Q1 2020 Earnings Call
And welcome to the Gardner first quarter 2020 earnings conference call.
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I would now like they have the converts or what's your speaker today.
David Cohen, the VP Investor Relations. Please go ahead.
Good morning, everyone. We appreciate you joining us today for Gartners first quarter 2020 earnings call and hope you are well.
Joining me today on the color Gene Hall, Chief Executive Officer, Couric, Safian, Chief Financial Officer.
Oh included discussion or first quarter 2020 financial results and our updated outlook for 2020 is disclosed in today's press release. In addition to today's release you provided a detailed review of our financials in business metrics and earnings supplement for investors and analysts.
It was posted the press release in the earnings supplement on our website investors that Gartner dotcom.
Comments by Jean and Craig We will open up the call. If your question. We ask that you limit your questions to one and a follow.
On the call unless stated otherwise all references to EBITDA or for adjusted EBITDA, but the adjustments as described in our earnings release.
Reconciliation for all non-GAAP numbers, we use are available in the Investor Relations section of the Gardner Dotcom website.
But given the definition, we use for free cash flow the cash provided by operating activities determined in accordance with gap those payments for capital expenditures.
For mission or free cash flow no longer excludes acquisition and other nonrecurring items as we believe this change better captures actual cash generated in the period for the purposes of capital allocation.
Supplement it included the historical add backs for prior periods as well as what they would've been in the first quarter to allow for comparability.
Finally, our contract values and associated grocery to discuss your based on 2020 foreign exchange rates unless stated otherwise.
Set forth in more detail because he's earnings release certain statements made on this call may constitute forward looking statements.
Forward looking statements can vary materially actual results and are subject to a number of risks and uncertainties, including those contain the company's 2019 annual report on form 10-K quarterly reports on form 10-Q, as well as in other filings with the FCC encourage all of you through if you the risk factors listed in these documents now I will turn the call.
Over to gardeners, Chief Executive Officer Gene Hall.
Good morning, Thanks for joining us I hope, you're all safe and healthy the cobot 19 pandemic humanitarian crisis that continues to drive massive social economic and operational disruption everywhere around the world.
Navigate this environment. There are three messages you should take away from our discussion today.
We're well positioned to help our clients addressed depend damage and the economic downturn, we've taken steps to carefully monitor costs and cash flow in response to the economic downturn, and we will come out of recession strong and well positioned to resume driving long term sustained double digit growth.
It's supposed to be no partner up reaching three business segments research conferences consulting.
These business segments has been impacted somewhat differently by the current environment research is our largest and most profitable segment remains a core value proposition.
Our research second is well positioned to operate as a virtual business prior to the pandemic. The majority of our analysts experts and thought leaders relocating countries around the world, they're already supporting our clients via telephone video comps.
Oh, Lord Cerberus sales and service change based and centralized stops locations or selling them servicing our clients remotely.
All Gartner associates are equipped with laptops configured for a virtual work environment as part of our business continuity program.
Response to the pandemic and local government directors, we close or offices during Q1, because we have strong infrastructure in place associates were able to make a smooth transition to working from home.
Of course, not everything went as planned for example, some associates have relatively slow internet connections.
So managers had to adjust to managing the teams remotely.
Immediate challenge has been increased difficulty bridging prospects and some clients in their remote environments rather than their offices.
We continue to make a significant global impact or research insights tools and advice.
Actual with a research content can change the adapt our research agenda to ensure where do you know topics that support our client current mission critical priorities.
[music] one was no different when news of the pandemic broke we added comprehensive content for every major functional roles across the enterprise on critical topics such as what steps to take in response to cope with my team.
Once you do so that employees are productive working from home and how to make smart cost reductions across the organization. In addition, we took the best cross practice content and made it available to all clients.
Findings from expanded krona burst coverage and real time surveys or be widely used by our clients. These insights have also been fighting a wilmar media outlets, including the Wall Street Journal CNBC economist in more during Q1, we significantly increased the number webinars and other virtual events, where we deliver content to our clients. These have been highly valued.
Example, in early March we watch the global Webinars on living through Cobot 19.
Registrations for that event were about eight times more than our average for 2019 Webinars.
Clarifications, one of the biggest drivers of retention and piping agile adapting our content our client engagement has remained strong.
Services are very cost effective and provide high value to clients, because we're able to get to write content to the right audience at the right time in a virtual format.
Our new business and renewals have been impacted takeover 19 in today's environment. We see three categories of clients first are those companies in industries. Most impacted by couple of 19, So just travel entertainment and retail.
Renewals and new business with companies. These industries, it's more difficult than it was last year.
There are many realize they continue to need our services and are continuing to buy just at a slower rate.
Second category includes companies that had been minimally impacted economically back up in 19, So just companies that provide goods or services like food cleaning supplies and some type of software.
Renewals and new business within these companies continues at about the same pace as it has in the past.
The third categories companies that are not directly impacted pickup in 19, but are experiencing reduced demand for their products and services well. These companies continue to buy you're placing additional scrutiny on all purchases, including Gartner products and services, that's going to spend the time to complete a sale or renewal.
Across GTS and the GBS our clients have expressed from partner services are especially during these turbulent times.
HR finance and legal practices had demand and bites cycle similar to White T. I was the GPS practices supply chain your marketing businesses had the weakest performance in Q1.
Due to interruptions and supply chains, many supply chain leaders have been forced upon us to strategic initiatives and become more directly involved in tactical supply chain operations. This often extends the time to complete a sale of renewal.
Discussed last quarter, we're facing out certain marketing products is low profitability, which reduced the retention in growth rate of remarking practice.
Overall, our research business is well positioned operate successfully as a virtual business.
