Q4 2019 Earnings Call
Ladies and gentlemen, thank you for saying Goodbye and welcome to the Gardner fourth quarter 2019 earnings Conference call.
This time, all participant lines aren't in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you would need to press Star then one on your telephone if you acquire any further assistance. Please press Star then zero I would now like to turn the conference over to your Speaker today, David Cohen gardeners.
VP of Investor Relations. Please go ahead.
Thank you Sarah and good morning, everyone. We appreciate your joining us today for Gartners fourth quarter 2019 earnings call with me today are Gene Hall, Chief Executive Officer, and Craig Safian, Chief Financial Officer.
I will include a discussion of fourth quarter 2019 financial results and our outlook for 2020 as disclosed in today's press release.
Addition to today's press release, we have provided a detailed review of our financials in business metrics and earning supplement for investors and analysts.
Most of the press release me, earning supplement on our website investor Dot Gartner Dot com.
Following comments by Jean and Craig We will open up the call for your question. We ask that you limit your questions to one follow up.
On the call unless stated otherwise all references to revenue in contribution margin or for adjusted revenue and adjusted contribution margin, which exclude deferred revenue purchase accounting adjustment and the 2018 divestitures all references to EBITDA or for adjusted EBITDA with the adjustments as described in our earnings release and excluding the 2000.
18, divestitures or cash flow numbers, unless stated otherwise our as reported no adjustment related to the 2018 divestitures references to organic growth exclude the recently acquired towboat.
All growth rates in genes comments or FX neutral unless stated otherwise.
Reconciliations for all non-GAAP numbers, we use are available in the Investor Relations section of the gardener Dot Com website.
Finally, all contract values and associated growth rates. We discussed are based on 2019 foreign exchange rates unless stated otherwise.
Set forth in more detail in today's earnings release certain statements made on this call may constitute forward looking statements.
Forward looking statements can vary materially from actual results and are subject to a number of risks and uncertainties, including those contained in the company's 2018 annual report on form 10-K.
Quarterly reports on form 10-Q, as well is in other filings with the FCC encourage all of you to review the risk factors listed in these documents now I will turn the call over to gardeners, Chief Executive Officer Gene Hall.
Good morning, and thanks for joining us.
In 2019, we continued to deliver strong performances across our business.
We made progress our core strategy of establishing leading market positions in every role across the enterprise, while continuing to drive innovation.
Regarding our sales forces and reduced open sales positions to record lows.
We made substantial investments in GBS products service and sales to accelerate the future growth.
We also made substantial investments in critical support functions such as recruiting to ensure we have a talent to support sustained long term double digit growth.
We helped more than 15000 enterprise clients in 100 countries around the world with their mission critical priorities.
We provided great jobs to 17000 associates around the world and position our company for the long term benefit of our shareholders.
And 29 chain total revenues were up 11% feel about double digit growth in each of our business segments research conferences and consulting.
Research, our largest and most profitable segment is the core of our client value proposition.
Our research business was up 11% year over year.
The Gartner formula for sustained long term double digit growth continues to drive success and our research business.
As we previously highlighted the Gardner Formula consists of indefensible indispensable insights exceptional talent.
Sales excellence, enabling infrastructure.
For each of these elements, we drive relentless globally consistent execution at best practices and continuous improvement in innovation.
Global Technology sales were G. T S serves leaders and their teams within Nike.
This group represents more than 80% of our total research contract value.
GTS contract value grew 12% against a tough compare over the prior year.
In most of our top markets, including U.S. UK in Canada, we had strong double digit growth.
We also had growth of more than 20% in a number of markets would slow GDP growth such as Japan, Brazil in Saudi Arabia, and this is due to the high tell you quite received from our products.
Despite these strengths GTS contract value growth decelerated.
There were three primary factors.
The single biggest factor was the impact of our revised strategy preserving very small tech centers as we've discussed previously.
The next largest factor was leadership changes in Germany in India, which you've also just discussed previously.
Finally, we had challenges in China.
So while GTS had some challenges we achieved strong double digit contract value growth of 12%.
We put in we've put actions in place to address the challenge is expect to see improvements over time.
We continue to have vast market opportunity across all sectors sizes and geographies.
We've made investments over the past two years, including sales head count that position us well to capture that market opportunity.
Following 12% growth in GTS head count over the past two years, we expect GTS head count growth for 2020 in the high single digits.
Last quarter I outlined three sales optimization initiatives dynamic territory planning.
Just in time recruiting and just in time training.
Overtime. These initiatives will help us a lighter cost growth with a revenue growth, while enabling us to train an employer sales hires more effectively.
We estimate that these new programs or the equivalent adding three to 5.2, our reported head count growth.
Global business sales were GPS serves leaders and their teams beyond Nike and represents about 20% of our total research contract value.
This includes supply chain and marketing, which we've addressed for several years.
As opposed to other major enterprise roles, including HR finance legal sales anymore.
GBS contract that you continue to accelerate growing 8% organically.
Retention improved more than 400 basis points for the year and productivity was up significantly.
GBS growth accelerated throughout 2019 that we did have some challenges.
The GBS Mark in practice has some products unique to marketing that have week retention and low profitability.
Marketing contract value grew only 4% largely due to these products.
As we alone or cost growth revenue growth, we're transitioning these lower margin lower Chechen products to more profitable GE XL products.
We're making this transition as the lower <unk> lower margin products come up for renewal during 2020.
And we expect we will this will have a negative impact on our 2020 CV growth will improve profitability going forward.
Our check cell product line continue to grain momentum, it's contract value increasing $43 million during 2019.
Do you have so products provide greater value to clients because they are tailored to the client individual needs.
This in turn it results in higher prices per user and stronger retention.
