Q2 2020 Gartner Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Gartner second quarter 2020 earnings Conference call. At this time all participant lines are in listen only mode. After the speakers presentation. There will be a question answer session Duck. The question. During the session. You want me to press Star one on your telephone please be advised that today's conference is being.
Recorded if you're reporting your brother sister, Please press Star Zero I would now like to have the conference over to your speaker today, David Cohen GE VP of Investor Relations. Thank you. Please go ahead Sir.
Good morning, everyone. We appreciate you joining us today for Gardner second quarter 2020 earnings call and Hope you are well joining me today on the color Gene Hall, Chief Executive Officer, and Craig Safian, Chief Financial Officer just.
Oh will include a discussion of second quarter 2020 financial results never updated outlook for 2020 as disclosed in today's earnings release. In addition to today's earnings release, we have provided a detailed review of our financials and business metrics and earnings supplement for investors and analysts.
Most of the press release me, earning supplement on our website Investor Dock Gartner dotcom.
Following comments by Jean and Craig We will open up the call for your questions. We ask that you limit your questions to one and a follow up.
On the call unless stated otherwise all references to EBITDA for adjusted EBITDA would be just links as described in earnings release, all growth rates in genes comments or FX neutral unless stated otherwise reconciliations for all non-GAAP numbers. We use are available investor relations section of the Gartner Dot Com website finally a contract.
Values and associated growth rates, we discussed are based on 2020 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 that was contained in the company's 2019 annual report on form 10-K quarterly reports on form 10-Q as well.
Another filings with the FCC encourage all here to review the risk factors listed in these documents now I will turn the call over to Gartners, Chief Executive Officer Gene Hall. Good morning, everyone. Thanks for joining us the cobot 19 pandemic well have a permanent and dramatic impact on business leadership and society leaders space more simultaneous.
Tranches than ever before health and safety risks sustained macroeconomic dislocations shifting customer expectations regulatory changes combating racism and strengthening social justice cyber security risks in more.
Gartner is the best source of the timely and relevant insights is bison tools that empower leaders across every major enterprise function to achieve success with their mission critical priorities with our board with your research and our ability to be agile and supporting our clients through ongoing uncertainty demand for analyst interaction is up almost 30% euro.
For your clients and not quite the like continue to leverage our quarter bars resource center as we plan for the reset with the challenging macroeconomic conditions, we're seeing an uptick in leaders accessing our cost optimization content.
And with the ongoing fight for social Justice, we're seeing significant engagement with our diversity equity and inclusion resource Center.
This resource center aggregate much of our broadly relevant HR insights on diversity inclusion of engagement.
Critical tools, Webinars and makes them publicly accessible.
We recently reinforced our own commitment to diversity inclusion in social equity consistent with our research advice to clients. We increased the level of programming engagement of our employee resource groups women.
Hi, mosaic and veterans at Gartner, we reinstated our ciardi match program to a power associates job, even greater impact to the organizations they choose.
We established a cross functional executive Council, one diversity and inclusion we published our corporate social responsibility report out my actions, we've taken to improve our operations and support our clients.
No remains strong as we continue to navigate in global uncertainties, our second quarter results reflect our unique value proposition across all major functions of the enterprise.
Oh sure. If you highlight incredible give you the full details in a moment.
For the second quarter 2020, total revenues were down 8% year over year.
However, excluding the impact of our conferences business revenues were up 6% year over year, and we drew approval to EBITDA.
And free cash flow was up 71%.
We continue to calibrate our cost reduction programs.
We strategically paused spending in March to protect profitability and conserve cash.
We restored some of the spend in targeted areas, we remain committed to full year margins of at least 16.1%.
Research, our largest and most profitable segment is the core of our value proposition.
We continue to make a significant global impact through our research business.
Total research revenues were up 8% over this time last year.
And while the selling but remains challenging we did see modestly better trends in June and the first two months of the quarter.
Global technology sales or GTS surf leaders and their teams within I T. GTS represents more than 80% or total research contract value.
Global business sales were GBS source leaders and their teams beyond like T.
<unk> HR finance legal sale supply chain marketing and more GBS represents about 20% or total research contract value.
The second quarter Twentytwenty, both GTS and GBS drove similar contract value growth performance is around 7% in.
GTS, we saw strong performances across many regions in sectors.
Many countries in Asia, Latin America in Europe industries, including retail services and technology.
In GBS your your contract value was up across every practice area, except marketing.
As I mentioned last quarter, our conferences segment was significantly impacted by cobot 19, because of government mandates and health concerns.
Unable to hold any destination conferences during Q2 to prioritize the health and safety of our attendees partners and associates, we have decided to cancel or in person conferences for the remainder of Twentytwenty pivot a subset of these conferences to a virtual format.
Gartner virtual conferences, we'll provide attendees affordable way to gain unparalleled insights any advice and accelerate their learning without the need to travel.
We'll monetize these conferences f., we protect the virtual format.
Looking to the long term, we expect the future is a combination in person had virtual conferences. We continue to expect conferences, we'll be an important contributor to our overall business.
Quarter consulting is an extension of Gartner research and provides clients with a deeper level of involvement three extended project based work to help them execute their both strategic initiatives.
Consulting revenues were down year over year in Q2, we had strong result in contract optimization.
In summary, we continue to have a strong value proposition across all major enterprise functions are clients are facing more disruptive change than ever before and Gartner is the best source the cost effective relevant insights will empower leaders to succeed amid ongoing uncertainty.
