Q3 2019 Earnings Call
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I would now like they have the conference over to your Speaker today, David Cohen Gardner GE VP of Investor Relations. Please go ahead.
Thank you Sarah and good morning, everyone. We appreciate your joining us today for Gartners third quarter 2019 earnings call with me today are Gene Hall, Chief Executive Officer, and Craig Safian, Chief Financial Officer.
This call will include a discussion of third quarter 2019 financial results and our current outlook for 2019 as disclosed in today's press release. In addition to today's press release, we've provided a detailed review of our financials and business metrics and earning supplement for investors and analysts.
We posted a press release in the earning supplement on our website investor Dot Gartner dotcom.
Following comments by Jean and Craig you open up the call for your questions. We ask that you limit your questions to one and a follow up.
On the call unless stated otherwise all references to revenue and contribution margin or for adjusted revenue and adjusted contribution margin, which exclude deferred revenue purchase accounting adjustments and the 2018 divestitures all references to EBITDA or for adjusted EBITDA with the adjustments as described in our earnings release.
And excluding the 2018 divestitures or cash flow numbers unless stated otherwise our as reported with no adjustments related to the 2018 divestitures.
All growth rates in genes comments or FX neutral unless stated otherwise and our discussion of global business sales were GBS, we will refer to the G X L product.
These are the products for business leaders across an enterprise Gardner for marketing leaders is G.M.L. Gardner for finance leaders is cheap F. L and so on in aggregate, we refer to these products for business leaders as GE XL.
Reconciliations for all non-GAAP numbers, we use are available on the Investor Relations section of the Gartner Dot Com website. Finally, all contract values and associated groceries. We discussed are based on 2019 foreign exchange rates.
As set forth in more detail in today's earnings release certain statements made on this call.
May constitute forward looking steep fall.
Statements can vary materially from actual results and are subject to a number of risks and uncertainties, including those contained in the company's 2018 annual report on Form 10-K , and quarterly reports on Form 10-Q , as well as in other filings with the FCC I encourage all of you to review the risk factors lifted. It can these documents now I will turn the call over to gardeners.
If executive Officer Gene home.
Good morning. Thanks.
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Total revenues of 11%.
Gross.
Research.
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We helped more than 50.
And with 100 countries around the World mission critical.
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Research our largest.
Is it.
Are we just because it was up 10%.
Excellent.
Double digit growth.
A recent system.
As we previously highlighted the Gartner Formula consists of indispensable insights exceptional talent sales excellence and enabling infrastructure.
Richard its elements, we dropped relentless globally consistent execution of best practices and consistent improvement and innovation.
Global technology sales or GTS source leaders and their teams within IP. This group represents more than 80% over total research contract value.
GTS contract value growth was 13% year over year.
We delivered double digit growth in every region across every size company and in virtually every industry.
Global business sales or GBS source leaders and our teams beyond I T and represents about 20% of our total research contract value.
This includes the supply chain and marketing, which we addressed for several years as well other major enterprise roles, including HR finance legal sales anymore.
GBS continues on a path towards double digit growth with total GBS contract value accelerating to 3%.
Our general product line continued to gain momentum with contract value increasing $26 million sequentially.
Oh products provide greater value to clients because they are tailored to the clients individual needs.
This in turn result in higher prices for user and stronger retention.
You had better pricing retention digital products provide exponentially more growth opportunities because we can sell these high value products throughout our client organizations.
For Q3, G. XL contract value grew 65% year over year, and new business was up 39%.
We expect continued acceleration in GBS contract value.
In Q4.
New business growth and retention improvement is the same as it was in Q3 contract value growth will be 9.6%.
Our conferences segment also delivered a terrific performance in Q2 with double digit revenue growth of 19%.
Got to conferences combined the outstanding value of research with the immersive experience of life interactions, making every conference we produce the most important gathering for the executives we serve.
I recently attended our I T Symposium conference in Orlando, Florida.
This conference is the most important gathering of scenarios and senior executives in North America.
We hosted around 8000 attendees onsite and about 3000 fees were chief information officers.
This is near all time highs.
At our conferences you can see first hand, the power Gartner in helping clients achieve their mission critical priorities.
Once received incredible insights from our analysts they network with leading peers.
Experienced leading edge technology for the most important providers in the world.
Our executive attendees were inspired and empowered to succeed as a result insights we delivered at this important event.
Our associates were equal inspired and excited about the incredible value we delivered to our clients.
Our consulting segment also achieved double digit growth in Q2 with revenues up 20%.
Got it consulting this extension of Gartner research and provides quite a deeper level in Poland through extended project based work to help them execute their most strategic initiatives.