Our conferences segment has been impacted the most of my cobot 19, because of government mandates health concerns were able to hold only a limited number of conferences during Q1.
With the situation. We're now planning told 17 destination conferences later this year out of our original full year plan of 77.
Yes, as well as a reduced events the schedule reduced our expected revenues from our conferences business.
Based on the reduced expected revenues from this segment, we've taken steps to reduce cost including staff reductions.
Our conferences provide tremendous value to both attendees and exhibitors were constant contact with our exhibitors. They continue to have a high level of interest and are ready to return would say to do so there's a similar level of interest among potential attendees.
We're carefully developing changes in our conferences to increase safety, such a sanitation standards additional separations et cetera.
We're also developing virtual conference formats.
We held our first virtual conference just last week that conference for sales leaders went from concept to event, including the marketing for the conference in less than three weeks.
Were nine sessions held were single day.
We had more than 1900 total registration for this conference. The net promoter score was 77, a strong squirt, which exceeded our expectations.
Well, we are up originally planning toll conferences during the latter part of the year. We've recognized this may not be possible to the government mandates for health concerns.
As a result, our updated financial guidance assumes that we will be unable to hold these conferences.
What do you long term weeks at conferences to continue to be an important contributor to our overall business.
Garner consulting this extension of Gartner research and provides clients with a deeper level involvement three extended project based work to help them execute the most strategic initiatives.
Consulting has also been impacted by Cobot 19.
Many clients are postponing major new initiatives until they have more clarity as to the impact of the pandemic and the economic downturn as a result or backlog was up only 1% during Q1.
Looking across our business during Q1, we close or offices worldwide. The safety of our associates into comply with government mandates.
Consist with government guidelines, we reopened her offices in Shanghai and Beijing.
User experiences with these offices to reopen in other countries when sheltered home directives began to relax.
We've taken steps across the business to manager costs without impairing, our ability to drive growth in the future.
We've implemented a very tight controls and staffing levels equally hard freezes where appropriate.
Reduced staff more conferences business as I mentioned earlier.
We significantly cut Nonlabor Cindy.
And we slowed or capital expenditures, such just to build outs of new office space.
The operational changes, we made love ensure we have positive cash flow.
In addition, we're tightly managing our financial operations functions to possibly impact cash flows.
We've also taken steps to help ensure we maintain adequate liquidity, we ended the quarter with $228 million in cash on April 1st we drew an additional 300 million from our revolver and we have another 700 million of capacity available.
Finally, we negotiated an amendment to our credit facility with financial covenants gives us improved flexibility.
We will come out of their session strong and well position to continue driving long term sustained double digit growth. We continue to have vast market opportunity across all sectors sizes and geographies.
Well continue to maintain and improve our core capabilities to capture market opportunity, what carefully managing our cost structure and cash flow.
We plan to maintain approve our analyst and advisor capability for developing highly valuable research insights and trust services capability to be quite needs.
Plan to maintain paper sales coverage and capacity well, taking this opportunity to address underperforming sales territories.
We will remain agile so we're prepared for whatever may come next.
In summary, as we navigate the uncertainties of this unique environment. These are the three messages you could take away from our discussion today.
We are well positioned to help our clients addressed the pandemic and economic downturn.
We've taken steps to carefully manager costs and cash flow in response to the economic downturn.
And we will come out of recession strong well position to resume driving long term sustained double digit growth.
I'll now turn call over to our CFO Crexus again.
Thank you Jane and good morning, everyone. I Hope you your families and your colleagues are safe and healthy as we navigate the pandemic and economic downturn I'll provide an update on our strong liquidity and capital structure as well as an overview of the cost actions, we've taken to ensure our financial flexibility then I will review our first quarter results include.
In the impact of covert 19.
Finally, I'll describe our updated outlook for the year within the context of the rapidly evolving macro environment.
Beginning in early March as we first started to see the impacts the pandemic could have on our business, we quickly pivoted to EBITDA preservation and cash conservation mode.
Gene described many of the actions we took.
The goal of all the actions was to ensure our financial strength and ongoing flexibility.
I'll start this morning, with a discussion of our cash and balance sheet position.
At the ended the first quarter, we had $228 million of cash which is more than we need to run the business.
On April 1st to increase our cash position and preserve financial flexibility, we drew $300 million on a revolver, bringing our cash balance to $528 million.
This puts our liquidity in a very strong position reinforced by our ability to continue to generate positive free cash flow.
We have additional revolver capacity of more than $700 million available to us as well.
Cash flow trends in April continued on a positive track.
At March 30, Onest debt balance was about $2.2 billion that increased by $300 million to $2.5 billion. After the April 1st revolver draw.
We've also amended our credit facility to provide greater covenant flexibility as follows.
First our total leverage covenant has increased half a turn from 4.5 to five times.
Second our secured leverage covenant has increased by a quarter of return from 3.5 to 3.75 times, our interest coverage covenant is unchanged.
The calculations use gross that trailing 12 month, EBITDA and trailing 12 month interest expense.
Gross debt EBITDA and interest expense used for the covenant calculations are defined in our 2016 credit agreement.
Based on the debt levels after the incremental revolver draw on April 1st our leverage ratios under the covenants were 3.5 times total debt 2.4 times secured debt and 7.4 times interest coverage.
These are all well within the required levels for compliance under our credit facility.
While we don't expect to need the incremental covenant capacity, we secured the amendment to ensure future financial flexibility.
We repurchased $73 million of our stock in the first quarter of that total $34 million relate to open market stock repurchases.
We paused our share repurchases during the last week of February we will not resume until we have a clearer picture of how the pandemic and economic downturn will play out.
