Sherief Hassan Bakr - Gartner, Inc. Eugene A. Hall - Gartner, Inc. Craig W. Safian - Gartner, Inc..
Anjaneya K. Singh - Credit Suisse Securities (USA) LLC Gary Bisbee - RBC Capital Markets LLC Tim J. McHugh - William Blair & Co. LLC Manav Patnaik - Barclays Capital, Inc. Jeff P. Meuler - Robert W. Baird & Co., Inc. (Broker) Jeffrey Marc Silber - BMO Capital Markets (United States).
Good morning, ladies and gentlemen, and welcome to Gartner's Earnings Conference Call for the Fourth Quarter and Full year 2016. A replay of this call will be available through March 4, 2017. The replay can be accessed by dialing 888-286-8010 for domestic calls and 617-801-6888 for international calls by entering the pass code 31206649.
This call is being simultaneously webcast, and will be archived on Gartner's website at www.gartner.com for approximately 30 days. I will now turn the conference over to Sherief Bakr, Gartner's Group Vice President of Investor Relations, for opening remarks and introductions. Please go ahead, sir..
Thank you, Dave, and good morning, everyone. Welcome to Gartner's fourth quarter and full year 2016 earnings call. With me today in Stanford is our Chief Executive Officer, Gene Hall; and our Chief Financial Officer, Craig Safian. * This call will include a discussion of Q4 and full year 2016 financial results as disclosed in today's press release.
We will also discuss our preliminary outlook for 2017. After our prepared remarks, you'll have an opportunity to ask questions. I'd like to remind everyone that the press release is available on our website, investor.gartner.com.
Now, before we begin, I'd like to remind you that certain statements made in 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 2015 Annual Report on Form 10-K and 2016 Quarterly Report on Form 10-Q, as well as in other filings with the SEC.
I would encourage all of you to review these risk factors listed in these documents. Now with that, I'd like to hand the call over to Gartner's Chief Executive Officer, Gene Hall.
Gene?.
Good morning, everyone. Thanks for joining us today. We delivered another great year in 2016. We told you we would accelerate and we did. We delivered against our key metrics for the year, including double-digit growth in contract value, revenue and earnings per share. In addition, as many of you know, we recently announced our intent to acquire CEB.
I'm incredibly excited about our business, our prospects for growth and our strategy to drive long-term growth and value for our shareholders. As in the past, I will give you a high level overview of our results on an FX neutral basis, since that's the best way to understand the underlying performance of our business.
For the full year 2016 contract value was up 14%. Total company revenues were also up 14% and EBITDA was up 10%. This performance was driven by robust quarter-over-quarter results and demand for our services remained strong.
Our results reflect a tremendous value delivered to our clients and all of this occurred against the challenging global economic environment that we had throughout 2016. Research is our largest and most profitable segment and this business is firing on all cylinders.
For the fourth quarter of 2016, we had double-digit growth in every geography, every size client and virtually every industry. Research revenues grew 15% and total contract value grew 14%. Client retention was 84% and wallet retention 104%, which were near our all-time highs. Both client and wallet retention improved sequentially over Q3 2016.
Sales productivity improved as well. Rolling four-quarter productivity improved sequentially to 7% over Q3. And our standalone Q4 2016 sales productivity increased by 12% over Q4 of 2015. And we are not stopping there. Our number one priority is continuing to drive higher sales productivity.
Our Events business delivers great value to our attendees, helps improve client retention and is a great proof-of-concept for our clients. For the full year Events revenues were up 8%. Q4 is when you hold the majority of our Symposium/ITxpo events. Symposium continues to be the must-attend event for CIOs and their teams.
We hosted more than 6,000 CIOs, which is up 15% over 2015. That said, our overall Q4 Events results were modestly below expectations, and this was impacted by two major things. First, several of our highest performing attendee and exhibitor sales people were promoted into management and other roles within Gartner.
Over the past few years, turnover among this team has been unusually low. Promotions that would normally have occurred over time happen to have been concentrated in 2016. This left us for the larger number of open territories while successors were hired, and of course, new sales people take a year or two to reach full productivity.
Secondly, we consolidated three events into one, as I discussed in our last call. And the consolidated event performed below expectations for both attendee and exhibitor revenues. We have addressed those issues, leading indicators are strong and we expect to achieve double-digit growth in 2017.
Our Consulting business represents an opportunity for us to deepen our Research relationships with our largest clients. For the full-year, our Consulting business delivered 6% revenue growth in line with our expectations. We ended the year with approximately four months of backlog, which is in our target range.
As you know, one of our key strategies in Consulting is to build a cadre of managing partners. As we enter 2017, our managing partners are up 13%. And this provides a great foundation for us to deliver strong Consulting performance in 2017. Gartner is a people business. We'll continue to make significant investments in our associates.
We're investing in recruiting and training. We're attracting extraordinarily high quality talent to join our team. And we're investing in systems, tools and processes that drive productivity. I just returned from our Annual Kick-Off Meeting with sales leaders from around the world. And I've never seen a more excited and talented group.
They've got great momentum and are incredibly enthusiastic about our prospects for 2017. So summarizing, our business continues to perform extraordinarily well, even in a mixed global economic environment. This performance reflects the value we deliver against our clients' mission critical priorities, whether those clients are thriving or in distress.
Because Gartner is a people business, we continue to make significant investments in our talent. Our sales leaders are incredibly excited and enthusiastic about the year ahead. We drove a terrific close to 2016 and are entering 2017 with great momentum. Our full-year and long-term outlook is strong.
