David Cohen - Gartner, Inc. Eugene A. Hall - Gartner, Inc. Craig W. Safian - Gartner, Inc..

Jeff P. Meuler - Robert W. Baird & Co., Inc. Gary Bisbee - RBC Capital Markets LLC Tim J. McHugh - William Blair & Co. LLC Manav Patnaik - Barclays Capital, Inc. Anjaneya K. Singh - Credit Suisse Securities (USA) LLC Toni M. Kaplan - Morgan Stanley & Co. LLC Kayvan Rahbar - Macquarie Capital (USA), Inc.

Mike Reid - Cantor Fitzgerald Securities Jeffrey Marc Silber - BMO Capital Markets (United States) George Tong - Goldman Sachs & Co. LLC William A. Warmington - Wells Fargo Securities LLC.

Good day, everyone, and welcome to Gartner's Fourth Quarter 2017 Earnings Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I will turn the call over to Gartner's GVP of Investor Relations, David Cohen. Mr. Cohen, please go ahead..

Thank you, Mark, and good morning, everyone. We appreciate you joining us today for Gartner's fourth quarter 2017 earnings call. With me today are Gene Hall, Chief Executive Officer; and Craig Safian, Chief Financial Officer.

This call will include a discussion of fourth quarter and full year 2017 financial results and our outlook for 2018 as disclosed in today's press release. Following comments by Gene and Craig, we will open up the call for your questions.

In addition to today's press release, we have provided an accompanying presentation as a reference for investors and analysts, which we will reference during our prepared remarks. Both the press release and the presentation are available on our website, investor.gartner.com.

On the call, unless stated otherwise, all references to revenue and contribution margin are for adjusted revenue and adjusted contribution margin, which exclude the deferred revenue purchase accounting adjustment. All references to EBITDA are for adjusted EBITDA, with the adjustments as described in our earnings release.

Reconciliations for all non-GAAP numbers we use are available in the Investor Relations section of the gartner.com website. As set forth in more detail in today's earnings release, certain statements made on this call may constitute forward-looking statements.

Forward-looking statements can vary materially from actual results and are subject to a number of risks and uncertainties, including those contained in the company's 2016 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 Gartner's Chief Executive Officer, Gene Hall..

Welcome to our quarterly earnings call. Thanks for joining us. 2017 was a great year for Gartner. We had strong operating results. We closed and largely integrated CEB, we acquired L2, and we took steps to support future growth.

I continue to be excited about our business, our prospects for growth, and our strategy to create value for our shareholders over the long-term. I'll begin with an update on the CEB acquisition which has gone extraordinarily well. We announced our acquisition of CEB in January 2017.

There's uncertainty as to the time required for due diligence, arranging financing and the required regulatory approvals. Based on typical timelines, we laid out a plan for closing the acquisition. We satisfied all the requirements and closed the CEB acquisition in early April, much faster than typical for this size deal.

There's also uncertainty as to how fast we could proceed with integrating CEB into Gartner. For due diligence, we determined that we would be able to pursue an extremely aggressive timeline for integrating CEB and preparing for accelerated growth. Once the acquisition closed, we pursued this aggressive integration.

As of today, we have fully integrated the two organizations. This is no simple task as it involved integrating about 5,000 heritage CEB associates with about 10,000 heritage Gartner associates. The two research organizations have been integrated. The product teams are integrated.

The heritage CEB destination events and Evanta businesses have been integrated into the heritage Gartner Events business and the staff functions such as HR, finance and IT have been integrated. We have met our expectations on capturing synergies.

We determined the Talent Assessment did not fit strategically, set it up as a standalone business, and have reached an agreement to sell the business. We've also accelerated the investments needed to drive future growth in the heritage CEB research and advisory business. We developed a new set of products.

We introduced improved commercial terms, restricting customer service, improving retention. For the first time in recent CEB history, we accelerated hiring. As of today, we've grown our heritage CEB sales territories by approximately 18% year-over-year. We expanded our sales support positions by more than 20%.

All these actions were in a much faster timeline than we anticipated when we announced the transaction. And they're already having an impact. Heritage CEB contract value grew 2% in 2017, significantly faster than in recent years. And wallet retention improved by 6 percentage points, a remarkable improvement in a single year.

We acquired CEB for the strategic value of being able to address all functions across the enterprise and best of both operational approaches.

The rapid closing, aggressive integration timeline, and accelerated growth investments, together with our initial operating results, give us a high degree of confidence that we are well on the way to achieving our strategic objectives and delivering consistent double-digit growth over the long-term.

In short, the CEB acquisition is proceeding ahead of our initial expectations. While we're making great progress on CEB, the heritage Gartner Research business had its best year ever. Contract value growth accelerated to 16%. Once again, we had double-digit growth in every region across every size company and in virtually every industry.

Wallet retention was 106%, up 1 percentage point year-over-year; and client retention was 84%, also up 1 percentage point year-over-year. These are near our all-time highs. We ended the year with almost 12,000 enterprises as clients, up 7% year-over-year. Our sales force continues to be a critical investment.

At the end of Q4, the heritage Gartner sales force grew 16% year-over-year. We identified and hired a large number of highly qualified sales people, allowing us to reduce our number of open sales territories to near record low levels. And this provides a great foundation for future growth. Growing sales productivity remains a top priority for us.

Over the past few years, we've implemented a number of programs to improve sales productivity. Those actions are working. We drove another consecutive quarter of sales productivity improvement. Sales productivity for Q4 2017 improved 15% organically over the same quarter last year. And looking forward, our sales pipeline is strong.