In addition to our strong cash position and access to capital, we're taking steps to align our costs with our revenue, allowing us to continue to generate positive free cash flow going into the current situation, we'd already built to plan for 2020 that aligns cost growth with revenue growth.
Following the rapid changes in the world as a result of Cobot 19, we took additional steps to ensure our long term financial health and operational excellence through a number of cost avoidance initiatives.
We made tough decisions to eliminate merit increases freeze hiring temporarily restrict travel cancel internal meetings and reduced third party spending.
We've also made reductions to our conference a staff to better align our cost structure with our conferences revenue and new schedule.
These decisive actions help ensure ongoing financial flexibility in this challenging and uncertain environment without compromising on the quality of the insight advice and service we provide to our clients, we remain well positioned to reaccelerate and drive future growth once the timing of the economic recovery and this pandemic becomes more evident.
Moving to our first quarter results.
Research and consulting growth were inline with our expectations and we moved quickly to manage costs late in the quarter first quarter revenue was $1 billion up 5% as reported and up 6% on an FX neutral basis, excluding conferences, our revenues were up 11% year over year on an FX neutral basis. In addition contribution margin was 60.
6% up 200 basis points versus the prior year, EBITDA was $214 million up 51% year over year and 53% FX neutral.
EBITDA performance was tracking strongly through February and then benefited from the cost avoidance initiatives. We implemented in March adjusted EPS was $1.20 cents and free cash flow in the quarter was $31 million.
Research revenue in the first quarter grew 10% year over year on a reported basis and 11% on an FX neutral basis.
First quarter contribution margin was 72% as margins benefited from temporary cost avoidance initiatives, which we will only keeping place while the macro environment remains challenging total contract value was $3.5 billion at March 30, Onest FX neutral growth of 11% versus the prior year as we do each year, we've updated our historical reach.
Metrics that 2020 FX rates in our earnings supplement global technology sales contract value at the end of the first quarter was $2.8 billion up 11% versus the prior year GTS CV growth and associated metrics performed well in January and February before slowing late in the quarter asked the cobot 19 response led to lower new business grow.
Within modestly lower retention rates more challenging selling environment had an impact on most of our reported metrics client retention for GTS remains at around 82% down about 50 basis points year over year wallet retention for GTS was 104% for the quarter down about 200 basis points year over year GTS new business.
Klein, 2% versus last year.
We ended the first quarter with 12826, GTS enterprises slightly up from last year. The average contract value for enterprise continues to grow it now stands at $219000 for enterprise and GTS up 11% year over year growth in CV for enterprise reflects the combination of Upsale increased number of.
Subscriptions and price.
At the end of the first quarter, we had 3196 quota bearing associates and GTS or an increase of 5% year over year as part of our cost reduction programs, we announced in late March we temporarily froze head count growth for GTS the year over year net contract value increase for and CVI divided by the beginning period quite a bit.
And headcount was $92000 per salesperson down 21% versus the first quarter of last year.
As we get more clarity on the economy in the short term demand environment, we will look to increase sales hiring to position us for sustained long term double digit growth on the top and Bottomline global business sales contract value was $646 million at the end that first quarter, that's about 20% of our total contract value.
CV growth was 8% year over year, both reported inorganic gx LCV grew 48% to $307 million and legacy CV declined 13% year over year to $338 million.
Total GBS, new business was down 12% in the quarter impacted largely by supply chain and marketing our supply chain practice saw a decrease in both retention and new business.
Supply chain practice was uniquely affected in the quarter by the global disruptions caused by the pandemic developments in Asia last quarter, we explained that we've stopped selling and renewing some lower margin marketing products as expected this impacted GBS growth.
The GE XL legacy split in GBS becomes less meaningful every quarter. So we are phasing out reporting GBS that way. This quarter, we are providing the new business and attrition dollars for GE XL and legacy as we did in 2019.
In the first quarter total gx sell new business was $22 million, while legacy new business was $5 million also on the first quarter Gx sell attrition was $17 million and legacy attrition was $14 million client retention for GBS was 83% up about 170 basis points year over year while.
Our attention for GBS was 101% for the quarter of about 700 basis points year over year. We ended the first quarter with 5025, GBS enterprises down about 4% from last year. The average contract value for enterprise continues to grow it now stands at $128000 per enterprising GBS up 13%.
Year over year growth in CV per enterprise reflects up sell an increased number of subscriptions and price at the ended the first quarter. We had 862 quota bearing associates in GBS down 1% year over year head count was down sequentially and year over year as we optimized our territories and then temporarily froze hiring.
Being as part of our cost avoidance program for GBS the year over year net contract value increase or end CVI divided by the beginning period quota bearing headcount was $57000 per salesperson a significant improvement from when it was negative last year.
As we communicated in March the conferences segment has been materially impacted by the global response. The pandemic, we were able to hold a few small conferences early in the first quarter, resulting in $14 million of revenue, we will not have any conferences through August for the rest of the year. We've revised the schedule for in person conferences. The result is a plan for fewer cars.
Differences with a focus on maximizing the value we deliver for our clients I'll review some additional points related to conferences in the guidance section a bit later.
First quarter consulting revenues increased by 3% year over year to $96 million FX neutral growth was 4% consulting contribution margin was 31% in the first quarter down 14 basis points versus the prior year quarter.
Labor based revenues were $81 million up 3% versus Q1 of last year or 4% on an FX neutral basis labor base billable headcount of 808 was up 9% utilization was 62%.