I grew up in the quarter was a combination of our labor based business and strengthen our contract optimization business.
So we delivered another strong quarter across all three of our business segments.
We continue to have a vast market opportunity.
We've made investments over the past few years that position us well to capture that market opportunity.
We are preparing our 2020 business plan and expect to continue attractive double digit growth.
We plan to maintain expense growth in line with revenue growth by leveraging investments we've made over the past three years.
Specifically, we expect total expense growth to be in line with total revenue growth.
We've had a strong history continuous improvement and continuous innovation.
We're shifting the emphasis of our innovations and improvements to be on more tightly managing expenses.
Sales is one of our largest expense categories in sales will be implementing significant innovations that we expect will improve sales expenses relative to contract value.
Here are three examples.
Territory designed as an important factor in determining a salesperson to productivity.
Especially in a growth company.
We've developed a highly sophisticated territory planning capability over the past few years.
For 2020, we're making a major advance, but making the territory planning process much more dynamic.
Another important factor impacting sales expense is how quickly new sales hires gets into the territory and make the for sale.
Over the past few years, we developed a very strong recruiting capability.
For 2020, we're implementing changes to the recruiting process, which will allow us to put salespeople and territory just in time analogous to just in time manufacturing.
A third factor impacting sales expenses training.
Over the past few years, we developed the sales trend that is broadly recognized as being outstanding.
For our next evolution, reducing the amount of upfront training and shifting the strange we just in time as a sales person needs. It.
This will enable us to be even more effective well getting salespeople into territory even faster.
John sales, we expect get leverage from the Gionee investments, we've made over the past few years.
We've already begun making these changes to ensure we get the full impact in our 2020 plan.
Summarizing we're shifting to getting returns from the investments we've made over the past three years, while maintaining the long term growth that captures our enormous market opportunity.
Looking ahead, we are well positioned for sustained long term growth.
We expect continued sustained long term broken GTS.
We expect continued acceleration in GBS.
And conferences and consulting or on a strong path.
Looking ahead to 2020 with the great strategic positioning of GTS in GBS together with leveraging the investments. We've made we expect double digit top line growth and EBITDA growing approximately in line with revenues.
With that I'll hand, the call over to Greg.
Thank you gene and good morning, everyone.
Global technology sales the largest part of her business continues to deliver strong double digit growth.
Global business sales continued to accelerate after inflecting to growth last quarter.
Our strategy to deliver products and services with a compelling value proposition across all enterprise functions is working.
Conferences, and consulting or having outstanding years.
Third quarter revenue was $1 billion up 10% as reported and 11% on an FX neutral basis topline growth was impacted by about 100 basis points in the quarter from the product retirements, we previously discussed.
In addition contribution margin was 64% down 10 basis points from the prior year.
EBITDA was $140 million ahead of expectations, although down 6% year over year and 5% FX neutral.
Adjusted EPS was 70 cents and free cash flow in the quarter was $190 million.
Our research business had a strong quarter.
Research revenue grew 9% year over year in the third quarter and 10% on an FX neutral basis.
Third quarter contribution margin was 69%.
Total contract value was $3.3 billion at September Thirtyth.
Growth of 11% versus the prior year.
We always report contract value growth in FX neutral turns.
I'll now review the details over performance for both GTS and GBS.
In the third quarter GTS contract value increased 13% versus the prior year.
GTS had contract value of $2.6 billion on September thirtyth, representing just over 80% of our total contract value.
Client retention for GTS remains strong at 82%.
Wallet retention for GTS was 105% for the quarter down 16 basis points year over year.
Our wallet retention rates show that our client spend more with us each and every year because of the value we provide to them.
GTS, new business grew 12% versus the third quarter of last year, a strong rebound from second quarter.
New business is coming from a mix of new enterprises and growth in existing enterprises through sales of additional services and upgrades.
We ended the third quarter with 12728, GTS enterprises up 2% compared to Q3 2018.
We've added over 1600, new enterprises, so far in 2019.
The majority of client losses, our with our smaller lower spending clients would you can see in the client retention rates.
Moving forward, we expect to grow the number of enterprises as well as expanding the contract value in those enterprises.
The average contract value for enterprise continues to grow.
Now stands at $208000 per enterprise in GTS up 11% year over year.
Growth in CV for enterprise reflects both price increases as well as upsell and increased numbers of subscriptions.
At the end of the third quarter, we had 3355 quota bearing associates in GTS or growth of 14% year over year.
We've made investments in the GTS salesforce and have seen CV accelerate from 2017.
Following the additions we made late last year in early this year, we are recalibrating our expense growth to ensure we align it with GTS CV growth.