And finally, as always, we remain committed to enhancing shareholder value through investment in our business, strategic acquisitions and share repurchases. With that I'll now turn the call over to Craig, who will provide more detail on our business results..
Thank you, Gene, and good morning, everyone. 2016 was yet another strong year for Gartner.
The combination of the tremendous value we provide to our clients around the world, the investments we are making to capture our vast market opportunity, our focus on strong operational execution, and our exceptional business model saw us continue our trend of delivering double-digit growth with strong free cash flow conversion.
On an FX neutral basis, our year-over-year financial performance for the full year 2016 included total company revenue growth of 14%, Research revenue growth of 17%, normalized EBITDA growth of 10%, and diluted earnings per share excluding acquisition adjustments of $2.96 per share or 24% growth.
Our exceptional business model continues to create a consistently high level of free cash flow conversion. On a rolling four-quarter basis, our free cash flow conversion was 140% of normalized net income. We also continued to utilize our balance sheet to drive long-term value for our shareholders via a mixture of acquisitions and share repurchases.
As you know, in early January we announced our agreement to acquire CEB, an acquisition that we expect to deliver significant value to our shareholders over both the short and long term. We continue to see robust demand for our services across the globe.
During the fourth quarter, we saw an acceleration in our contract value growth along with sequential improvements in our retention metrics and sales productivity. And as our 2017 outlook demonstrates, we expect to deliver another year of double-digit revenue and EBITDA growth with strong cash flow generation.
On an FX neutral basis, our year-over-year financial performance for the fourth quarter of 2016 included, contract value growth of 14% and Research revenue growth of 15%, Events revenue growth of 2% on a same-event basis, Consulting revenue growth of 1%, normalized EBITDA growth of 3% and diluted EPS excluding acquisition adjustments of $0.97 per share.
I'll now discuss our fourth quarter business segment performance and P&L in depth before turning to our balance sheet and cash flow dynamics. I will close with remarks on our 2017 guidance. Gene will then spend a few moments discussing our planned acquisition of CEB. And we will then be happy to take your questions. Beginning with Research.
Research revenue grew 14% on an as-reported and 15% on an FX neutral basis in the fourth quarter. Our newest acquisitions had a less than 1 point impact on Research revenue growth for the quarter. For the full year 2016, Research revenues increased by 17% on an FX neutral basis or 13% excluding the impact of acquisitions.
The gross contribution margin for Research in Q4 was 68%, a 40 basis point increase compared to the fourth quarter of 2015. On a full year basis, the gross contribution margin for Research was 69% in 2016, flat when compared to the full year 2015.
Building on the positive momentum that we highlighted last quarter, all of our Research business metrics remained very strong and improved on a sequential basis. Total contract value was $1.930 billion as of the end of Q4 or FX neutral growth of 14% versus the prior year.
For reference and comparison, our Q4 2015 total contract value at current year FX rates was $1.697 billion. We continue to drive contract value growth through strong retention rates and consistent growth in new business.
Our growth in total contract value continues to be broad-based with every region, every client size and virtually every industry segment growing at double-digit rates.
Because of the breadth of our value proposition and our ability to focus on our clients' most mission critical priorities, we continue to deliver tremendous value to decision makers and businesses across the globe. Consistent with this, our retention metrics remain very strong and are near all-time highs.
As Gene mentioned, client retention was 84% in Q4, stable on a year-on-year basis, and up 1 point sequentially. Wallet retention ended at 104% for the quarter, roughly flat year-on-year and up 70 basis points sequentially. New business growth remained strong, up 13% from last year's fourth quarter.
The new business mix is consistent with prior quarters and remains balanced between sales to new clients and sales of additional services and upgrades to existing clients. Our new business growth reflects our success in penetrating our vast market opportunity with both new and existing client enterprises.
We ended the fourth quarter with 11,122 enterprise clients, up 3% compared to Q4 2015. And as always, we continue to benefit from our consistent price increases and discipline around pricing. As mentioned last quarter, we implemented a price increase on November 1 that averaged just north of 3%. The average spend for enterprise also continues to grow.
It now stands at $174,000 per enterprise, up 10% versus prior year on an FX neutral basis. This increase in average spend reflects our ability to drive CV growth through both new and existing enterprises. Turning to sales productivity.
As we discussed on our Q3 call, we projected that we would see an acceleration in our sales productivity measures in Q4. Our Q4 delivered on that, with rolling four-quarter productivity for account executive increasing by 7% sequentially from Q3 to $107,000 of net contract value increase or NCVI per AE.
Over the rolling four-quarters, we delivered $233 million of NCVI. That's the numerator to use in the productivity calculation. The denominator is our beginning of period head count, which was our Q4 2015 ending head count of 2,171. Equally as important, our standalone Q4 2016 sales productivity increased by 12% on an FX neutral basis over Q4 of 2015.
As always, we remain highly focused on improving our sales productivity and remain confident that the initiatives we have implemented to drive productivity will positively impact our results over both the short and long-term.
To sum up, we delivered another strong quarter in Research with an acceleration in CV growth and sequential improvements in both our retention metrics, as well as sales productivity. Moving to Events. Total revenues were flat year-on-year on an FX neutral basis in Q4.
On a same- events and FX neutral basis, Events revenues increased by 2% year-on-year in the fourth quarter. Our Q4 Events performance was impacted by three primary factors. First, several of our highest performing attendee and exhibitor sales people moved into management roles or to other parts of Gartner during 2016.