We continue to have a vast untapped market opportunity.
No the right thing to do to capture that opportunity in thriving we're uncertain times.
Looking ahead, we expect to go out of this recession strong and well positioned to drive long term sustained double digit growth in revenues earnings and free cash flow for years to call with that I'll hand, the call over to our CFO Craig Sylvia. Thank you Jane and good morning, everyone I hope everyone remains safe.
Well.
Second quarter results were ahead of our expectations due to a modestly better demand environment and strong cost management execution, we had a successful bond offering during the quarter, which allowed us to reduce maturity risk without increasing our annual cash interest cost. This year as we've gotten more clarity on the economy engaged our business performance over the past several months Weve resumed backfilling.
Goals, and making selective growth hires while we continue to manage our cost carefully we remain focused on positioning ourselves to rebound strongly when the economy recovers second quarter revenue was $973 million down, 9% as reported and down 8% FX neutral excluding conferences or revenues were up 6% year over year FX neutral.
In addition contribution margin was 67% up more than 300 basis points versus the prior year EBITDA was $192 million up 4% year over year end up 6% FX neutral adjusted EPS was $1.20 cents and free cash flow in the quarter was a very strong $322 million research.
Revenue in the second quarter grew 6% year over year on a reported basis and 8% on an FX neutral basis second quarter research contribution margin was 72% benefiting in part from the temporary cost avoidance initiatives, we put in place last quarter as the macro environment improves we will take a balanced approach to resuming growth spending in incenting our associate.
For the core of our business.
Total contract value was $3.4 billion at June Thirtyth, representing FX neutral growth of 7% versus the prior year.
Global technology sales contract value at the end of the second quarter was $2.8 billion up 7% versus the prior year.
A more challenging selling environment that began in March continued in the second quarter and had an impact on most of our reported metrics.
Client retention for GTS was 80% down about 260 basis points year over year.
Wallet retention for GTS was 100% for the quarter down about 470 basis points year over year.
Yes, new business declined 14% versus last year, we ended the second quarter with 12381, GTS enterprises down slightly from last year.
The average contract value for enterprise continues to grow it now stands at $223000 for enterprise and GTS up 10% year over year.
Growth in CV for enterprise reflects the combination of Upsale increased number of subscriptions and price.
At the end the second quarter, we had 3089 quota bearing associates and GTS for a decline of 4% year over year.
We expect to end 2020 with more than 3100 quota bearing associates, a slight decline from the end of 2019.
We entered this year with a large bench, which we have now fully deployed.
For GTS the year over year net contract value increase for in CVI divided by the beginning period quota bearing headcount was $58000 per salesperson down 48% versus the second quarter of last year. Despite the challenging macro environment GTS CV grew in nearly all of our 10 largest countries and was up double digits in Brazil, Japan.
France, and the Netherlands, CV grew across all sectors, except for transportation, which was down modestly.
The smallest enterprises, we serve saw double digit see growth through the strong efforts for midsize enterprise sales teams.
Across our entire GTS sales team, we sold significant amounts of new business in the quarter to both existing and new clients.
New logos continued to be a significant contributor to our CV growth.
Finally, despite some net churn and clients we continue to see increased spending by retain clients on average this speaks to the compelling client value proposition, we offer in both strong and challenging economic environments.
Global business sales contract value was $643 million at the end of the second quarter, that's about 20% of our total contract value CV growth was 7% year over year as reported and 6% on an organic basis.
CV growth in the quarter was led by supply chain and the human resources practice, all practices positively contributed to the 7% CV growth rate for GBS with the exception of marketing.
Next LCV grew 40% to $319 million and legacy CV declined 14% year over year to $324 million.
Total GBS, new business was $36 million in the quarter down 8%.
However, we saw strong new business, and our finance and sales practices.
As we've discussed last two quarters in the marketing practice, we are transitioning away from some lower margin products. This has created short term headwinds, but is expected to improve profitability in a normal environment.
Because gx sell will comprise the majority of GBS CV, starting next quarter, we will be reporting total GBS only.
In the second quarter total gx sell new business was $31 million, while legacy new business was $5 million also in the second quarter Gx sell attrition was $19 million in legacy attrition was $20 million gx sell retention performance year over year was consistent with GTS.
Client retention for GBS was 83% up about 170 basis points year over year wallet retention for GBS was 100% for the quarter up about 520 basis points year over year. We ended the second quarter with 4789, GBS enterprises down about 7% from last year, the average contract value for interface.
Yes continues to grow it now stands at $134000 for enterprise in GBS up 15% year over year growth in CV for enterprise reflects up sell an increased number of subscriptions and price. Despite the pandemic are retaining clients are continuing to spend more with us every year.
At the end of the second quarter, we had 834 quota bearing associates GBS down 9% year over year head count was down sequentially and year over year as we optimize their territories and then temporarily froze hiring as part of our cost avoidance program.
We now expect to end 2020, with roughly flat head count to the end of 2019 in GBS for GBS the year over year net contract value increase or and CVI divided by the beginning period quota bearing headcount was $43000 per salesperson up from last year. As you know the conferences segment has been materially impacted by the global pandemic.
We have cancelled all destination conferences for the remainder of 2020, we're pivoting to producing virtual conferences with a focus on maximizing the value we deliver for our clients. We held three virtual conferences in the second quarter, which were used as pilots for the rest of the year. We also held a number of our one day local conferences with a virtual format.
