hall - Chief Executive Officer
Chris Lafond - Chief Financial Officer
Hank Diamond - Vice President of Investor Relations
Peter Appert with Goldman Sachs
Fred Searby of JP Morgan
Laura Letterman with William Blair
Bill Sutherland with Boenning and Scattergood
Good morning, ladies and gentlemen, and welcome to Gartner, Inc. earnings conference call for the fourth quarter of 2007. A replay of this call will be available through March 7, 2008. 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 52397907. 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 Mr. Hank Diamond, Group Vice President of Investor Relations and Corporate Finance for opening remarks and introductions. Please go ahead, Sir.
Hank Diamond - Vice President of Investor Relations
Good morning everyone and thank you all for joining us. On the call with me today are our CEO, Gene Hall and our CFO, Chris Lafond. Before we discuss our results for the quarter, I would like to remind everyone of four things. First, the rebroadcast, reproduction and retransmission of this conference call or webcast, without the expressed written consent of Gartner are strictly prohibited. Second, if you did not receive a copy of our press release, it is available on our website at www.gartner.com; we are on the FirstCall system. Third, the company will be making statements about its future results and other forward-looking statements during this call. Statements about future results made during the call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations in the current economic environment. Forward-looking statements and projections are inherently subject to significant economic, competitive and other uncertainties and contingencies which are beyond the control of management. The company cautions that these statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements. Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements and projections are specified in the company’s filings with the SEC, including in its annual report on Form 10-K for fiscal year 2006. Finally, during the call the company will be using certain non-GAAP financial measures as defined under SEC rules. We are required. We have provided a reconciliation of those measures to the most direct comparable GAAP measures in the tables and the press release. Before I turn the call over to our CEO, let me briefly review the major points from today’s press release. Starting with the P&L, revenue for the fourth quarter 2007 increased 15% year-over-year to $348 million. Revenue for the full year 2007 increased 12% to almost $1.2 billion. EPS for the fourth quarter grew 85% to $0.37. EPS for the full year increased 36% to $0.68, including $0.04 in charges recorded in the second quarter. For the fourth quarter 2007, net income increased 72% year-over-year to $39 million and EBITDA increased 53% to $80 million. For the full year, the net income increased 26% to $74 million and EBITDA increased 25% to $194 million.
Turning to cash flow for the full year 2007, the company generated $148 million of operating cash flow, up 40% versus 2006 and spent $24 million on capital expenditures. During 2007, we repurchased $169 million of the company stock including $103 million in the fourth quarter alone. On the balance sheet, the company had total debt of $394 million and cash of $110 million as of December 31, 2007. Finally, we introduce our preliminary outlook for 2008. Chris will give you more details but to highlight, we are projecting revenue growth in the range of 9% to 11%, EPS growth in the range of 32% to 47%, and operating cash flow of between $155 million and $170 million. Now, I would like to turn the call over to Gartner’s Chief Executive Officer, Gene Hall.
Gene Hall – Chief Executive Officer
Thank you, Hank. Good morning everyone and thanks for joining. In 2007, we delivered another successful year of growth and progress at Gartner. We continued to execute on the strategy that we launched in 2005, which is to accelerate the growth of our research business while at the same time maintaining the growth and profitability of our consulting and events businesses. The cornerstones to this strategy are to produce extraordinary research content, deliver innovative and highly-differentiated product offerings, enhance our sales capability, provide world class service and improve our operational effectiveness.
The success of this strategy is evident in our 2007 financial results, including total revenue growth of 12%, earnings per share growth of 36% and cash flow from operations growth of 40%. Since introducing the strategy in 2005, we have successfully returned the company to double-digit revenue growth, increased our normalized EBITDA at a compound annual growth rate of 36%, improved our EPS from a loss in 2005 to $0.50 in 2006, $0.68 in 2007, grown our operating cash flow from $27 million in 2005 to $148 million in 2007, and repurchased a total of almost $450 million dollars of our common stock, which has reduced our share count a lot. This strategy is working.
