Q2 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to the Gartner second quarter 2019 earnings Conference call.
At this time all participants are in listen only mode. Later, we'll conduct a question and answer session and instructions will follow at that time, if anyone should require operator assistance. Please press Star then zero on your Touchtone telephone.
Please note that today's call is being recorded.
I would now like to introduce your host for today's conference David Cohen Gardeners G. VP of Investor Relations Mr. Cohen you may begin.
Thank you Sarah and good morning, everyone. We appreciate your joining us today for Gartner second quarter 2019 earnings call with me today are Gene Hall, Chief Executive Officer, and Craig Safian, Chief Financial Officer.
This call will include a discussion of second quarter 2019 financial results and our current outlook for 2019 as disclosed in today's press release.
In addition to today's press release, we have provided a detailed review of our financials and business metrics and then earnings supplement for investors and analysts.
We have posted the press release and the earnings supplement on our website Investor Gartner Dotcom.
Following comments by gene 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 revenue and contribution margin for adjusted revenue and adjusted contribution margin, which exclude the deferred revenue purchase accounting adjustment in the 2018 divestitures.
All references to EBITDA, our for adjusted EBITDA with the adjustments as described in our earnings release and excluding the 2018 divestitures.
Our cash flow numbers unless stated otherwise are as reported with no adjustments related to the 2018 divestitures.
All growth rates in Gene's comments are FX neutral unless stated otherwise.
And our discussion of global business sales were GBS, we will refer to the G. X L. Products. These are the products for business leaders across the enterprise Gartner for marketing leaders is G.M.L. Gardner for finance leaders is GFL and so on.
In aggregate, we refer to these products for business leaders as GE XL.
Reconciliations for all non-GAAP numbers, we use are available in the Investor Relations section of the Gartner Dot Com website, finally, all contract values and associated growth rates.
We discuss are based on 2019 foreign exchange rates as set forth in more detail in todays earnings release certain statements made on this call may constitute forward looking statements forward looking statements can vary materially from actual results and are subject to a number of risks and uncertainties, including those contained in the company's 2018 annual report on Form 10-K , and quarterly reports on Form 10-Q , as well as in other filings with the SEC I encourage all of you 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, and thanks for joining us.
For the second quarter 2019, we continued to deliver strong form of performances across our business.
Total revenues were up 12% fueled by double digit growth in each of our business segments research conferences and consulting.
We continue to make significant global impact would be segments.
We helped more than 15000 enterprise clients in more than 100 countries around the world with their mission critical priorities, while providing great jobs to more than 16000 associates globally.
Research, our largest and most profitable segment is the core of our value proposition.
Our research business was up 10% over this time last year.
The greater formula for sustained double digit growth drives our success in our research business.
As we previously highlighted the Gartner formula consists of indispensable insights.
Exceptional talent.
Sales excellence, enabling infrastructure.
For each of these elements, we drive relentless globally consistent execution of best practices and continuous improvement innovation.
Global Technology sales were GTS serves leaders and their teams within IP.
This group represents more than 80% of our total research contract value.
GDS market growth was 14% year over year.
We delivered double digit growth in every region across every size company and in virtually every industry.
Global business sales or GPS sors leaders and their teams beyond Daiichi and represents about 20% of our total research contract value.
This includes supply chain and marketing, which we've addressed for several years as well as other major enterprise roles, including HR finance legal sales and more.
GBS continued on a path towards double digit growth with total GBS contract value accelerating to 1%.
Archie XL product line continued to gain momentum with contract value increasing $20 million sequentially.
Just sell product to provide greater value to clients because they are tailored to the client individual needs.
This in turn results in higher prices per user and stronger retention.
You had better pricing retention gx, so products provide exponentially more growth opportunities because we can sell these high value products throughout our client organizations.
For Q2 Gx of contract value grew 71% year over year, and new business was up 51%.
We continue to expect double digit contract value growth in GBS by the end of the year.
Our conferences segment also delivered a terrific poor performance in Q2 with double digit revenue growth of 29%.
Gartner conferences combined the outstanding value for research with the immersive experience of life interactions, but every conference we produce the most important gathering for the executives we serve.
We continue invest in our conferences portfolio.
In GTS, we expanded our flagship conference Gartner IP symposium.
We held an ITC Symposium conference in Canada, which exceeded performance expectations.
In GBS, we continue to build out our conference portfolio to align to the GBS roles we serve.
In June we launched the Gartner CFO and Finance Executive Conference.
This program featured strategic guidance on the trends that ship Finance company performance and personal leadership.
Okay participants the opportunity to connect with peers and talk one on one with thought leaders.
This conference at greater attendance with 63% of attendees at the CFO , our VP level.
Overtime will launch additional conferences deport the other functions in GBS.
In addition to all that we'll continue growing you'd have to business.
Our consulting segment also achieved double digit growth in Q2 with revenues up 10%.
Fair to consulting as an extension of Gartner research as much clients a deeper level of involvement through extended project based work to help them execute their most strategic initiatives.
Our growth in the quarter was a combination of our labor based business and strength in our contract optimization business.
As you'll hear from Greg we've adjusted our guidance for the rest of the year.
These changes are driven by two factors.
A modest reduction in expected revenues and a modest increase in expected costs.
The revenue change was driven by two factors as well.
First lowered non subscription research revenue than expected.
Within our research segment, we have some non subscription based products many of which are legacy.
One of our strategic priorities is emphasizing subscription based research offerings compared to non subscription based offerings.
In Q2, our non subscription based revenues were lower than expected and we expect this to affect our revenues during the rest of the year as well.
The second factor is lower than forecast some subscription revenue.
