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Earnings Calls: 
Gartner Second Quarter Earnings Call
Author: 123jump.com Staff
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Last Update: 3:44 PM EDT September 04 2007

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The provider of research and analysis on the global information technology industry reported revenue increase of 7% to $303.5 million. Gartner had planned to hire 120 sales associates over the course of 2007, but based on recent performance and market demand, the company has accelerated its investment in growing the research business. The company reduced its GAAP EPS guidance by 4 cents per share to reflect the impact of the charges and non-operating items recorded in Q2.


Investors Question and Answers

 
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- Revenue was $83.6 million, essentially unchanged from the same period of 2006, as the company continues to focus on productivity improvements rather than revenue growth.
- Revenue was also impacted by the company''s decision to exit its consulting business in Asia Pacific.
- Each of the company''s key consulting productivity metrics improved: utilization averaged 73% versus 67% in the same period of 2006 and the average annualized revenue per billable headcount increased to over $450,000.
- Billable headcount was 487 as of June 30, 2007, reflecting the exiting of consulting operations in Asia Pacific.
- Consulting backlog increased 9%, year-over-year, to approximately $109 million at June 30, 2007.

Events

- Revenue was $53 million, as compared to $58.6 million for second quarter 2006. These results reflect the timing of four events, which shifted this year from the second quarter into the first quarter.
- The company held 27 events with 12,842 attendees, as compared to 33 events with 13,905 attendees during the same period in 2006.

Up-to-Date Financial Highlights

- The company held 39 events with 20,234 attendees, versus 39 events with 18,131 attendees in the same period last year.
- The company has added 102 new sales associates, bringing the total number to 765 as of June 30, 2007.

Fiscal 2007 Outlook

- The company increased the low end of its total revenue guidance and reiterated its normalized EBITDA guidance to reflect the strength in its Research business, partially offset by the exiting of Consulting services in Asia Pacific and lower growth in its Events business. The company reduced its GAAP EPS guidance by 4 cents per share to reflect the impact of the charges and non-operating items recorded.
- The company is now targeting total revenue of approximately $1.168 to $1.187 billion, an increase of 10% to 12% over 2006.
- By segment, the company is now targeting Research revenue of approximately $658 to $664 million, Consulting revenue of approximately $317 to $323 million, Events revenue of approximately $185 to $190 million, and other revenue of approximately $8 to $10 million.
- The company reiterated its normalized EBITDA guidance for full year 2007 of $193 to $203 million, or an increase of 24% to 30% over 2006, and is now projecting GAAP EPS of 66 cents per share to 73 cents per share (including the 4 cents per share in charges recorded in the second quarter), or an increase of 32% to 46% over last year.
- The company continues to target cash flow from operations of $135 to $150 million and capital expenditures of $20 to $25 million.
- The company expects to add approximately 150 new sales associates, versus its prior target of 120.

Key questions from the second quarter earnings call conducted by Gartner Inc. on July 31, 2007.

Peter Eckert (Goldman-Sachs): For the last couple of quarters the great momentum you are enjoying in the research businesses has been offset by weaknesses in other parts of the business, particularly Consulting. What confidence do you have that the problems you have had in Consulting are fixed and that there will be margin leverage out of this business in the second half?

Eugene Hall: Gartnerís strategy is focused on growing the research business and the reason for it is, is that it has its incremental profitability is the best of all of its other businesses. The company focuses people more on research and less in consulting. That is what has driven the consulting results in terms of the top line. In the first half of this year, particularly in the First Quarter, the company pushed the research business a lot with its sales force. Second Quarter Gartner twisted the knob more to get more sales in Consulting that is why the bookings were up 9% year-over-year. It is one of those things the company is going to try to make that balance where it has growth in research and growth in the range that it has given in the guidance, especially the long term guidance, for Consulting. The growth in consulting will be consistent to what was provided in the long term roadmap.