Beyond better pricing retention do you have so products provide exponentially more growth opportunities because we can sell these high value products throughout our client organizations.
We implemented the Gartner formula for growth in GBS.
In 2018, we invested in the products processes and Salesforce growth.
In 2019 growth accelerated NRG XL products gained momentum.
We have built a great foundation for future growth.
The conference. This segment also delivered a terrific performance in 2019 with double digit revenue growth of 18% in conference attendee growth of 8%.
Gartner conferences, combining outstanding value of our research with the immersive experience of life interactions.
Making every conference we produce most important gathering the executives we serve.
Looking ahead to 2020, we plan to introduce more new conferences for example in Europe for GTS will launch security and risk management.
And data and analytics summits.
And in Europe for GBS launch marketing Symposium Expo in supply chain planning Simon.
Our consulting segment also achieved double digit growth in 2019 with revenues up 14%.
Gartner consulting is an extension of Gartner research and provides clients a deeper level of involvement through extended project based work to help them execute their most strategic initiatives.
Our growth was a combination of our labor based business and strengthened our contract optimization business.
We had a record year in the contract optimization business.
So that's another good year in 2020, but likely to lower growth rate given how strong 2019 was.
Over the past several years, we've made great progress in the consulting business and are well positioned for continued long term success.
Summarizing we delivered another strong year across all three of our business segments.
Looking ahead, we are well positioned for sustained long term growth.
But the great strategic position of GTS and GBS together with leveraging the investments. We've made we expect strong topline growth and EBITDA growing in line with revenues.
With that I'll hand, the call the Craig.
Thank you Jane and good morning, everyone.
2019 marked another year of strong revenue growth for Gardner.
Global technology sales the largest part of our business again delivered double digit growth.
Mobile business sales accelerated growing more than 8% organically highest growth rate since the acquisition in 2017.
Our strategy to deliver products and services with a compelling value proposition across all enterprise functions is working.
Conferences, and consulting had outstanding years as well.
For year over year.
Financial performance for 2019 included total contract value growth of 12%.
FX neutral total revenue growth of 11%.
FX neutral adjusted EBITDA growth of 2%.
Diluted adjusted EPS of $3, a 90 cents free cash flow of $462 million.
Demand for services remains robust around the world and as our 2020 outlook demonstrates we expect strong topline growth to continue as we adjust cost growth to align with revenue growth.
Fourth quarter revenue was $1.2 billion up 11% as reported and on an FX neutral basis.
Topline growth was impacted by about 60 basis points in Q4 from the product retirements, we discussed in prior quarters.
In addition contribution margin was 63% flat versus the prior year.
EBITDA was $218 million up 3% year over year, and 5% FX neutral.
Adjusted EPS was $1.18 cents with upside from a lower than expected tax rate.
And free cash flow in the quarter was $40 million.
Our research business had a strong fourth quarter.
Research revenue grew 11% year over year on reported basis, and 12% on an FX neutral basis in the fourth quarter.
Fourth quarter contribution margin was 70%.
Total contract value was $3.4 billion at December 30, Onest growth of 12% versus the prior year.
We always report contract value in FX neutral terms.
For the full year 2019 research revenues increased by 9% on a reported basis and 11% on an FX neutral basis. The gross contribution margin was 70% up 56 basis points from the prior year.
I'll now review the details of our performance for both GTS and GBS.
In the fourth quarter GTS contract value increased 12% versus the prior year.
As you know we were up against the tough compare which will continue into the first quarter 2020.
In most of our top markets, including in the U.S. UK in Canada, we maintained strong double digit growth.
And by utilizing our sales excellence playbook, we were able to drive greater than 20% growth in challenging markets like Japan, Brazil in Saudi Arabia.
As Jean just detailed GTS CV decelerated due to three primary factors.
First in the largest factor was the impact of the way we sell in service very small technology vendors, which we've discussed on prior calls.
Second as we've discussed previously we made sales leadership changes in both Germany, and India and both of those changes intersected with a tougher macro environment in those markets.
And third we had challenges in China, where the economy has slowed and we also made a leadership change.
As gene mentioned, we put actions in place to address these challenges and expect to see improvements over time.
Do you guys had contract value of $2.8 billion on December 30, Onest, representing just over 80% of our total contract value.
Client retention for GTS remains at around 82%, where it has been running throughout the year.
Wallet retention for Gcs was 104% for the quarter down 96 basis points year over year.
Our wall retention rates show that our client spend more with us each and every year because of the value we provide to that.
GTS, new business grew 7% versus the fourth quarter of last year.
New business is coming from a mix of new enterprises and growth in existing enterprises through sales of additional services and upgrades.
As with CV and wallet retention, which are all related we faced difficult compares this year.
We ended the fourth quarter with around 13000, GTS enterprises up 1% compared to Q4 2018.
Net client additions were impacted by higher churn and lower ads in the small enterprise part of the market.
These tend to be lower spending clients.
A key factor was the shift in strategy specifically in a small tech company sector that we've discussed previously.
We expect to lap the strategy shift during the course of 2020.
The average contract value per enterprise continues to grow it now stands at $214000 per enterprise and GTS up 12% year over year.
Growth in CV for enterprise reflects both price increases as well as up sell and an increasing number of subscriptions.
And the ended the fourth quarter, we had 3267 quota bearing associates and GTS or an increase of 5% year over year.
As part of our planning for 2020, and our Salesforce optimization initiatives, we moderated our growth in sales head count exiting the year.
This is in contrast, the end of 2018, when we did a higher than normal level of advanced hiring.
We expect to see productivity, improving 2020 as overall Salesforce tenure increases and we continue to make improvements in recruiting training and sales tools.