Well very strong our contract value growth is modestly below our plan set out at the start of the year.
There are number of drivers that are individually minor, but in aggregate have an impact.
These items included a larger than usual number of sales leadership changes in GTS.
Expanded deployment of sales teams into our Dallas and Barcelona offices.
And changes to our selling approach for very small tech companies.
The second major factor driving our adjusted guidance is a modest increase in costs as we were more successful than expected in filling open sales territories.
Just storage has become opened through a combination of planned growth promotions lateral moves within Gartner.
Sales people, leaving the business.
What's the sales person gives notice that they are leaving it takes about three months to higher replacement and another six weeks to train them before they get into territory.
It could take longer in some countries or with specialized skills are needed.
We sold less in a sales territory with no sales person than one that has a salesperson.
So one of our priorities is to minimize the time sales territories are open.
We made significant progress last year.
We exceeded our expense expectations again, this year and expect this trend to continue.
For example in one of our sales organizations, we planned for 6% open territories and are achieving 2%.
Overtime due to additional salespeople come up to speed, which will lead to higher sales.
In the near term, we incurred higher than planned costs. These include compensation recruiting training and technology.
As a result, we're expecting our SG and eight through the rest of the year higher than originally planned, but the payoff in incremental sales being realized in 2020.
So we've adjusted our guidance to reflect a modest reduction revenues combined with a modest increase in costs.
Looking ahead, we are well positioned for sustained double digit growth.
We expect contained continued to sustain double digit growth in GTS.
We're at an inflection point in GBS.
We've invested to get GBS on a growth trajectory to realize the incredible market potential.
In Q2 contract value growth accelerated and we expected and we expect continued acceleration.
Going forward, we expect to get a strong return on the investments we've made in GBS with GBS contributing to both higher research contract value growth and increasing profits.
And of course conferences consulting around strong path.
Looking ahead to 2020 with the great strategic positioning of GTS and GBS together with leveraging the investments we've made we expect double digit topline growth.
And EBITDA growing approximately in line with revenues.
With that I'll hand, the call over to Craig.
Thank you Jane and good morning, everyone.
Global technology sales the largest part of our business continues to deliver exceptional growth.
Global business sales contract value growth turn positive.
Our strategy to look to deliver products and services with a compelling value proposition across all enterprise functions is working.
Conferences and consulting are having outstanding years.
This year, we are completing a period of above trend investments across our business positioning us for sustained long term double digit growth.
Second quarter revenue was $1 billion up 9% on a reported basis and 12% on an FX neutral basis.
The product retirements, we discussed last quarter impacted the topline growth rate by about 130 basis points.
In addition contribution margin was 64% up 39 basis points from the prior year.
EBITDA was $185 million up 1% year over year, and 4% FX neutral slightly above our expectations.
Adjusted EPS was one dollar and 45 cents with meaningful help from tax.
And free cash flow in the quarter was $197 million.
Our research business had a strong quarter.
Research revenue grew 8% in the second quarter and 10% on an FX neutral basis.
Second quarter contribution margin was 69%.
Total contract value was $3.2 billion at June Thirtyth.
FX neutral growth of 11% versus the prior year.
I will now review the details of our performance for both GTS and GBS.
In the second quarter GTS contract value increased 14% versus the prior year.
GTS had contract value of $2.6 billion on June Thirtyth, representing just over 80% of our total contract value.
Client retention for GTS remained strong at 82%.
Wallet retention for GTS was 105% for the quarter of 25 basis points year over year.
The combination of a client and wallet retention rates show, how our clients spend more with us each and every year reinforcing the value we provide to clients.
GTS, new business increased 4% versus the second quarter of last year, which had a very strong new business, which had very strong new business growth.
New business is coming from a mix of new enterprises and growth in existing enterprises through sales of additional services and upgrades.
The third quarter pipeline is strong.
We ended the second quarter with 12739, GTS enterprises up 3% compared to Q2 2018.
The average contract value per enterprise also continues to grow.
It now stands at $203000 for enterprise and GTS up 10% year over year.
As we discussed previously we continue to invest in GTS.
The investments in head count growth and improving productivity are driving the GTS acceleration you have seen over the course of 2018 and into the first half of 2019.
At the end of the second quarter, we had 3207 quota bearing associates in GTS or growth of 14%.
Reflecting our planned growth and to better than expected reduction in our open territories.
For GTS the year over year net contract value increase or end CVI divided by the beginning period quota bearing head count was $110000 per salesperson up 2% versus second quarter of last year.
This is the seventh consecutive quarter of year over year productivity improvement.
Turning to global business sales.
GBS contract value was $602 million at the end of the second quarter or about 20% of total contract value.
TV returned to growth increasing 1% year over year.
Many of our GBS metrics continued to be affected by the discontinuation in 2018 of sales of the largest legacy products.
As we described last couple of quarters. The Discontinuations were based on a purposeful strategy that allows our sales team to focus on gx sell products going forward.
Gx sell products continue to gain share and are an important part of our strategy.
Looking at total contract value from the Gx sell products, we drove an FX neutral increase of 71% year over year from 133 million to $228 million.
Similar to the last two quarters on page 11 of the earnings supplement we've provided a bridge from the first quarter to second quarter.
We sold $29 million of Gx sell new business in Q2 up 51% versus the prior year quarter.
We continue to make great progress with our GXT sell products across each of the functions GBS serves.
More than half of the gx sell new business in the quarter came from newly launched products.
Gx LCV now makes up 38% of our total GBS contract value of 16 percentage points from Q2 of last year.
While legacy GBS CV attrition is close to 30% DXL attrition is around 20% almost at GTS levels.
We reduce attrition levels through improving client engagement.