Gartner Events allows our clients to interact in person with our analyst and their peers. Revenues for the heritage Gartner Events business grew 10% during 2017. Our attendees grew 17% and we hosted more than 10,000 CIOs for the first time. Not everything went perfectly.

We continue to have higher level of open territories in our exhibitor sales force which impacted our revenues from exhibitors. We believe these are now addressed and our forward bookings for 2018 are up at double-digit rates. Gartner Consulting extends the value of our research, providing in-depth expertise on longer-term engagements.

Our Consulting business grew 3% during 2017 which is below our expectations. We experienced a higher than usual turnover at Managing Partners in selected regions which impacted our bookings and revenues. Our Contract Optimization business had a solid year overall, but underperformed our expectations in Q4.

Looking forward, we ended the year with a backlog of 9%, position us well for 2018. As we discussed in the past, the Talent Assessment business does not fit strategically with the rest of Gartner. As a result, we announced today that we've reached an agreement to sell our Talent Assessment business.

While not a strategic fit with Gartner, Talent Assessment is a leader in an attractive market and this change will ensure a bright future for this business. During 2017, Talent Assessment underperformed our expectations. This was primarily due to an unusually large number of open sales territories from when the business was acquired.

We largely filled those territories. With a full sales complement and exciting new products, we believe the business is well-positioned for the future. So summarizing, the heritage Gartner Research business had its best year ever with accelerated contract value growth, higher retention and improved sales productivity.

Heritage Gartner Events had strong attendance, exhibitor sales that were below our expectations and a strong forward exhibitor bookings. Consulting, 2017 revenues were below our expectations but ended with a strong backlog.

We acquired CEB for the strong strategic benefits of extending our market to all functions across the enterprise and to enable best of both operational approaches.

The rapid closing, aggressive integration timeline and accelerated growth investments, together with our initial operating results, give us a high degree of confidence that we are well on the way to achieving our strategic objectives and delivering consistent double-digit growth over the long-term.

I'll now hand the call over to Craig Safian, our Chief Financial Officer..

first, continued underperformance of the Talent Assessment business; second, we performed below our expectations with high-margin exhibitor and contract optimization revenues; and third, higher SG&A costs, as just discussed.

Depreciation charges increased year-over-year in the quarter, predominantly reflecting the addition of CEB, while amortization and integration charges were up significantly, again related to the transaction. Interest expense in the quarter was $36 million, up from $6 million in the fourth quarter of 2016.

The full year interest expense was $125 million, up from $25 million in 2016. The higher interest expense relates to additional debt used to fund the CEB acquisition. Again, I'll note that we took on the debt early in the second quarter as the acquisition closed.

The Tax Cuts and Jobs Act has significant impact on both our Q4 and full year effective tax rate. In Q4, we benefited from revaluing our net U.S. deferred tax liabilities at the lower corporate tax rate and utilization of some foreign tax credits. This was partially offset by the one-time transition tax on accumulated foreign earnings.

The net benefit to our P&L in Q4 from tax reform was $60 million or $0.65 per share. We have normalized this benefit out of adjusted EPS. Our adjusted tax rate for the quarter and full year, excluding the one-time net benefit, was 32.8% and 30.4%, respectively. I'll discuss the 2018 benefits of tax reform during the guidance section of today's call.

Adjusted EPS in Q4 was $1.17, excluding the tax law change benefit of $0.65 in the quarter. Our adjusted EPS result for Q4 is about $0.08 short of the low end of our previous guidance and $0.14 below the midpoint. The primary driver was the EBITDA performance I just detailed.

This was partially offset by a combination of lower equity compensation expense, a lower adjusted effective tax rate for the quarter, and a few other below-the-line benefits. In Q4, operating cash flow was $22 million compared to $83 million for stand-alone Gartner in the year-ago quarter. Our combined operating cash flow decreased 81% year-over-year.

Q4 operating cash flow includes significant acquisition and integration payments, which we adjust out for our free cash flow calculation. Q4 2017 CapEx was $35 million and Q4 cash acquisition and integration payments and other non-recurring items were approximately $27 million. This yields Q4 free cash flow of $14 million.

The decrease versus the prior year is due to the higher interest and CapEx. Additionally, there was a one-time $40 million impact from the timing of billings. As part of the integration, we moved clients from the CEB billing platform to Gartner's. This resulted in temporary delays in sending out invoices.

We expect this impact to reverse in the first half of 2018. Relative to the approximately $3.6 billion of gross debt we had as a result of the acquisition, we have repaid more than $300 million by the end of Q4 with a quarter ending gross debt level of approximately $3.3 billion.

From a net debt perspective, we had $2.8 billion at the end of Q4, which translates to approximately 4 times leverage on a combined last 12 months of adjusted EBITDA. Given the favorable cash flow characteristics of the combined company, the repatriation benefits of U.S.

tax reform and recent debt repayments, we're tracking ahead of schedule on delevering to reach our long-term leverage target of approximately 3 times gross leverage. In January of this year, we repatriated around $250 million which we used to pay down debt. This is factored into our interest expense guidance for 2018.

As mentioned earlier, we intend to use the proceeds from the divestiture of the Talent Assessment business to pay down additional debt. Once that transaction closes, we will update you on the impact to our guidance. Turning now to guidance. For 2018, we expect adjusted revenues of approximately $4.1 billion to $4.2 billion.