These changes are consistent with our commitment to strong execution and sustained long term double digit growth on the top and bottom line.
We expect GTS head count growth for 2020 in the high single digits.
We are able to do this while driving CV growth in part because of the above average hiring we did in late 2018 in early 2019.
Addition, as a result of the sales optimization program seen highlighted last quarter in earlier today, we are driving greater efficiencies and how quickly we can deploy new salespeople.
We estimate that these new programs or the equivalent of adding three to five points to our reported head count growth.
Beyond 2020, we would expect to resume head count growth modestly below CV growth.
For gcs the year over year net contract value increase or end CVI divided by the beginning period quota bearing headcount was $99000 per salesperson down 13% versus the fourth quarter of last year.
The higher headcount growth late last year and into this year brought down the average tenure as new salespeople take time to get to full productivity.
One of the benefits of moderating the head count growth exiting this year and moving into 2020 is that the average tenure will increase which should improve productivity.
Turning to global business sales.
GBS contract value was $647 million at the end of the fourth quarter or about 20% over total contract value.
The momentum we saw last quarter continued with organic CV growth increasing to 8% year over year.
GBS CV growth, including the recent acquisition of Towboat increased 9% year over year.
We grew across all of our major functional areas with particular strength and supply chain, where we have maintained strong double digit growth and in HR, which grew CV almost 9% year over year.
Our marketing practice grew 4% in 2019.
We have begun transitioning some lower margin marketing products to more profitable gx sell products as they come up for renewal.
We're making this change to better align our cost in revenues.
This transition will continue in 2020, and we'll have an impact as we move through the year.
Well this will have a short term negative impact where CV growth rates well see the benefits over the medium and long term in terms of increased profitability.
The impact to research revenue is built into our guidance.
The acceleration in GBS contract value was driven by strength in gx out, which as we've detailed is an important part of our strategy and continues to contribute a larger and larger share GBS CD.
Total GBS, new business was up 16% in the quarter driven by GE, XL, new business, which was up 31% year over year.
On page 11 of the earning supplement we provide additional information to highlight the trend in gx sell new business and contract value.
We sold $58 million of Gx sell new business in Q4 up 31% versus the prior year quarter.
We continue to make great progress with our DXL process across each of the functions GBS serves.
More than half of the gx sell new business in the quarter came from newly launched products.
Do you XL contract value increased 55% year over year from 191 million to $297 million and now makes up 46% of GBS CV up about 14 percentage points from Q4 last year.
We are driving increased client engagement through expanded service teams and growing adoption of individualized content and service.
For the Standalone quarter, we drove attrition rates down for GBS.
For contracts were up for renewal in the fourth quarter attrition improved by 520 basis points over the prior year quarter.
Again. This is the result of the increased engagement, we discussed a richer mix of GE XL renewals and all of our other retention programs, having an impact.
At the end of the fourth quarter, we had 869 quota bearing associates in GBS or growth of 10%.
Head count was down sequentially as we continue to align our cost growth to our revenue growth.
We expect GBS head count growth in the mid single digits in 2020, as we focused on realizing the benefits of the investments we've made.
For GBS the year over year net contract value increase or end CVI divided by beginning period quota bearing headcount was $67000 per salesperson up significantly from last year's $14000 per salesperson.
The inclusion of total contract value positively impacted GBS productivity by about $5000 per salesperson.
Conferences revenues increased by 11% year over year in Q4 to $217 million.
FX neutral growth was 12%.
Fourth quarter contribution margin was 53% up 47 basis points versus a year ago period.
We had 15 destination conferences in the fourth quarter on a same conference FX neutral basis revenues were up 9% with a 1% increase in attendees.
Attendee growth was impacted primarily by the emerging of two infrastructure and cloud related conferences into one.
Fourth quarter ticket bookings were up 11% year over year.
For the full year 2019 revenue increased by 16% on reported basis, an 18% on an FX neutral basis gross contribution margin was 51% an increase of 20 basis points from 2018.
Turning to consulting.
Fourth quarter consulting revenues increased by 9% year over year to $104 million FX neutral growth was 9%.
Consulting contribution margin was 28% in the fourth quarter up 34 basis points versus the prior year quarter.
Labor based revenues were $80 million of 9% versus Q4 of last year or 10% on an FX neutral basis.
Labor base billable head count of 815 was up 10%.
Utilization was 60%.
Backlog at December 31st was $116 million up 7% year over year on an FX neutral basis, our backlog provides us with about four and a half months of forward revenue coverage inline with our operating target.
Contract optimization revenues were up 7% versus the prior year quarter as we've detailed in the past this part of our of the consulting segment is highly variable.
Full year consulting revenue was up 11% on reported basis and 14% on an FX neutral basis and its gross contribution margin of 30% was up 108 basis points from 2018.
[noise] SDMA increased 14% year over year in the fourth quarter and 15% on an FX neutral basis the growth in net DNA reflects the double digit head count growth earlier in the year in both GTS and GBS.
For the full year as seen a grew 14% on reported basis and 16% 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've started the process to align sales and enabling infrastructure cost growth with revenue growth.
EBITDA for the fourth quarter was $218 million up 3% year over year on a reported basis that 5% on an FX neutral basis.
The fourth quarter. This year EBITDA was adversely affected by about two percentage points were 4 million dollar impact due to the product retirements we've discussed.
Taking that into consideration underlying FX neutral EBITDA was up about 7% in the quarter.
Depreciation in the quarter was up approximately $13 million from last year as additional office space went into service amortization was flat sequentially <unk>.
<unk> expenses were down year over year as we've moved past the biggest part of the integration work.
Net interest expense, excluding deferred financing costs in the quarter was $25 million up from $23 million in the fourth quarter of 2018.