We are driving increased client engagement through expanded service teams and growing adoption of individualized content and service.
For the Standalone quarter, we drove attrition rates down for GBS.
For contracts that were up for renewal in the second quarter attrition improved by about 270 basis points over the prior year quarter.
Again. This is a result of the increased engagement, we've discussed and all of our other programs.
Having an impact.
We continue to expect to achieve double digit CV growth in GBS by the end of this year.
The combination of improving attrition and corresponding retention rates and continued ramping of gx sell new business are the metrics that will get us there.
At the end of the second quarter, we had 919 quota bearing associates in GBS or growth of 24%.
We expect GBS head count growth to moderate by the end of the year to approximately 16% to 18%.
We have made significant investments in GBS in sales as well as in research products and services.
With the investments we have made and those contemplated in our guidance, we are well positioned to see the benefits as we move into 2020.
In conferences revenues increased by 27% year over year in Q2 to $141 million.
FX neutral growth was 29%.
Second quarter contribution margin was 57% up slightly from the same quarter last year.
We had very strong growth from GBS conferences, including marketing and supply chain.
As gene mentioned, we also had a very successful launch of our first conference for finance leaders.
Andy Vantiv continues to grow over 20% a significant improvement from before we owned it.
We had 27 destination conferences in the second quarter.
On a same conference FX neutral basis revenues were up 21% with an 18% increase in attendees.
The second quarter is typically our second largest quarter after the fourth quarter and Q2 was strong for our conferencing business.
Second quarter consulting revenues increased by 7% to $104 million.
FX neutral growth was 10%.
Consulting contribution margin was 33% in second quarter.
Labor base revenues were $79 million up 3% versus Q2 of last year or 5% on an FX neutral basis.
Labor based billable head count of 773 was up 9%.
Utilization was 63%.
Backlog at June Thirtyth was $110 million up 7% year over year on an FX neutral basis.
Our pipeline for the second half of the year remains strong.
Contract optimization revenues were up 27% versus the prior year quarter as we've detailed in the past this part of our this part of the consulting segment is highly variable.
SGN, a increased 13% year over year in the second quarter or 16% on an FX neutral basis.
We continue to grow sales capacity, enabling infrastructure to support our strategy of delivering sustained double digit growth over the long term.
The enabling infrastructure includes investments in human resources functions like recruiting and in real estate to support our increased number of associates around the world.
As we discussed at Investor Day, our largest dollar investments are in GTS, where we have seen strong growth in contract value and higher productivity.
Our continuing investments in gcs the conferences sales team have been driving faster growth in that segment.
GBS investments are also continuing and we expect to see contract value acceleration this year and going forward, which will drive a return on the investments we've been making.
Across all of our sales teams, we are investing to increase territories to reduce open roles and to drive improvements in sales productivity.
Adjusted EBITDA for the second quarter was $185 million up 1% on a reported basis and 4% on an FX neutral basis.
EBITDA was adversely affected by about five percentage points or $7 million impact due to the product retirements.
Taking that into consideration the underlying FX neutral EBITDA growth was about 9% in the quarter.
Depreciation was up about $3 million from last year as additional office space went into service.
Amortization was flat sequentially after taking and expected step down in the fourth quarter last year as some of the acquisition intangibles reached their 18 month life.
Integration expenses were down year over year as we've moved past the biggest part of the integration work.
Interest expense, excluding deferred financing costs in the quarter was $23 million down from $28 million in the second quarter of 2018.
The lower interest expense resulted from paying down roughly $250 million in debt over the past year.
The Q2 adjusted tax rate, which we used for the calculation of adjusted net income was negative 3% for the quarter.
The adjusted tax rate for the quarter was affected positively by an intercompany sale of intellectual property, which resulted in the material favorable impact on the adjusted tax rate.
The tax rate for the items used to adjust net income was 23.1% in the quarter.
Adjusted EPS in Q2 was $1.45 cents with upside relative to our expectations from below the line items, including a lower than expected tax rate.
In Q2 operating cash flow was $227 million compared to $174 million last year.
The increase in operating cash flow was driven by lower interest expense lower taxes and contributions from working capital.
Q2, 2019, Capex was $39 million and Q2 cash acquisition and integration payments and other nonrecurring items was approximately $8 million.
This yields Q2 free cash flow of $197 million, which is up 25% versus the prior year quarter normalizing 2018 for divestitures and working capital timing.
On a rolling four quarter basis, our free cash flow conversion was 126% of adjusted net income excluding divested operations and working capital timing.
Turning to the balance sheet.
Our June Thirtyth debt balance was about $2.2 billion, our debt is 100% fixed rate.
Adjusting EBITDA for the divestitures, our gross leverage ratio is now about 3.2 times EBITDA.
We repurchased about $2 million of $2 million of stock in the quarter.
We will continue to be price sensitive and opportunistic as we return capital to shareholders, we have about $870 million remaining on our repurchase authorization.
Our capital allocation strategy remains the same.
We deploy our free cash flow and balance sheet flexibility by returning capital to our shareholders through our buyback programs and through strategic value enhancing M&A.
Turning to the outlook for 2019.
We've recalibrated, our revenue outlook modestly lowering the growth expectations in research, including the non subscription piece, while increasing the expectations for conferences and consulting.
The topline growth outlook on an FX neutral basis remains strong.
In addition, as we moved through the first half of the year, we decided to make modest investments, most notably reducing the level of open territories in GBS.
Our GTS and conferences investments have been generating returns and we expect to see returns from the GBS investments as we move into 2020.
As a result of these changes we revised our outlook relative to our initial guidance.
As you think about modeling the operations for the rest of the year, we expect mostly typical seasonality for the quarterly phasing.