We expect our local conferences business to rebound faster than the destination conferences, given the smaller sizes the gatherings no need for travel and strong relationships and sense of community. Among the participants with the cancellation of the fourth quarter destination conferences. Unfortunately, we had to reduce the number of associates in the business. We continue to incur costs both in cost of service.
And as gene aid to support the virtual conferences and to be in a position to resume in person conference is what it is safe and permitted the second quarter is a reasonable run rate for how to think about conferences cost for the rest of the year. I also wanted to provide you with an update on potential termination or some costs on cancel conferences as well situation with our event cancellation insurance.
We expect to recover the majority of sunken potential termination costs for future conference is through either force majeure clauses in our vendor contracts other arrangements with vendors or event cancellation insurance claims timing of receiving insurance claims is uncertain. So we will not record any recoveries in excess of expenses incurred until the receipt of the insurance proceeds.
Leads our guidance for 2020 continues to assume no conferences, we'll be held for the remainder of the year.
Second quarter consulting revenues decreased by 6% year over year to $97 million on an FX neutral basis revenues declined 5%.
Consulting contribution margin was 34% in the second quarter of over 130 basis points versus the prior year quarter margins were up to favorable mix and cost reduction actions LIBOR based revenues were $69 million down 13% versus Q2 of last year or 12% on an FX neutral basis labor based billable head count of 700.
96 was up 3% utilization was 59% backlog at June Thirtyth was $99 million down 10% year over year on an FX neutral basis, our backlog provides us with about four and a half months of forward revenue coverage, we had a small workforce action and consulting business in the second quarter to better align our billable head count with a revenue.
Outlook for the balance of the year.
Our consulting business is seeing demand and three broad areas digital cost optimization and data and analytics demand in digital span several areas, including digital strategy digital talent and digital workplace cost optimization also span several areas such as sourcing and vendor management infrastructure and operations and application rationalization.
Our contract optimization business, which is a part of our brought our cost optimization offerings had a strong quarter.
Revenues were up 17% on a reported basis versus the prior year quarter as we have detailed in the past. This part of the consulting segment is highly variable and we face continuing tough compares as we move through the year.
DNA decreased 4% year over year in the second quarter and 2% on an FX neutral basis as the cost of once initiatives. We put in place last quarter continue to generate savings as soon as a percentage of revenue increasing the quarter driven by recognition of commissions from canceled conferences and severance EBITDA for the second quarter was $192 million up 4%.
Year over year on a reported basis and up 6% FX neutral as we offset lost conference margins with significant cost avoidance and cost reductions.
During the quarter was approximately $3 million from last year, although about flat with the first quarter as a result of additional office space that had gone into service before the pandemic hit amortization was about flat sequentially.
Net interest expense, excluding deferred financing cost in the quarter was $27 million up from $23 million in second quarter of 2019 net interest expense is up because we had higher debt balances in the quarter in our interest rate swaps at higher fixed rates than the ones, which expired last year. The Q2 adjusted tax rate, which we used for the calculation of adjusted.
Net income was 15.3% for the quarter the tax rate for the items used to adjust net income was 22.8% in the quarter. The adjusted tax rate for the quarter was affected positively as expected by an intercompany sales intellectual property, which resulted in a material favorable impact on adjusted tax rate. This benefit was already reflected in our FFO.
So your guidance.
Adjusted EPS in Q2 was one dollar and 20 cents as a reminder, last quarter. We 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 Mike.
Repayment and share repurchases.
Operating cash flow for the quarter was $343 million compared to $227 million last year. The increase in operating cash flow was primarily driven by cost avoidance initiatives and lower tax payments capex for the quarter was $21 million down 46% year over year.
Free cash flow for the quarter was $322 million, which is up 71% versus the prior year. This includes outflows about $10 million of acquisition integration and other nonrecurring items free cash flow as a percent of revenue or free cash flow margin was 13% on a rolling four quarter basis, continuing the improvement we've been making for the past few years.
Years free cash flow as a percent of GAAP net income was about 230%.
During the quarter, we issued $800 million of new senior unsecured notes with a 4.5% coupon we used the proceeds from the notes along with $200 million a balance sheet cash to repay $1 billion a debt on a revolver and term loan aid due in March 2022.
We reduced maturity risk, while providing more financial flexibility at a relatively low cost.
Our June Thirtyth debt balance was $2 billion, our total debt covenant leverage ratio was 2.8 times at the end of the second quarter well within the five times covenant limit our other financial covenants are also well within compliance levels at the end of the second quarter, we had $357 million of cash as we discussed last quarter.
We paused our share repurchase activity as we get increased clarity on how the pandemic an economic downturn will play out we will deploy excess cash for debt repayment share repurchases and strategic acquisitions. We also have about $1.2 billion of revolver capacity. In addition to our strong cash position balance sheet flexibility and access to.
Capital, we've taken steps to align our cost with a revenue, allowing us to continue to generate positive free cash flow going into the current situation. We've already built to plan for 2020 that align costs growth with revenue growth.
As we outlined last quarter, we took additional steps to ensure our long term financial health and operational excellence through a number of cost avoidance initiatives. These decisive actions helped 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.
We accelerate and drive future growth once the timing of the economic recovery from this pandemic becomes more evident.
Well I go through the outlook assumptions for each segment I'll review the overall approach we've taken to developing the updated outlook for 2020.
First we've analyzed our experience in results for March through June to drive forecast for the balance of the year second our guidance does not assume a recovery for 2023rd our overall outlook assumes that we will not be able to run conferences for the balance of the year.