These changes are consistent with our continuing commitment to strong execution and sustained long term double digit growth.
We expect GTS head count growth to end 2019 at approximately 10%.
With the hiring we've done the Salesforce has the capacity to grow GTS contract value between 12, and 16% per year consistent with our medium term guidance.
For GTS the year over year net contract value increase for and CVI divided by the beginning period quota bearing headcount was $104000 per salesperson.
Down 4% versus the third quarter of last year.
The higher head count growth late last year and into this year have brought down the average tenure as new salespeople take time to get the full productivity.
One of the benefits of moderating the head count growth exiting this year and moving into 2020 is that average tenure will increase which should improve productivity.
Turning to global business sales.
GBS contract value was $620 million at the end of the third quarter or about 20% of our total contract value.
The momentum we saw last quarter continued with GBS, CV, increasing 3% year over year.
The acceleration in GBS contract value was driven by strength in gx out.
Total GBS, new business was up 26% and retention improved as well.
Gee XL products are an important part of our strategy and continue to gain share.
Looking at total contract value from the Gx sell products, we drove an FX neutral increase of 65% year over year from 154 million to $254 million.
We've updated the GFL data we provided the last few quarters on page 11 of the earnings supplement to highlight the trend and gx sell new business and contract value.
We sold $35 million of Gx sell new business in Q3 up 39% versus the prior year quarter.
We continue to make great progress with our gx sell products across each of the functions GBS serves.
More than half of the GE XL new business in the quarter came from newly launched products.
Gx LCV now makes up 41% of our total GBS contract value up 15 percentage points from Q3 of last year.
We are driving increased client engagement through expanded service teams and growing adoption of individualized content and service.
For the Standalone the quarter, we drove attrition rates down for GBS.
For contracts that were up for renewal in the third quarter attrition improved by about 500 basis points over the prior year quarter.
Again. This is a result of the increased engagement, we've discussed a richer mix of gx on renewals and all of our other retention programs, having an impact.
Our path to continued acceleration and double digit growth for GBS is clear as gene detailed the path to double digit growth is based on new business growth and attrition improvements consistent with Q3.
At the end of the third quarter, we had 910 quota bearing associates in GBS or growth of 19%.
Headcount was down sequentially as we are recalibrating our cost base.
We expect GBS head count growth to moderate by the ended the year as we shift to reap the benefits of the investments we've made.
In conferences revenues increased by 16% year over year in Q3 to $66 million.
Next neutral growth was 19%.
Third quarter contribution margin was 41% down 239 basis points from an especially strong third quarter 2018.
The largest impact on the year over year Q3 contribution margin comparison was the movement of our your supply chain conference into Q2.
On a year to date basis conferences contribution margins flat compared to the prior year.
We had 18 destination conferences in the third quarter.
Same conference FX neutral basis revenues were up 20% with a 9% increase in attendees and a 100 basis point improvement in same conference contribution margin.
Turning to consulting.
Third quarter consulting revenues increased by 18% year over year to $93 million FX neutral growth was 20%.
Consulting contribution margin was 28% in third quarter.
Labor based revenues were $78 million up 11% versus Q3 of last year were 13% on an FX neutral basis.
Labor base billable head count of 809 was up 11%.
Utilization was 57% as the third quarter is our seasonally lowest utilization quarter and also when our annual MB hires joined the company.
Backlog at September Thirtyth was $109 million up 3% year over year on an FX neutral basis.
Our backlog provides us with about 4.5 months of forward revenue coverage inline with our operating targets.
Contract optimization revenues were up 70, 474% versus the prior year quarter as we have detailed in the past. This part of the consulting segment is highly variable that compares get significantly more challenging in the fourth quarter.
As gene a increased 15% year over year in the third quarter and 17% on an FX neutral basis.
We will continue to grow sales capacity, enabling infrastructure to support our strategy of delivering sustained double digit growth over the long term.
We have started the process to recalibrate, the sales and infrastructure investments to align cost growth with revenue growth.
EBITDA for the third quarter was $140 million down 6% year over year on a reported basis and 5% on an FX neutral basis.
In the third quarter. This year EBITDA was adversely affected by about four percentage points for 5 million dollar impact due to the product retirements we've discussed.
Taking that into consideration underlying FX neutral EBITDA was down about 2% in the quarter.
Depreciation was up about $3 million from last year as additional office space went into service.
Amortization was flat sequentially.
Integration expenses were down year over year as we've moved past the biggest part of the integration work.
During the quarter, we recognized an unrealized gain of $9.1 million related to a minority equity investment that we sold in October .
The gain is.
Gains in other income.