Net interest expense is up due to a modestly higher interest rate as a result of the roll forward of our floating to fixed interest rate hedges.
The Q4 adjusted tax rate, which we use for the calculation of adjusted net income was 34% for the quarter as we incurred less incremental tax costs associated with our intellectual property than anticipated.
The tax rate for the items used to adjust net income was 23.5% in the quarter.
The adjusted tax rate for the full year was 18.9%.
Adjusted EPS in Q4 was $1.18 cents above our expectations, primarily due to a lower tax rate.
For the full year adjusted EPS was $3 in 90 cents EPS growth for the year was 7%.
Operating cash flow for the full year was $565 million compared to $471 million last year.
The increase in operating cash flow was primarily driven by improved collections and lower integration costs.
Capex for the year was $149 million and cash acquisition and integration payments and other nonrecurring items were approximately $45 million.
Free cash flow for the full year was $462 million, which is down 1% versus the prior year.
Adjusted for divested operations and working capital timing benefits in 2018 free cash flow grew 13% for the year.
2019 was a strong cash flow year as we made significant improvements in our collections process and benefited from lower cash interest costs.
Free cash flow conversion from adjusted net income was 130%.
Turning to the balance sheet.
Our December 30, Onest debt balance was about $2.2 billion, our debt is effectively 100% fixed rate.
Our gross leverage ratio is now about 3.2 times EBITDA.
We repurchased $58 million of stock in the quarter at an average price of about $154 per share.
For the full year, we repurchased $199 million of stock.
We will continue to be price sensitive and opportunistic as we returned capital to shareholders, we have $750 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.
Turning to the outlook for 2020.
Before jumping into the details I want to give you some context of how we approach for 2020 guidance, which includes a return to aligning our cost growth with revenue growth.
As you can see we provide revise the presentation to simplify the way we provide guidance.
The new approach is intended to convey more clearly indirectly our expectations for the business.
We have set the guidance based on our best view of what we expect to deliver in 2020.
Based on our experienced last year, we believe providing simpler more transparent guidance will be helpful to you in building your models.
Note that the approximate guidance levels for EPS and free cash flow are calculated assuming point forecasts using the revenue growth in EBITDA margins of starting point.
Yes, and free cash flow results will vary depending on where revenue EBITDA and everything else in between land.
Three additional contacts points.
First our 2019 ending contract value and corresponding growth rates are key driver of our 2020 research revenue.
Second advanced bookings and consulting backlog are the metrics that drive our conferences and consulting revenue guidance, we had solid advance bookings in our conferences business and our consulting backlog is up high single digits.
Third we continue to invest to support and drive the future growth of our business in 2017 through the first half of 2019. We invested ahead of growth in 2020 is returned to our typical approach of investing as we grow.
The highlights of our full year guidance are as follows.
We expect FX neutral revenue growth in research of about 9.5% conferences growth of about 10% and consulting growth of about 3%.
Consulting outlook reflects very challenging compares versus a strong contract optimization year in 2019.
The result of these segment growth rates as an outlook for consolidated FX neutral revenue growth of approximately 9%.
At today's FX rates, we expect FX neutral growth rates to be roughly inline with our reported growth rates.
We expect adjusted EBITDA margin to be at least 16.1%, which would be flat to 2019.
We expect an adjusted tax rate of around 22% for 2020.
We expect 2020, adjusted EPS of about $4, a six cents, which is growth of about 4%. If the tax rate were constant EPS growth would be approximately 8%.
For 2020, we expect free cash flow about $505 million, that's a projected change about 9% versus our 2019 free cash flow.
All the details of our full year guidance are included on our Investor Relations site.
It's also important to note that we revalued or contract value at current year, FX rates, which had a very modest overall impact.
Our 2019 ending contract value at 2020, FX rates is $2.8 billion for GTS and $649 million for GBS.
Details are included in the appendix of the earning supplement.
In terms of the quarterly phasing for 2020, we expect our quarterly revenue to be roughly consistent with what you saw in 2019.
You can also assume quarterly phasing for the below the line items consistent with last year expect our tax rate for the first quarter to be higher than our annual rate.
Finally for the first quarter of 2020, we expect adjusted EBITDA of about $150 million to $155 million.
In summary, GTS contract value closed the year with healthy 12% growth.
While we did not quite reached double digit growth in GBS CV growth accelerated to 8% organically and the sales of our new gx sell products and GBS continue to rise.
Our conferences and consulting businesses, both had great years.
Free cash flow is strong and conversion from net income for the year was 130%.
Going into 2020, we have aligned our cost growth with revenue growth and we will continue to apply the Gardner formula across the combined businesses to drive sustained long term double digit growth to revenues EBITDA and free cash flow with that I'll turn the call back over to the operator, 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 Keane, we ask that you. Please limit yourself to one question and one follow up.
Please standby, while we composite culinary roster.
Our first question comes from the line of Jeff Mueller with Baird. Your line is now open.
Yes. Thank you would love some more detail on the three to five points that you're assuming and.
Tuck research that you're going to get from the optimization initiatives does that also include the increased 10 year as you slow the salesforce head count or just.
What's the operating risk to achieving that because three to five points from optimization alone would seem like a lot to me. So it would love any color to how you get there because I guess my concern would be GTS TV already decelerating now slowing sales head count growth fairly meaningfully and.
Calling out the softness in China, which probably gets saw gets worse before it gets better. Thanks.
Hey, Jeff It's gene so.
The three to five points is due to the difference is due basically to having more people selling as a portion of our total payroll. So as you think about it I'll give you a specific example, with training we have great. Trey we have world class training and the way we trained historically as we bring someone in and they train for six straight weeks and then.