While we typically experienced turnover, this was pronounced and that many of our key sales people transitioned in the same year. Second, and as we referenced on our Q3 call, we consolidated three larger applications focused events into one.
The consolidation did not go as planned, and the Event performed below our expectations for both attendee and exhibitor revenues. And lastly, the year-on-year comparison in Q4 was especially tough, following the exceptionally strong 15% same-events year-on-year revenue growth in the fourth quarter of 2015.
We held 14 events in Q4, one less than in the prior year quarter, and on a same-events basis, attendees were up 3% versus last year. Events' Q4 gross contribution margin was 54%, down by approximately 350 basis points compared to the fourth quarter of 2015, primarily due to lower than expected revenues.
On a full year basis, Events revenues increased by 6% in 2016 or 8% on a same-events basis and its gross margin contribution of 51% was down slightly compared to 2015. As we look forward to Q1 and the full year 2017 outlook, we have a fuller, more tenured sales force driving our Events business and our forward-looking indicators are strong.
This is reflected in our 2017 guidance that calls for Events returning to double-digit growth. Turning to Consulting. On an as-reported basis, fourth quarter Consulting revenues were approximately flat year-on-year and increased by 1% on an FX neutral basis.
Our labor-based business was approximately flat versus Q4 of last year with modest growth for contract optimization practice. On the labor-based side, billable head count of 628 was up 4% from the year ago quarter and fourth quarter annualized revenue per billable head count ended at $372,000, which was down by 4% year-on-year on an FX neutral basis.
Our ongoing investment in managing partners continues to drive demand for our services. We had 123 managing partners at the end of Q4, a 13% increase over the year-ago quarter. Backlog, the key leading indicator of future revenue growth for our Consulting business ended the quarter at $104 million, down 9% year-on-year on an FX neutral basis.
As we noted last quarter, our Consulting backlog benefited in 2015 from a very large contract booking in a non-target geography, which was a significant driver of backlog improvement in the year-ago quarter. Excluding this one large contract, Consulting backlog decreased by 4% year-on-year.
This represents approximately four months of forward backlog, which is in line with our operational target for this measure. Consulting gross contribution margin declined by 310 basis points year-on-year. This was driven by two primary factors, higher than usual severance and modestly lower utilization.
On a full-year basis, Consulting revenues increased by 6% on an FX neutral basis, in line with our long-term growth target range of 3% to 8% and we expect to continue this growth trend in 2017. Moving down the income statement. SG&A increased by 12% year-over-year in fourth quarter, primarily driven by the growth in our sales force.
As of the end of 2016, we had 2,423 direct quota-bearing sales associates, an increase of 252 or 12% from a year ago, consistent with our previous guidance. Moving on to EBITDA and earnings. Normalized EBITDA was $145 million in the fourth quarter, up 6% year-over-year on a reported basis and up 3% on an FX neutral basis.
For the full year, normalized EBITDA was $457 million, representing 12% growth for 2016 or a 10% increase on an FX neutral basis. Moving down the income statement.
Depreciation charges increased year-over-year in the quarter reflecting higher capital spending to support our growth, while acquisition and integration charges declined by 12% reflecting the impact and timing of acquisitions made in recent years.
Our GAAP tax rate for the quarter was 37.4%, which is lower than the guidance of approximately 40% we gave three months ago. The tax rate was lower than guidance predominantly due to a favorable impact of earnings mix and the timing of certain tax costs.
Adjusting for acquisition charges, our normalized tax rate for the quarter was 33.5% and is also lower than our previously issued guidance of approximately 38% for similar reasons to the GAAP rate. GAAP diluted earnings per share was $0.79 in the fourth quarter 2016.
Our GAAP EPS figures also include $0.18 worth of acquisition and integration charges, approximately $0.05 higher than we had guided. The higher charges relate to our recent acquisition activity. EPS excluding acquisition and integration charges was $0.97 per share in Q4, up 5% versus Q4 of 2015.
For the full year 2016, our fully diluted GAAP EPS was $2.31. GAAP EPS included $0.65 of acquisition and integration charges. EPS excluding acquisition and integration charges was $2.96 per share for the full year, an increase of 24% on a reported basis. Turning now to cash. In Q4, operating cash flow was $83 million, up 5% on a year-on-year basis.
For the full year 2016, operating cash flow was $366 million, up 6% compared to full year 2015. We define free cash flow as operating cash flow, less capital expenditures with cash acquisition and integration payments added back.
In the fourth quarter, free cash flow was $76 million, compared to $73 million in Q4 2015, an increase of 4% year-over-year. For the full year 2016, free cash flow was $347 million, up 10% compared to full year 2015. Free cash flow was modestly below our expectations due to a combination of Q4 Events performance and the timing of our CV growth.
Managing our business to generate strong cash flow is one of our top priorities, consistent with the negative working capital dynamics that are a key characteristic of our subscription-based business model, we continue to generate free cash flow well in excess of net income.
We ended the quarter with a strong balance sheet, cash position and liquidity profile. As of December 31, we had gross debt of $703 million. When combined with our cash balance of $474 million, it represents a net debt position of $229 million or about 0.5 times normalized EBITDA. Our current $1.8 billion credit facility runs through 2021.