This was a hurricane HCV minority investment in a small company, which was acquired.
Net interest expense, excluding deferred financing costs in the quarter was $22 million down from $25 million in the third quarter of 2018.
The lower net interest expense resulted from lower average debt balances of roughly $170 million.
The Q3 adjusted tax rate, which we use for the calculation of adjusted net income was 22.8% for the quarter.
Lower than expected as result of more favorable income mix and timing of reserve movements.
The tax rate for the items to adjust net income was 24.2% in the quarter.
Adjusted EPS in Q3 was 70 cents above our expectations due to operating upside and a lower tax rate.
In Q3 operating cash flow was $220 million compared to $249 million last year.
The decrease in operating cash flow was primarily driven by lower EBITDA.
Q3, 2019, Capex was $36 million in Q3 acquisition and integration payments and other nonrecurring items was approximately $7 million.
This yields Q3 q free cash flow of $190 million, which is down 17% versus the prior year quarter normalizing 2018 for divestitures and working capital timing.
On a rolling four quarter basis, our free cash flow conversion was 119% of adjusted net income excluding divested operations and working capital timing.
The lower conversion is due to timing and we expect to finish the year with a conversion rate in the high 100 Twentys.
Turning to the balance sheet.
Our September Thirtyth debt balance was about $2.2 billion, our debt is effectively 100% fixed rate.
Adjusting EBITDA for the divestitures, our gross leverage ratio is now about 3.3 times EBITDA.
We repurchased $95 million of stock in the quarter at an average price of about $134 per share.
We will continue to be price sensitive and opportunistic as we returned capital to shareholders.
We have $777 million remaining on our repurchase authorization.
Our capital allocation strategy remains the same.
We deploy our free cash flow and balance sheet flexibility by returning capital to our shareholders through our buyback programs and through strategic value enhancing M&A.
Earlier this month, we acquired Copa a provider of insight and advice for sales leaders.
The overall purchase price was $33 million with a portion of the consideration deferred for a couple of years.
Turning to the outlook for 2019.
Revenue adjusted EBITDA free cash flow and adjusted EPS guidance, all remain unchanged from last quarter.
The topline growth outlook on an FX neutral basis remains strong and we're committed to the same second half targets we provided in July .
As you're thinking about the fourth quarter in the context, the third quarter results. There are two points to keep in mind.
First consulting outperformed our expectations in the quarter in both labor based and contract optimization.
Most of the upside was revenue we previously forecasted for the fourth quarter.
And second as we get as we began the process to realign our expense growth with our revenue we shifted some cost out of Q3 and into Q4.
Our guidance reflects FX rates as of September Thirtyth.
FX is causing a roughly two point negative impact or projected 2019 full year growth rates across revenue EBITDA adjusted EPS and free cash flows.
The highlights of our full year guidance are as follows.
We expect FX neutral revenue growth of 10% to 11%.
We expect adjusted EBITDA in FX neutral in terms of down 1% to up 4%.
We expect an adjusted tax rate of around 25.5% for 2019.
That implies a mid 50% rate for the fourth quarter, our tax planning related to our intellectual property is ongoing and we anticipating incremental tax costs in the fourth quarter.
Please note that if you were adding back from GAAP net income the rate for the tax effect on the add backs is also about 25.5%.
For 2019, we expect free cash flow of $400 million to $430 million that is a projected FX neutral or change of down 2% to up 5% versus our normalized 2018 free cash flow.
All the details of our full year guidance are included on our Investor Relations site.
In summary, GTS contract value growth continues to be strong and sales of our new gx sell products in GBS continue to rise our conferences and consulting businesses. Both had great quarters, we expect to finish the year with free cash flow conversion from net income in the high 120 percents.
As we prepare for 2020, we are actively recalibrating our investments to ensure cost growth is in line with revenue growth.
And we continue to apply the Gartner formula across the combined business to drive sustained long term double digit growth revenues EBITDA and free cash flow.
With that I'll turn the call back over to the operator, and we'll be happy to take your questions operator.
Thank you as a reminder to ask a question you would need to press Star then one on your telephone to withdraw your question. Please press the pound cake.
Please standby well, we composite Q and a roster.
Our first question comes from the line of Jeff Mueller with Baird. Your line is now open.
Thank you to start can you just give some more color on the improved GTS new business, so trend and I guess, what I'm wondering is last quarter you talked about.
And I am normal amount of management, our operational change and that had some impact I'm. Just curious does it tie back to those regions or just anything you can say about the improved TTS knit business soltren.
Hey, good morning, Jeff Thanks for the question.
I think our new business performance obviously.
We want to drive consistent double digit improvements in our new business on a year over year basis.