We are operationally planning to deliver one day conferences in the fourth quarter in geographies, where it is safe and possible and fourth we will continue to calibrate our cost reduction programs with our topline results given the second quarter business performance, we have already restored some of the spending we deferred starting in March.
We are updating our full year outlook to reflect future performance cost restoration considerations and finally, a weaker U.S. dollar compared to when we gave guidance in may.
We now forecast research revenue, including the FX update of at least $3.48 billion for the full year. This is growth of about 3% versus 2019 and reflects a continuation of late March and second quarter, new business and retention trends through the rest of the year, while the full second quarter was modestly better than what we saw in late March and April there were still.
All macro risks to the second half largely for the Nonsubscription portion of the segment. We continue to expect total CV to decelerate through the year CV changes earlier in the year have a larger impact to full year research revenue growth. There was a lag effect on research revenues, so slower CV growth exiting this year will lead to slower research revenue growth in 2021.
As we ramp or spending back up to position ourselves for long term success, there will be a short term headwind to margins next year do a lag between CV and revenue growth. We expect that in a normal 2022, we will see margins of at least a 16.1% we delivered in 2019.
The conference. This segment our guidance is based on not running any conferences for the duration of 2020. This will result in revenue about $35 million for the full year.
We will continue to incur costs and the conferences business, both cost of services as well as SNA 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 conferences that or canceled wherever possible. We expect to roll forward conference participation by exhibitors and attendees.
To future conferences.
We now forecast consulting revenue, including the FX update of at least $365 million for the full year or decline of about 7%. The consulting outlook continues to contemplate a slowdown in labor based demand and reflects very challenging compares for the contract optimization business through most of the year.
Timing of revenue in the contract optimization business can be highly valuable as you know overall, we expect consolidated revenue, including the FX update of at least $3.8 billion. That's reported decline of about 9% versus 2019, excluding conferences, we expect revenue growth of 2% versus 2019 on a reported basis the costs.
Cost avoidance programs, we put in place in March have allowed us to protect profitability and conserve cash we have started to resume certain spending as the operating environment appears to at least stabilized and we want to ensure we are well positioned for an economic recovery.
The implied operating costs in our outlook are not a new run rate, but reflect planning assumptions for a cautious view of the revenue outlook. We expect adjusted EBITDA of at least $635 million, which includes $10 million of projected FX benefit.
While we're raising our revenue outlook for the full year, we are leaving the EBITDA outlook unchanged before the FX benefit consistent with our comments last quarter. The full year margin before updating for FX or about 16.3% up from the 16.1% margins. We had in 2018, we remain committed to full year margins of at least 16.1%.
We also want to maintain the flexibility to be able to resume growth hiring and to restore certain expenses. We deferred starting in March. These are important for us to accelerate out of the recession and position us to drive CV growth in 2021 and beyond as we've discussed 2021 margins are likely to be down versus 2020, as CV reaccelerates because of the lag between.
CB revenue there may be upside to 2020, EBITDA, depending on top line results and the timing and magnitude of our cost restorations.
Our weighted average interest rate will increase as we continue to have the run out of our interest rate swaps through the respective maturities. We continue to expect an adjusted tax rate of around 22% for 2020.
We expect 2020, adjusted EPS of at least $3, an eight cents, including an eight cents benefit from FX. The lower Q2 tax rate benefit was due to timing for 2020, we expect free cash flow of at least $425 million our free cash flow guidance reflects both the piano outlook. We just discussed strong Capex management.
And better than previously forecasted collections all the details of our full year guidance are included on our Investor Relations site. Finally for the third quarter of 2020, we expect adjusted EBITDA of about $130 million to $135 million, while we expect revenues to decline sequentially. We expect operating expenses to increase significantly as we.
Begin to restore some of the cost we deferred starting in March in summary, we delivered strong financial results in the second quarter. Despite a very uncertain economic environment cash flow is outstanding and we have taken a number of measures to increase our financial flexibility reduce maturity risks and ensure we have ample liquidity, we will continue to balance cost avoidance probe.
Grants with targeted investments and restoration of certain expenses to ensure we are well positioned to rebound when the economy recovers with that I'll turn the call back over to the operator, and we'll be happy to take your questions operator.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
For all your question Brett accounting, please standby will we compile the key when a roster.
Our first question comes on the line of Jeff Mueller from Baird. Your line is now open.
Thank you good morning, I guess, the short version of the question as to quantify modestly better.
Conversion is.
CV looks pretty good to me the commentary some positive Watson pockets of good growth.
So just any help kind of reconciling that language with a fairly modest increase to the full year revenue guidance at a point in the year, where I would think it's early adopted the year, we'd see the benefits So would love any quantification on what modestly better in Jude means and any other considerations.
That could be a headwinds other than just the generally uncertain environment and I guess the point in time revenue decline.
Hey, Jeff gene so.
We can't really quantify the difference, but well tell you as if we look at kind of the performance during the quarter June was definitely.
A trend that was a better selling environment in the previous couple of months. So.
Weve, that's kind of what we said in our.
Our remarks.
We can't quantify it anymore than that.
Hey, just other kind of what conciliation factors, you would would provide or just something I might not be considering on why the revenue guidance increase looked fairly modest that maybe it's just the methodology of assuming the late March into QQ kind of trends continue for the balance of the year.
Let me say, hey, Jeff stealing yep, absolutely, thanks, Joey and good morning, Jeff.