I would go into territory and ever worked really well, we constantly innovate and make improvements and we've identified we think is a big improvement in training that allows our global ourselves much better training and that's to provide just to try and training. So instead of 68 weeks upfront whether on the payroll, but they're actually not selling we're going to give them two weeks training upfront.
And then they'll still just the other four to six weeks like a day a week through their first year with attuned to be what they need at the time they needed. So just in time training. So it's actually a better way to train we actually get more people in territory faster. So instead of having an inventory of six to eight weeks of when there.
In training time.
Whether or not selling upfront actually get into territory. After two weeks that gives us a lot more salespeople actually in front of clients than we have today and so it's a combination of that's in the training we're doing that we're making similar changes in recruiting which actually gets people into our Tory faster so reducing the number of people that are be paid but are actually aren't selling.
Being smarter about how we joined and that's where the three to five points comes from if you look actual number of territories. For example, GTS, we're expecting to grow territories and gcs approximately 10% during 2020 and so even though the total number of salespeople won't grow as fast it's because we're being much more effective getting people inventories, where it's faster. So you can think about it will still have.
More tear it more people in front of clients actually selling its just a smarter way to work.
Okay, and then on I guess the change in guidance methodology and simplifying Ed I think there was a comment that it's the best view of what you expect to deliver so should we view this is kind of being the equivalent of like the midpoint of the prior range and tying to that it looks like you change the medium term revenue guidance.
From 10 to 14 to at least 10, so with that 10% also be a midpoint type number or are these supposed to be like kind of low end at least type numbers. Thanks.
Great question, Jeff and thank you for that the way to think about the change in the presentation format is again, it's really simplification and attempting to represent.
Our best view of where from where we stand today, how we expect the business to perform in 2020, and so I wouldn't related to a point in.
Ranges, we used to provide it's really just our best estimate.
Of what we think we're going to do in 2020 from where we stand today in terms of the medium term guidance, it's really just.
Fine tuning and simplifying the way, we're presenting it and so again I wouldn't read into it as it's a change we're just simplifying the presentation.
Okay. 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.
Mentioned, China being a driver as slower growth and GTS I was hoping you could help us with what percent of your business is in China, and what was driving this slowdown in the fourth quarter and any color on how much it's slow and if you're taking into the guidance and impact from.
It's kind of Irish impact.
You know how much how much he says Oh, Dan thanks.
It's only seen so.
China historically has been a good source of growth for us, but it's still small market for us its ticket think approximately 1% of revenues and just over 1% of revenues and so it's not big for us, but it was a fast growing worked for US what's happened in China really is three things. One is that we had a leadership change budget, we had a great leader, but the leader.
I was a American whose family after being there for a few years family needed to come back to the less and so we made a change there and we have another leader and we put in which is we think a very strong leader, but his earlier in their tenure and sort of learning the market that coincided with a drop in GDP growth in China to the lowest in 27 years as well.
So those things like the tariff concerns thus the unrest in Hong Kong.
I'd now like wrote of ours and so the it's kind of a an intersection of a leadership change where again, we think long term will be great, but along with a sharp slowing in GDP growth and a lot of concerns about what.
Within the Chinese about what the tariff implications will be on their economy.
[music].
Perfect and then to help us breakout.
TTS and CBS.
Contract value growth in the guidance expecting GBS.
Average somewhere in like the mid single digit kinda range and as a result that marketing product changes and I guess, how much should that marketing changes have fine on growth next year. Thanks.
Hi, good morning tight so we we don't provide contract value guidance.
And so.
The way I would think about it is.
The best estimate of we're going to be as kind of where we are today.
From a growth rate perspective, and that's what's baked into.
2020 research revenue guidance.
Got it any color on that okay marketing.
So we're not going into that level of detail on the marketing we wanted to make sure that investors understood. We were making some changes it will have.
A modest impact.
The good news is as gene mentioned.
We're dealing with.
Contract as they come up for renewal they are phased evenly over the course of the year. So it's a pretty modest impact on on the revenue line and as we roll through the year, we'll provide more color on the impact on the contract value growth.
That's great. Thanks, so much.
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, so that I, just I'm, having a hard time understanding 9.5% research revenue growth in the guidance relative to the Q4 contract value of 11.7, I think Craig and in your preamble to the guidance you, even said that and I quote ending CV is the good leading indicator of the.
Of the trend in that business, so why nine and a half versus 11.7 and sort of what's going on there I think we need more color.
Sure of course, good morning, Gary So.
I guess two things I'd note.
One is there is often if you look back historically.
A little bit of a gap between.
The kind of point contract value endpoint, and where research revenue growth ends up and there's a couple of things driving that first is really the timing of when contract value growth comes in over the course of.
The upcoming year in 2020, and so we've modeled in our best estimate of where we think that revenue and then CVI is going to calm and when it's going to come and that has an impact on the overall growth rates. The second thing I'd note is all within that research revenue number is a decent amount of non subscript.
And revenue.
In our.
Revenue disclosures, it's the all the kind of point in time revenue as opposed to the overall.
Overtime revenue and so we have certain product lines in there that are growing faster and help with the overall growth rate. We have other product lines that we are managing down or flat to declining over time that also impacts the research revenue growth rate. So I guess, what I'd say is where we stand today based on everything we're seeing.
And the way, we've modeled in our and CVI by quarter yelling modeled in new business and.
And renewal rates I'm not an AFE percent is our best point estimate of where research revenue is going to end up.
Okay and then the follow up maybe maybe for gene. So we appreciate after the last couple of years, the commitment to flat to improving margins, but it almost feels like when I think about all your commentary in the guidance here, you're slowing sales head count in investment to deliver.
Flat margins and and so I guess the question is something changed with the model.