You know, we got back on track for that trend in the third quarter with strong new business growth.
I think that.
The challenges we detailed last quarter.
We are working our way through them. It takes time to work through them. So I would definitely not attribute.
The rebound to those things all bounce back, but I just I just attributed to one we have a huge market opportunity, which we continue to go after two we've continued to grow our salesforce to go after that opportunity and three you know we have an expectation that will drive double digit growth in in our new business.
To basically support our sustained double digit growth within GTS.
Okay, and then on the way that you're managing expenses and margin I know, it's being well received premier shareholder base, but I guess just wanted to make sure that the way you're managing it doesn't ultimately impact gross and I hear you on the GBS sales head count that you've kind of already made the investment and the time too hard.
I missed that but the other things that you're citing the sound to me like kind of the continual improvements that Gartner is always making so am I wrong about that is there. Some reason why we should think that those productivity.
Impacts will be bigger from this round of initiatives or are there other areas other than kind of harvesting GBS sales headcount, where you're actually.
Dusing spender are not making investments that you're otherwise would've made.
Hey, Jeff as Jane I put into categories one is.
Three times I'm, sorry, three categories, one is sort of in GBS, where again as you correctly.
Calculated we made some major investments since we acquired.
Through our TV.
We're seeing those returns on those investments and we're very focused on making sure. We get those for terms. The investments were kind of we've got the Salesforce trained we got so that we got the products introduced.
So now we want to make sure we focused on good returns from that as we see a big upside there.
Secondly.
GTS Similarly, we've made.
And GTS several we made some investments over the last during that same period of time, and we invested a little higher rate than we had invested even before the CV acquisition and we have a similar situation just not as pronounced as it was on the.
On the GBS side and some of the changes involve some innovations like dry took you through three of them. We think are material innovations that will affect in particular the expense relative to contract value, which is really important in sales and the last thing I also mentioned, which is we do think that there's some leverage we get out of our DNA.
That we havent gotten over the last couple of years.
And I'll give you. One example, which is as we grew we had some major real estate projects. Those projects are now where we can start getting the benefit from those and so we have less of a dragon DNA from those which is part of the reason we could expect as I said DNA to grow slower than our overall revenues.
Going forward.
Thank you.
Thank you. Our next question comes from the line of Manav Patnaik with Barclays. Your line is now open.
Thank you. Good morning, I was wondering if you could just to talk a little bit more around that client count reduction, it's being three quarters. Now I know you said most of it was on the small business side, but thats usually the case I'm. Just wondering is is there anything incremental and your confidence and growing that again are you going to shift strategy to more larger.
Okay. So just if there's any change there at all.
Good morning, Monocytes and thanks for the question you I think on the on the enterprise counts paying.
Or the enterprise count trend I should say there are few things going on there one is.
As we've talked about in the past.
Any M&A, obviously will impact that count.
And we have been in a period, where theres been more M&A than than normal and that has a modest impact on the count on the second piece, which we talked about last quarter was we're continually refreshing and updating our data sources and that does and has over the last three or four quarters.
Impacted the enterprise count a little bit due to the negative as we've.
Cleaned up data and consolidated certain enterprise again, another modest impact on the third thing I'd say is which I alluded to in the prepared remarks, we're continuing to add.
New enterprise is at a very strong clip in GTS as I mentioned through the first three quarters, we've added over 1600.
Gross new enterprises.
You will note a modest uptick.
Or downtick I should say in our client retention rate.
And essentially you're not seeing the.
The increases you've historically seen in our enterprise cow because of the cleanup and because of the small downtick in the client.
Retention rate.
Going forward I don't think there's any change in strategy, it's not about going after larger companies. The note I'd make around really small companies and small tech companies. In particular is we have a different strategy around how we're attacking them.
The bulk of our market is really not them.
And so we want to make sure that we handle that bit of the business in a more efficient more effective and more profitable matter, but the market opportunity remains really really really that and we'll continue to go after that opportunity.
By adding new salespeople and by growing the enterprise count over the long term.
Okay got it and gene just a follow up on your last comment there around seeing the returns in a lot of investments in making sure you see more I guess, how will we see like shouldn't we also see some of that with some signs this improved margins given the heavy investment though is that maybe two years out which is why you guided to.
That margins for next year.
Hey, Bob I'll jump in you mentioned margins a gene looked over to me.
So I think the with the way to think about it is I think you're right. So two things one is we're not providing 2020 guidance yet we're working our 2020 operating plan as we speak and we will give you an all of our investors. The details of that plan enter in early February .
Two I do think there is.