Now, I would like to highlight some of our key events during 2007. We headed six new role-based products of Gartner for business leaders suite and also rolled up Gartner bright key executives, which is our new offering for CIO’s. Now role-based product offerings were a major contributor to our strong growth in research contract value during 2007. We also grew our new client base substantially, adding over 700 net new client organizations during the year, including over 400 during the fourth quarter alone. A significant portion of our contract value growth this year came from new business with these clients, which demonstrates that we are successfully penetrating the vast untapped market opportunity. We also made great progress in selling additional research subscriptions to our existing client enterprises, also upgrading them to our premium role-based products. The improvements in our product portfolio and the great reaction from our clients resulted in our wallet retention remaining over 100% for each of the four quarters of the year.
On the pricing front, we continued to successfully execute on the strategy to systematically increase prices on research products, both through annual price increases and by adding higher priced premium products to the portfolio. In sales, we added 143 net new associates and through our enhanced recruiting training programs, increased the productivity of our sales force substantially. We dramatically improved our client support organization including rolling out client on-boarding programs to ensure that our clients get full value for their research subscriptions. These programs along with our innovative products and increased sales capability have been a significant contributor to our improved client retention metrics in 2007, which Chris is going to discuss in more detail.
Turn to consulting. During 2007, we both retuned that business to top-line growth and improved the productivity of our consultants by focusing on larger, more profitable engagements and existing less profitable geographies. We also continued to hire more senior-level consultants who have business development responsibilities in addition to consulting delivery. It basically enabled us to shift more of the consulting sales dysfunction to the consultants themselves, freeing more of the overall Gartner sales force to focus on research. Finally in events, we grew attendance by 8% of our 2006 by introducing new events to our portfolio including other events that have been less popular. As a part of our effort to effectively manage the events portfolio, we announced the planned divestiture of our non-core vision events business which Chris will discuss in more detail, and we are also taking steps to boost our exhibitor business. While no company is immune from the economy, we believe that our businesses are extremely well positioned to meet our growth objectives, even in the softer economic environment.
Now, this is particularly true with our research business and the reasons are threefold. First, all of our clients and prospects must manage efficient and value-added IT programs regardless of the macro environment, and Gartner research is critical to their ability to do so. Second, the cost of our research is very modest considering the value it provides. Our average client organization spends only about $70,000 per year on Gartner research out of total IT budget that run in the tens of millions or greater, so cutting Gartner research will not make a meaningful impact on their budget if they need to cut cost. And third, our research subscriptions are one year or longer in length so we benefit from recurring revenues and our results today support this view. We have seen no meaningful indications from our clients or prospects that their appetite for Gartner research will slow due to budget constraints.
Indeed, during the fourth quarter we grew our contract value by 18% year-over-year and we saw a broad-based strength globally across all industries and all geographies, including the financial services and banking sector.
Even in difficult times, the effective management technology remains critical for almost every company around the world. Also, I want to again point out that our opportunities for growth and market penetration are passed. Despite our impressive client base, there are still thousands of companies worldwide that do not currently use our services. Moreover, within our existing client enterprises, there are hundreds of thousands of IT professionals who do not currently use Gartner research but would benefit from doing so. We believe we have captured only a very small percentage of our potential markets. So as we sit here today, both the near-term and the long-term outlooks for our research business are as good or better than they were a year ago, and I am really optimistic on our business fundamentals and market opportunities, but I am cautious on the economy. We do recognize the economic environment is uncertain and we remain vigilant for any change and demand for our services, and we have plans in place to preserve our margins if demand does slow, though we are ahead of our original sales stacking plan in 2007 which puts us in a great position as we begin 2008.
Given the strong starting position and the uncertain economic environment, we have decided to target adding an additional 80 sales associates during 2008. Thus our current plan is to grow the sales force this year by about 10% versus our longer term target of 20% annual growth. So this is an investment we can easily slow down or speed up and we are going to carefully monitor demand and sales as per activity and then make whatever adjustments are warranted up or down based on the trends we see. As a result of the tremendous success, we have had accelerating growth of our research business and its attractive returns. We are going to continue to focus on growing the research business. As a result, you will know in our 2008 guidance, which Chris is going to explain in more detail, that the projected growth in research is at the high end of our long-term road map we have previously provided while events and consulting are below. This is the result of our deliberate decision to focus more on growing research. Events and consulting are two great businesses and important component of our portfolio but the incremental earnings in cash from growing research are significantly higher and over time, we believe this strategy will generate higher revenue earnings in cash flow growth and better returns for our shareholders. So with that, I will turn it over to Chris for additional business unit highlight and financial detail.