This reflects growth of 10% to 13% on a combined 2017 revenue. For Research, we expect combined adjusted revenues of between $3.10 billion and $3.15 billion. This reflects combined reported growth of 12% to 14%, supported by the very strong contract value growth we just delivered.

For Consulting, we expect revenues of between $340 million and $355 million. This reflects growth of 4% to 8%. For Events, we expect adjusted revenues of between $380 million and $400 million. This reflects growth of 10% to 16% on a combined basis. And for TA & Other, we expect adjusted revenue of between $285 million and $305 million.

The signed divestiture agreement is not reflected in this guidance. After the deal closes, we will update the guidance. For 2018, we expect adjusted EBITDA of $750 million to $800 million. This reflects growth of 8% to 15% on a combined basis.

For our adjusted tax rate, our best estimate based on our current understanding of the new tax law is an effective adjusted rate of around 26%. We estimate the benefit of our lower rate at around $0.25 per share on 2018 earnings. However, there is still a fair amount of uncertainty around the implications of the law.

Finally, our EPS guidance is based on a weighted average fully diluted share count of approximately 93 million shares for the full year of 2018. Putting that all together, we expect full year 2018 adjusted EPS of between $3.71 and $4.11 per share. On a reported basis, that's 12% to 24% growth.

Had we owned CEB for all of 2017, the 2018 adjusted EPS growth would be over 300 basis points higher. For free cash flow in 2018, we expect free cash flow of $451 million to $491 million. At the midpoint, the conversion from adjusted net income is about 130%.

For the first quarter of 2018, we expect GAAP EPS between negative $0.44 and negative $0.40 per share. This includes approximately $1 per share of non-GAAP adjustments, predominantly related to acquisition charges. Therefore, on an adjusted basis, we expect EPS of between $0.56 and $0.60.

All of the details of our guidance are available in the presentation available on the Gartner Investor website. 2017 was a pivotal year in the Gartner journey. We delivered outstanding performance in the heritage Gardner Research business, with strong top line growth and some of the best operational metrics we have posted in many years.

We acquired CEB and L2 and have been executing ahead of plan on the integration, cost synergies, and investments to support future revenue growth.

We subsequently signed an agreement to divest the non-core business and have positioned ourselves for a strong 2018, a year in which we expect to drive double-digit top and bottom line growth and further strengthen our balance sheet. Now, I'll turn the call back over to the operator, and we'll be happy to take your questions.

Operator?.

Thank you. Your first question comes from the line of Jeff Meuler, Baird. Please proceed..

Yeah. Thank you. So, I guess, an order of magnitude question on the margins and the margin headwinds. Fully get that you're investing to support growth and obviously see it in the key metrics.

But I guess what I'm wondering is just given the 2018 implied margin guidance, is there anything else in terms of like wage inflation picking up or paying people more because of the tax savings or anything along those lines.

Or is this like, I guess, a one-time step-up as you accelerate head count growth and then 2019 there should be better margin flowing through?.

Hey. Good morning, Jeff. So, on the opening part of your question, from a planning perspective related to wages and things of that nature, it looks very much like we've seen in previous years, so really no change to report there. In terms of the margins, you're spot on. We are investing to support and drive future revenue growth.

And as you followed us for many years, that's been our strategy. You can see it bearing out on the heritage Gartner Research side with our productivity accelerating, contract value growth accelerating, et cetera.

And, again, our plan is on the CEB side to make sure that we are fortifying that business appropriately and also, as Gene mentioned, investing to drive future growth. So, the way we're thinking about it is this is a growth game and we are investing to make sure that we can drive sustainable, long-term, double-digit top line growth..

Okay. And I guess with the growth synergies on plan, you're investing more sooner.

Is it a timing issue and you still expect to realize the net OpEx synergies from the deal at some point or is there a change in the targeted net OpEx synergy realization figure?.

Hey, Jeff. It's Gene. I'll answer the first part of the question which is, as I mentioned in my prepared remarks, both the acquisition close and the acquisition integration has gone much faster than we had originally planned for.

We had kind of a middle-of-the-road plan and we wanted to be aggressive and it turned out we could be aggressive both with the closing and also with the initial integration. And so, we're much further ahead than we had in our original plan.

Because of that, we pulled forward some growth investments that we might have made 6 or 12 months down the road, because we believe that that will allow growth to accelerate faster as well. So, fundamentally, what's going on is, we went faster than we had originally expected on both closing and integration.

That allowed us to pull these growth investments forward, things like increase the number of salespeople, increasing sales support, increasing customer service, new products that we've developed, closing open roles like with Evanta, for example.

All those things are things that are going to have great payoff in growth and that we believe that growth moving forward..

Okay..

And then, Jeff – go ahead..

I just was going to finally ask, on cash flow, I understand the premium over adjusted net income as growth rate dependent and you're at the front end of hopefully accelerating the CEB growth.

But if I ex out the $40 million timing hit to 2017, which I would think is a benefit to 2018, it looks like the free cash flow premium is quite a bit lower than historically Gartner generated.

So, any reason why you can't get back to like 140%, 150% premium over adjusted net income over time?.

That's a great question, Jeff. And I think you're spot on in your upfront assertion. It really does have to do with reaccelerating the contract value growth at heritage CEB. And once we do that, there is no reason why the overall conversion of adjusted net income to free cash flow can't be similar to what Gartner looked like prior to the acquisition.

So, that is absolutely the goal. And, fundamentally, the business model supports that..

Okay. Thank you..

Thank you. Your next question comes from the line of Gary Bisbee, RBC. Please proceed..