Time that takes to actually see those benefits flow through especially given that the ratable nature of the bulk of our revenues and so what gene gene stated and which I have firmed is we we believe for 2020.
Revenues and expenses in EBITDA will grow roughly in line with one another and in my mind, that's the first step towards seeing.
The real benefits of of the all the investments we put in place.
Right got it thank you guys.
Thank you. Our next question comes from the line of Gary Bisbee with Bank of America. Your line is now open.
Hey, guys. Good morning Gene I guess the first question for you on on the sales changes that you mentioned can you just give us a little a little more color I've always thought your sales training was a key part of your long term success, so reducing that upfront more I guess you said just in time as you go what does that really mean and is there any.
Activity risk around that and similar concept on the recruiting process changes or even the new way you're managing territories.
What's the risk to those stretch thank you.
So let me just.
I mean, there's there's clearly risk anything you do but we think these are actually have a lot of upside to it and we just take for example, the training piece. So the way we have traditionally trained is will bring in new person on and depending what role there and in what geography. There in the training is six eight weeks lawn and it's really good training we have it we have.
It really gives a lot of tools.
What we found is after meaning training for a couple of weeks the kind of retention of what they've learned isn't as high as you'd like and so we've come up with what we think is a big innovation, there, which is shortening the upfront training to approx. It it'll get it'll vary the call approximately two weeks.
And then delivering the others other training as they're in throughout their first year, but when they needed. So for example.
You might have a training session on how to handle client objections for a particular product.
With that trend up front with its much more applicable if there are about to talk to a quite about that particular product to get their front and how to handle objections. The day before as opposed to three months beforehand, where they the retention that there would they remember about what they were told is a lot lower and so the way to think about as they're going to get the same amount of training, but this is actually.
A much more effective way to do it because we given the base where they need upfront and then each week. They think about each week they would get a booster on to the specific things they need to address the challenges they have their their client base that particular week and so the total training. We're not think Youtube is less it's just a smarter way to do it where they get it where they can really use it anyway.
Studies that you read in our experiences are saying, which is if you get training Davao if sales person gets train the day before they have to actually use it they pay a lot higher attention that if it's the fifth week of six weeks of training for something we're going to use in nine months.
And so the way to think about it is same training just much more effectively delivered it also happens to help our cost structure. Because then we have people into territory sooner and so it's still going to church retro six or eight weeks, it's going to territory. After two weeks and so the extra learning their client base and get to that first sale faster, which gives us a lot of confidence.
Great. That's helpful and then the Craig just one for you when you talked about free cash flow I think I heard you say extra divestitures fine, but you also say when you're talking about conversion X working capital movements and if so two part or are you changing how you talk about cash flow conversion number one number two is there anything about the working capital.
Characteristic, particularly now that you've got.
CV growing at GBS that that that we should think is different than what has been in the past.
Good morning, guys. Good question so the.
The working capital timing adjustment that we've.
We discussed.
Relates to the catch up.
Where we got behind at the end of 2017, which we talked about what's really impacted 2017 free cash flow at the time, we said it was about a $40 million impact of free cash flows because we had challenges in the integration with getting the invoices out about $40 million of 2017 free cash flow slipped into two.
2018, and so when we talk about the adjustment the going quite adjustment for working capital timing, that's putting that $40 million back in 2017, when we do the year over year comparison to get a better view on what the true organic growth rate is in free cash flow and then on the second part of the question No no no.
Change to the working capital characteristics of the company.
We remain really focused on making sure that we leverage and get the benefits out of the negative working capital characteristics of our research businesses. We're very very very focused on that as we've discussed in the past and as you alluded to as GBS contract value accelerates that clearly as a benefit.
It on those and our net negative working capital components, because as that business is growing faster we get to take more advantage of it and then the third thing I'd say as we remain very focused on improving the efficiency of our working capital as well and so yes, I think as as we roll forward.
We would expect to see us continue to get the benefits, perhaps even to get more benefits.
Out of the fundamentals of our our working capital model as we grow both gcs CVN GBS CV.
Thank you.
Thank you. Our next question comes from the line of Toni Kaplan with Morgan Stanley . Your line is now open.
Thanks, very much Craig you mentioned two main reasons for keeping the guidance, you're seeing that consulting and.
Vince is shifting into Q4.
Would you say more conservatism in the guidance than last quarter and.
Are there any incremental factors.
I know that are are maybe a little bit.
Yes, good and not the reason you're keeping the same.
Yeah, and good morning, Tony Thanks, Thanks for the question I think.
The way the way to think about the guidance is when we came out of Q2.
And with our adjustments there we were very focused on delivering what we committed to over the second half of 2019.