Peter Eckert (Goldman-Sachs): The exiting Asia helps you from a margin perspective even though that business was profitable from the contribution basis. Is that correct?

Eugene Hall: In Asia-Pacific Gartner had about forty consultants spread around four widely disbursed countries thousands of miles apart. It was below the scale there. If one takes all the costs into account, it did not have positive contribution over all and even worse than that, it was a small portion of Gartnerís consulting business and so its management team had to spend time in working those issues. The sales team had to spend time working sales in Asia-Pacific in consulting. because the company had few people, it decided it made more sense to just let the sales team focus on research, and to have the consulting management team focus on the Americas and Europe where there is scale in that business. Gartner thinks that for next year it will have a positive financial impact.

Peter Eckert (Goldman-Sachs): Can you expand on the typical pattern in terms of the productivity ramp for new Sales Associates and are there any risks to margins associated with this ramping up of a large number of less productive sales people on year term basis?

Eugene Hall: The company tracks the productivity of its sales people closely. It reviews it on a regular basis and divides it by class of sales person in terms of when they joined or vintage, so Gartner knows exactly how long it takes for a new sales person who has joined. The company has been accelerating the number of new sales that it added over the past three years and what it found is that by adding the new sales people, it has been able to get their productivity up faster, and simultaneously it has been growing the productivity of the not-new people as well. The net of that has been that its overall productivity has been rising in the whole sales force, and that trend is continuing. The trend for the whole sales force productivity continues to rise because the company is focused on both getting the new people more productive quickly and also getting the more experienced people more productive as well. Last year the company started implementing a screening tool that every associate or prospect that applies to Gartner to be a sales person, takes a test that was developed by comparing the companyís best sales people. The company compared the skills of the applicant with the skills of its best sales people, and then it takes the top group of people from that test, and then they go through an interview process. What that allows the company to do is the better at hiring people that are going to be more successful, than the company was a year ago. That helps make sure that new people get productive more sooner. The second thing the company has done there is it has enhanced its training programs, and so better training also helps new sales people get up speed sooner. The third thing done is the company has interspersed the training in a way that rather than they get trained completely up-front without selling anything, and then they go into their territory, the company actually trains them some, they sell some, train them more, they sell more and so forth, so that their actual time to first sale and their overall productivity in the first three months to the first six months has been getting better.

Peter Eckert (Goldman-Sachs): Do you have an estimate of what the FX impact on operating income was?

Chris Lafond: It continues to be negligible. The company has a natural hedge with its revenues expenses and that has continued even with the significant movement in the FX this Quarter.

Laura Liederman (William Blair): Is there less cushion in the EBIDTA guidance for the year?

Chris Lafond: From EBIDTA guidance perspective the company put guidance out that it feels comfortable with. It is consistent with the guidance it gave last Quarter. Gartner is mindful and thoughtful of ensuring as it said at the beginning of the year that it can invest in the future, while delivering the results that it has committed and that it is committed at the end of the First Quarter where, it increased the EBIDTA guidance by about $4 million to $5 million. At this point in the year Gartner has great visibility into the research part of its business, so that part of the business it feels comfortable about, and the other two businesses there is less visibility, just to the nature of the business, but again the company feels comfortable there. In the press release Gartnerís EPS guidance is 66 cents to 73 cents. In cost of service the impact of foreign exchange was 60%.

Laura Liederman (William Blair): You increase the number of sales people because of your concept. it seems that is there a trade-off in terms of profitability, because you want to increase sales but not at the price of profitability. Is that a goal of increased profitability versus accelerating the top-line?

Chris Lafond: The company is mindful of the guidance it has given but it is also long term thinking about the business. It is not thinking only about the quarter to quarter impact. It is thinking about the long term view that it believes the benefit of continuing to add to its sales capacity will have. In the research performance Gartner has accelerated CV growth, accelerated revenue, added two points of margin improvement. The company is driving leverage out of that part of its business which is the thing that drives the biggest future profitability and growth of earnings.
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