'cause because we've been in the you know I think the story you been talent is a lot of investment over several years in GBS, but presumably there was going to be a return on those investments.
And now to get flat margins it feels like you're having to cut back on investment, which just seems to imply maybe the models not as dynamic or its more penetrated or something has changed year.
Thoughts.
Hey, Gary so the <unk>, that's not an accurate characterization I think basically the.
We hope we invested ahead of our revenues over the last year's purposefully, especially in GBS and now we want to make sure we get a return on that investment in GTS as I mentioned, what we were still intending to grow the actual number of people selling at quite a good rate. We just felt a smarter way to work this year, where we think.
But.
It will both.
The positive impact on Salesforce effectiveness and give us better cost structure.
We have an enormous market opportunity in every segment and every size company in every geography.
We're committed to continue to go after that we just trying to smarter way to do it for 2020.
Beyond 2020 would expect to kind of back to the the as we get there kind of returns on invested we made to make these changes.
Going back to kind of normal.
This was growth the other thing I know Gary is we do continue to invest behind the business and so even in a 20 and we talked about it we still got.
Investment slotted in four GTS.
To grow head count in the high single digits close to close to double digit rates and also continued investment in GBS as well. So it's a moderating modestly but we are continuing to invest behind the business you know with the whole goal of driving sustained double digit growth over the long term.
Okay. Thank you.
Our next question comes on the line of Man is Patnaik, yes.
Barclays. Your line is now open.
Thank you good morning, guys.
So just back on the medium term guide, it's hard not to interpret that.
And your expectations of.
Goals, what was 10% to 14% and I think that's we think that picked up on there is obviously bull GTS Salesforce. Both I guess decelerating you talked about changes in the GBS and then I think given marketing, which was double digit growth segments are you I suppose you're seeing is now 4% am I missing anything.
Listen I guess I just wanted to know how temporary aidid's.
Deceleration.
So let me take but let me take the marketing piece first so our marketing practiced today.
It is a combination of new products for our products like GML and then products that were from that were based on other acquisitions like I kind of culture L. Two heritage.
And the GML product, which is our official product last year is that's for several years grew way north of 20% on a pretty good CV base the issue with his with some of those other products and so we're quite long term optimistic we got marketing because it's growing the new products are going actually the gym approaches our core products are going extremely well.
Because the other products had poor attention and had.
Much lower profitability rather than.
Tied to retain those clients, what we're doing is making them not renewable and getting people to upgrade to GML between those a much better products.
That lowers the total growth rate in the short term, but increases the profitability. Once we go through that transition, we expect that market will be a very fast grower as it has historically been and as general continues to do today.
You know the other thing I'd mentioned not is as you think about.
Future growth rates and we've talked about this a lot in the past there are really two levers that drive the contract value growth rate. So it's investing in incremental headcount.
And again you can look at it in terms of raw head count the head count number or you can look at it the way gene described it which is the amount of available head count that actually is 12 alive talking to clients and selling and we're looking at it both ways.
And productivity improvements and so you know from where we stand today, we still believe there is a lot of room to do both you invest in continuing to grow both sales forces and also to continue improve productivity across the board.
While we had a really nice improvement in GBS productivity, it's still only at about two thirds of the gcs level and so there's still room to go there and you know gcs.
We had a little bit of a rough year on the productivity is still very strong, but there's definitely room for improvement there and so if you model in a combination of head count growth and even modest productivity improvements. We believe we can achieve similar contract value growth rates to what we've done in the past.
Okay, and then just a follow up on the GBS side. So I think you said Gee XL was 46% up the contract value. This quarter, you know what's a reasonable.
Time frame up cadence to.
Do you kind of modeling every year on how that percentage progressive lifting the legacy business as appose.
Yes. It's good question one of the you I'd say I'd say two things one is we've actually improve the retention rates on the legacy which is.
Hey, Hughes net positive for US you know because we're keeping more more dollars there Ed and happy clients, there and so that has slowed the growth one of the of the legacy portion of the overall GBS contract value, but as we roll into the future you know, we expect to pass over the top halfway.
More than 50% of the TV being GBS, some being gx l., rather sometime in the first half of 2020 and that trend will continue over time and again, if you kind of model in results consistent with what you saw in 2019 in terms of the legacy decline.
Line and the Gx cell growth rates that'll give you a good sense for that shift in mix.
All right. Thank you.
Thank you. Our next question comes from the line of and U.
Nicholas with William Blair. Your line is now open.
Hi, good morning.
Wanted to ask about CV growth in GBS, and how you expect it to progress over the course the year I know you mentioned some of the lower margin products and marketing coming do throughout 2020.
Should have an impact on profitability, but I'm just wondering if there's any way to quantify or give some color on just the cadence the CV growth and how maybe some of those products coming due.
Would flow through throughout the year.
Hey, good morning, Andrew It's Craig So we we don't provide.
Contract value guidance for either GTS or GBS.
You know as I mentioned earlier the the phasing.
Of.
Those lower margin products as they come up for renewal across.
2020, you know, it's more heavily weighted towards Q2 in Q4, but yeah, we do have contract value in each of the quarters, all that will come up for renewal.
You know I would expect.
Similar you know.
We have backup for a second so from a GBS perspective, we had great momentum in 2019.
In closing the year, 8.2% organic contract value growth.
You know absent the changes in marketing.
We expect to continue to drive really nice growth in GBS and again over time, we'll be able to transition in migrate away from those lower margin marketing products that gene and I, both ascribed to higher margin Gx all products. So.
Long answer no specific CV guidance, but we're obviously focused on continuing to drive growth in GBS.
Great. Thank you.
And then your EBIT margin guidance, obviously aligns with your messaging last quarter no surprises there, but I was hoping you could.