Backlog at March 30, Onest was $110 million up 1% 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 1% on reported basis versus the prior year quarter against a difficult compare as we've detailed in the past. This part of the consulting segment is highly variable SGN a decreased 4% year over year in the first quarter and 3% on an FX neutral basis as the cost avoidance initiatives, we put in place specifically around internal.
Meetings and other travel went into effect EBITDA for the first quarter was $214 million up 51% year over year on reported basis and up 53% on an FX neutral basis.
Appreciation in the quarter was up approximately $3 million from last year as additional office space went into service amortization was flat sequentially.
Net interest expense, excluding deferred financing costs in the quarter was $25 million up from $23 million in the first quarter of 2019 net interest expense is up due to higher floating to fixed hedge costs as we roll the previous contracts forward.
Q1, adjusted tax rate, which we used for the calculation of adjusted net income was 22.5% for the quarter roughly in line with our guided full year rate the tax rate for the items used to adjust net income was also 22.5% in the quarter.
We completed an intercompany sales intellectual property in April 2020, we expect to will have a material favorable tax impact where second quarter 2020 financial results. This benefit was already reflected in our full year guidance.
Adjusted EPS in Q1 was $1.20 cents.
I have updated the definition, we use for free cash flow to be cash provided by operating activities less capital expenditures and we will no longer be adding back adjustments are nonrecurring items. This free cash flow definition provides a measure that reflects cash available for capital allocation like debt repayment operating cash flow for the quarter was $56 million compared to 30.
$6 million last year, the increase in operating cash flow was primarily driven by cost avoidance initiatives and improved collections.
Capex for the quarter was $25 million. This includes a small software tech was issue and that helps increase analysts productivity through automation and AI. Excluding the small acquisition capex would have been down versus the prior year quarter.
Free cash flow for the quarter was $31 million, which is up 101% versus the prior year. This includes outflows of about $10 million of acquisition integration and other nonrecurring items.
Free cash flow as a percent of revenue or free cash flow margin was 10% on a rolling four quarter basis, continuing the improvement we've been making over the past few years free cash flow as a percent of GAAP net income was about 150% almost back to historical levels.
Since there was significantly more uncertainty and volatility in the economy than normal we're providing an updated outlook for 2020 before I go through the outlook assumptions for each segment I'll start with the overall approach we've taken to developing the updated outlook for 2020.
First we've taken our experience and results from March and April to drive forecast for the balance of the year second we have not forecast recovery for 2023rd our overall outlook assumes that we will not be able to run conferences for the balance of the year. We do have plans in place to start delivering conferences again in September if that proves possible.
And fourth we are calibrating, our cost reduction programs with our topline results.
Its business is weaker than forecast, we will further reduce cost to protect EBITDA dollars and cash flow.
And if business is stronger than forecast, we will reinstate certain expenses that we had turned off to protect profitability.
With the strengthening of the U.S. dollar, we're giving the updated guidance in reported dollar terms and making no assumptions on future changes or volatility to exchange rates.
We now forecast reported research revenue of at least $3.4 billion to $5 billion for the full year about 1% to 2% growth.
This reflects a continuation of late March and April new business and retention trends through the rest of the year. We expect total CV to decelerate from the first quarter due to a more challenging customer spending and decision making environment based on what we're seeing in March and April and improvements we've made in the business over the past decade, CV growth should remain above the levels we saw.
In the last downturn.
CV changes earlier in the year have a larger impact the full year research revenue growth. There's a lag effect on research revenue. So slower CV growth. This year may lead to slower research revenue growth in 2021.
As we ramp backup our spending to position ourselves for long term success. There may be a short term headwind to margins due to the lag between CV and revenue growth.
For the conferences segment as I mentioned, we are currently planning to resume conferences in September. However, our guidance is based on not being able to run any conferences for the duration of 2020.
The result, without running conferences for the balance of the year will be revenue of about $35 million, we will continue to incur costs and the conferences business both cost of services as well as CNS within the business. We have direct expenses that relate to specific conferences and other expenses that don't we won't be incurring the direct costs related to specific Congress.
Is that our cancel.
This results in modestly lower costs, and lower decremental margins than we'd expected when we provided an update in late March.
Wherever possible, we expect to roll forward conference participation by exhibitors and attendees to future conferences, if we're able to run our updated conference calendar in the last four months of the year. We estimate additional revenue of approximately $200 million. In addition at the end of April we reduced number of associates in conferences to align with the new reality of the.
Business for 2020.
Severance costs of $5 million to $6 million will be incurred in the second quarter.
Finally, we have the potential to recover insurance for cancel defense beyond the amount of the direct expenses potentially up to the amount of lost revenue in some cases, the timing of insurance coverage remains uncertain, but our policies or specific to our conferences business and not generic business interruption coverage.
The insurance recovery will not be included an EBITDA and is not included in our EBITDA guidance.
However for debt covenant purposes. The insurance recovery is included in the calculation of EBITDA, we continue to work with our insurance brokers and providers and will provide updates on our progress in future quarters.
We now expect reported consulting revenue of at least $350 million or a decline of about 11% for the full year.
The consulting outlook contemplates a slowdown in labor based demand and reflects very challenging compares for the contract optimization business through most of the year and implies being down roughly 15% for the remainder of 2020.
Overall, we expect consolidated revenue of at least $3.81 billion, that's reported decline of about 10% versus 2019.
For the full year at current FX rates and business mix, we expect a drag on revenue growth of about 130 basis points.
Cost avoidance programs could yield up to $400 million in savings for the full year, assuming no recovery from the economic downturn. The implied operating costs are not a new run rate, but reflect planning assumptions for a cautious view of the revenue outlook.
As soon as we can get back to normal operating environment, we will resume spending to drive future growth.
We expect adjusted EBITDA of at least $625 million.