Well I think about it it is.
Obviously, we have the experience from from March.
In April, which we talked down last earnings call you solved.
The Q2 experience and so what I'd say overall is from a new business perspective, I think we were modestly better than what we experienced in March and April.
We talked about new business being down in the 20 is down year over year around 20% as you saw GTS was down 14% GBS was down 8%, so new business definitely.
Performed our expectations from that perspective.
Retention was a little more challenging.
We had ceded.
In March and April and so again sort of dialogue goes to new updates through our exploration skew and normal trending of bookings and new business for the balance of the year.
The one thing I would add though is and I think I'd like it does come in the prepared remarks the.
There are certainly more risk on the non subscription pieces of the the research business.
Yes, obviously, we've got great forward visibility on the.
On the subscription run out and feel really good about those numbers.
But because of the macro environment, there's definitely more uncertainty on the on the Nonsubscription pieces.
And then last just GBS just if you will.
Permitted hey.
Favorable question about GBS spend awhile.
Yes, I guess I was surprised at how resilient, it's Ben and how little it decelerated.
Year over year, and I know, you've been saying forever that it's a bigger bigger opportunity than GTS, but I was thinking there's less cost optimization researching the library less tenured staff the marketing challenges you're working group. So I don't know if you were equally surprised by that would but would love any additional color on I guess the relative GBS performance.
Yeah chip so basically the we've been saying all one is you as you mentioned that the value proposition in GBS is really thing value proposition and GTS, meaning that we identified clients mission critical priorities and we help them with those mission critical priorities.
And every function has priorities that are just as important they're different like function you know again.
I was curious HR, but you may be worried about building more effective diversity.
Inclusion program.
Just as important HR leaders and so our repurchase focused on what are the mission critical priorities that these leaders are going to face and helping them to address those mission properties in the best in most cost effective way again, that's been kind of what we could fill along and I guess you kind of see it there in terms of what's going GBS.
Okay. Thank you.
Thank you. Our next question comes on the line of Toni Kaplan from Morgan Stanley. Your line is now open.
Thanks very much.
Yes, Craig you beat the two Hughes EBITDA guide by 30 million and raise the full year by 10 million FX benefit and I know you sort of look at things on a full year basis maybe.
English a little bit later, then it into Q.
That's the reason for why the full year guide wasn't raised by the 30 and I guess just.
In conjunction with that.
Ramp down in margin guidance in the second half the year seems like a lot. So just help us understand.
The big ramp down in margins in the second half.
Yes, sure happy to thanks, and good morning, Tony you know the way to sort of read.
Phasing and what's been going on obviously.
In March and April when we really Didnt know, how bad or how deep or how broad.
Yes, the macro impact was going to be from the pandemic.
We are very quickly put the brakes on lots of spending across the board and it was the right thing to do we had to make sure that we were taking a balanced approach towards the balance of year that we're maintaining liquidity maintaining flexibility all that stuff and so.
You really saw that start to flow through primarily in Q2.
And you know some of the Q2 performance or Overperformance was driven by revenue being modestly better than expected and in a lot of it was driven by.
So voiding more cost than we initially dialed that.
Where we sit today is trying to find that balance between making sure that we're delivering on our financial commitment to delivering on our EBITDA and other targets, but also making sure that we are investing in the business and restoring expenses that we now that we think are.
Ordinarily important for us to get through this year and more importantly serve as sort of jumping off point.
When there is a recovery and so the way to think about the balance of the year is.
Yes, as an example in Q2 we weren't.
Immediately backfilling open rolls, even in certain research or or service positions.
We have now stabilized ourselves and have good line of sight for the balance at year end. So we're battling those roles and we're actually making selective growth hires where we think there's a high.
Possibility for.
Return and payback on that and also starting to restore certain expenses and so we are looking at it on a full year basis, not necessarily on a Q2 versus Q3 basis, but it's largely about.
We have stabilized the business and we want to make sure that we are putting back into the business the right costs and targeted spends so that when there is a macro recovery, we're poised to leap off of that.
Okay.
Thank you. Our next question comes from a line of Gary busy from Bank of America. Your line is now open.
Hey, guys good morning.
Craig maybe ill follow up on that last point so.
Can you just in Craig gene both I get this.
Can you help us think about what determines when you bring the costs back on is it really demand driven and seeing the near term opportunity for that and I asked from this perspective, it's commendable given the margin performance in the last few years to maintain the margin target for this year I think one might argue given.
You know a lot of investors are looking at this is sort of a throwaway year that.
Opportunities to bring them back this year, even if.
Even if you would have margins below that target.
But that improved the pace of recovery.
Into next year that that might be a wise decision. So just how are you thinking about.
About what's the factor that determines when you bring the investment back.
Thank you.
Yes, so great question, Gary So the if you think about the way that we have quite described this a bit earlier, which is.
We didn't know how bad or how deep the downturn was going to be so we put on a pretty hard hiring freeze very very selective hiring other thing everything else frozen that included research analysts that included salespeople product development etcetera and so.
You know as we've seen kind of power performances and how the market is.
We want to make sure we maintain to your point the right number of analysts right sales capacity the ability developed introduced new product et cetera. So we're basically bringing back that capacity. So we're very well positioned specialties beginning in 21 to reaccelerate growth. There are some expenses that we don't need to bring back and that would be like.