Hi, guys. So, it's an interesting result because the revenue and all the operating metrics look terrific. And yet, the SG&A spend and the acceleration there in the margins being hurt by that all are a lot worse than anyone expected. I guess a two-part question from me.

So, clearly, with the guidance, you're not going to achieve the double-digit accretion bogey that you set out when you announced the CEB acquisition. So, help us think through just how you think about in investing relative to delivery of profits.

And really the second part of that is, why be so aggressive with CEB? The 18% sales head count growth is like almost double the CV target that you've laid out for that business. It just seems like you've gone so aggressively that you're pushing out profits quite a while, and I'm trying to understand how you think about those two things. Thank you..

Let me start with the second one first, Gary. As you know historically with the Gartner sales force, we determined how fast to expand the sales force based on assessing each individual first-level manager and what their capability was to absorb growth. What we did is the same thing on the CEB side.

And so, we went through and looked at what's the capability of having more salespeople with each of the individual area managers and with the total number of area managers we had. And that's how we got the number of sales territories that we had. So, we think it's operationally feasible.

And, for sure, as you know, the thing that has driven our growth over time is making sure the sales capacity to actually address this enormous market opportunity that we have. So, that's why we have – so we've set the growth rate based on what we believe is operationally feasible.

Again, as we go forward, if we see that that's too fast or too slow, we'll adjust based on our actual results. And, again, in terms of the issue with our business, you hire the salespeople. They start selling. They sell things. They get contract value and then it turns into revenue. Now, for the other part of the question, go ahead..

one, actually start addressing the operational issues sooner or more quickly; and two, pull forward growth investments more aggressively with a higher degree of confidence. And so, where we are today is we understand the operational issues. We know how to fix them. We're fixing them and making really good progress on that.

We've also moved to significantly simplify the business. And, obviously, the announcement on the divestiture of the CEB Talent Assessment business is a big step towards simplification. And so, the transaction or the net result is – the transaction is still accretive in 2017 and 2018, although less than we originally thought of.

But our view is we've made the right trade-off for investors because we get to have a much stronger, better positioned business sooner than we otherwise would have.

And then, the other thing I'd say, just to kind of close, is we now have an even higher conviction in our ability to deliver that double-digit CV growth in 2020 than we did when we announced the deal..

Great. Thanks. If I could ask just one much quicker follow-up. You mentioned some investments to fortify places they'd underinvested, but, obviously, the sales head count is really proactive investment for growth.

Can you give us a sense how much is in each bucket and what's the timeline for that CV to accelerate? It seems to me it's got to be a lot faster than 2020, given how aggressively you've done the integration and hired the sales head. Thank you very much..

Yeah, Gary, I guess two things. One is on the fortifying areas I can give you a couple of examples. Probably the most notable one that has an impact or had an impact on their results were open territories.

And so, when we acquired the business, there were significant amount of open territories in the Talent Assessment business, significant amount of open territories in the heritage CEB Research business, frontline sellers and a significant amount of open territories in all the sales support functions, to name a few.

And, obviously, we know this from fact. You sell less when you have open territories and when you actually have people in the territory. And so, those are some examples of fortification of the core. In terms of the goals for the future, we're not adjusting that long-term expectation.

That said, as I just mentioned and I think as Gene mentioned in his prepared remarks, all the things we're doing are to drive a stronger business that can grow faster and potentially sooner.

We're still targeting that 2020 date for double-digit contract value growth, but we're putting in place all the things that should allow us to grow this business really, really fast, have a lot of strength, and set us up for future, sustained, double-digit growth..

Thank you. Your next question comes from the line of Tim McHugh, William Blair. Please proceed..

Thanks. Just a follow-up on the margin question. I guess to ask in a little different way, I guess, you commented before that CEB essentially kind of was over-earning and had underinvested in a few areas.

When we look at the 2018 margins, as you think about kind of given what you now know about CEB and the overall company, I guess, what I'd like to try and understand.

Are we under-earning here in this year given the margins? And in other words, I guess, are your margins depressed more so than normal or as we look at this 2018 outlook, is this more consistent with kind of the long-term margin structure as you see what's necessary to grow the kind of combined business?.

Hey, Tim. Good morning. I'd say it's a little bit of both if you think about it. And so, as you know, our business model around hiring new salespeople, there is a lag in terms of the performance they deliver.

And we've gone through this over the years where it takes a few years for a new salesperson to get up to "full productivity." And what that means is, in year one, we're paying full cost, but they're delivering half the productivity. In year two, we're paying full cost, but they're not delivering all the productivity.

And then, by year three, they look like a normal tenured salesperson. And so, what you're seeing on the CEB side a little bit in 2018 is we've got the full cost of the territory expansion, but very little benefit baked into the P&L because it's a subscription-based model.

Even if they sell a lot of stuff, it will likely be weighted to the back end of the year, therefore, not really flowing through from a revenue perspective in 2018. And then, we start seeing the benefit in 2019, et cetera.

That said, what Gartner has done is we've got that virtuous cycle, if you will, of we're hiring new sales people, they graduate in tenure, but because we're about the long-term play here and driving sustained double-digit growth, we continue to invest in new people who then come in as new salespeople and then graduate into the tenure band and get more productive over time..

And, Tim, it's Gene. In addition to that, for the heritage CEB salespeople, there were some differences in how they sold. So they use discount heavily and we don't use discounting. They sold enterprise agreements and we sell seat-based products. Their content of the products is different than it was before.