That's despite a revenue impact we currently contemplate of about $800 million and a roughly $20 million negative impact from FX to EBITDA, if our topline forecast prove conservative and we are able to restore and more normal spending we continue to expect margins to be at least 16.1%, which will be flat to 2019.
We expect an adjusted tax rate of around 22% for 2020.
For 2020, we expect free cash flow of at least $300 million, our free cash flow guidance reflects both the piano outlook, we just discussed as well as some slowing of collections.
All the details of our full year guidance are included on our Investor Relations site.
Finally for the second quarter of 2020, we expect adjusted EBITDA of about $160 million to $165 million.
In closing we are focused on the right things, we need to do for our associates clients and shareholders to deliver long term value has seen discussed we will execute to come out of the downturn better positioned than before to drive long term sustained double digit growth. We know that the value of Gartner is a long term stream of free cash flows we expect to generate.
By delivering value to our clients in a very large addressable global market. So while we are taking the steps to ensure our short term financial flexibility, we remain focused on driving long term shareholder value.
Amid a tough economic backdrop, our research business had a healthy quarter and consulting held up as well.
We are avoiding expenses managing cash flow and working through insurance recovery.
We maintain a strong unhealthy balance sheet and are focused on maintaining high levels of liquidity and financial flexibility.
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 key again that is star then one if he would like to ask the question.
Our first question comes from the line of Jeff Mueller with Baird. Your line is now open.
Yes. Thank you good morning.
Let's see if you're willing to provide any of the data around the late March and April new business and retention trends and as they reset lower starting in mid March have you seen them stabilized.
Whether or not you're able to provide that can you tie it to what type of contract value exit rate for 2020 as implied by the updated research revenue guidance.
Good morning, Jeff.
Out of the the planning assumptions, which.
Eventually comes back because you're trying to.
Preserve the ability to grow double digit rates long term and that the third bucket would be <unk> is there any sizable portion that is some form of permanent costs take order productivity.
Yeah, well, so it's kinda hard to to parse right now so for first to cancel the first part of your question the up to $400 million is in year 2020 savings <unk> and if you kinda map the changes in our guidance you you'll need that you know savings to deliver on the on the Eve.
Guidance or the the minimum either died guidance. We we just gave you know as we think about it the the the cost avoidance and it and to be Frank. It is more cost avoidance, then cost reduction as as you mentioned, it and and as I mentioned were both very focused on we're all very focused on making.
Sure that when we come out of this we are strong and prepared to rebound back as quickly as possible similar to what you know what happened during the last downturn and so I wouldn't categorize much of the cost avoidance as quote unquote permanent I think that over time varying degrees of.
It will get turned back on a different paces. So as an example, as you mentioned with growth had cow. If we are growing the business and we are seeing sales productivity, we're going to add the right number of research analysts and service people and and sales people, we will actually do that to support the business and dry future growth.
Top of that yeah, we have large buckets of spend like travel and that one will probably turned back on at a slower rate than potentially headcount and then the other thing I'd mentioned is you know we've yeah. We've made some tough decisions around takeout reductions as we talked about in other compensation related things.
And when we get out of this or when we can see our way out of this you know we we are people business and we want to make sure that yeah, we keep our team happy and motivated and and and you know chasing the goal of of consistent double digit growth.
Okay. Thank you.
[noise]. Thank you on next question comes on the line of Gary busy with Bank of America Security airline is not open.
<unk>.
I just the first question so it's interesting to me.
Cost cuts I'm sure. This is.
Rather than the goal.
Maintain that.
Around 16.
That.
You acknowledge that.
The revenue.
Next year in for the margin to go down as you bring the cost back you know.
So aggressive with costs.
That.
Really going to delay the ability to business.
Or or.
Something.
<unk>.
Liquidity.
Solvency.
Yeah sure I I think part Okay got the best team person you can go first.
No. Good go ahead, Greg [laughter], Okay. So I think you're right <unk> when we when we saw what was potentially the impacts on the business, most notably or conferences schedule right and and walk conferences only represents you all around 11% of revenue not for nothing.
A 500 million dollar business and as we started to look at the potential for you know be not being able to run a full schedule only being able to run a partial scheduling potentially as their outlook reflects not being able to run any conferences at all we were very focused on really even thought preservation.
<unk> liquidity international flexibility right those were kind of our Montrose you know through throughout March and we very aggressively hit the brakes on a lot of items to make sure that we maintain as much financial flexibility as possible. We've done you know what I would argue a a really good job of.
Of getting that inline making the tough decisions when we need to but again as I mentioned, it's it's more cost avoidance than actual cuts and you know again. Unfortunately, we have had to make some cuts but the bulk of the savings is really around cost avoidance and it kind of just did round to that roughly 60%.
Range, we were not solving for that it was more about just making sure we can maintain as much financial flexibility as possible moving forward and then I'll I'll flip it to gene to talk about the future.
Yeah, it'd been again, Gary <unk>, we didn't have a target in terms of marginally we're aiming for we basically wanted to build in sufficient flexibility for the future that we can cover a range of outcomes and we're very much the thinking about what's going to happen 2020, and one is Craig and I both mentioned are scripts.
And are preparing so that we can returned to quite you know, we're hoping to build or turn to quite good growth there, but we're prepared for whatever make huh.
The follow up then within that up to 400 million of cost and I realized.
Me to turn by have revenue comes in but.
Help us understand how much of that was really.
Business, where you've got the major short term problem.
Is how much of that as cost avoidance.
Research that you'll have to rebuild the support getting back to double digit growth.