As of December 31, we had approximately $1.1 billion of revolver capacity. Strategic acquisitions and share repurchases continue to be our primary uses of our free cash flow and available capital. Our number one priority remains executing on value creating acquisition opportunities.
During the fourth quarter, we acquired Machina Research, a market leader in research focused on the Internet of Things or IoT. The bigger news related to acquisitions clearly came at the beginning of January, with the announcement of our agreement to acquire CEB.
Our teams are working diligently through the necessary processes and preparing the filings and arranging the financing required to complete the transaction and start capturing value from day one.
Turning now to guidance, as always, we will be providing you with guidance for revenue at a total company and segment level, normalized EBITDA, EPS and free cash flow. Our EPS guidance is both on a GAAP and adjusted basis with the latter excluding acquisition and integration charges.
We'll also provide you insight into the larger line items below EBITDA that get us to our EPS guidance range. Please note that all of our 2017 guidance ranges relate to Gartner on a standalone basis, and do not include any estimates related to the pending acquisition of CEB.
Our guidance is consistent with our performance over the last several years, as we are again projecting at the midpoint of our guidance range, double-digit growth in revenues, EBITDA and EPS, on an FX neutral basis. And we continue to invest to support our key strategic objectives and drive long-term value for our shareholders.
The details of our 2017 outlook are also included in today's press release, but to summarize, our base level assumptions for our guidance are as follows. Our sales force grows approximately 13% in 2017, sales productivity remains flat from 2016 levels on an FX neutral basis.
We have used recent foreign exchange rates in setting our guidance and outlook for year. And as is our practice, we will provide updates on our quarterly earnings calls should there be any changes to any of these assumptions. I will begin with the details in context of our 2017 revenue guidance.
We are expecting total revenues for 2017 of $2.680 billion to $2.745 billion or 12% to 14% growth on an FX neutral basis. Turning to our three business segment. First, revenues for the Research segment are expected to be $2.050 billion to $2.085 billion in 2017, FX neutral growth of 14% to 16%.
Again continuing our trend of mid teens growth for our largest, most profitable and most cash generative segment. Second, we expect Consulting revenues of $345 million to $360 million or 2% to 7% FX neutral growth compared to 2016 and consistent with our longer term outlook of 3% to 8% annual growth.
And third, we expect to deliver Events revenues of $285 million to $300 million, 8% to 14% growth on an FX neutral basis. This continues our trend of meeting or exceeding our long-term growth outlook for this segment. We currently expect to hold approximately 69 events in 2017 compared to 66 in 2016.
We expect normalized EBITDA for the full year 2017 to be between $495 million and $530 million or 9% to 17% growth over 2016 on an FX neutral basis. We expect the costs associated with stock-based compensation expense in 2017 to be approximately $52 million to $53 million.
Total depreciation and amortization should be approximately $67 million to $68 million, inclusive of the amortization of acquired intangible assets. We expect acquisition and integration charges of $17 million and net interest expense of approximately $24 million.
For our tax rate, we are projecting an annual effective rate for GAAP of 32% to 33%, and for normalized earnings of approximately 31.5% to 32.5%.
Please note that our tax rate may vary from quarter-to-quarter due to the projected geographic mix of earnings, the impact of ASU 2016-09 related to stock-based awards, as well as the timing of certain items. Our GAAP EPS earnings guidance for 2017 is for EPS to be between $2.80 and $3 per share.
This includes $0.35 per share of acquisition-related charges. Excluding acquisition and integration charges, our guidance for EPS is to be between $3.15 and $3.35 per share in 2017. This represents 6% to 13% growth to full year 2016 or 10% at the midpoint of the guidance range and includes approximately a 1% headwind related to FX.
Please note, our guidance is based on average fully diluted shares outstanding of approximately 82 million to 83 million shares for the full year 2017. As we discussed on earlier calls, we had a number of favorable items occur below EBITDA in 2016 that benefited earnings.
These items include benefits related to equity compensation expense, tax credits and tax incentives, and the tax rate. We are not forecasting those items to occur again in 2017.
Normalizing for those items, the midpoint of our 2017 adjusted EPS guidance yields 14% EPS growth versus 2016, which is in line with the midpoint of our EBITDA growth guidance for 2017. For 2017 we are guiding operating cash flow of $385 million to $415 million, or 5% to 14% growth on a year-over-year basis.
We anticipate cash outflows for acquisition and integration charges to be $38 million in 2017. As a growth company, with a growing associate population, one of our larger capital expense items are real estate projects.
Large real estate projects happen with varying frequency, but in 2017, we have two major projects in two important locations occurring simultaneously. Inclusive of these two large products, our capital expense guidance is for $75 million to $80 million in 2017.
Putting this together equates to free cash flow of $348 million to $373 million in 2017 or flat to 7% growth over 2016. Normalizing for the two major projects I just mentioned, free cash flow would be increasing by between 7% and 14%.
As in prior years, our free cash flow is expected to again be well in excess of our normalized net income levels in 2017. Specifically, our guidance implies a normalized net income to free cash flow conversion range of approximately 135%. Excluding the large building related capital expenditures, our conversion rate would be approximately 145%.
Now I'd like to provide some additional information to allow for an understanding of the seasonality and other factors that will impact our revenue and earnings on a quarterly basis. Starting with our guidance for Q1 2017.
If you recall, we had an unusually strong first quarter in 2016 with 81% year-on-year growth in adjusted EPS, driven by a combination of very strong growth in Events and Consulting as well as a few non-recurring below the line benefits, such as lower stock-based compensation expense that we do not expect to repeat in Q1 2017.