And you know as as we roll through Q3, I'd say again, the three of the two things I mentioned on the call most notably the timing around consulting and and deferral of certain expenses.
Into in from Q3, Q4, certainly we're the largest impacts.
Yes, you might argue we were a little conservative in the Q3 number.
When we came out with it.
But I would not imply.
Huge overarching conservative conservatism over our second half target, which we remain committed to.
Okay great.
Wanted to ask about conferences.
I'd, probably headed I appreciated the link between conferences research sales.
Much as I should have and so I can you just talk about how the CBS conference.
I think going.
I guess, if if there's any way to quantify.
How much benefit you normally get from a conference translating into research sales later on and.
Anything.
In terms of improvement.
Great. Thank you.
So our.
Finally, our conferences are great business and is a great leverage our research what we do research on a particular topic, obviously thats very relevant to the people that are research client. It's also very relevant to people that are not not yet Richard.
And so we've introduced as you pointed out the conference GBS tickets are the ones that we had before they were smaller and those of all that great. They've really grown very rapidly they've been very attractive to both the exists research clients as well as people by the road tickets separately and we tend to continue that whole strategy.
Thank you.
Thank you. Our next question comes from the line of Andrew Nicholas with William Blair. Your line is now open.
Hi, good morning, Thanks for taking my questions.
Just I want to talk about GBS little bit when we're thinking about your ability to get to double digit CV growth.
Next quarter is that entirely a function of generating new GE XL business or do you think theres still a little bit of room to go in terms of improving your legacy attrition.
Hey, Good morning, Andrew I think it's absolutely both as we've as we've discussed throughout the year.
Our focus clearly has been on gx, Alan and Gx sell new business and that's been going really really well for us as we've described and as you can see in our in our disclosure information.
I I would note, though that we have also been very focused.
On improving the attrition rates across the entire GBS portfolio and so the numbers we've given over the past couple of quarters have been inclusive of both GE XL and the legacy leadership Council and we've seen really significant and material improvements in our attrition rate.
It's a nave improved from quarter to quarter to quarter.
With our best quarter, so far being Q3.
And that's across both Gx cell and legacy leadership Council business and so yes that is absolutely a big lever for us the bigger lever is clearly continued momentum in gx sell new business.
But but every dollar we save from a mytrition perspective, obviously helps.
To accrete the overall growth rate.
Great. Thank you and then within jet sell again, I know you target a number different verticals their HR sales so on and so forth I'm. Just curious if you could speak to where you're seeing the most traction and then maybe on the flip side, which verticals you would like to see grow a bit faster. Thank you.
Yeah, I'll talk to the.
So the quantitative part of that question and gene can talk strategically I think the really nice thing that we've seen since we launched the gx sell products.
Each of the functions that we serve.
We've seen really really strong continued strong growth and accelerating growth and one of the things. We keep mentioning is more than half of the new business weve generate in each of the last three quarters more than half of it has come from the new Gx sell products that were launched post.
Acquisition, so meaning we are doing well, we can continue to do well on the marketing and supply chain.
XL offerings that we had prior to the CV acquisition, but we're really growing rapidly across all the functions.
That we now have the XL products for it again, whether you look at HR legal or finance.
They're all doing really really well.
Next I'll new business in each of those enterprise functions is up significantly on a year over year basis, and we've seen really nice progress across all the functions.
Yes, that's not good additive there we don't have a a place that we sort of say hey.
It's underperforming relative to the expectations.
Got it thank you.
Thank you. Our next question comes from the line of Jeff Silber BMO capital markets. Your line is now open.
Thanks, So much wanted to go back to the margin discussion.
If I go back a number of years ago before you guys bought SPB now GBS you were generating adjusted EBITDA margin.
Close to 19% or so.
I know GBS was different business made a lot of investments and a lot of improvement I think when you bought the company you were hoping to make they make it a gartner like company, which you know you're making a significant amount of progress already do you think we can get back to these adjusted EBITDA margins around 19% over time.
Good morning, Jeff, Yes, I think we're committed.
As we've talked about too.
Getting returns on the investments we've made and we spent a lot of time. This morning talking about in last quarters, while talking about ensuring that we are aligning our cost structure.
To to our revenue growth and so I think the way to think about it is you know we are committed to that we're going to go after that and when we get through 2020, we can start talking about.
2021, and by doing twice or three look like.
But for now I think we're very focused on finishing this year, making sure that the enter 2020 in the best possible condition. Both from a bookings perspective and also from a cost structure perspective, and then we're going to take it from there.
Okay fair enough. Thanks, so much.
Thank you. Our next question comes from the line of Joseph Foresi with Cantor Fitzgerald. Your line is now open.
Hi.