Yeah, Gary the when when we when we talk about the the cost avoidance. We're we're not taking credit for the cost that we don't have to have to deliver the conferences. So it's kind of separate and apart you know from from from the conference inside you know what we've done on the conference.
Site is right size the business as we as we talked about but the bulk of the the 400 million relates to as I mentioned really more cost avoidance measure. So we had a plan for 2020 within that plan, we had pretty decent growth in sales headcount in service.
Head count in you know other other areas of headcount, we've temporarily frozen all of that and that yields you know pretty significant amount of savings we stop traveling obviously I'm not our choice necessarily but that yield significant savings and as I mentioned, you know with Jess question over time that.
We'll have to be turned back on but it's probably not a binary thing where you know we immediately go back to spending a exactly what we were spending pre pre crisis and so it's kind of a mix of different things, but the bulk of the savings really relate to avoiding costs that we had built into our.
2020 plan and harvest thinking savings from things like P.N.A. or maybe not investing as much in facilities or things like that which you again, we don't know with a new reality is going to look like going forward. As you mentioned everything we're doing is to maintain as much flexibility financially and operate.
<unk> as we move forward.
Thanks.
[noise]. Thank you on next question from from the line of Pony Catlin with Morgan Stanley airline US now thing.
It's only we're not hearing ya.
Now.
<unk>.
No Tony Tony <unk>, Yes, we could hear yeah. Okay. Thank you Jean you spoke about the three impacted client category did you just give us your sense of the proportions for each of those just thinking that the cove it impacted clients could come back click or well, maybe that impaired business clients could take.
Longer just trying to understand how you're thinking about that piece of recovery in research.
So Tony we don't have a <unk> kind of a quantitative breakdown of those I'll give you kind of the qualitative perspective, which is you know the largest category is the companies that are not directly impacted by a covert 19 like for example.
So not hotels things. So that's not the largest category largest getters companies that are not directly impacted but they might sell things to hotels or sell things to airlines and so they have some impact on the business that's the largest category.
And then I'd say the second largest category are the companies that are I picked up front of the other two categories are probably equal size, which is the ones that are directly impacted like hotels restaurants airlines things like that and then equal size would be the companies that are not impact at all like if you're selling video conferencing software.
Or your in certain parts of the media, but it's like streaming media business for example.
Got it and and I know you mentioned a little bit earlier that you'd expect research T.V. gross to sort of glide down during the year I guess, that's it result of recession as opposed to like sort of left click or snap that.
[noise] just cracks sort of his remarks, we basically for our guidance assume no improvement during the year. So we can think about we took the results in you know in March and April and said if nothing gets better for the year what is it going to look like and so we took our.
Out our new business growth in our retention rates and extracted later that through the rest of the year with the.
Country really we have coming up for renewal and that kind of gives you what happens with business the research business.
Gotcha, Okay, just for my file out.
Thinking about the timing of.
Conference in person conferences are are you looking at certain metrics like Kate like you know number of cases, and and et cetera, you make that determination as holding them like do you have to see a vaccine before you feel comfortable before having a lot of impression conferences again.
I guess going for which you expect structurally a higher level of virtual conferences, and if you to give us any sort of sense of rather than you differential between like a virtual conference versus in in person.
So in terms of timing when we restart conferences first we have two kinds of conferences, we have kind of <unk> were people tend to fly in from around the country. So like Orlando supposed to be one of those then we also have our advantage <unk> would tend to be small <unk> think 50 people.
<unk> at a local event, where people don't travel it could be a dinner could be a one day event.
So first we expect that the you know conferences that are more local are more likely to be feasible to hold before we'd be able to hold the largest addition, dukakis'. The second thing is that as we assessed windows you know what is a good time to restart we're gonna get input you know right now in fact, we have focus groups with you know with both exists.
Litters and with the <unk> the of what they think would be necessary for us to a restart and we're using that information as input. We're also going to be looking at what the rest of the world is doing so you know is the NFL, having you know kind of be having football games in the fall and are you know how do people are they comfortable doing that is.
Disneyland or Disney World reopening and so if you look at kind of where to look at those kinds of things and of course, we're looking at what the health officials say as well and so it's going to be triangulating, what clients up and potential you know attendees would say looking at what the rest of the world is doing and then look at what the health risks would be and then try undulating all that stuff.
Figure out what we actually do I'm also imagine that it may not be the same answer around the world. So you know as you probably know you know some some of the some companies opened things like that these kinds of events in China already and so we'll see what happens there and what's the health risks are and what the reaction to the public.
<unk>.
[noise] thanking with regard to.
Yeah, and so with regard to virtual events as I mentioned on the call. We've already you know we we believe it it's a reasonable about that a virtual bits will be more popular and so we are.
Experimenting and innovative look at how do we both hold stanaland virtual events, but also how do we combined with in <unk> in person events with virtual events. So that if people want to participate but they don't aren't not comfortable incoming virtually income necessary coming in person that they can participate virtually and so we're developing those bottles now we're testing them and.
Optimistic that will come up with a good model there.
Thanks, a lot.
Thank you.
Next question come from the line.
Nah, Pat Knight with Barclays. Your line is now okay.
Thank you as in one gentleman. My first question was you know just the the research guidance by the D. celebration, you know, we'll be above the level than the last downturn I was just hoping just so we have the same page you can just give us some color on what those levels with the G.P.S.G.B.
Yeah sure. Thanks, a lot of good morning. So you know during the last down Karen obviously, we we were just essentially GTS and and just start technology business. It was prior to us acquiring A.M.R. and it was obviously well in advance of us acquiring.
<unk> C.E.D.
And you know if you go back and look look at the the metrics.
The C.V. trough was around negative 4%.
So in in the second or third quarter of 2009 that was kind of the bottom.