In addition, our guidance reflects FX rates as of June Thirtyth.
Due to US dollar strengthening we expect FX to cause of roughly two point negative impact for projected 2019 full year growth rates across revenue EBITDA adjusted EPS and free cash flows.
Looking at our updated full year guidance, we expect revenue towards the lower end of the $4.2 billion to $4.3 billion range.
That is FX neutral growth of 10% to 11%.
This reflects research revenues of about $3.355 billion to $3.380 billion reduction at the midpoint of about 2%.
About half of the reduction is from non subscription products and services.
As a reminder, in addition to the noncore businesses that we divested over the course of 2018, there were some additional products from the SIHI acquisition that we viewed as non core we have retired these which is impacting our 2019 total revenue growth rate, which is impacting our 2019 total revenue growth rate by about 75 basis points. This is almost $30 million about two thirds of which drops to EBITDA.
Additionally, as gene mentioned, our Q2 non subscription based revenues were lower than expected and we expect this trend to continue for the rest of the year.
We expect adjusted EBITDA of $670 million to $700 million FX neutral growth of down 1% to up 4%.
Some of the lower EBITDA reflects modestly lower revenue expectations. In addition, this reflects incremental operating expense of 1% to 2% versus our prior outlook.
As gene mentioned, we decided to invest beyond our original plan to take advantage of the opportunities we see for increased growth most notably the reduction in open territories.
We expect an adjusted tax rate of around 25.5% for the full year 2019.
Please note that if you are adding back from GAAP net income the rate for the tax effect on the add backs is also about 25.5%.
Our full year tax rate remains unchanged despite the benefit in the second quarter.
Our tax planning related to our intellectual property is ongoing and we anticipate incremental tax costs in the fourth quarter.
We expect 2019, adjusted EPS of between $3, and 39 and $3.64 per share range of down 7% to flat year over year.
For 2019, we expect free cash flow of $400 million to $430 million that as a projected FX neutral change of down 2% to up 5% versus our normalized 2018 free cash flow.
All the details of our full year guidance are included on our Investor Relations site.
For the third quarter, we expect adjusted EPS of about 40 to 45 cents per share.
As you build your models remember that last year's third quarter EBITDA was very strong.
This year, we have a larger cost base in the third quarter is a small revenue quarter, which magnifies the effect of the costs.
And finally, we expect our adjusted tax rate to be in the low thirtys on a percentage basis.
Through the first half of the year, we have delivered strong results across our business, notably GTS contract value growth continues to be strong and sales of our new gx sell products in GBS continue to rise.
Our conferences and consulting businesses, both had outstanding quarters free cash flow was up versus last year and conversion was stable.
We are applying the gartner formula across the combined business to drive sustained long term double digit growth to revenues EBITDA and free cash flow.
With that I will turn the call back over to the operator, and we'll be happy to take your questions operator.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchstone telephone. If your question has been answered oyster remove yourself from the queue. Please press the pound key.
We ask that you please limit yourself to one question and one follow up question again that is star then one if you would like to ask a question.
Our first question comes from the line of Tim Mchugh with William Blair. Your line is now open.
Hi, Thanks.
I guess just wanted to start out obviously I guess on the revenue outlook for further research business.
First the non subscription piece in the Q U you release kind at the point in time revenue as one of the disclosures and that number would be pretty.
Look I can kind of consistent sequentially it was up 17% year over year. So.
Can you help us give a little more color on the non subscription piece being.
Lower than you thought that would seem like a pretty steady and kind of healthy.
Growth number.
Hey, good morning, Tim Thanks for the question. So on the on the research revenue as you pointed out a hunk of the reduction relates to non subscription revenue Theres a couple of factors going on there that are buried within the disclosure.
And the and the year over year growth rate you are seeing so as you know we retired a bunch of products at the end of 2018, and we're we're dealing with the impact of that in 2019 and that was contemplated in the original guidance on top of that there are a number of non subscription products.
Tied to GB as that were not retired.
But did not get the sales focus.
In the first half of the year as we've been driving real focus on Gx Allen subscription products and so the revenue on those fell off faster than we had anticipated and we're baking that continued fall off into the balance a year and that is obviously impacting.
The growth rate and the guidance, a little bit, but more and more pronounced the outlook for that for the rest of the year on top of that.
There are some additional non subscription revenues, which as you point out continue to perform very strongly.
But have come down modestly from more elevated levels of performance in previous quarters.
Okay, and then just on the subscription piece of the guidance change I guess the research revenue guide change by roughly 2%.
And we only have half a year left.
GTS is growth I guess I'm trying to reconcile the fact it against the tougher comps slowed down 80 bips.
Why for half year that drive say.
Two point change and the full year outlook or sorry, even if it's one point I guess related to the subscription piece that would seem to be a bigger impact.
Then I would have thought.
Unless the original guidance assumed I guess further acceleration and GTS.
Yes, Hey, Tim it's a good point and you're right.
Again about half of the reduction relates to subscription half the non subscription so about 1% is a more accurate way to think about it.
I think a couple of things so one is that with GTS.
It's still performing really really well, 13.5% growth is very strong.
And again is up from where we were in 2017 and early parts of of 2018.
It had been humming along at north of 14%.
And obviously that that modest slowdown we saw in the second quarter has a flow through impact.
It's not just the quarterly impact and flowing that through we've also modulated the expectations for Q3, and Q4 and that had a modest impact on the outlook as well and so it's really the essentially in gene described it which was our our our outlook was for stronger.
Total combined CV growth through the first half of the year, we're off that modestly and thats, causing that roughly 1% impact on the subscription revenue for 2019.
Okay. Thank you.