We expect that Q1 will be our lightest quarter of the year from both a total company and Events revenue perspective. Just to double click on Events, we expect Q1 2017 revenues to be proportionally similar to Q1 2016.
For Consulting, we expect to see a modest year-on-year decline in revenues, when compared to the unusually strong 11% year-on-year growth from Q1 2016. Completing the primary drivers of our Q1 EPS, we expect a GAAP tax rate of approximately 26%, and 27% on a normalized basis.
Both lower than our projected full year tax guidance ranges due to the impact of ASU 2016-09 related to the expected timing of excess tax benefits from stock-based awards that I highlighted on last quarter's call.
As a result, we expect GAAP EPS to be between $0.45 and $0.48 per share in the first quarter of 2017, including approximately $0.13 per share of acquisition and integration charges in Q1. And as in past years, the fourth quarter is expected to be our largest, with more than 50% of the full year Events revenue occurring in Q4.
Finally, I'd like to spend a moment on the impact of foreign exchange, as it relates to our reported total contract value. As we have communicated to you in the past, contract value is reported on an FX neutral basis throughout each year. We do this so you can understand the true organic growth in our Research segment.
In early July of each year, we restate the opening contract value at current foreign exchange rates. As a result of changes in FX rates since January of 2016, contract value at January 1, 2017 is approximately $27 million lower than the $1.930 billion reported on December 31st.
As a result, $1.903 billion is the baseline figure you should use for comparison purposes when judging contract value growth in 2017 on an FX neutral basis. So before I turn call back to Gene, let me summarize.
We delivered another very strong quarter in Research in Q4, capping off another strong year of mid-teens revenue growth for our largest and most valuable segment. We continue to provide tremendous value to our clients and we have continued to invest and strengthen our operational capabilities.
In 2016, we saw improved momentum in total contract value, delivering 14% CV growth and our client and wallet retention metrics are near all-time highs. And as our 2017 outlook demonstrates, we expect to continue our trend of double-digit growth with strong cash flow generation.
We are in a very strong position to capture the vast market opportunity ahead of us and continue to live, to deliver long-term value for our shareholders.
The addition of CEB will enhance and expand our capabilities to address the most important priorities of virtually all functional business leaders across every industry and size of enterprise worldwide. We believe this will further enhance our ability to generate long-term double-digit growth with strong free cash flow conversion.
With that, I will turn the call back to Gene, who is going to share some closing thoughts on our planned CEB acquisition before we take your questions. Gene..
So, as Craig said, I'll turn now to our recent announcement to acquire CEB. Yesterday, we received U.S. antitrust approval for the proposed transaction, which is an important milestone in completing the acquisition. This transaction has multiple compelling shareholder value drivers. First, this is a highly complementary combination.
The Gartner brand is known for delivering independent objective insights for syndicated research and advisory products to all levels of IT, supply chain and marketing professionals. CEB is widely admired for delivering best practice and talent management insights to executives and other functions such as HR, sales, finance and legal.
Together, we create the leading global research and advisory company serving all major functions in enterprise. In today's world, every functional area of the business is undergoing dynamic change comparable to what's been happening in IT over the past decade. Much of this is in fact driven by increased technology capabilities. Take HR for example.
Today's Chief HR Officer relies on sophisticated analytics around hiring. They're increasingly using artificial intelligence and machine learning. They also have a rapidly changing regulatory environment they need to keep abreast of.
The advent of cloud computing has enabled new types of HR tools, such as Workday, a core HR platform, Avature, which supports candidate CRM or Cornerstone, a talent management system that addresses workforce learning and development. Just like IT leaders, HR leaders need help in selecting the right tools in today's rapidly changing environment.
These are mission critical priorities for every enterprise and they must be addressed whether companies growing or in financial distress. Our services will be just as critical for HR leaders as they have been for IT leaders. The same is true in finance, as Craig can tell you.
And it's true for the other major functions of the business such as sales, marketing, supply chain, product development, service delivery and more. We believe CEB can achieve double-digit contract value growth by applying the proven approaches that have driven double-digit growth in Gartner over the past decade. Take wallet retention for example.
Improving wallet retention directly accelerates contract value growth. Gartner wallet retention has consistently been around 104% while CEB's has dropped to around 88%. We believe there is no reason CEB can't achieve the same level of wallet retention as Gartner. And this chain alone would boost CEB's growth rate to double-digits.
We know how to achieve and sustain high levels of wallet retention. Let me give a few examples that are all applicable to CEB. We've developed automated tools to drive higher client engagement and higher client engagement drives higher retention. High quality service kickoffs get clients in habit of using our services which results in higher retention.
We know how to manage the renewal process to maximize retention. And we have many tools in processes that we'll introduce to CEB's business that drive retention. Another factor that drives growth is sales force growth. And we know how to identify, attract, train and excite incredibly talented sales people at double-digit growth rates.
We've now been in integration planning for around four weeks. With this experience, we're even more confident in the synergy opportunity range we have discussed, which is $25 million to $50 million net of investments to accelerate growth of the business. Here are some examples. We don't need two CEOs or two boards of directors.
We won't need to pay two sets of New York Stock Exchange fees. There're real estate consolidation opportunities as well as system and process consolidation opportunities. This transaction is financially attractive for both the short and long-term.