And if you look at it we actually bounce back and rebounded really quickly and by the mid point of the next year or or end up 2000 can we were already back a double digit growth rates and so that's what happened with the C.V., when we left new business and and and retention the new business declines we're in a 20.
Negative 25% range for a couple of quarters when the the bad stuff on the day recession really started to head and our attention rates you know what we're down you know in in Yeah call. It you know 500 to two 750 basis points range as well yeah as we.
Mention though you know there's probably two primary reasons why we believe we are better position today than we were back in 2000, a 2009 and you know we've noted them over and over whenever we'd gotten questions in the past her as we've described our business, but it really isn't around.
The the types of research we deliver the real focus we can drive on on on cost reduction in cost optimization.
And and the levels of engagement were were you know we drive with our clients consistently and have continued to drive you know in March and April and so you know, while we do anticipate or I shouldn't say that <unk>. While we have model then based on our March April experience that deceleration and and and glide down.
Yeah, we we we do feel that we are in a stronger position than we were during the gray recession in 2089.
Got it and then if I could just all of and he did die guidance you know the the the the implied second half.
Guidance is much lower than the two q. number you gain and you know I guess I really I would think too cute probably you know ends up being the worst part of it. So I'm just curious what the Delta is it I mean I think you.
Maybe thrown out some hints of conservatism along the lead but just in any bridge there.
Yeah, I I think yeah, there's there's a couple of things there <unk> you know they number one we were very fast.
To harvest cost avoidance opportunities and anything we could harvesting Q1, we've harvested in Q1, if you think about that from a financial flexibility perspective, we get the benefit of that yeah. If you look at our debt covenants and <unk> and all that we get the benefit of that for the next four quarters and so it was.
Important for us to make sure that we harvested as much as we could we could think you want to maintain all of that financial flexibility second thing I'd say is if you. If you model out research revenue. We've always said you know research revenue growth lags contract value.
Growth because of the revenue recognition. It's the same thing on the flip side when when there is a deceleration and contract value and so we we intend to glide down on or we've model the gliding down on the C.V. growth over the course of the year. The research revenue glides down at a slower.
If you will just because of the revenue recognition methodology that we <unk>, we employ on that large part of the business and so you know as we look at Q2 three q. for again, we we've tried to be thoughtful around not assuming any sort of recovery and as you mentioned there are parts of the world.
You know, whether it's conferences or research or what have you. There are parts of the world that are quote unquote re opening up but we we have not taking that into account we wanted to be appropriately conservative in thinking about this and not trying to get when we think of recovery will come whether it to you shape recovery R.V. shape.
Cover your or W. shaped recovery, we didn't want to get into guess work on that and so I think you know <unk>. We're just trying to make sure that we manage the business appropriately we take the steps necessary to maintain financial flexibility and we're also making sure that we maintain capacity in places like sales and research and service.
That when we come out of this we're prepared to re accelerate.
Thanks again.
[noise] [noise]. Thank you next question comes on the line of Andrew Nicholas with William Blair.
Airline it's not open.
Morning.
Just sort of follow up again on the the earlier question on and conferences, hoping you could speak a bit more specifically about kind of higher looking at that business in in the medium term based on some of those focus groups. You reference do you expect clients to to gradually ramp up to previous attendance levels over the next.
Quarters or years or is your expectation that there'll be some sort of permanent Ah reset lower and then and then maybe related Lee is there a way for us to think about the attendance required relative to previous levels in order to make that a worthwhile endeavor.
So what a Sanders, we don't know how fast people are going to come back and so we're going to have to play that by ear, but I do know is as we've done our focus groups that there's a a very in fact, it's exceeded all expectations. The level of interest that clients have an attending decide for conferences.
And so.
What we find is that there's actually quite a bit of enthusiasm. When people are you know anxious to be able to an and looking for to be able to different entities. Obviously, if if they don't feel safe they won't but you know so get across those threshold and we don't know when that will occur but the good news is the underlying demand seems to be there are people still want to come to conferences for all the reasons, they having a path.
And so to the extent that we can make the environment uncomfortable that'll draw the faster and we're certainly doing that we're looking like I said is in terms of ways that we can make the conferences you know we can hold him in a way that people feel very safe going there.
Got it and then maybe just one one quick followed.
Sorry, if I missed it but did you outline or mention how much the expense savings, we're realizing Q1 specifically.
Good morning, Andrew we we didn't call that out specifically, but you know obviously, we had a pretty you know we beat our original guidance I'm pretty significantly in the first quarter you know as I mentioned we were.
We're tracking very well from any with our perspective through January and February.
And you know tracking well well ahead of our our our you've adopt budget for those two months.
Then on top of that once we saw some of the challenges that we're now dealing with we slammed the brakes on a significant amount of costs and we were actually able to offset about $46 million worth of lost confidence revenue in the quarter as well and so as you kind of think about the the.
Cost avoidance, you know benefits and Q1, if you Kinda bridge between our original guide in where we ended that's that's a pretty good estimate for how much we were able to save.
Great. Thank you.
[noise] [noise] [noise]. Thank you.
My next question comes from the line <unk> <unk> Goldman Sachs.
Yeah, a lot of not open.
Hi, Thanks, Good morning, your G.T.S. Salesforce productivity decline 21 per cent in one q. and swung the positive 57000 in G.D.S. can you discuss how productivity trend in April and what's scenarios are contemplated in your updated 2020 guidance.
Hey, good morning, Jordi <unk> I'll I'll I'll take it all started and then Jenkins on the filling the blacks.
So you know productivity as you know the way we measure. It is a is are only four quarter measure based on the amount of net contract value growth that we deliver over those rolling four quarters divided by opening headcount, it's it's sort of a derivative.