Chris Lafond - Chief Financial Officer
Thanks Gene and good morning everyone. 2007 was another strong year for Gartner. We continued to successfully execute on our long-term strategy with the objectives of accelerating growth and revenue, profitability, and cash flow. We delivered on the financial objectives that we established early in the year, and we are now well positioned to continue to generate double-digit revenue and earnings growth.
Let me start today by reviewing our fourth quarter and full year 2007 results before turning to outlook for 2008. I’ll begin with our research segment. Contract value achieved a record $753 million at December 31st. This was an 18% year-over-year increase, 14% FX neutral and our fourth consecutive quarter of high teens growth, as reported. In each of the four quarters of 2007, contract value increased at least 18% year-over-year. And for each of the past three years, we have accelerated the organic growth and contract value excluding the impact of foreign exchange, in the Meta acquisition. As many of you know, contract value is a key leading indicator of our research business, and this performance demonstrates a strong demand for our products despite the uncertain economic environment.
I am particularly happy to report that this contract value growth is extremely balanced. Each of our major geographies delivered double-digit increases. All of our client industry segments, including the financial services sector, achieved strong contract value increases both year over year and versus Q3. Similarly, we are experiencing solid growth across all sizes of clients, highlighting the demand and market opportunity for our research products from the highest and largest companies to small and mid-size enterprises. We have experienced no weakness in the demand for our research products.
New business continues to be an important contributor to contract value growth, approximately two-thirds of the year-over-year increase in contract values from new client enterprises that we were not working with at the start of the year. We continue to execute on our strategy to systematically increase prices on our research products to both annual price increases and by adding higher-priced premium products to the portfolio. That said, the majority of our contract value growth in 2007 was driven by volume, not price increases, further evidence of the strong demand and vast market for our products. The success of our role-based products accounted for 40% of the strong growth in net new client enterprises. Gartner for IT leaders alone had $154 million of contract value at December 31st, up more than 100% over last year. And Gartner for business leaders represented $55 million of contract value in only its first year on the market. Our executive programs business accounted for $189 million of contract value at December 31st, a year-over-year increase of 19% as reported, with 13% on an FX neutral basis. Gartner for IT executives, our new suite of role-based products for CIO’s included in executive programs, was launched in the third quarter and is already showing encouraging results.
Importantly, we are also having great success at further penetrating our existing clients by selling them additional research subscriptions and upgrading them to our role-based products. This is reflected in our improved retention rates. Role retention was up significantly this year and remained over 100% in all four quarters of 2007. We also saw higher client retention throughout the year, ending at 82% in December. The higher retention rates have also been the result of the improvements we have made to deliver world class client service. Our ability to deliver contract value growth earlier in the year converted to strong research revenue growth in the fourth quarter, up 19% to $181 million. We capitalized on the operating leverage in our research business as we drove a 6 point increase to research contribution margin in Q4. For the full year research revenue increased 18% to $673 million a substantial acceleration in growth versus 2006. And contribution margin increased 4 percentage points. Our FX neutral basis research revenue growth is already at the high end of our financial roadmap range of 12% to 16%, a target that we originally expected to achieve by 2009.
Improving our sales capability and productivity is another important component of our strategy. For the full year 2007, we added 143 new sales associates, bringing our year-end total to 806. We are extremely focused on generating an attractive return on this investment by ensuring that our sales force achieves maximum productivity. At investor day on March 6, we plan to provide more detail on how we measure sales force productivity to highlight the progress we are making. At a high level, the principal metric we look at is the average annual net increase in contract value generated for a sales associate. This metric of sales productivity increased significantly in 2007, and we expect it to continue to increase in 2008.
Let me now turn to our consulting business. This segment had a great fourth quarter as well with revenue up 20%, contribution margin up 10 points to 42%, and utilization up 12 percentage points to 73%. This growth was driven by a substantial improvement in our contract optimization business as well as solid growth from our core consulting business. As we had previously explained, our contract optimization business was particularly weak in the fourth quarter of 2006, due to a change we made to sales incentives. We told you that we believed the situation was corrected, and our Q4 results show the actions we took were successful. For the full year 2007, consulting revenue increased 6% despite the overall head income being down 9% from last year as a result of exiting consulting operations in the APEC region in the second quarter. Our utilization increased by 5 points to 69% for the full year. This is close to the target we set to have consistent 70% plus utilization. Our average engagement size has increased significantly and is now approximately $300,000. These metrics, coupled with the full year contribution margin of 39%, demonstrate that our strategy to improve productivity and invest with future profitable growth, is working as planned. Importantly, backlog ended the year up 11% at $121 million. This highlights the continued demand for our unique consulting assets and positions us well for growth in 2008.