It's immediately accretive to Gartner's adjusted EPS and we expect it to be double-digit percent accretive to our adjusted EPS in 2018. Summarizing, CEB is highly complementary to Gartner. Our services will be critical for every function of the business, whether that business is thriving or in economic distress, just like they have been for IT.
We believe our proven practices will significantly accelerate CEB's growth rates. There are sizable net synergy opportunities and it's financially attractive over both the short and long-term. With that, we'll take your questions..
Thank you. And please standby for your first question, which comes from the line of Anj Singh at Credit Suisse. Please go ahead..
Hi. Good morning, guys. Thanks for taking my questions. I wanted to touch on the Events business. I know you had spoken to the three specific events on your Q3 call, and you called out the promotions related turnover on this call. But it seems things worsened from the early November update that you had beyond what you were expecting.
Did the timing of the promotions particularly impact Q4 or was the performance there a bit softer as well?.
So, great question. It's Gene. The timing of promotions actually disproportionately affected Q4. As you know, Q4 is our largest Events quarter, and as we look at sales of tickets and exhibitor sales, it ramps up kind of exponentially into the quarter.
And so, the fact that we had some open territories, as I mentioned from these promotions, and by the way, these promotions are great for our people in long-term and other parts of Gartner would gave us the short-term problem at Events. And so, it was really the timing of them.
It just is kind of you have this exponential ramp up into our biggest Events quarter..
Okay. Understood. That makes sense. And then moving on to number of enterprises, you guys have been growing that figure in the sort of 6% to 8% range over time, and ahead of that I think in the past two years. That number trailed off to about 3%-ish in the quarter.
Could you provide some updated thoughts and color on that deceleration? Wondering, what are the potential offsets? I realized you had average enterprise spend tick up nicely in the quarter as an offset, but just wondering, if you can share any go-forward thoughts..
Yes. Sure. Good morning Anj. As we've discussed all the time as we've talked about our market opportunity, we have strong conviction in the fact that we have an enormous market opportunity in all of the enterprises that currently don't do business with us and we have an enormous market opportunity even in our existing enterprises.
And the continued expansion, the average spend for enterprise illustrates that the fact that there is that huge opportunity in growing our penetration within existing enterprises.
In terms of the enterprise count, I would just refer you, we had a slight dip in client retention over the course of the year, which you saw come back in the fourth quarter. That's going to impact that net enterprise number a little bit. I wouldn't read too much into it.
We drove really nice new business growth over the course of the year, and we did accelerate our CV growth rate over the course of the year up to 14% as well.
And so as we go forward, we again, expect to see about what we have seen historically which is about two-thirds of our growth come from further penetration of existing enterprises and about one-third of our growth come from net new logos..
Okay. Great. That's helpful. And one last one from me, just wanted to get your thoughts on the sales environment post-elections in the U.S. I realize there's still a lot of noise and uncertainty, but you guys have been speaking about it being a difficult environment in 2016.
So just wondering if you have any updated thoughts as it relates to your domestic business and internationally post-election? Thanks..
Yeah. It's Gene. So as we mentioned in our last call, we saw kind of an inflection point in our business and that continues. So the business environment got noticeably better, which sort of helped drive a strong Q4. That environment continues to be the same and I'd say both in the U.S. and globally..
Perfect. Thanks a lot..
Thank you. Your next question comes from the line of Gary Bisbee at RBC Capital Markets. Please go ahead..
Hey, guys. Good morning. Let me start off with another question on the Events business. I understand all the explanations you provided.
But can you give us an update as we think about the Symposium, the key events, how many of those are sold out? I know the North America one has been for a couple of years and is that a gating factor to growth as we think about the ability to continue to grow this going forward? And the second part of that is just, what actually gives you confidence that I think, Gene, you said or Craig said that tenure is improved heading into 2017 of the sales force there? Thank you..
So, it's Gene. So first, in terms of sold out the – we have as you mentioned in a couple of our events like Orlando Symposium, we are kind of at capacity. We're solving that problem a couple of different ways.
One is, we're increasing the number of CIOs that are going to Orlando Symposium and we're increasing ticket prices to match the fact that we have a richer audience going there as well. And so that's one mechanism of growth.
The second mechanism of growth is, we are introducing – if you look in the North America, we're introducing other events that we can take even CIOs to beyond Symposium where there might be capacity.
So for example, we had a Canadian event that is very much like a symposium that over time in fact could become a symposium where we have two in North America, not just one, so that our Canadian clients would tend more to go to that event and the North American ones.
Similar for Latin America, we have an event today in Brazil for the people in Latin America that use to come to Orlando Symposium, they can now come to our Brazil Symposium. And so part of our strategy is we'll introduce additional symposiums over time, just as we've done in the past. And so, we're not constrained in growth.
We're looking to introduce new comparable events that are tailored for – that are more tailored actually to a specific audience like the Canadian one I mentioned. So, we're not really constrained in any way by our Events team..
And Gary, on the second part of your question, in terms of the tenure. Two things working in our favor that actually give us positive view on the outlook for Events.
So number one is, we have more sales people in territory entering 2017 as compared to where we were at the same point in 2016, and we'll also get the benefit of – we hired them over the course of 2016, and so their tenure mix or seasoning will have improved as well.
And as we've talked about in the past, obviously, people in their first year are not as productive as people in their second year, or not as productive as people in their third year. So the outlook for Events is really based on the fact that fuller territories, essentially a bigger army selling events and the improvement in tenure mix..