Of all the other metrics that we look at in terms of what drives contract value growth and so.
Oh, we saw in the first quarter, obviously and you can yeah. You can see this on the on a specific T.T.S. and G.B.S. pages is the actual N.T.V. I generated in first quarter of 2020, if I talk about G.P.S., specifically was less than the Nick the we generating Q1 of 2000.
19, and so on the rolling for quarter basis, We we lost a let's call it a strong quarter and replaced it with a more challenging quarter and that's essentially you know what impact that productivity Niger. Since it is a derivative metric as you know if contract value growth is going to decline.
Over the balance of the year productivity would decline as well and again, if you think about the inputs of productivity at the kind of granular level, they're they're the same as we talk about at the highest level, which is what is the retention rate a contract value that has come.
<unk> and how much new business are you actually able to generate and as we mentioned obviously in March and you know through April because of the environment both of those metrics had pressure on them.
And so we would expect that pressure or I should take we've model that pressure consistent pressure to continue through the balance of the year with G.B.S.. Yeah. Obviously last year, we had a bunch of negative quarters in the rolling poor quarter measure and so now we've obviously flip deposit.
In in in G.B.S., which is great and where we want to be on and that's what's driving that you know flipped from negative to positive in in the first quarter, but the same dynamics that apply to new business and retention for G.T.S. will also apply to to G.B.S. or at least as we've model then.
The balance of the year.
That's helpful. So you talked about planning 400 million in cost savings. This year does this assumed that the research sales force headcount freeze will extend through the end of the year and given it takes a year for news sales force tires to ramp and productivity what are your thoughts on.
Whether the glide down in research C.D. will extend into 2021.
[noise] [noise] [noise] so.
Yeah, I I <unk> I.
I think a lot of the dynamics related to research contract value growth in in the kind of short to mid term will be driven by recovery and so you know if there is a recovery in the third quarter or the fourth quarter or the first quarter of of next year.
Obviously that that is what's going to you know support contract value kind of bouncing back and and and Reaccelerating in in the short term midterm Gee I don't know if we want to take the the question on on on G.P.S., I can't specifically and how we're thinking about it.
Yeah. So George basically we don't we're going to set G.T.S. headcount based on the productivity were seen at individual.
Territory basis in so where we see territory. If we today, we see territories that are have good productivity, we're gonna be adding to those territories and so it's gonna be just looking sort of at what's our overall productivity a church, where my territory or the places that we could at at <unk>. You know then we could productively territories, we'll do that so you shouldn't think about that our sales headcount.
G.T.S. is frozen for the year, we're going to you know a moderate that headcount based on the productivity we see.
Got at the told where like you.
Yep.
Thank you.
I don't next question how found the line of hands them as alright Jeffrey.
A lot of not open <unk>.
<unk> good morning, hope, you're a healthy and safe out there how hard to question around you know how how discretionary is the G.P.S. portfolio or in terms of you know customers friends versus G.D.F.. So you know when you pick up our marketing legal H.R. supplied Jane is that much more.
Work discretionary versus you know your caller I.D. business or you know asked another way. The next you business that you're seeing down.
20% to 25% is is that larger and you know the marketing segment or H.R. any thoughts there you know because you're doing it on T.V.S. into prior downturn.
Yeah. So the I wouldn't think about a G.B.S. as being more discretionary van G.T.S. and here. So we think about it which is that in G.B.S.. So first things like H.R. finance legal as I mentioned my remarks, really a very similar characteristics in terms of buying cycles bind criteria things like that.
As in G.T.S. and I mentioned are also that in marketing and in supply chain their specific issues in supply chain. The issue is that a lot of the supply chain leaders that we would sell two are actually doing tactical operational things in their business to go supply chains are struggling in in other companies. It gives a marketing it then.
Acted by the fact that we had this product lines, we talked about that we are just continuing because the profitability wasn't where he wanted it to be and so that those two things are actually taking the G.D.S. growth lower than it would otherwise be and then the other factors. It affects G.B.S. It's different in G.T.S. is are you test sales service teams have much more experience you know we have sales.
Service people in G.T.S. that have been working there for 10 15 20 years in G.B.S., we have a much smaller group of people that have been using those same playbooks for that kind of a period of time and so we expect that that will have an impact overtime, they'll keep getting better and better and approach G.T.S. levels and so those are kind of the two factors that affect Y.G.B.S.
You know has been a little bit of a laggard relative to G.T.S.
That's a very very hard for instance to follow up question anything you're seeing geography wise in April that's you know different maybe any learnings from areas that they would have come out of the shut down if you have any and and and what you're seeing there.
[noise]. So you know we're in 100 countries around the world. They say very a lot you know I don't think there's anything I would take away you know specifically strongly like I'll give you two examples India in Japan have been doing well forest relative to other countries, but I think it's just our our execution was.
Just a little bit better there is kind of what I put it up to as opposed to us <unk> as opposed to its there's something fundamentally different there.
The economy or something like that.
Gotcha. Thank you so much.
Thank you.
Today's question and answer session I wouldn't know like the time to call back to Jane Hoffa closing remark.
So as you heard from our call today as we navigate the uncertainties of our current environment, we are well positioned to hope our clients address both depends <unk> and the economic downturn.
We've taken steps to carefully manager costs in cash flow in response to the economic downturn and we're going to come out of the recession strong and well positioned to resume driving long term sustained double digit growth.
Thanks for joining us today, we look forward to update <unk> updating you again next quarter.
Ladies and gentlemen, that's going to class today's conference call. Thank you for participating.
That's kind of that.
[music].