Turning to our events segment, I will focus on the results for the full year, since quarterly results are skewed by the timing of our events calendar. For the full year 2007, events generated revenue growth of 7%, while holding 78 events and 74 the prior year. We continue to attract a high quality audience of CIO’s and other senior IT executives. Attendee growth of 8% demonstrates continued interest in our portfolio of events. On the exhibitor side, revenues were modestly below our expectations to the operational issues we discussed earlier in the year. As Gene mentioned we have identified opportunities for improvement and have plans in place to capture them.
We continued our ongoing strategy to effectively manage our events portfolio by launching new events and pruning less successful events. As part of that process, we announce today that we are in negotiation to divest our non-core Vision events business and expect to complete a deal this quarter. Vision is a very good business but unlike the core events in our portfolio, the main value proposition is not driven by research content. Our competitive advantage in events is driven by or unrivaled research content and Vision does not fit into this model. Divesting this business will allow the events leadership team to focus on our core businesses and importantly allow the vision business and team to thrive under a different owner.
Moving down the income statement, SG&A increased by $13.4 million or 12% year-over-year in the fourth quarter and by $59.2 million or 14% in the full year. The increase reflects our continued investment in our sales organization, which grew headcount by 22% during the year. Also our SG&A expense comparisons were adversely affected by foreign exchange with $5 million impact in the fourth quarter and a $20 million impact for the full year. We continue to successfully manage G&A expense, which has again declined as a percent of revenue; two percentage points for the fourth quarter and one percentage point for the full year. Excluding the impact of foreign exchange and non-cash equity comp expense, the absolute spending on G&A is down from 2006.
Moving to our tax rate, you will note it was 39% on the fourth quarter. This was due to our decision to take advantage of an opportunity to repatriate $43 million of cash held offshore, which resulted in an increase of 1.7 points on the rate for the full year. We believe this repatriation was executed at an attractive and modest one-time cost. Going forward, we expect our annual effective tax rates to be approximately 32% to 33%.
Turning to cash for the full year 2007, operating cash flow increased 40% to $148 million and capital expenditures were $24 million. We continue to tightly manage capital spending to focus on investments critical to the execution of our strategy. You can see we are generating operating cash flow approaching $1.50 per share, substantially above our earnings per share. As a result of the decline in our stock price and coupled with our strong operating performance and outlook, we were very aggressive with share repurchases during the fourth quarter. We repurchased 5.5 million shares at a total cost of $103 million, bringing our full year repurchases to 8.4 million shares, a total cost of $169 million. As a result, our fully-diluted shares outstanding ended the fourth quarter down 8% from December 31, 2006. We have continued to repurchase shares during January, and as of January 31st had about 23 million remaining in current authorization. We believe that repurchasing our stock remains a compelling use of our capital and our board is authorized up to an additional $250 million to be used for share repurchases.
Now let me turn to our business outlook for 2008. We expect that total revenues will grow by 9% to 11% to approximately $1.3 to $1.325 billion. Projected revenues by segment are as follows: research revenue of approximately $770-780 million, a 14% to 16% growth rate; consulting revenue of approximately $335-345 million, a 3% to 6% growth rate; events revenue of approximately $190-194 million, a 5% to 7% growth rate; and other revenue of approximately $5-6 million. We expect normalized EBITDA for the full year 2008 to be $213 and $223 million, an increase of 10% to 15% over 2007. In 2008, the cost associated with equity compensation under FAS 123 are/is expected to be approximately $26-28 million.
For 2008, we expect total depreciation and amortization to be approximately $28 million. We expect interest expense of approximately $22 million, and other expense of approximately $3 million. We are projecting an effective annual tax rate of between 32% and 33% and average fully-diluted shares outstanding of between 98 million and 100 million shares for the years. GAAP EPS for 2008 is expected to be between $0.90 and $1, a 32% to 47% increase over last year. The company will continue to improve its cash generation as we drive growth in our research business. In 2008, we expect cash flow from operations of $155 million to $170 million and capital expenditures of $25 million to $27 million. After a number of years of low cash tax payments as a result of refunds and other planning opportunities, our cash tax payments are increasing in 2008. As demonstrated over the past year, we will continue to use our strong cash position to reduce our outstanding shares through the expansion of the share repurchase program announced today. Note that this 2008 outlook does not reflect the impact of the planned divestiture of the Visions events business I discussed earlier. Assuming the transaction is completed, the impact on our projections for full year revenue, normalized EBITDA, GAAP EPS and cash flow are included in the press release.