Travel expenses, you know today, we're lucky in that as information services company, we can work with Arclight, which are in very very well working with our clients remotely and so our travel expenses dropped dramatically. This year that doesn't hurt our future growth or anything like that it's sort of goes with the environment. So for the things that really affect future growth research sales product development.
The places that we are making sure we have investments in place.
Thats reflected the forecast for the things that kind of go with the environment like travel or the reductions in our conferences business.
The other category.
And Gary I guess, the one thing I'd add is.
I think.
We can do both which is you manage for profitability and great free cash flow performance now and also make sure that we're making those targeted Spencer that when there is a recovery as we that as gene Ibos mentioned, we're ready to.
Rebound very quickly with it so it's not an either or for US we think in this environment.
We can do both.
Okay, Great and then just a follow up on the conferences business.
When you said, it's remains an important part a garden or something to that effect.
How are the digital pilots going any any sort of learnings on how you might monetize that.
If we look beyond this year.
Yeah, the inability for a while to get back to the prior conference.
Attendance levels or.
EBIT or.
Performance or is that is that still work in progress figured out how to monetize.
So it's clearly a work in progress, but we have had we've done some pilots as we've mentioned before those went very well in terms of understanding what how how clients feel about what we found is that.
Attendees still want to go to conferences and in this environment virtual they're very happy to go too and so we think we can get really good attendance at conferences with exhibitors exhibitors one of their best sources of clients is conferences. So they're variance in working with us to find ways that worked for them as well if you attendees I feel very good.
We'll find some of those things as we experiment throughout the remaining month of the year, we're going to the future actually the whole moved coverage will be good for us because we're kind of seen that.
In the future, there's probably going to be a mix of both in person and virtual conferences and will develop those purchase contract virtual conference skills. During this period.
Thank you.
Thank you. Our next question comes on the line of Bill Warmington from Wells Fargo. Your line is now thanks.
Good morning, everyone.
So.
You've mentioned a couple of times.
Spending that position for a recovery.
To add functionally from a from a planning standpoint.
What's the timing you're assuming for recovery, we think in third quarter 2021.
Hey, good good morning Bill.
I'll start and gene can can follow up.
So we're not.
We're not pegging any any sort of timing for recovery.
As it stands right now, we're obviously watching the markets in watching everything going on just like you and everyone else on this call is doing.
And so there's no pinpointed.
Time for recovery that weren't planning around I think what were what we want to make sure. We do is number one continue to deliver great value to our clients.
Who who really does and so we don't want to do anything that degrees our ability to do that now at the same time. We also don't want to make short term decisions around reducing expenses that.
Impinge upon our ability to actually rebound when there is a recovery.
So again, what we're talking about now is not yet specifically when we pivoted and when there is a rebound, but really about making sure that we.
Have ample capacity from a selling perspective from a servicing perspective from a research analysts perspective, the et cetera. So that when there is a rebound we are poised.
To take advantage of it.
I see.
And then.
The 6% to 7% growth that you're seeing and research on a combined basis GTS and GBS for CV.
Is that a good way to think about the type of CV growth that we can continue to see in this type of an environment until we see the recovery.
You know bill as.
As we talked about a little bit earlier, we do expect.
Based on.
Running out or extrapolating, the math that we've seen.
In the second quarter that CNTV will continue to decelerate.
Yes, we talked about last quarter, you know based on everything we see today, we don't think it will be anywhere near what we experienced in the last great recession back a little over a decade ago, but with these sort of trends we will continue to see.
You know until there is stabilization on recovery.
Some glide down on on the CV growth, obviously as we talked about the CV is holding up really really nicely.
Both on the GTS and GBS side, both being around 7% for the quarter, but we would expect some continued modest degradation in those CV growth rates if current trends continue.
Got it thank you helpful color.
Thank you Sir our next question comes on the line of Andrew Nicholas from William Blair. Your line is now open.
Hi, good morning.
I was hoping just to follow up quickly on conferences questioning.
A bit earlier, specifically as it relates to virtual versus in person conferences.
There anything you could say about higher how you're thinking about profitability differences between those two types and and whether or not in 2021 or 2020 to the extent that you get to a situation, where where you're holding more hybrid type attitude that if those could potentially be.
As profitable or even more profitable than than what you've historically done in the years prior.
Andrew.
The as I said, we've done some of her we're kind of the early stage of virtual conferences pilot. The pilots have been successful distance that we know that clients will come to them. We know clients in the same kind of numbers are larger even down with.
In person conferences, because you don't have to travel and we know clients rate them very highly.
You know and we know they are less expensive to hold the destination conferences in terms of the whole financial equation, we're still figuring that out in type you'd be premature to kind of.
So we've got that figured out yet okay. If you Wanna add to that.
No I would I would have said the same exact thing.
Got it.
And then in terms of the contract optimization business, obviously really strong quarter, just curious how you're thinking about the runway for that business. I know you mentioned that it's highly variable and that makes sense, but just wondering if it at a high level you expect that to be something that's more of a near term spike or something that can never runway heading out into next year. Thank you.
<unk>.
Well as you know our contract compensation because it helps our.
Our clients save money and this kind of environment, there's a lot of interest in being able to save money. So I think that we're getting where we're at a very.
Good selling barber that kind of product, having said that at any point in time, even when the economy is moving there is always companies, they're trouble, who want to save money and lowering companies what does that money as well and so I'd say a few that business as a relatively small business in gartner, it's going to stay relatively small business garner, but I do think it will grow along with the rest of the company.
I would just I would add one one point.