And lastly I'd say, as we looked at the ramp up of our new sales people, that we did hire in 2016, on what they sold toward the end of 2016, which affects 2017 events not 2016 events, they're right on track for having very good productivity..
Great, thanks. And then just a follow-up on CEB.
What would be a reasonable timeline to have some of the improvements like the retention stuff you laid out and/or better growth in training and management of the sales force? I mean, should we expect that this a several year project? Or is some of that stuff potentially a little more quick-hit opportunities than that? Thank you..
So we think of the opportunity as being sort of short term, medium term, longer term. So there's opportunities in all categories. We're going to prioritize the things that have short term pay off first, make sure we get those nailed very quickly.
So we think that we'll see pretty quick improvements in CEB's retention and other kind of factors as we implement these things that have the nearest term impact first. And then to your point, there will other things that take longer to do, but there are definitely things that have a short-term impact..
Thank you..
Thank you. Next question is from the line of Tim McHugh at William Blair. Please go ahead..
Yes, thanks.
Just on the Research contract value growth, the acceleration, can you give us any more color? Was this some of the weaker areas that grew slower earlier in 2016 improved? Or I guess what – anything that stood out in terms of geographic or industry improvement versus what you saw early in year?.
Yeah. Good morning, Tim. It's Craig. The improvement we saw was broad based. As we mentioned on prior calls, we have seen a rebound in Brazil. We have seen a rebound in the energy and utility sectors, which were probably the two areas – and also in the Middle East as well, which were probably the three areas that were the biggest hit.
That alone does not account for the acceleration in CV growth. We actually saw a nice improvement in the Americas, nice improvement in Europe, nice improvement in Asia and Australia as well. So it really was a combination of improvement in some of the areas that were most impacted.
But also a broad-based improvement as well, which ties into the inflection point comment that Gene gave, both on last quarter's call and on this quarter's call..
Right. Okay. And organically I guess does – you've got SCM and then Machina during the quarter.
What was the contribution I guess in terms of contract value?.
Yes, it was small impact, less than 1 point on the overall growth rate. Important note, SCM World was in last quarter. So the sequential improvement is actually full-on organic sequential improvement..
Other than Machina? Or is that not....
Yeah, Machina is very, very small, yes, very small..
Okay. All right. And then lastly, I guess the Consulting business, as we think about the contribution margin from that business going forward, it's kind of multi-year trend kind of down, as you've built out the managing director program. I get the strategy behind it.
But at what point would you expect that to level off? And could it improve again? I guess how do you think about the economics of that strategy, as we think about that part of the business going forward?.
Sure, Tim. You're right in that investment in managing partners is a core pillar of our Consulting strategy. Ultimately over the long term what it will do when we get to full coverage is drive deeper, longer lasting recurring relationships that make the business more predictable, that make our utilization more predictable and at higher levels.
That's ultimately the strategy. And as you mentioned, we've been growing the capacity to get there. As we look ahead, we're going to continue to invest in managing partners. We do believe that over the long term that will result in the things I just mentioned, which are more stable revenue growth, more stable utilization.
And so we would expect to see margin improvements or more attractive margins for this business over the long term..
Okay, great. Thanks..
Thank you. The next question is from the line of Manav Patnaik at Barclays. Please go ahead..
Thank you. Good morning, gentlemen. The first question was just on the Events promotions issue, I mean, I guess, we all know Q4 is your big Events quarter.
So was there any reason why these promotions could not have been delayed into the next year? And then just tied to that, I guess, you moved these guys into management, so the productivity stepped down.
Just how do you manage those same issues when you do the same thing with CEB? Like presumably, some of your senior sales people will be helping you out improve CEB's growth.
And so how do you prevent that from hitting your productivity on Research as well?.
So on the timing of the promotions, the – I'll tell you the philosophy we've had, which is particularly for our high-performing people, they can apply for jobs inside Gartner or outside Gartner. And they can do this whenever they want to do it. And of course, if we have high performers, we really want to retain those people.
And so we've adopted a policy that we want to be competitive with outside jobs.
And so the concern we have is if we say, well, you can't change jobs and get this great promotion where you'll make more money and have a better job and advance your career, because it's not integral (52:20) to the company, we're concerned – and this was what a lot of companies have, is that then drives them to take jobs on the outside.
And so while we do try to work with people for timing, but people want to advance their careers and increase their compensation, et cetera. And so it's a fine balance there. I also do think – again this was kind of a very unusual happening where we had unusually low turnover for like the last three years among these teams.
And then this just – again, they applied to different jobs regardless. It wasn't like they all went to one place, different kind of jobs. And it just all happened to hit at a time that was not the best for our Q4 events. In terms of CEB, I don't see a similar kind of thing happening.
Again we're going to work with identifying and increasing – first, as we mentioned, having improvements in retention programs. If we think – there really it's just about executing the programs, implementing the tools that we've developed over the last decade at Gartner. And then we'll accelerate hiring of new sales people.
And that'll be about building a recruiting capability, a training capability and then deploying these new sales people in CEB's organization..
Okay. And then the Events consolidation from three to one, which underperformed, I mean, was that just a factor of confusion with your clients? Is there anything to read in terms of travel budgets and so forth? I guess you're increasing the number of events in 2017 as well, so maybe not. But just some thoughts there..
Yeah. So it had nothing to do with travel budgets. We had three events that were application oriented. And they had a clear value proposition for both our attendees and our exhibitors.