While our policy is to provide annual but not quarterly earnings guidance, I want 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. I would like to remind everyone that the revenues from our events business are based on the timing of our events. In 2008, changes in the events calendar result in approximately $8 million of revenue moving from Q1 into Q2 as compared to 2007. A majority of events revenue will be delivered in the second and fourth quarters and our fourth quarter remains our most significant, with annual fall symposium IT Expo Series occurring in October and November. We are currently targeting 82 events in 2008, up from 78 in 2007. Both these figures include 16 events in the Vision portfolio in both years, our key performance metrics for consulting our annual targets. Utilization in particular fluctuates from quarter to quarter primarily due to seasonal factors such as holidays and vacations. We anticipate the timing of revenue for the consulting segment in 2008 to approximate the pattern of 2007. Given all of these seasonal factors, we expect Q1 EBITDA to be roughly 14% to 16% of the annual EBITDA. As Gene mentioned, you can see from our outlook we are managing our businesses for higher growth from research and more modest growth from consulting and events as outlined in our financial road map. We believe this will maximize growth and shareholder returns. As we have shown over the past three years, we are committed to double-digit revenue growth and margin expansion over time, and we will provide a more detailed discussion on the financial road map as we always do at investor day on March 6.
In closing, let me summarize the highlights of our 2007 performance. We succeeded on our commitment to generate double-digit revenue and earnings growth. We generated overall revenue growth of 12%, expanded our normalized EBITDA margin by almost two points, grew our GAAP EPS by 36% and produced $148 million of operating cash flow. We continue to invest to accelerate the long-term growth and profitability of our research business through new product launches, sales capacity and productivity enhancements, and client service improvements. We effectively managed our consulting and events businesses for growth and maximum profitability, and we returned significant cash to our shareholders by repurchasing $8.4 million shares of our outstanding stock.
Looking ahead, as Gene stated, we are very optimistic about our business fundamentals and market opportunity but cautious on the economic environment. We are prudently managing our business to ensure that we continue to deliver double-digit revenue growth, double-digit earnings growth, and increasing returns to our shareholders in any economic environment.
Before we finish and begin the Q&A session, I want to remind you about our annual investor day in New York City on March 6. Please call Germaine Scott at 203-316-3411 to register, or if you have any questions about this event. We look forward to seeing you there. With that, I’ll open up the call for your questions. Operator?
Your first question comes from the line of Peter Appert with Goldman Sachs. Please proceed.
Thanks and good morning. These are very impressive results. Congratulations guys. So, I just have a couple of questions. One, in the context the more challenging macro backdrop, I am wondering if you are rethinking at all your pricing strategies and specifically, whether you might step back from the fairly aggressive efforts you have had in the last couple of year’s increased prices.
Hey Peter, it’s Gene. In terms of our pricing, let me just tell you two things. First, we have not seen any push back on pricing from client’s prospects or our sales people. Having said that, let me just clarify what our pricing strategy is, we have some legacy products out there that people bought before the new set of products we started introducing three years ago, and those products, we have been on a strategy, which I intend to stay on, of increasing the prices modestly, think 5% to 7% a year, and our real price increase strategy is we have new products that are very attractive that are typically priced something like twice as high as the discounted old legacy products. And so, our price strategy is two-fold. If they stick to the legacy products, think kind of 5% to 7% a year; if they upgraded to new products, the clients make a decision to spend, call it on average, twice as much, or that kind of depends on where they start, but I’m going to call it on the average, twice as much, and what we found is, when clients are making that decision, they are just flying for making those price increases and they are also very happy, think of sort of the 5% to 7% on our legacy products as being very reasonable price increases, consistent with what they are doing in the general economy. So the answer is, we are going to keep them on the same pricing strategy that I just described, and we have seen it working extremely successfully. It is of all of the concerns that come out on things; pricing is not one that we see hardly ever.
Okay. That is very helpful. Thank you. And how about changes, to follow up on that, what are you doing for the clients in year 2 or year 3 of the migration to the newer product offerings? Are there price increases built in there?