And so, even the existing CEB salespeople, in the short-term, have got to learn different skills to be able to be as effective as they will be when they – or get up to speed on these. We're hoping that's a few months, but it definitely takes time to do that.

And so, it's a combination of both the transition the existing heritage CEB salespeople have to do to this new world which we're well along and the all good leading (00:46:07) indicators are good, but we're not there yet. Combined with when we hire new salespeople, it takes a little bit of time for them to get up to speed..

Okay. Thanks. And then just on the exhibitors, can you – just to ask a different topic here. The open sales territories there, I guess that was something you had talked about a while ago.

Is it just harder to find salespeople or what was the issue? I guess why were the territories opened than you expected?.

Yeah. Great question. So, what happened is we had very, very, very low turnover in our exhibitor sales force over a long period of time. We then had a surge. And it's a combination of things that just happened all at the same time, different careers, performance, whatever. It all happened at the same time.

We didn't have enough recruiting capacity to match all the open territories we had. So, basically, it took a little while to get to speed. We now have the recruiting capacity to deal with that. We have the territories filled and there's two very good things looking forward to the business.

The first is that our advance bookings for 2018 – in other words, the exhibitor bookings in – that will be realized in – the revenues will be realized in 2018, the bookings for those were up at substantial double-digit rates in 2017. So, we'll see those revenues. So, we go into 2018 with a great, call it, backlog of exhibitor bookings.

And then, secondly, our – and this is important as well. Our attendees last year, as I mentioned in my remarks, were up 17% year-over-year which is an acceleration of tax equated attendee performance, and exhibitor revenues follow attendee revenues. When attendees are growing, exhibitors want to exhibit those events.

When attendees aren't going to do, that's when they are declining, exhibitors don't like so much going to those events. And so, I think the combination of – we have the recruiting capacity. The territories are filled. Our advance bookings are up substantially.

And the fact that the growth in attendees drive future exhibitor revenues gives us confidence that we're in a good track for 2018 and beyond with our events business..

Okay. Thank you..

Thank you. Your next question comes from the line of Manav Patnaik, Barclays. Please proceed..

Thank you. Good morning, guys. First question, just on free cash flow again. I think you said the conversion in 2018 would be 130% after backing out those charges, so just a two-part question.

One, like once you sell TA, I guess, does that automatically help that conversion I would think? And then, the $126 million of charges that you have in 2018 like maybe just some color on how that breaks down. It sounds pretty similar to the 2017 number..

Yeah. Sure. Good morning, Manav. So, just a clarifying point. So, the 130% was just taking the 2018 free cash flow guidance midpoint over our adjusted net income free cash flow guidance. If you back out the $40 million reversal, if you will, it's closer to 120% conversion, just to clarify.

In terms of the charges, there is a run out of charges, as you'd expect with a large transaction. There is the timing of retention bonuses, when people actually exit the business and get paid severance. We've got charges in there related to the decoupling of the Talent Assessment business.

And so, while it looks like roughly the same level of cash on a year-over-year basis, it makes sense and again is related to carryover from stuff from the CEB deal and then a lot of stuff related to the Talent Assessment divestiture as well..

Is it fair to assume though that the TA pulls down that conversion? So, like once you sell it, it should help improve that?.

Yeah. It's a great point. Absolutely. And I think the interesting thing – and we'll re-run all these numbers once we close the deal – but, obviously, with that roughly $200 million of TA revenue no longer a part of Gartner, it makes the subscription-based portion of the business an even larger piece of the pie. And you're 100% right.

That will help the free cash flow conversion rate on a go-forward basis..

Okay. And then, Gene, earlier, you talked about all the new products in commercial terms and the success you've seen there.

I was hoping you could just elaborate a little bit more on maybe some anecdotal points and like how far you are along in that transition to the commercial terms and how many new products more you have in the pipeline and so forth?.

Yeah. Great question. So, in terms of the commercial terms, we introduced the new commercial terms last year. So, all of our salespeople, 100% of the Gartner and CEB salespeople have been selling on the new commercial terms since last year. So, we're well on the way there. And again, some people have switched immediately and are doing great.

Others have to learn and it's a different talk track, answering questions like why you can't get a discount (00:51:32) and why you can't get an enterprise group, things like that. But everyone's been doing that and I feel like we're making great progress on that. In terms of new products, all the new products have been developed.

We introduced a few of them last year. A lot have been introduced in January and the last ones will be – we're going to continue – we'll have – continues to do product development, but of the combined Gartner plus CEB content with a seat-based product in the first half we will have most of those out.

Now, we're going to continue innovating because, as you know, on the Gartner side, we have products for the C-level, a different product for – that reports to the C-level, et cetera. And over time, we'll be rolling those kinds of products out as well throughout each of the CEB or the heritage CEB roles like HR, finance, et cetera..

Okay. Got it. Thanks, guys..

Thank you. Your next question comes from the line of Anjaneya Singh, Gartner (sic) [Credit Suisse]. Please proceed..

Hi. Good morning. Thanks for taking my questions. Follow-up on the margins. Ask another way, have you guys fully captured the investments that may be required at CEB? It seems in the three quarters you've reported since acquiring the business you've had three negative EBITDA surprises.

And I realize it's not all attributable to CEB, but fiscal 2018 is also well below EBITDA expectations. So, how confident are you that you've identified the speed bumps, et cetera, that you've spoken to in the past? Thanks..