When we combined them into one, we didn't do a good job of communicating what that new value proposition was, and it's kind of as simple as that, it has nothing to do with travel or anything like that. We've analyzed it in detail. We understand what happened there.
But otherwise I should mention, larger events have bigger economics and better economics. And so in general, they're better for us. In this particular case that tried to move from three to one, which looked great on paper.
We communicated it ineffectively in terms of – to both our exhibitors and our attendees and didn't had the result we would have liked..
Okay. And then just last question for Craig. I think typically you always start the year with sort of a wide range of guidance especially on EBITDA and free cash flow.
But any particular moving pieces that you would call out that would take us either to the low end or high end of that?.
Good morning, Manav. The range we give, again, we are talking about a roughly $500 million base. So the range from our perspective isn't that enormous. It's the typical range of outcomes. If we see Events performance or Consulting performance being towards the top end of their range, obviously that drives profits to the top end of range.
If we have accelerated CV growth earlier in the year, that obviously can flow through and impact the earnings as well. So, it's really no change in philosophy in terms of the size of the range and no terms in philosophy in terms of the puts and takes to our overall guidance..
Okay. Got it. Thanks a lot guys..
Thank you. The next question is from the line of Jeff Meuler at Robert W. Baird & Co. Please go ahead..
Yeah. Thanks.
Can you comment on the sales force productivity by tenure? What I am wondering is, are you seeing broad-based improvement both for the new hires and the more established people? Or is there one of those groups that is in particular driving the improvement?.
Actually, great question, Jeff. So, there's actually really good news here, which is the group that had the best improvement productivity is our newest hires. And we focused on making sure we hire people with the right fits, that we give them world-class training and we give them tools and get them off to a fast start and that's just really working.
And so the single biggest tenured group that had improvement is in people earlier in their tenure..
Okay.
And then I understand maybe a guidance assumption, but any reason for the assumption of flat productivity and 13% head count growth in the guidance just wondering why not accelerate the head count growth a bit more or why not assume a higher productivity just based upon the breadth of the improvement that you are seeing?.
Good morning, Jeff. In terms of the head count growth, as we have talked, we do a bottoms up planning exercise around all the territory growth we want to do at any given year.
And when we did the bottoms up this year, again, we want to go faster in places that have really nice productivity that is accelerating, and we go a little bit slower in places that are having challenges. And when we did that math or did all of that analysis, from a territory expansion perspective, it netted out to 13%.
As always, as we go through the year, if we are seeing productivity continue to accelerate and improve, we will go a little bit faster. If we see places where we are challenged, we will go a little bit slower in those places.
But our overarching planning assumption as we rolled it up from the bottom netted out to about 13% territory growth and that's what we baked into the plan. In terms of the productivity assumption, Jeff you know from a planning perspective we typically – we don't plan with a hockey stick. We don't plan based on hope.
We plan based on what we've actually achieved. And so from our perspective, the way to actually build the plan is, we build it based on flat productivity. As you know, if we deliver flat productivity, that's not what we're aiming for.
We're aiming for consistent improvements in productivity, but from a planning perspective we always find it most prudent to go with our most recent performance..
Makes sense. Thank you..
Thank you. We now have a question from the line of Jeff Silber at BMO Capital Markets..
Thanks so much. Just wanted to switch quickly to the proposed CED acquisition.
Can you just remind us what the milestones are going forward that we need to follow before closing?.
Sure. Good morning, Jeff. So a couple of things so, number one, as you see in the press release, and as Gene mentioned in his prepared remarks, clearing HSR is obviously a big milestone and we cleared that had yesterday, which is great. We're looking to file the S-4 and Proxy in the next couple of days.
That will be for 9/30/2016 and for full year 2015, both companies will be filing their 10-Ks towards the end of this month. We will then very quickly follow up with a updated S-4 and Proxy that is pro forma combined 2016 results.
We're in the process of working through our financing and we will be lining all that up with the milestones you should be looking at or obviously HSR clearance which we just got through the required regulatory filings and then we will be out marketing our financing instruments in March. Again, we're targeting, we said first half of 2017 close.
Ideally, that happens sometime in April, but you never know what bumps could be there from a filing or regulatory perspective, but we're on track to close as quickly as we can, and the hurdles are really around the regulatory filings and then getting out and marketing the financing..
Great.
And just one clarification, the S-4 that you file over the next few days with the September 30 information, you'll have pro forma information in there as well?.
There will be pro forma combined financials for nine months ended 9/30/2016 and full year 2015..
All right. Fantastic. Thanks so much..
Thank you. There are no further questions. So I would now like to turn the call back to Mr. Gene Hall for closing remarks..
Well, thank you for your questions. So, to summarize the key points of today's call, we're performing extraordinarily well as a company. For the full year 2016, we delivered double-digit growth in every geography, across every size company and in virtually every industry.
Our sustained success demonstrates the tremendous value we deliver for our clients, whether thriving or in economic distress. We recently announced we've entered into an agreement to acquire CEB.
CEB is highly complementary to Gartner and we're confident that our combined services will be critical for every function of the business just like they have been for IT. Additionally, this transaction is attractive for both the short and long-term.
It's immediately accretive to Gartner's adjusted EPS and we expect to be double-digit percent accretive to our adjusted EPS in 2018. We're getting better, stronger, faster day-after-day, year-after-year. We're entering 2017 with incredible momentum and we expect to continue our trend of double-digit growth for years to come.
We look forward to updating you again at our next earnings call. Thanks for joining us today..
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day..