Generally, no… well, first for the new products we also increase those every year as well. So like I said legacy products whether the clients are paying an increased 5% to 7% a year. The new products we priced, as I have said the entry price is kind of twice as high but on top of that, then each year those go up and we do not discount those. Everyone is on the same pricing plan that has those new products, unlike our legacy products.
And so those prices do go up. Now there is one exception which is for clients that are particularly low legacy pricing, we have a pricing plan where our client can go from the legacy to the new over a two-year period. They do have the difference in the first year and in the folder which is the second year with a two-year contract with us. But actually, what we are finding is that vast majority of clients actually go straight to the high price as opposed to the two-step plan. But it they are on the high price, there is still going to be increasing each year, call it 5% to 7%.
Got it. I guess I could figure this out from some of the numbers you have given us but you can tell me roughly what percentage of the contract value then is still in and what you would consider to be legacy products?
Peter, if you just go through some of the numbers that we’ve shared and let me just reiterate them for people. So total contract value ended at $753. Our entire research portfolio, which includes both the legacy products and new products is $563 million roughly, executive programs being about $189 million. As we talked about during my section, about $154-155 million is the new Gartner for IT leaders product, about $55-56 million being the new Gartner for business leaders product. So the remainder would be what is left in the legacy products, and that would be Core Research, Dataquest; it would also include Industry and Invest so there are a number of things in there. But that’s roughly how it breaks out.
Okay, great. Very helpful, thanks. And then, on the dialing back of the sales force expansion, can you give a little more of your thought process there, in the context of how successful it’s been in the last couple of years. I guess I’m a little bit surprised that you stepped back. And then I’m also wondering, how does that flow through then, as we think about this inability of growth in 2009 and beyond because presumably you’re going to be adding less new contract value next year?
So, great question. When you cut to the chase, we don’t think of it as a slower growth rate, and here’s why. First, our original plan for 2007 was to harp out 120 salespeople. As I mentioned, we actually harped 143. So we added something about 23 more than we had originally planned. We are still planning to hire another 80 this year, so that when you think about it actually, it’s the 80 plus the 23 so call it 103 that we will add this year. We just happened to get 23 of them on board in December, call it, as opposed to in the first quarter. And so, it’s not quite as big a change as it looks.
Secondly, we think that as we look at it, there’s a big opportunity to improve productivity as well. And so what we’re doing really is saying let’s, given the economic outlook, let’s focus a little bit on adding product, on improving productivity, during the first half of the year; we’ll still be hiring modestly but will focus more on productivity. And in the second half, as we see what happens with the economy and our productivity, decide what to do. And so, if we see that productivity is really good, demand is holding up, we could easily go beyond the 80 we talked about earlier, as we did last year when we saw things were going well. But just because we think both productivity improvement and we started the year with 23 more people than we normally would have, is why we kind of cut back a little bit. You shouldn’t take it as a lack of either optimism on demand or anything. It was that from time to time it’s good to focus on productivity as well, and it’s just a small change anyways. Instead of 120, it’s 103 for the full year if you look at it the way I described it.
Sure. Makes sense. And then, would the 80 then be backloaded in the year or be spread through the year?
So, we have 30 on board already and the other 50 are in the second half, spread throughout the second half pretty evenly. As I said, Peter, if we saw conditions either better or worse, we’ll ramp it up or down, but that’s kind of our starting point.
Okay. And then, one last thing then I’ll let someone else speak. Chris, obviously you’ve been very aggressive on the stock buy-back, which makes a ton of sense, I think in the context of the share price performance, so how comfortable are you adding incrementally to leverage beyond what you’ve done already to further accelerate the stock buy-back, and how do you think about leverage ratios in terms of your comfort level?
Great question. A couple of things, Peter. First, it’s important to note that if you look back over the last few years, with all the shares we bought back, our overall debt to EBITDA ratios have not dramatically changed. So, as we have gone through this exercise, yes, our debt has gone up a bit. We have funded a lot of this through ongoing cash flow, which we would expect to be part of what we would do going forward. So, even at the current levels of debt, net debt today is about $284 million. We are very comfortable at these levels, in fact, very comfortable increasing from here. So we have increased slightly; I’d be happy to increase more. Certainly, as you look at debt to EBITDA levels below three times debt to EBITDA, we still feel very comfortable and we are well below that. Just to be clear, it’s $294 million of debt, $110 of cash to get to the net number I gave you of $284 of debt. Just to be clear on that. But again, we are more than happy to at these levels take on some additional debt to continue to be aggressive because again, we believe that at the current levels this is a very creative and a very good return of capital for shareholders.