So, Anj, what I would say first is that we had CEB advantage where we understand what the economics are and what the business is going to be like. And, over time, there's no reason – in fact, it's our expectation that the economics would be very similar to what Gartner was before we acquired CEB.

And so, there's some upfront investments which we've talked about in the call and other times. But, over time, there's no reason margin shouldn't be very comparable to what we've done with Gartner over time..

And, Anj, I would just add. In terms of the speed bumps, for lack of a better term, a lot of the downside we saw over the course of the year related to the Talent Assessment business and as we got in there and really analyzed it, there were a number of things that were causing that, most notably a significant amount of open territories.

And so, we did invest to fortify that, fill open territories. If you look at bookings performance on that business, it was definitely better in the second half of 2017 than it was in the first half of 2017, and we got that out of the way. And, again, now, once we close that deal, that will no longer be a part of the overall Gartner business.

The other thing I'd mention is just in pulling out the TA business, when it does happen, essentially it's been a low growth to no growth, declining-type business.

And, obviously, with it coming out, just the raw Gartner growth rates will improve by 50 or 60 basis points on a comparable basis, and that will obviously help us on a go-forward basis as well.

The other areas where we've seen those speed bumps, again, we've seen lots of positive signs after we've identified, assessed, and fixed them, whether it'd be around retention rates which again we've seen improving over the course of the year, whether it's around the performance from a bookings perspective on the Evanta business, in terms of their advance bookings and things of that nature.

So, I think we feel good that now with essentially nine or 10 months of CEB under our belt operationally, we've identified all the problem areas. We've actually addressed them as well and should be operating from firmer ground on a go-forward basis..

Okay. Got it. That's helpful.

And as a follow-up, maybe I missed it in your prepared remarks, but what sort of CEB growth is implied in your 2018 guidance? And if you could just help us with what you're seeing as being most instrumental in the acceleration of the CEB growth we saw at CEB this quarter, has it been the contract term is changing, the investments in sales force, or the new products? Thanks..

Let me get to the second part first. So, the reason that we saw the acceleration, they were in the negative growth category for quite a period of time, and we see that uptick. The biggest issue has been the six-point improvement in retention I talked about which is an enormous amount in one year.

And that's due to change in operational practices in terms of instituting some of the practices that you know so well from Gartner. So that's kind of what caused that improvement. And we're getting there. There's no reason that their retention, their wallet retention, client retention, can't be at the same exact levels as Gartner.

And we see that happening over time, and then new business growth, again same levels..

And on the implications within the guidance, we're obviously not breaking that out. But it's safe to assume in line with or a little bit better than reported contract value growth for the heritage CEB contract value. So, we said 1.5% on the overall heritage CEB contract value growth in 2017.

That obviously drives the bulk of the revenue as we head into 2018..

Okay. Perfect. Thank you..

Thank you. Your next question comes from the line of Toni Kaplan, Morgan Stanley. Please proceed..

Hi. Good morning. Based on the numbers that you gave, Craig, it sounds like there's part of the Talent Assessment business that is not being sold in this transaction. And so, I was hoping you could give us some color on either what part you're keeping or if you're planning on selling that remaining piece as well.

And basically, if you are keeping it, just what's the growth rate of that piece and will that impact the overall business?.

Hi. Good morning, Toni. So, as we talked about, we're selling about two-thirds of the Talent Assessment & Other segment, which consists essentially of the business formerly known as SHL that CEB had acquired in 2012. And so, that's about, as I mentioned, $200 million of revenue and about $38 million of EBITDA.

And so, that's a little bit different than the contribution margin, because it is inclusive of SG&A, but on a net basis, about $38 million of EBITDA. So, that will leave us around $100 million of other, if you will. And those are predominantly training businesses and a few other smaller acquisitions that CEB had done over time.

And it's again now representing post-divestiture $100 million on a $4 billion business, so a really, really small part of the overall business with what I would say our kind of average CEB growth rates associated with it. So, that's what will be left. Again, a really small part of the overall total Gartner revenue portfolio..

Okay. Great. And we've seen a couple of data points recently indicating that IT spend should be strong this year and accelerating from last year. It sounds like just based on the guidance you've had some strong growth rates for each of the segments there.

How are you thinking about the overall environment? Would you be able to maybe raise prices faster this year or just see greater demand for services? It just sounds like the environment is really good, and so I just want to get some color on what you're seeing..

Hi, Toni. It's Gene. So, first, I'd like to kind of just address one point which is that our growth is not really linked to IT spending. I mean, clients use us and need us when their spending is higher or even when their spending is lower. They're still spending an awful lot of money on IT.

And whether it's growing at 3% or 4% or 1% or shrinking 1%, they still need a lot of help, and so that's not been a big factor for us. Having said that, the selling environment I would characterize today as being a normal selling environment.

Meaning there are clients that are booming, there are clients that are okay, and clients in trouble if you look around the world and the different markets that we're in. So, I'd characterize it kind of a normal selling environment..

Okay. Thanks..

Thank you. Your next question comes from the line of Hamzah Mazari, Macquarie. Please proceed..

Hi. This is Kayvan Rahbar filling in for Hamzah.

Post tax reform, could you give us an update on how you're thinking about capital allocation priorities in the M&A pipeline?.

Sure, a great question. So, obviously, the one other benefit of tax reform that isn't really factored in is the ability to repatriate foreign accumulated earnings.

And, obviously, as we talked about during the prepared remarks, we've been knocking down our debt levels and again we view the optimal cap structure to have something in the neighborhood of 3 times gross leverage. And we're moving in that direction pretty rapidly.