I guess my my first question here is just around that seems like there's a shift in strategy and that maybe the investment cycle for gx sell.
It is over at this point is that accurate and if so you know why this quarter versus other quarters.
So I have seen so there is a shift in strategy you're right in the shift in strategy. We over the last three years, we've been investing for the temperature.
In particular with things like getting the DXL products in place getting the sales were trained on and getting our salesforce capacity up.
Moving the all of the GTS tools and training it's over into GBS, then I'll talk a lot of investment we've made those investments and we feel like that there's there's leverage we can get out of those so there really is a big shifts in strategy from putting those investments in place to now actually we have them in place and getting acceleration and take advantage was invest.
Obviously, and so we vote a heavily investing ahead of our.
The growth, particularly in GBS now we want to make sure that we get all the levers we came out of those investments.
Okay, and then secondly, and I guess this is for you Craig because you get the margin questions for GE will at least point to form.
On the on the margin side, if T. XL.
Improves and the revenues accelerate their as you're implying with the guidance and the contract value.
Is it fair to say that margins will follow it.
Up because I mean, it's been sort of the area of dilution.
Our is there any reason to think that there'd be a separation there. Thanks.
Morning, Joe. Thank you. So again I think the way to think about it is that gene just mentioned we have invested a lot.
The investments are largely in people.
And we continue to pay those people and that in that cost base.
Is relatively fixed but we'll continue to go up with inflation and things of that nature.
I at we absolutely do believe that as we accelerate our.
The DXL business in the GBS business in total.
That all other things equal that is definitely a health.
Our overall margin.
Profile and margin physician.
I would remind you that GBS only represents about 20% of our total contract value and probably only 15% of our total revenue and so it does have an impact, but a modest or more muted impact than you might think just given the size of it the real.
So kind of margin or or profit profile or incremental profitability that we generate really comes out of our GTS business, which is again.
$2.6 billion business, that's growing at 13% per year and again, we remain committed to making sure that we align our cost base with our with our cost base growth with our revenue growth and that's how we're thinking about it as we plan for 2020 and as we roll again into into future years, we will continue to us.
Date, everyone on on how we're going to manage the business going forward.
Thank you.
Thank you. Our next question comes from the line of George Tong with Goldman Sachs. Your line is now open.
Hi, Thanks. Good morning, you indicated earlier that GBS CV growth will be about 9.6% in the fourth quarter, if new business and attrition improvements in the third quarter carryover to Fourq you can you outline precisely what assumptions that involve and maybe talk about the top two or three factors that could cause the trends from threeq.
Got to carry over to for Q.
Hey, good morning, George so the the topline assumptions are.
Yes, new business growth of 26% year over year, which is what we achieved.
In Q3, and about a 500 basis point improvement in the attrition rates, which also is what we achieved in Q3 and so as Jean went through the math.
Those are the assumptions.
That weve used to get to that 9.6% based on the amount of contract value. We have expiring in the fourth quarter at yeah as you know.
Expiring CV it tends to be the or it is that.
The highest way the quarter in terms of expiring cdeight.
But again if you just extend what we saw in Q3 into Q4 with a new business through mid and attrition improvement if you run that math to get the 9.6%.
Got it that's helpful and I want to tackle the margin question, a little bit differently last quarter, you took down the full year margins from about 17 and half percent put about 16% at the midpoint for EBITDA. Because you were pulling forward. The open territory hires and now it sounds like you're going to recalibrate your expense growth to match the topline growth.
It's going to take about a year.
For 2020 for that to happen, so roughly flat margins, but but as you managed to margins.
Longer term is there room for for the for the margins to get back to.
Yeah, Hey, George excellent job of re swiveling the question in a thoughtful way so thank you for that.
So again I think that theres nothing structurally different in the business, we're running it in a very similar way to the way we ran it.
Forever within Gartner.
For 2020 again as we've talked about around just making sure that our cost growth and our is aligned with our revenue growth thats kind of step one in the process.
If everything works to goes well.
Is there potential for some margin benefit yes, we would say that absolutely how much will come back to you on that as we kind of get through this first phase, which is really making sure that we are aligned for 2020.
Got it thank you.
Thank you. This concludes today's question and answer session I will now turn the call back to gene Hall for closing remarks.
We delivered credible value every major books the enterprise, we have a vast market opportunity. We've made investments of the past two years that position us well to capture that market opportunity and looking ahead to 2020, but the great strategic positioning of GTS in GBS together with leveraging the investments. We've made we expect double digit topline growth and EBITDA growing approximately in line with revenue.
Yes. Thanks for listening we look forward to upturn you again next quarter.
This is added 125.