Excellent. Great. Thanks, guys.
Your next question comes from the line of Fred Searby of JP Morgan. Please proceed.
Yeah, thank you. Couple of questions. One is on the consulting business. It’s been very lumpy, but you had a great fourth quarter. But in the guidance, you were sort of saying that’s not going to carry through and I’m thinking about your consulting business. Can you help us think about how economically sensitive it is? There seems to be a component that would be countercyclical. You’ve named a new head of the business but you see it below your target growth rate and you’re seeing 3% to 6%. It looks like maybe deceleration, so is that economic sensitivity? I wonder first if you could help us with that. And then secondly, are you seeing any geographic differentiation in demand and growth, specifically international markets that haven’t been quite as impacted obviously by the credit crunch in Asia and some of the other markets where you could see maybe stronger growth than in the US or is it pretty much still uniform? Thank you.
Those are very great questions. Let me start with the second one first, which is: In terms of demand for all of our products, and there’s not research or consulting organs, all of them. We have seen strong demand across all geographies and across all industries. So, and to your point, demand has been either a little bit stronger in Asia but this year demand has been strong everywhere. So if you looked at our actual demand, and you can see it in both our research contract value growth and the acceleration in backlog in consulting. If anything, in fourth quarter, and we’re seeing that as we speak today, demand has been higher, not lower, and again it’s uniform across the board, all industries, all geographies. So we don’t see any indication in our demand or in our pipeline that we are seeing any impact of the economic uncertainty.
In terms of consulting, there are a couple of things going on there. First, as I mentioned, because the economics of research are so attractive, we really could have focused on growing research. Which means that on balance shift some additional resources there, additional management attention and so forth. Which means consulting events will get a little bit less. So that’s one piece of what’s wrong with consulting.
The second piece is that our kind of philosophy on thinking about projections is let’s use past performance as the best indicator. Even though we may be doing things and we are doing things we think could accelerate that performance, ensures projections is what we want to use, is what we’ve actually seen, not what might happen. And so if you look at our guidance for consulting next year, it’s really based on that philosophy. There’s no concern on economic impact. Again last year we had the best growth in backlog in consulting as you can see our numbers but we’ve seen I think it’s the fact that they’re in Gartner. And so to your point, it may even be a little counter cyclical given the kinds of things that we do for clients, which is two of the primary businesses are really focused on cost reduction: that’s our benchmarking business, contract optimization services. The third business core has a big component which is also focused on cost reduction. Of course you would not count on guidance on this issue.
Yeah, Fred it’s Chris. Just a couple of things to help make sure people understand the Q4 significant growth we had. And if you recall in Q4 of 2006 we had a particularly weak quarter because our contract optimization business didn’t perform particularly well. We had made some changes to plans that didn’t work out the way we had hoped. We made changes to those, and we had a particularly strong Q4 in contract optimization. So when you kind of normalize for that, that had a pretty significant impact on the reason we were kind of 20% up year over year. So if you normalize for that and then you look forward, it doesn’t look like we’re going from a 20% growth rate to a lower percentage that we have in our guidance of that business of 3% to 6%. So I would not necessarily look at it as a deceleration. You should also note that fourth quarter also always tends to be a relatively strong quarter for us because of some of the seasonality of that contract optimization services and how that business works. So, I just wanted to provide a little clarity on that.
One other thing I’d add, Fred, is that as you mentioned we had a leadership change to consulting, but there really isn’t any parameters. Warren, he’s been with us for 11 years, and has had a series of jobs within consulting, has been very successful; in fact, he led our core consulting business worldwide, which has performed very well, probably the best of the three consulting segments. So he has a great track record and I think it really positions us well in terms of leadership.
Okay, great. Thanks guys.
Your next question comes from the line of Laura Letterman with William Blair. Please proceed.
You had a great quarter guys. Can you tell us a little bit about acquisitions going forward as the environment this week or this year prices will go down or do you remain looking out there for different types of properties and if so, what type of things would you look at?