Thank you. Our next question comes from the line of Jeff Mueller with Baird. Your line is now open.
Yes, I guess on the subscription piece as a follow up.
You mentioned some sales leadership for elevated sales leadership, the GTS or maybe some execution hiccups can you just.
Go into more detail on that and to what extent do you view macro as a factor that could be impacting kind of.
Both the small business non subs revenue as well as for GTS contract value or deceleration.
Hey, Jeff Gene, so basically as I mentioned so.
And as Craig mentioned GTS had great contributor, 13% is very strong growth. It was a little off what we had expected as I said there were a number of small factors that individually wouldn't be a big deal, but it happened all hit at once I'll. Just go through so first we had some management some leadership changes in GTS. We always have those we happened to have a greater than usual number. So for example, we had a leader running Asia for many years, who needed to come back to us for personal reasons, we had in Germany, we had our.
The two top people that were running Germany got one got promoted one winter GBS, we had changes in India for similar things like I, just don't have there's a bunch of and normally these are these more spread out it happened for a combination of business and personal reasons to be more concentrated in the first half. So that was one piece of it.
Second piece I mentioned was.
An expansion, our Dallas and parcel in offices, we as we as a company we grow we need to have different talent pools. We.
Our European.
Headquarters has traditionally been in the London area through a combination of Brexit and other talent markets Weve.
Opened a major office in Barcelona at again moved a bunch of people.
Leaders and.
Into the Barcelona, which was disruptive a similar thing happened between Florida and Texas. This year, we expect our Dallas Office again these were planned.
So quite a bit of an advance and just happened at the same time.
And then I also mentioned we changed our approach to selling to very small tech companies is there is a lot of innovation slotting fees are great market for us and we reorganized slightly to make it more effective in selling that to that market.
Each of those things normally wouldn't have.
Overall small effect, but there are others, but these are the kind of the biggest ones each of them were small but collectively resulted in that very minor change in our growth rate in subscription revenue and it's all GTS basically.
Okay, and then your view macro is not a worsening sector.
No we don't see it if you look at our so if you look at our business. So our research GTS grew 13.5% GBS accelerated events administer our conferences business had a very strong quarter one of the strongest quarters, we've ever had our consulting business had a very strong quarter. So across the business, we had a really a lot of strength.
Now again at any point in time, we have some companies that are doing really well we have some of our clients that among the 15000 enterprise went some that are not doing so well as you saw the consulting business theres cooling uptick in interesting cost optimization, but again all of our businesses adverse strong performance.
Okay, and then just I guess similar question given that it's only a half year effect on the magnitude of that EBITDA guidance.
Reduction.
And it appears carats production.
Is it should we think about some of the lost revenue being like a near 100%.
Decremental margin or just a very high decremental margin and then on top of that I guess the other factor is.
Sales head count is going to try to trend higher because of the closing of the open territories or is that they're able to take about or just I'm trying to understand the magnitude of it.
Yes, Jeff I think and good morning, It's Craig I think thats, the right way to think about it so.
For a portion of the revenue reduction.
It would would have flowed through at very high margin, so basically cost base fixed and when the revenues there. It flows through a very high margins. Conversely, when the revenue is not there the hurt is.
You know large flow through margins as well.
On some of the revenue we were able to are able to modulate the costs.
But for the most part.
They are it is a fixed cost base and so your assertion on the the large decremental revenue is as appropriate.
In terms of the costs I think you're right also most notably is the.
Reduction in open territories in GBS, but also a little bit in in GTS and in our conference sales, but most notably.
In GBS that is flowing through to the balance of the year I think yes. The other thing worth noting is some of this.
Some of the increased spending was baked into our Q2 outlook.
At that point, when we gave our guidance. We our view was we would make it up in other areas and then obviously as gene mentioned with a modest downtick in our revenue expectation.
And this modest uptake in the cost it caused us to recalibrate the outlook I'm coming out of the second quarter.
Okay. Thank you.
Thank you. Our next question comes from the line of Manav Patnaik with Barclays. Your line is now open.
Thanks, and good morning, gentlemen, if I could just follow up on that.
On the EBITDA guidance I guess, you would use that let's say 50 to 65 million.
I think you said that the non subscription.
Legacy GPS stuff that you had with 30 million that would complete drop through so if you think about it.
That does that drop to talking side and is the rest of that split between the increase.
Investments in sales and the team GPS and GPS side.
Yes, good morning, Manav, it's Craig So I think I think the way to think about it is that.
You're right you're roughly right.
And so yeah as I mentioned, just before with Jeff There's some portion of the revenue.
Downside, where it's not 100% flow through we're actually able to eliminate or reduce certain costs, but most of it is flowing through.
And then you know the increased spending and most notably around.
Faster growth or a lower proportion of open territories in GBS say I think that is the right way to think about it.
Okay got it and then also just to your question on the macro impact I think in your 10-Q, we usually have this language on double digit growth in contract value across the world.
Industry segment Tonight last four day with few quarters and then this quarter you said it was hot so is that is that just law of large numbers. I guess is just fine in that data point pull up and if youre seeing any.
Slowdown deceleration in Unilin segments.
Yes, I think the way to think about it.
Is in GTS, where we have traditionally made that comment.
It's every client size every major region and virtually every industry grew at double digit rates.
The comment in the queue I believe relates to the combined.
GTS and GBS and so that's going to be a little more mix just because we're combining a 13.5%.
Grower with a with a 1% grower, but on the GTS side.
The way we look at the measures it's been very consistent where we've had that same level of almost universal double digit growth across every vector that you could look at.
All right. Thank you.
Thank you. Our next question comes from the line of Toni Kaplan with Morgan Stanley . Your line is now open.