We do you have that business performed very well last year. So there are tough compares.
In the back half of the year, but I would echo everything Jean said about the great value that it provides to clients in any sort of economic situation, but particularly in this one yeah, there's definitely real value there for clients, but again tough comparison in the second half a year for that business.
Thank you. Our next question comes on the line of Jeff Silber from BMO capital markets. Your line is out there.
Thanks, so much I.
I know, it's tough to give guidance in this environment, but you didnt give us some color for the rest of the here. So we do appreciate it.
If we keep on going at current trend assume you hit the guidance for the year. When you think you hit the bottom in terms of CV growth in roughly what rate would that be.
So Jeff good morning, you're right. It is tough to guide in this environment. So so thanks for the prelude there.
So.
We don't guide on on contract value.
And we're not changing that policy now I think.
The way the latest sort of think about it is.
We're obviously now comparing our business trends to what was a normal year a year ago.
First half of 2018 and second half of 2018.
So I think we if the.
Economy doesn't recover or we don't see broad based recoveries around the world when we get into 2021, we're now comparing to a pandemic impacted results and so you would expect at that point. If we continue at current course and speed with.
This sort of retention.
Result, and this sort of new business phasing or pacing I should say.
That the contract value growth would stabilize.
I'm not going up Pega number where where we think that is as we've talked about we do believe that based on everything we're seeing that trough is a lot higher.
Than it was during the last downturn for us, but that's that's that's as close as you're going to get to us sort of pegging a number on it.
But again I think you know the thing that you know as we look at the business and it is tough out there, but our teams are doing a really fantastic job of sort of cutting through.
The tougher selling environment and you know the sheer volume of new business that we're writing.
It is really great, yes, it's less than we did a year ago.
But we're bringing on new logos, we're growing accounts were adding new seats were adding new subscriptions doing that across the board and so again I think as we if we if we have another 12 months of this.
You would see the CV growth stabilized because we'd be comparing to a similarly impacted period, when we get when we get 12 months from now.
Okay fair enough.
I'm going to stick out a little further talk about 2021 since you kind of opened up the discussion.
You had mentioned given the rate.
CV growth and the lagged impact that we see some sort of margin decline in 2021 again, just assuming you kind of hit your guidance at the end of the year, what kind of magnitude are we talking about what would be impact be next year.
Yes, so Jeff we're not going to guide.
Yes for next year, all we're saying is.
We would expect.
And there is an economic recovery for our CV to read out and as you know there's a lag between when that revenue comes.
And so we're going to make sure that we.
Scale, our business and invest in.
Core things in relation to the contract value not necessarily the accounting revenue run out and.
So in doing that that can create some margin headwinds that's what we're really saying about 2021.
No we fully expect to recover we fully expect to return to growth.
But because of the lagging the revenue recognition on the subscription base business, we could see some modest margin headwinds.
Okay fair enough. Thanks, so much.
Thank you. Our next question comes on the line of Manav.
Barclays. Your line is now open.
Thank you good morning, guys I just wanted to ask if you could help US is breakdown you know GTS productivity a bit more you know, it's obviously been getting incrementally worse by the quarter and this quarter. Obviously it was down quite a bit as you as you reported but just curious how much of that was more one time.
Type roadblocks listens improvements gene you talked about a client activities good and so forth to can you just how we should assume that should start trending now.
So the amount of let me give you a little color around that so.
If I think about GTS that kind of deceleration going on.
There's different.
Components of it.
One is that we sell new enterprises are its clients that have never been kind of gardener that amount of business actually is about for GTS about the same year over year. So we're not you've seen a deceleration in our ability to sell to.
New enterprises that never built Gardner.
We saw about a third of the deceleration is from enterprises that left Kroger, they used to be with us and they left us.
Another third is from enterprises that stay with us, but historically have grown but they didn't grow so it looks like deceleration because instead of buying another cedar too.
They actually stayed flat where as in past years, that's a significant part of broke.
And last third as clients, who might have four seats and they go to a less expensive kits looking foresee, but usually less expensive seats are downgrade so going from one feet that had a higher service level to a little lower service level and so we're really seeing is.
New business with.
Client, but not with new enterprises flat year over year.
A little uptick in lost enterprises, which is about a third of the difference if you look at CV growth.
And then the other two thirds from existing clients not growing it would have run before or from clients that.
Our still with US same number of seats, but shoes for one of the seats, a lower service level, which obviously looks like a reduction in TV.
And well like my interpretation of it is people feel lot of value most of the deceleration is not due to client, leaving us in a tough environment people might talk choice. It's fair to say, Hey, I foresee I want to keep my foresee, let's take one too little or service level et cetera.
So that's kind of gives a little color in terms of what's going on under the covers so it would be wrong to think that are like clients are leaving us more than they did before there are some of that that's not the biggest piece of the biggest pieces, we're not getting the upgrades the growth would have gotten from additional seeds with existing clients and secondly, some clients or rather giving up seats downgrading the service level, but keep.
In the seats because the value they see.
Got it and I guess that that one third two thirds mix that's more on the.
New business side, right I guess, maybe if I could just at the down 47% productivity like how should that start picking back up like was they just one time distraction because it in April may timeframe.
Yes, so on one of the numbers I was giving were not about new business per se. It was.
No. It was about the change in CV growth that incorporates both of the engine and new business.
So we like the attention.
If somebody has a chooses a lower pricing that's a lot lower dollar retention.
Okay got it and then so maybe if I can just ask.