Hi, Laura. Gene. Great question. We have a group that is in charge of identifying, evaluating, and negotiating acquisitions and we try to make sure that we have the capacity to do it as well. We see that as a core part of our strategy. We are always looking and evaluating the companies and if we see opportunities, we will certainly go after them. In fact, at any given point in time, we have a number of targets that we’re looking at.
Just in case, but when you talk to your CIO’s and you probably have more access to them than anybody else, what are they saying about that budget? Should we expect them to go down and I guess part two of the question is if they do expect their budgets to go down, what have they said about your services in terms of how they fit within that concerning budget and burden and you hit it a little bit that they said that they would remain strong, but can you talk a little bit about details about what’s going to happen in budgets and how that impacts you? Thank you.
Sure. So it really varies by geography at that. So if you talk in Asia Pacific, budgets are going up and people are planning to spend more and even though there are alert of obviously the economic issues in the US, there’s no thought of there might be a budget cut or anything like that when we talk to Asian clients. When we talk to European clients, there is actually a very similar story that the general thought is that budgets are going to go up and it’s kind of business as usual. In the US, there’s a nix where people are concerned and I think it’s more that budgets haven’t been cut but there are people in certain industries, you can guess which ones, that have a concern that their budgets could decline at that. Now, in fact it goes by geography but overall is quite positive.
And then secondly, with regard to our services, even though our budgets are likely to decline, clients are very enthusiastic about our services. And I’ll give you an example. If you have a large financial institution that’s spending a billion dollars on buying equipment, they’re making a draconian budget cut that says instead of a billion you have to spend $800 million? Which is a big reduction if you’re selling stuff to that company. On the other hand, they’re still buying $800 million, and when you look at our services, we’re now, my boss, the CIO as well as the CEO expect that he still delivers stuff at 20% less. I have to be more effective and if I pay Gartner $70,000 to help me make that $800 million more effective, that’s an incredible value. And so, that’s the value we provide and that’s how CIO’s and others in IT think about us. It is such a small expense and it helps them do what they need to do even in an uncertain economic environment.
Final question then I’ll pass it on. Looking at the exhibitor piece of the events business that has been very, very profitable and honestly, there were some issues there that you made some changes. Can you talk about the progress there and whether if you look at the high-tax bureau coming up or the one in the fall whether the business is starting to pick up in terms of those trade show booths?
Great question also, Laura. We’ve made, as I mentioned, some operational changes in our exhibitor business. I’d say early indications are good, and I’ll give you one metric that is important to us. That is, last year when we went into the year, we had a large number of open sales territories in that exhibitor business. And when you don’t have salespeople, they don’t sell it. You have the state insurance but when I say you’ll have a lot better luck selling something to a client if you have somebody in the sales territory. Initially what we’ve done is put a real focus on making sure that all the sales territories are filled and filled with highly capable sales people. And so, and it’s material; it’s a material number of people. It’s not a small number. And so we go into the year with one of our biggest issues solved, which is that we actually have a full complement of sales selling to exhibitors, which we didn’t have last year. In addition to that, we made some changes to our product portfolio where, as I mentioned last fall, we tried some things that didn’t work as well with what we would have liked. We’ve analyzed that and it has worked well. And we’ve focused in on our product portfolio on those kinds of events which are more attractive to exhibitors. And it (inaudible) and it leads to it by the way. And so those two changes are examples of the kinds of things we’re doing that give the optimism that in fact that we’ll see a good year in our events business.
Once again, congratulations on a good quarter. Thank you.
Your next question comes from the line of Bill Sutherland with Boenning and Scattergood. Please proceed.
Hi, this is actually Bill Vittorio for Bill Sutherland. Just have one quick question. What was the ending diluted share count as of December 31?
Alright, Bill. Just give me one second. The ending of fully diluted share count on December 31 was 1059.15 for the quarter. In fact, that’s fully diluted so our actual, if you look at shares outstanding, they actually end at just right around 100 or slightly below 100 given the aggressive share repurchases we had in the quarter. So, that number obviously is the average of the quarter. I just want to make sure to point out that it’s been coming down pretty significantly.
Great. Thank you.
At this time, there are no further questions in cue. I will now the call back over to Gene Hall for final remarks.
Thank you for joining us today. We appreciate you hearing out our results there. We look forward to seeing you on March 6th at our investor day. Take care.
Thank you, ladies and gentleman for your participation in today’s conference. All parties may now disconnect. Enjoy your day.
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