And when we closed the Talent Assessment divestiture, it accelerates our ability to get there. And then, of course, we have the great free cash flow generation of the combined business globally on a go-forward basis. So again, our view is about 3 times gross leverage is the right permanent fixture on our balance sheet.

And then, once we get there, we return back to what our previous capital allocation strategy was, which was a combination of strategic value-enhancing M&A, which more likely in that means smaller to mid-size type acquisitions or in absence of that, return of capital to shareholders through our buyback programs.

And so, once we get back down to those rough levels of around 3 times gross, we'll then revert back to our stated, tried and true capital allocation strategy around M&A and return of capital through buybacks..

And just a quick follow-up, anything from your customers in terms of spend? Are you hearing anything?.

Again, it's Gene.

Well, I'd say as I characterized it as a kind of normal environment, which is that the spending is – again there are companies that are doing really well that are kind of spending money on all kind of things, companies that are doing okay and companies that are in trouble who needs help figuring out how to allocate their funds even better.

And so, I'd characterize kind of a normal selling environment, not especially good and not especially bad..

Okay. Thank you..

Thank you. Your next question comes from the line of Michael Reid, Cantor Fitzgerald. Please proceed..

Hi, guys. Thanks for taking the question. Wanted to hop over to Consulting, where there was a couple issues last quarter, but it looks like you kind of progressed and are moving past those with the update.

Do you think this improvement will continue and did the strong pipeline that you talked about in the last period continue?.

Yeah. Great question, Michael. I mean, as I mentioned, Consulting, we had, again, some open territories there among our Managing Partners for different reasons, health, career change, et cetera, and not across the board, but it's of selected areas. Those have now been filled and we had a really good backlog.

The backlog was up 9% year-over-year, which is great. And we feel very good about the strategy for Consulting, fit with the company. And at our (01:04:13) Investor Day next week, we'll talk more about how that strategy is evolving, to make it even more important and contributing to the company..

And, Michael, you're right. I'd point out a couple of facts. One is the labor-based portion of the business was up 12% in the fourth quarter, which is a really nice improvement from what we had seen, particularly in the first half of the year. That was offset a little bit by weakness or softness in the contract optimization business in the quarter.

What I'd say is the contract optimization business actually had a very strong year, really super strong in the first half and then below our expectations a little bit in the second half, but overall delivered nice growth for us for the year. So, I think your observation is right. Labor-based was very strong in the fourth quarter.

And, again, the backlog position we're in is probably the best or one of the best backlog positions we've been in entering a year in a while..

Okay.

And then with the integration kind of, you said to be ahead of track and the synergies definitely being met, could you remind us again where some of these cost synergy savings are coming from and maybe where you expect them to come from moving forward?.

Yes, sure. On the cost synergy side, I guess, I'd start with when we assessed the deal upfront and looked for cost synergy opportunities, we did not look in research because that was really the most important asset and we wanted to maintain that.

And we didn't look in sales because again, as we know, the more salespeople you have, the more you generally sell. And we didn't want to touch service either. So, the cost synergy opportunities really fall in the G&A lines. And I'd put them in a handful of buckets. So, one is around redundant people, redundant functions, redundant processes.

So, in finance, as an example, we only needed one CFO. And so, there was a savings opportunity there. We're consolidating everything into Gartner's accounting systems, Gartner's billing systems, Gartner's HR systems. Gartner's IT systems, et cetera. And so, as we do those consolidations and integrations, costs will go away.

So, it's really around, first, the people and leveraging our centers of excellence and eliminating redundant roles. Two would be around eliminating redundant external spends whether they'd be on consultants, on software applications, on data centers, on things like that.

And the one caution there is we're moving really well and rapidly, but there are certain elements of those spends that due to contract terms or due to needing to run dual or parallel platforms for some point of time, those don't get turned off until maybe 2019.

And then the third major category is probably around facilities and consolidation of facilities. And so, we've started that in 2017 in some of our smaller city locations around the world. We're doing it much more aggressively in 2018 and there will remain opportunities to do that in 2019 and beyond.

So, really focused on the G&A side and really focused around leveraging our scale whether it'd be on personnel, on external spend or on facilities..

Okay. Thanks, guys..

Thank you. Your next question comes from the line of Jeff Silber, BMO Capital Markets. Please proceed..

Thanks so much. I hate to go back to the accelerated spending but I'm going to. I'm just curious when these decisions were made. I don't remember you talking about plans on doing this on the last quarter's call..

Hey, Jeff. Good morning. So we've tried to be – we've been, I think, transparent on this. We talked about, I believe, on the Q3 call about our accelerate – on the territories specifics. It's a related support, so recruiting capacity, service people, the incremental territories, et cetera.

So, it's now becoming real because we're actually doing the spending and hiring the people, but we have talked about it on at least last call and I think the two prior calls..

Maybe I just missed the order of magnitude. Thanks so much..

Thank you. Your next question comes from the line of George Tong, Goldman Sachs. Please proceed..

Hi. Thanks. Good morning. Gene, I want to dig deeper into the pull-forward of investment spending.

Can you discuss the planned timing of investments in 2018 and how your planned heritage Gartner sales force growth will compare with heritage CEB sales force growth?.

Yes. So, in 2018, the heritage Gartner sales force growth is going to be typical of past years, so in the same kind of range that we've had in past years. And, again, I can't give an exact number because as I've talked about, we do it based on what our operation capacity is.