Thank you.
So I wanted to clarify are you still expecting to get to double digit TV growth same GBS by the end of the year and.
Also just in general I know you made the change in GTS.
Selling to this small tech companies in terms of sales process, but are there any sales process.
Hi, Jane GBS or are you just just given that.
Has been such a big transition are you just sort of seeing.
It takes time and and just seeing how that goes or are you sort of incrementally changing as it goes along as well.
Hey, Tony Gene. So we are expecting double digit growth in GBS.
By the end of this year, we continue to expect that we already know what our results were for the first half we have our bottoms up forecast for Q3, and we've looked at what we think new business and retention is likely be in Q4, and Thats what were basing our expectation that we will still get to double digit growth by the end of 2019. So it's based on like I said the results for the first half our laws of forecast for Q3, and then our expectations on future on what would happen in Q4.
So thats the answer that question in terms of sales process.
The way that we've been handling GBS is let's make sure we get the right product line, which has got Gx Ellen let's make sure we get the right sales capacity, which we've got sales capacity, let's make sure we got the right selling direct selling recruiting training tools and processes in place.
And the right retention programs all of those things now are in place and we've modeled them as we've talked in the past over what we've been very successful for many years for GTS and so while we while we may make some tweaks as we learn in terms of the processes, we really feel like we've got all the all of the pieces in place and that's what you're seeing in the kind of really strong acceleration as Craig talked about we had $29 million of new business in Q2 that was up 51% from Q1 for Gx sell these products are really selling very very well and so weve because a lot of really good track there.
Great and then I know I ask this question all the time, but.
Given.
EBITDA margin for this year at the midpoint of guidance.
About a 150 basis points lower than last year, which was a 100 basis points lower than year before I know there is sort of a major transition going on and the revenue growth hasn't come.
As quickly as.
As the expense level right now, but you know what sort of along.
The right level for margins for that business I'm not trying to say like where are you going to be this year and next year et cetera, but just over time like what what kind of margin level should this business support. Thank you.
Hey, good morning, Tony It's Craig So I think we're not going to give long term guidance on our margin expectation I think gene in his remarks.
Outlined the way that we're all thinking about 2020, right now which is.
Yes, it will grow.
Revenue at double digit rates continue our trend of of of strength in revenue and we'd expect EBITDA to grow approximately roughly in line with revenue next year.
We've obviously.
Made a lot of investments in the business again across GTS, GBS and conferences and as we talked about we really feel good about the returns we're getting in GTS and.
And on the conference aside and we fully expect to start realizing those returns in GBS in 2020.
Hi, Thanks.
Thank you. Our next question comes from the line of Gary Bisbee with Bank of America Merrill Lynch.
Your line is now open.
Hi, guys. Good morning, So if I look at the incremental the slight reduction in revenue and that the incremental costs that the EBITDA guidance implies even if we assume a much higher than.
Corporate average.
Margin on that on that revenue and I guess acknowledging there's some mix shift within that with the higher margin revenue falling more than that total number it still feels like yeah, there's like 40 million of incremental cost coming in which if we were to annualize that it's like 4% of your of your SGN, a or or more than 2% of revenue it.
That seems like a pretty big number relative to.
Some investments in filling a few more open territories can you just help us understand what's for first of all is that Directionally right and what's really in that number what are you investing in.
It's such a high level in the back half of the year.
Hey, good morning, Gary It's Craig So the way to think about it is you are probably a little.
Hi on your expense impact is probably a little bit lower think roughly in.
In the Thirtyish million dollar range.
I think part of this is it's not all second half spending.
Yes, the spending may have started in late Q1, certainly in Q2, and so annual that you can't just double that to annualize. It some of it is already baked into our.
Our run rate for 2019.
Yes, as gene mentioned with one example, where one of our sales units were reduced the level of open territories from 6% to 2% and so think about think of that as almost a 4% increase in the number of heads on board and.
You know, there's the frontline cost of those individuals and then if we have that many more people we might be more managers, we might have needed more recruiters to.
To actually get them in seat et cetera, and so you know the.
The move of reducing open territories, which we firmly firmly firmly believe absolutely pays off in the future.
Does have a cost.
In the upfront and I think.
That is not the only thing that's impacting that cost line or the reduction in our EBITDA, but that is the most notable thing within that reduction and so you know again, just think about what the size of our sales forces.
GBS is at 919 people GTS is over 3200 people modest changes in against our assumptions in terms of percent of open territories can have a pretty sizable impact from a short term PNM perspective, but again, we firmly believe long term it pays off.
So I guess that leads to the follow up which is just how do you weigh on a day to day basis, when you're running the business.
No the concept of investing relative to delivering to your medium term targets. Because this is now the second year in a row, you won't hit that EBITDA growth target.
And.
And despite being well within the revenue range that you're targeting and at some point.
I know, there's growing frustration certainly for me I think from a lot of investors in this concept of constantly investing so much but yet really not showing.
A lot of return on investment because the level of reinvestment remained so high.
So Gary it's gene so first.
If you look at our performance again GTS is growing really well we've invested their gotten great returns on it our conferences business.
The reason has such rapid growth as we invest there got great returns.
I've talked about in the past.
In GBS, where that we've been investing ahead. We know we're investing ahead, we know there's great.
Incredible growth opportunities, there and as I said before we think Weve reached that inflection point, we're going to start getting those returns in GBS as we have in and GTS and in our conferences business.
So as we it was weak and we're not deciding to make.
New investments per Se again, as Craig said the biggest factor on the cost side is that we.
We assumed a number as a percentage of open territories. It was significant better than last year, we had an improvement last year.