Greg you might be in the research business. The non subscription revenue can you remind us.
How much that is and what that decline has been so far.
Yes, so the within the research segment about 10% of the research revenue roughly it falls into the non subscription category.
And that is made up a couple of different revenue lines one is our.
Our online businesses Capterra software advice and.
Get up and then there's some other non subscription type research services that fall into that category as well.
Last quarter, we talked about.
An expectation that that would be down about 10% to 15% year over year.
Sort of what.
Implied guide reflects as well for the the balance of the year for those businesses and so about 10% of research revenue and down about 10% to 15% for the balance of the year.
Got it thank you.
Thank you Sir our next question comes on the line of George Tong from Goldman Sachs. Your line is now open.
Hi, Thanks, good morning.
Youre GTS Salesforce that don't declined 3.7% and your GBS Salesforce I count declined 9.2% can you provide more detail around your outlook for salesforce hiring between these two segments and where you see head count growth coming back faster.
Hey, George Let me, let me cover the numbers in a gene can talk about the strategy and how we're thinking about headcount growth. So.
A couple couple of points. So I'll cover both first GTS and that GBS.
So with GTS as you mentioned head count growth is down about 4% year over year.
Our intention for the balance of year is to get that number back up over well over 3100.
Quota bearing frontline quota bearing people. So we expect to exit the year over 3100 people.
Which would put us down a little bit on a year over year basis, and part of the reason why it's not necessarily or I would say optically is down as we actually exited 2019 with a.
A pretty significant bench so people on our payroll who were either in training had just graduated from training werent yet in territory and over the first six months of the year.
Team did a really good job, making sure we got all those people deployed it's or our selling capacity is actually pretty good shape. Because we've now deployed those does that bags and have them out there on the frontline selling and so.
We'd expect our year over year head count growth to be down modestly.
Year over year, as we exit 2020, but from a selling capacity perspective.
We feel pretty good shape off from a GBS perspective.
Yeah, we hit the brakes their hard we do a lot of work around territory optimization, we also froze hiring there.
When we were doing our cost avoidance and cost reduction programs.
Our expectation is to get back to about flat for the full year for GBS and so while down 9% year over year now.
We would expect to end 2020 in roughly where we ended roughly where we ended 2000.
Which was we ended 2018 with 869, so thinking that in that neighborhood is our target for where we want to and from GBS head Count perspective channel. If there's anything you want to add to that.
But it will.
Great. That's very helpful. And then the follow up on GBS, you mentioned, a little bit of softness on the marketing side can you elaborate on any other onetime factors that could have impacted performance in the GBS CB performance either through the positive for the negative.
Yeah, George So you know the marketing is something we obviously, we do about and.
And told everyone. As we were exiting 2018 to expect it so that sort of that the onetime headwind.
That we knew about and are dealing with and again the goal of it is to improve the profitability of that business in a normal environment and work, we're well underway to to being able to do that.
I wouldn't call out any onetime benefits I think pad.
You know the teams have has done a really really good job of again fighting through the tougher selling environment.
With GBS, new business, only being down 8% year over year. I think was was really strong relative performance for that business.
Called out the fact that every major function is contributing to the overall seat growth with the exception of marketing, which we just talked about and so.
Yes, the business is performing pretty well and you again as Jean.
Library did I think the first question, it's because the value proposition is is consistent with what we've done forever from a GTS perspective.
Got it very helpful. Thank you.
Thank you. Our next question comes from the line Hamzah Mazari from Jefferies. Your line is now open.
Hi, This is merial corelogic filling in for Hamzah.
Just just within the consulting business. So just wanted to know what lines of work you think are seeing better demand versus others and how do you think cold.
Covance impacting.
The sales cycle as you get into July are you seeing customer decision, making getting pulled forward do the need for your service or are they still delaying out of caution.
So first I'd say that.
In this environment.
Decision cycles are definitely longer than they were a year it.
So I wouldn't have is less demand, but for this there are longer decision cycles, because there's often a another review like for example, maybe the CIO, but the decision before and now it's going to go the CFO and that May take another you know two weeks or 30 days to actually get a decision done and we're seeing demand in the areas you'd expect so things like cost up.
Station building digital business things like path.
Got it and then.
Looking at Salesforce productivity, just could you could you give us a sense of what the productivity looks like regionally are you seeing any variations with locked down there hasn't been pretty consistent across the country is as many businesses have.
From an operating in more of this work from home environment.
Yes, so there's clearly been both an industry and geography aspect of this Craig with service on the numbers earlier in terms of our overall business. We're seeing good overall demand, which you can expect there's tougher celebrants, if you're selling into some aspect of the travel business. Both the many of those companies are hit very hard and there's still buying from us but.
Let's talk a tougher selling environment that was a year ago.
Got it thank you.
Thank you at this time I'm showing no further questions I would like to turn the call back over to gene Hall for closing remarks.
So as you heard today exclude the impact of conferences, our company revenues were strong.
We have an unparalleled value probably this across all major enterprise functions. Our clients are facing more disruptive change there before and Gartner is the best source for the cost effective relevant inside that empower leaders to succeed amid ongoing uncertainty.
Continue to have it vast untapped market opportunity and we know the right things due to the capture that opportunity in driving or uncertain times.
Looking ahead, we expected to come out of this recession strong and well position to drive long term sustained double digit growth in revenues earnings and free cash flow for years to calm. Thanks again for joining us I look forward to update you again next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].