So, we look at each individual area manager and based on the capacity of those individual managers decide what it's going to be. But you can think about it as being kind of in the mid-teens like it has been historically for Gartner. For CEB, we're following the same process.

What we decided to do, again, was to pull forward and try to go into 2018 as fully staffed as we could on the CEB side. We're now going to see how those investments go. And based on the operational performance we'll decide how much hiring we're going to do through the year to prepare us for 2019.

Right now, we're staffed and we're very happy with where we are in terms of the staffing in sales, in service, in product, and sales support..

Got it.

And how would you think about the cadence of investments, just the timing of investments as you move through 2018?.

Well, again, on the Gartner side, it's going to be what we've done traditionally, which is we tend to ramp up more salespeople at the beginning of the year. It tends to be front-loaded. Our biggest selling is in the second half for new business. And so we want to let people get up to speed.

And so we tend to time more of our growth hiring in the first half, so we go into second half with a full complement. And, again, as I mentioned, the CEB is sort of a similar kind of a thing except – because it's new, we're going to be even more watching kind of the operational performance..

Got it. And just to follow up, you discussed the biggest driver of improvement in CEB performance has been really due to improving wallet retention rates.

Can you elaborate on how much new business is performing, how much it's growing at CEB, and discuss trends around pipeline growth and close rates for CEB?.

Yes. So great point. So retention itself is up significantly which was driving wallet retention.

New business hasn't performed as well and the reason is because of things we talked about, all of the changes that part of the CEB salespeople got to go through in terms of the change in commercial terms, new products, new enterprise agreements, all the things that we've talked about there.

And so, last year, the new business was weaker than it had been historically..

And, George, good morning. It's Craig. This is what we've talked about for the last two or three quarters. We were focused on trying to get as much noise out of the way in 2017. When Gene discussed earlier about the speed of our integration, it was really around, number one, we saw the opportunity to go faster.

Number two, we wanted to enter 2018 with as much behind us as possible. And that's why we pushed forward so much on changing the commercial terms and eliminating discounting and launching these new seat-based products.

And so, there was a lot of change with particularly heritage CEB frontline sellers, which we've managed through and Gene talked a little bit earlier about adoption and speed of adoption. But, again, the goal was to get as much noise, if you will, behind us, so that we could enter 2018 in as clean a position as possible..

Got it. Very helpful. Thank you..

Thank you. Your next question comes from the line of Bill Warmington, Wells Fargo. Please proceed..

Good morning, everyone, and welcome to David Cohen, Street name, Serious D (01:13:20). So, a question for you on the open territories. You've mentioned that a number of times as a problem that you've been addressing.

And I remember, historically, a few years back, you spent a lot of time and effort to try to come up with processes to really reduce the sales force turnover post hire.

And so, my question is what are you doing on the front-end on the CEB hiring, given the strong hiring there, to make sure you got the right people in those territories and that they're going to stay there long enough to get a positive return?.

Yeah. Bill, that's an important area of our focus. And so, over the last several years actually, we focused on building a recruiting capability that has a great ability to identify who are the people that are going to be most successful in selling at Gartner because we want to hire – when people are successful, they stay. They don't turn over.

And we wind up with our average tenure going up and higher sales results.

We've done that through both improvements in our selling process, as well as things like analytics where we use a series of analytics to help us determine who are the people that are most likely to be successful and necessarily a recruiting process that actually is very good identifying those people. That's been very effective on the Gartner side.

We're implementing that same recruiting – in fact, the same recruiting organization with the same processes, once they get fully rolled out, the same processes that we'll have at the CEB side. And right now, we're part way through that journey. We're probably the majority of way through the journey, but not completely there on the CEB side.

Once we get there, we expect our ability to identify the right people to hire will be great. Already, capacity-wise, we don't have any problem as you can tell from the growth in sales force that we talked about and we feel very good about the quality of people that we're hiring and they are fit..

Got it. And then one quick one on the CEB Talent Assessment. You've mentioned the $400 million gross proceeds.

How should we think about the net proceeds on that?.

Yeah. I mean, obviously there are some fees that go out related to bankers and lawyers and also other associated costs. I think we've modeled in probably $350 million of that being available to pay down, maybe a little bit more, but in that neighborhood..

Got it. Thank you very much..

Thank you. I'd now like to turn the call back to Gene Hall for closing remarks..

Well, thank you today for your questions and for joining us. So, to summarize the key points for today's call, 2017 was a great year for Gartner. In the heritage Gartner Research business, we accelerated contract value growth, drove higher retention, and improved sales productivity, which resulted in its best year ever.

Heritage Gartner Events had strong attendance. And while exhibitor sales were below our expectations, we have strong forward exhibitor bookings. Consulting 2017 revenues were below our expectations, but we ended with a strong backlog there.

We acquired CEB for the strong strategic benefits of extending our market to all functions across the enterprise and also to enable best of both operational approaches.

The rapid closing, aggressive integration timeline, and accelerated growth investments, together with our initial operating results, give us a high degree of confidence that we are well on the way to achieving our strategic objectives and delivering consistent, double-digit growth over the long-term.

We continue to get better, stronger, faster, day after day, year after year. We've got great momentum as we enter 2018 and we expect to continue our trend of double-digit growth for years to come. As most of you know, we'll be hosting our Investor Day next Thursday, February 15.

We'll review our businesses in more detail, and you'll come away with an even better understanding of our strategy and what we're so excited about our prospects for sustained, double-digit growth. We look forward to seeing you there and on our earnings call next quarter. Thanks for joining us today..

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day..