And it's across all three of our major Salesforce is we're actually overachieved in terms of pure open territories that is great for long term growth, you've gotten only get better growth better retention of existing clients and so it's a great thing to do and we already had those territories. So its not incremental what we just decided one day to have a whole nother investor.
Other investments.
So again, just summarizing we got great returns for GTSP investments that we've made great returns in Gcs, we're seeing we feel like we're at the beginning of getting those returns for GBS as well.
Thank you. Thank you. Our next question comes on the line of Bill Warmington with Wells Fargo. Your line is now open.
Good morning, everyone.
So a couple of questions on the productivity side the.
Within GBS the productivity was minus 2000 in Q1, it was up to a plus 7000 in Q2.
The previous GBS guidance for double digit growth had implied.
In it up productivity improvement to about 75000.
And I wanted to ask.
Given the new guidance what is implied.
In the new guidance.
Oh, Hey, good morning, Bill I'm, So you know it.
There's really no change in the way to think about the productivity. The way we measure it is opening period headcount and so again to drive the roughly 10% growth on a $600 million just below 600 million dollar base, we have to drive the same level of and see the guy and our opening a number of headcount hasn't changed so essentially it's the same math.
You're right in your accounts for Q1.
And in Q2, and again, we believe through a combination of improved retention rates and and what we've seen in both Q1 and Q2 is very favorable I think we said in Q1 for the contract that came up for renewal we were up close to 200 basis points in terms of the pure retention on those transactions on same measure in Q2, we were up 270 basis points.
You'll note that.
Due to new business for GBS in total was up 16% year over year, that's coming off several quarters of decline in new business on a year over year basis, and so again, if you kind of model forward improved the continued improvements to retention and continued ramping of our new business again as the sales salesforce seasons.
As they get more comfortable selling gx, Sal and as we get real momentum on Gx. So that's the way we think about the path to still get into that double digit growth in GBS by the end of this year.
Okay and then on the thank you Andy.
GTS side.
Productivity last quarter grew 9% versus the 13% comp in this quarter productivity grew 2% versus an easier 10% comp and I thought initially that that might be the.
Uh huh.
More rapid closing of the open territories than expected, but it sounded like a lot of that was really on the GBS side. So I wanted to ask what was.
What was driving that.
Lower productivity.
Yes sure so.
We as you know we did have a modest deceleration.
In the GTS overall contract value growth rate.
Again, 13.5 is still very very strong and the productivity is still up 2% on a year over year basis, but given the modest deceleration in the quarter, that's really what caused a modest deceleration in the productivity and again were up we had said that it was seventh consecutive quarter of productivity teeing up on a year over year basis, but the modest de sell impacted the productivity measure or said the other way the productivity measure it back to the modest de sell you can look at it either way, but thats really what happened in the second quarter.
Got it okay. Thank you very much.
Thank you. Our next question comes from the line of Jeff Silber with BMO capital markets. Your line is now open.
Thanks, so much.
Sorry, I just wanted to go back to the margin expansion question from earlier, if we look at 2020. It looks like you know your soft guidance is for flat margins next year I would've thought if we're ending this year at double digit CV growth in GBS, you talking about that potentially accelerating next year well off the headwinds from the you know the shift from the away from the legacy business, you're filling your open territory is a little bit quicker than you thought.
Why shouldn't we see more a little bit of margin expansion next year.
Good morning, Jeff and thank thanks, Thanks for the question.
So again, we're not really we're not giving 2020 guidance at this point, obviously a lot of it will be determined upon where we land the year. So the bulk of our quite funny economics are determined by the contract value growth or the end CVI, we deliver in both GTS and GBS.
For the second half of the year.
Yes, I'll be happy to go into and that's an infinite detail around our EBITDA growth assumptions. When we give 20, the 2020 outlook and we'll we'll certainly provide all the visibility and transparency in terms of being able to walk and reconcile the points you make we're just not in a position right now where we're talking about the 2020 guidance.
Or the margin outlook moving forward.
And Jeff I'd add that you know the reason I had that in my comments was that we wanted to communicate that.
We know we've been investing ahead of the game head of CV growth in.
GBS and that we feel like we've reached a point now where we have the right based as I talked about earlier, the bright number salespeople right product et cetera, where we can start getting returns out of that which is.
What we're trying to communicate as opposed to specific guides, where the margins are going to be next year.
Okay look forward to getting more detail as the year progresses, and then just a quick numbers question on you mentioned the the tax benefit impacting adjusted EPS in Twoq to Q, what was the exact amount of that tax benefit impact any P.S.
Hello, rough roughly speaking, Jeff I think it was about 38 million dollar benefit recorded on the income tax line.
Okay I can back into the B S number alright. Thanks, so much you got it.
Thank you. Our next question comes from the line of Joseph Foresi with Cantor Fitzgerald. Your line is now open.
Hi.
So I just wanted to kind of circle back to GE XL.
What do you what do you think the street is undervaluing.
That would result in the ramp that's necessary to hit that the double digit growth what do we not see sort of on the outside that you see on the inside from either a product improvement standpoint or some other.
Area.
Hey, Joe Good morning, it's Craig.
Well, Joe I think it's it's.
We've always had confidence in the quality of the product.
It really is a.
Very strong high value proposition at a relatively low cost product very consistent with.
Our IC products, our supply chain products in our marketing products.
And I think what really gives us confidence is two things. So one is the continued ramp of gx sell new business and again, that's one of the reasons why we've consistently been breaking that out for investors. So that investors can see the progress, we're making and again you know you can get a little math in the total numbers because there is a lot of moving parts, but when you isolate out what's happening with the XL, particularly on the new business side in the second quarter, we sold $29 million worth of new business and that was across every enterprise function, where we've launched new GE XL product and if I look at the growth on a year over year basis across all those enterprise functions. The growth was very strong as gene mentioned overall gx sell new business growth was up 51% year over year and in just about every enterprise function. We were close to that average so very very soon.