Elaborate a bit on some of the factors that could potentially drive margin expansion. In 2020 is that primarily a matter of exceeding your revenue growth projections or other other.
Central areas, where.
We could see some margin upside thanks.
Yes, So you know again, our view and from where we stand today is.
Our guidance is our best view of where we think we're going to land which is.
Roughly with flat margins.
The way to potentially see margin expansion would be nice improvements in sales productivity, which would correspond with contract value growth rates accelerating as well depending on when that happens.
It might flow through into 2021 as opposed to benefiting us from a revenue upside perspective in 2020, but you know the sales productivity is probably the biggest lever we have from a from a margin perspective.
Thank you. Our next question comes from the line of steel Remington with Wells Fargo. Your line is now open.
Good morning, everyone.
So oh follow up question on the decline in the sales productivity. The how long is typically the lag between the decline in the sales Hello.
Head count growth and the improvement in sales productivity.
Yes, there are not I would not say what one one correlated.
As you know bill we're constantly tuning the model of going faster in places, where we've got really strong productivity and pumping the brakes are slowing down in places where our productivity is not as strong.
You know you do see it from a pure calculation perspective, you know if we delivered same amount of.
And CVI with.
Less head count growth, yes that would equate to a higher productivity on average, but the way we're managing it is much more dynamically than that and again, making sure that at the individual unit levels of our frontline sellers that we're driving productivity.
People up though the learning curve are tenure curve as we've talked about investing in places that have all consistently deliver high productivity and slowing down in places that are not delivering from productivity perspective. So.
Net net we are just like we've always done tuning the model to make sure that we set ourselves up to to being a positive position from a sales productivity perspective.
[laughter] My for my follow up question on.
On the impact of the revised sales strategy for small tech companies.
When can we expect the terms of the phasing when can we expect the impact to that to start to moderate.
So I would expect to see improvement throughout 2020, and 2020 ones I think over the next two years, we'll get back to a really good spot there.
Got it well thank you very much.
Thank you. Our next question comes from the line.
Silver with BMO capital markets. Your line is now open.
Thanks, So much I'm, sorry, I just want to go back to the medium term guidance first of all can you just remind us how you define medium term and second.
If I look at the objectives that you provided I think on last year's Analyst day, you kind of went through the buckets in terms of research conference in consulting to come up with your medium term objectives for revenue growth.
Can you just tell us how those have changed if anything by the different segments. Thanks.
Hey, good morning, Jeff It's Craig so medium term in our definition is three to five years.
That's the way to think about medium term.
Again I.
My view or our view I should say on the medium term guidance is it sort of unchanged is just simplified.
The key thing that drives the bulk of our top line.
It is our research business and that's reflected on the slide in terms of GTS CV growth in GBS CV growth, which is unchanged.
Our expectations for conferences and consulting which is not on the page are essentially unchanged and so instead of doing the math that would get us with all the inputs.
To a range on revenue, we've just simplified it that it it's 10, plus and so again I'd say no change to the medium term guidance just simplification in terms of the way we're presenting it.
Okay appreciate that and then.
When you think gene you had mentioned that the eight and forgive me if I thought misquoting you that the GTS territories were going to be up 10%. This year can you just confirm that's what you said and can you. Just tells geographically are you focusing on specific areas for that increase.
So again, yeah, I did say Gee GTS territories would be up approximately 10% during twentytwenty and again, what we do as Craig mentioned earlier as.
We look at where the territories, we believe we're going to the high sales productivity and so we have the we have huge opportunities debt territories, we basically prioritize through say based on the tenure of the leader or the et cetera. All the teams operating what are the places that we think are likely at the highest highest sales productivity and that's the place we add the.
Territories.
In any specific geography is to call out there.
Well I Gotta were.
Hi, Barry again, so we'll be adding fewer territories in China.
Sure.
And you know so basically the places that are doing well.
Add more territories and the places that are challenged like China would be adding fewer territories. So.
That's kind of assume it's as simple as that okay. Thank you.
Thank you.
Next question comes from the line of George Tong with Goldman Sachs. Your line is now open.
Hi, Thanks, Good morning within GTS, you noted challenges from a strategy shift with small tech companies to show leadership changes, but you've made in headwinds in China would you talked about can you elaborate on your remediation actions in other words, what are you doing to actively reverse these headwinds opinion, leading them out and when you would expect to see no.
Normalization in operating performance.
Yes, George Great question. So in the small tech companies, we base, we changed our strategy. There's a there's a huge growth in numbers fall tech companies because of.
Cloud based computing and open source software development tools and so there's been a very large increased number of small tech companies such a great great market for us.
We started serving that market the way that we do larger companies. We discovered that was not as cost veterans with life and so we get with a much better way with Marriott, we're transitioning to there's some short term, but it's basically we're changing how we are selling those companies can make the us a specialized team just focus on those companies and its tune so that we.
At the right economics.
So that's what we're doing there as we've actually set up a dedicated gene modest twister sales processes for those smaller companies et cetera.
In the case of.
Germany, and India as I mentioned in Germany, I missed a couple of calls ago. We had two key leaders are sales or service leader, who basically got promoted and wants to take other jobs. One went to GPS one went to another place.
Our service organization very strong leaders had led Germany, the two told us in Germany.
Great growth here for their own careers. They want to other jobs, we can't we want to curb out there successors were more junior think about them as being the.
The tenure people, but five years earlier in their career, so takes a little time to get up to speed.
The performance of those two leaders is doing great. The new replacement leaders in Germany are doing really well if you look at leading indicators like pipeline development and things like that a client engagement, they're doing really well so leading indicators are good and so we made the right changes were giving them corporate leadership development support lead indicators are strong.
So those are probably the chart that that's <unk>.
And again, I guess, well go back to China, as well, which I would try to where we have a new there again, we feel very good about that leader, it's a tough situations economically and we're giving them support where we are.
Not be adding a lot of territories in China, but that's helped to from one is because the challenges there are fewer territory growth means it's easier to manage that actually helps them.
We will also help them with their leadership development as well.
Got it that's helpful. You previously guided to GBS CV growth of at least 12% in 2020 can you discuss why you're choosing to withdraw GBS guidance, even though visibility into CV growth is higher now than it was last year, what's I guess, what's changed structurally in GBS from when you previously guided.
To 12% plus CV growth.
Good morning, George It's Craig I think now that.
You know we're a few years past the acquisition now that we've seen really nice acceleration over the course of 2019.
We're we're reverting to our general philosophy, which is we don't provide contract value guidance.
For for either of our businesses, but you know again, you've got the medium term objectives that we are marching towards and so those are unchanged.
And you know we will continue to focus on.
Driving growth contract value growth in both GTS in GBS as we talked about earlier the way, we're going to get that growth is by continuing to invest in growing the salesforce and focus on improving the productivity salesforce.
[noise]. Thank you.
Thank you. Our next question comes from the line of Joe Foresi with Cantor Fitzgerald. Your line is now.
Hi, This is Stephen Chen coming on for Joe.
I just wanted to touch more on the medium term GBS CB guidance I understand you are expecting a lot of help from the gx, so transition and including the and maybe updates on the Salesforce, but just wondering if the anymore any other additions to that growth that.
That will help hit that range or should we expect most of it did come from those two sources.
Good morning, Steven Yeah, I think I mean, the way to think about it is we've over the last couple of years.
We've invested.
In growing the Salesforce in the new products in service teams to make sure we drive great engagement and value and we're going to continue to invest in those areas more in line with top line growth, but but those are the things that are going to continue to drive.
The contract value growth of GBS again, I think of it is really very similar to the way. We we run the GTS business. It's again, great products drive great value really strong retention rates and then you know growth through both finding new enterprises are new functional.
Areas within enterprises, and then penetrating so it's really the same playbook.
In GBS that we've run in GTS for a really long pop.
[laughter].
Okay. Thank you and also maybe just switching up a little I'm just wondering if you had any season changes or.
Changes or kind of increasing adoption and others other.
Specific industries are very closed are gaining traction, especially in the confidence section where years. For example, you are bringing analytics to bring in des Moines data focused confidence is seeing if there's any.
Updates on that.
So in our conferences. So you know obviously, our conferences are growing it really attractive rates.
So the most of the conferences are going really well.
Your point I think overall things like security and overall get it varies by geography.
In multiple geographies, but things like security analytics.
Tend to even faster growing that some of the others and yet the other thing I'd add Stephen is just as we build out the conference portfolio support GBS, we've seen really nice pickup traction in growth.
In those conferences the ones that have existed we've driven really great growth in them and then as we've talked about in the past we've lost a few new ones like a finance executive summit et cetera, where we've we've done really well and we think it sets up a a really nice platform for growth into the future.
Okay, great. Thank you.
Thank you. Our next question comes on the line of Hamzah Mazari with Jefferies. Your line is now open.
Hi, This is merial quarter Lochee on for Hamzah I.
I know, we talked about China, and what's going on there, but just curious to know what your salesforce productivity looks like in other regions and specifically, maybe Europe and whenever there is there any variation there versus what you're seeing in the U.S.
So Europe sales productivity actually varies quite a bit by country swear some countries in Europe that have very high productivity and others that have you know are not as good as we'd like a and so there's not kind of one answer for all of your production for is quite a bit like country and and it's really correlated to how much where our sales team is there.
And our level of operational execution, and Mario just to double click on that first SEC as gene mentioned, we're we manage and measure at a very granular level off from a productivity perspective, and so we're looking at it almost essentially at the sales manager level.
And that's what helps us determined where we're going to invest more in where we need to sometimes take a pause on growth and so you've got wide variability of productivity across the board, but we are looking at it very very deeply and to get into places where we're seeing strength. Those are the places that we tend to grow a little bit faster from.
Head count growth perspective, and in places that are challenging we tend to take a little bit of pause. So that we can get people off the tenure curve, whether it's the frontline sellers the sales manager or whatnot.
Great and just one more and I'll turn it over just regarding the the three to five point, you're going to get from the the optimization.
I guess, that's did that looks great. This year, but I guess does that is there any additional work that you guys can do next year to to optimize more or it is gross ramp.
After you guys lapse.
This does change.
So first I says we're committed to continuous innovation continues improvement so I'll never say, we won't come a important they should next year.
And also of some of these changes will take will take place over the two years. So we will get full impact this year it'll take the 2021 week the full impact the changes I discussed, but the and we're going to continue to they are planning is that we're going to get three to five point. This year and then in 2021 wells back to normal head count growth that you've seen in the past.
Great. Thanks, so much.
Thank you.
Concludes today's question and answer session I would now like to turn the call contain hall for closing remarks.
Well as you heard today, we once again delivered strong performances gives across all three of our businesses research consulting and conferences.
The Gardner firms are for sustained long term growth continues to drive success in our research business.
Our GTS organization continues to deliver strong performance GBS accelerated and those is on a path to sustained long term double digit growth.
We deliver incredible bode every major function the enterprise, we have a vast market opportunity.
Good investments of the past few years that position us well to capture that market opportunity.
We're aligning our cost gross with revenue growth.
Great strategic positioning of GTS GBS together, leveraging the investments we've made we're well positioned for sustained long term double digit growth.
Thanks for joining us today I look forward to updating you again next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].