Loan growth so the the market uptake continues to be strong and again, our sales teams continue to get more and more you know rat repetitions, if you will of selling the product and they're just getting better and better and better at it.
You couple that with the improvements weve seen in retention.
And that comment is both on the GM cell retention and also on legacy product retention and again you know we've seen very strong on things that have come up for renewal in the first half of the year, a very strong improvement in our retention rates and again, if you flow that through which we believe should flow through for the balance of the year and you continue to ramp up on the Gx out again, given we're not selling one d. choose either of these things were selling millions and millions tens of millions of dollars of these on each and every quarter. That's really what we're we're seeing under underneath the covers and again, we're trying to make that as transparent as possible as well.
Got it and then just as a follow up maybe you can just remind us of the investments schedule.
NGX sell what.
Now what are you currently investing in do you feel like you've made the proper investments at this point because I know that we are a couple of I think it goes back to after the closing saw a spike in investments and a pull forward and all the rest of that stuff. So maybe you can just help us with the investment schedule. What are you investing in now do you feel like the investments are now complete.
Are they continually ongoing is it mostly in sales just a little bit more color on the.
Capex that you're putting back into the business. Thanks.
Hey, Joe the gene the largest single investment is the sales force and the.
We've added to sales capacity, because you know thats key to getting long term sustained growth and we've got that in place now what we're doing is seeing and again as the business grows that will continue to grow.
We've also invested in getting the right products in place the right service delivery teams or retention gets up and all those things as Craig mentioned, our working meeting you excel selling very well retention of the the first ones have come from it will have been very strong retention programs are also affecting the legacy products as well where as Craig mentioned, our retention is up there as well.
And so the.
The key investments it really are in basic and one is in sales to a lesser degree in service delivery and in product.
Thank you.
Thank you. Our next question comes from the line of George Tong with Goldman Sachs. Your line is now open.
Hi, Thanks, Good morning, your GTS head count growth in the quarter accelerated to 14.5% I recall previously you were looking to slow your GTS head count growth and rely more on productivity gains to drive CV growth. So can you talk about your overall strategy in GTS between balancing headcount growth and productivity gains over the next call. It two to four quarters.
So George I'll look at the first half the question, which is so our the way we are.
Think about adding capacity to our Salesforce is that we just saw the number of certain of our territories, we want to add each year and the phasing of adding those territories through the year and then we assume that there is a certain number of open. So we talked about and so the story in GTS is the same as we talked about GBS, which is we gave you. The guidance. We gave you on the sales force head count growth was based on the number of territories.
That's great I mentioned, we've actually reduced the number of hotels territories in GTS as well as in GBS and that's why the sales growth. The sales force growth is little higher because we're we're not giving you. The number of territories give you the number of actual people on board.
And George Good morning, just to continue the thought and answer the second part of your question. So it's not a change in our territory growth assumptions.
It's we were just more efficient and more effective at filling open territories and we had that many that 14% more heads on board compared to where we were.
Last quarter, I know and yes, it's modestly a point or two.
Above what we had guided for the full year.
For for the next few quarters.
Yeah, we expect to run roughly in this range given.
The low level of open territories.
And the same level of territory growth again, we are we will remain focused on driving increased sales productivity consistently.
Yes, as we mentioned we have done it seven quarters in a row of year over year productivity improvement and we will continue to be focused on striking that right balance between headcount growth and productivity improvements and again as we accelerate on GBS I think will employ that same kind of.
I'm thinking the way, we want to get productivity, but we also want to make sure. We add so that we can go capture that used market opportunity and drive sustained long term double digit growth.
Got it Thats helpful. And then with respect to the open territories can you confirm that most of the upside and filling those territories does in fact come from GBS and perhaps quantify maybe the number of open territories that you filled versus what you had initially expected and how you expect the better filling up these territories the impact.
Sales over the next year.
Yeah sure George So the way to think about it is we've actually if you look at our three major selling units. So GTS GBS and then in the sales teams that fill the conferences.
We've reduced the level of open territories in in each of those segments and again you could argue in GTS, we're seeing the benefits of that and that return is paying off in conferences were seeing the benefit and in GBS, we're starting to see contract value growth accelerate and as gene mentioned, we really expect to start seeing the returns from all those investments in 2020 and beyond.
The way to think about it just quantitatively is.
We planned we've historically had roughly 5% open territories and in GTS and GBS and so.
You know a two or three point reduction in open territories can impact the head count growth by that same two or 3% and so as we've moved through this year in particular, we've been really efficient and effective at filling open territories at a faster rate.
Than we had previously.
On the GTS side, it's probably a couple of points better on the GBS side, It's a little more notable in terms of more than a couple of points better and again each of those improvements is it creating the growth rate that you are seeing in headcount and now that we filled those territories. We expect the kind of run at that level at least we've baked into our outlook running at that level for the balance of the year.
Got it thank you.
Thank you. This concludes today's question and answer session I would now like to turn the call back to Mr. Gene Hall for closing remarks.
So summarizing todays call for the second quarter of 2019, we continue to deliver strong performances across our business.
We again delivered double digit growth in each of our business segments research conferences and consulting.
We are well positioned for sustained double digit growth.
We expect continued sustained double digit growth in GTS.
Read an inflection point in GBS and conferences consulting or a strong path.
Our future growth remains bright.
Thanks for joining us today, and we look forward to updating you again next quarter.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program. You may all disconnect everyone have a great day.