Gartner, Inc. (IT) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Gartner Second Quarter 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference may be recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, David Cohen, GVP of Investor Relations. Please go ahead.

Good morning, everyone. We appreciate you joining us today for Gartner's second quarter 2020 earnings call, and hope you are well. Joining me today on the call are Gene Hall, Chief Executive Officer; and Craig Safian, Chief Financial Officer. The call will include a discussion of second quarter 2020 financial results and our updated outlook for 2020 as disclosed in today's earnings release. In addition to today's earnings release, we have provided a detailed review of our financials and business metrics and an earnings supplement for investors and analysts. We have posted the press release and the earnings supplement on our website, investor.gartner.com. Following comments by Gene and Craig, we will open up the call for your questions. We ask that you limit your questions to one and a follow-up. On the call, unless stated otherwise, all references to EBITDA are for adjusted EBITDA, with the adjustments as described in our earnings release. All growth rates in Gene's comments are FX neutral unless stated otherwise. Reconciliations for all non-GAAP numbers we use are available in the Investor Relations section of the gartner.com website. Finally, all contract values and associated growth rates we discuss are based on 2020 foreign exchange rates unless stated otherwise. 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 2019 annual report on Form 10-K and quarterly reports on Form 10-Q as well as in other filings with the SEC. We 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.

Good morning, everyone. Thanks for joining us. The COVID-19 pandemic will have a permanent and dramatic impact on business, leadership and society. Leaders face more simultaneous challenges than ever before – health and safety risks, sustained macroeconomic dislocations, shifting customer expectations, regulatory changes, combating racism and strengthening social justice, cybersecurity risks and more. Gartner is the best source of the timely and relevant insights, advice and tools that empower leaders across every major enterprise function to achieve success with their mission critical priorities. With our forward-looking research and our ability to be agile in supporting our clients through ongoing uncertainty, demand for analyst interactions is up almost 30% year-over-year. Clients and non-clients alike continue to leverage our Coronavirus Resource Center as we plan for the reset. With the challenging macroeconomic conditions, we're seeing an uptick in leaders accessing our cost optimization content. And with the ongoing fight for social justice, we're seeing significant engagement with our diversity, equity and inclusion resource center. This resource center aggregates much of our broadly relevant HR insights on diversity, inclusion and engagement, along with critical tools and webinars and makes them publicly accessible. We recently reinforced our own commitment to diversity, inclusion and social equity. Consistent with our research advice to clients, we increased the level of programming engagement of our employee resource groups – women, pride, mosaic, and veterans at Gartner. We reinstated our charity match program to empower our associates to have even greater impact through the organizations they choose. We established a cross functional executive council on diversity and inclusion and we published our corporate social responsibility report outlying actions we've taken to improve our operations and support our clients. Gartner remains strong as we continue navigating global uncertainties. Our second quarter results reflect our unique value proposition across all major functions of the enterprise. I'll share a few highlights and Craig will give you the full details in a moment. For the second quarter of 2020, total revenues were down 8% year-over-year. However, excluding the impact of our Conferences business, revenues were up 6% year-over-year, and we drew improvements in EBITDA and free cash flow was up 71%. We continue to calibrate our cost reduction programs. We strategically paused spending in March to protect profitability and conserve cash. We've restored some of the spend in targeted areas. We remain committed to full-year margins of at least 16.1%. Research, our largest and most profitable segment, is the core of our value proposition. We continue to make a significant global impact through our Research business. Total Research revenues were up 8% over this time last year. And while the selling front remains challenging, we did see modestly better trends in June than in the first two months of the quarter. Global technology sales, or GTS, serves leaders and their teams within IT. GTS represents more than 80% of our total Research contract value. Global business sales, or GPS, serves leaders and their teams beyond IT, including HR, finance, legal, sales, supply chain, marketing and more. GBS represents about 20% of our total Research contract value. In the second quarter 2020, both GTS and GBS drove similar contract value growth performances of around 7%. In GTS, we saw strong performances across many regions and sectors, including countries in Asia, Latin America and Europe and industries including retail, services and technology. In GBS, year-over-year contract value was up across every practice area except marketing. As I mentioned last quarter, our Conferences segment was significantly impacted by COVID-19. Because of government mandates and health concerns, we were unable to hold any destination conferences during Q2. To prioritize the health and safety of our attendees, partners and associates, we have decided to cancel our in-person conferences for the remainder of 2020 and pivot a subset of these conferences to a virtual format. Gartner Virtual Conferences will provide attendees a flexible way to gain unparalleled insights and advice and accelerate their learning without the need to travel. We'll monetize these conferences as we perfect the virtual format. Look to the long term, we expect the future as a combination of in-person and virtual conferences. We continue to expect Conferences will be an important contributor to our overall business. Gartner Consulting is an extension of Gartner Research and provides clients with a deeper level of involvement through extended project based work to help them execute their most strategic initiatives. Consulting revenues were down year-over-year in Q2, but we had strong results in contract optimization. In summary, we continue to have a strong value proposition across all major enterprise functions. Our clients are facing more disruptive change than ever before. And Gartner is the best source for the cost effective, relevant insights that will empower leaders to succeed amid ongoing uncertainty. We continue to have a vast untapped market opportunity. We know the right things to do to capture that opportunity in thriving or uncertain times. Looking ahead, we expect to come out of this recession strong and well positioned to drive long term, sustained, double-digit growth in revenues, earnings and free cash flow for years to come. With that, I'll hand the call over to our CFO, Craig Safian.

Thank you, Gene. And good morning, everyone. I hope everyone remains safe and well. Second quarter results were ahead of our expectations due to a modestly better demand environment and strong cost management execution. We had a successful bond offering during the quarter which allowed us to reduce maturity risk without increasing our annual cash interest costs this year. As we've gotten more clarity on the economy and gauged our business performance over the past several months, we've resumed backfilling roles and making selective growth hires. While we continue to manage our costs carefully, we remain focused on positioning ourselves to rebound strongly when the economy recovers. Second quarter revenue was $973 million, down 9% as reported and down 8% FX neutral. Excluding Conferences, our revenues were up 6% year-over-year FX neutral. In addition, contribution margin was 67%, up more than 300 basis points versus the prior year. EBITDA was $192 million, up 4% year-over-year and up 6% FX neutral. Adjusted EPS was $1.20 cents and free cash flow in the quarter was a very strong $322 million. Research revenue in the second quarter grew 6% year-over-year on a reported basis and 8% on an FX neutral basis. Second quarter research contribution margin was 72%, benefiting in part from the temporary cost avoidance initiatives we put in place last quarter. As the macroenvironment improves, we will take a balanced approach to resuming growth spending and incenting our associates who are the core of our business. Total contract value was $3.4 billion at June 30, representing FX neutral growth of 7% versus the prior year. Global technology sales contract value at the end of the second quarter was $2.8 billion, up 7% versus the prior year. The more challenging selling environment that began in March continued in the second quarter and had an impact on most of our reported metrics. Client retention for GTS was 80%, down about 260 basis points year-over-year, while retention for GTS was 100% for the quarter, down about 470 basis points year-over-year. GTS new business declined 14% versus last year. We ended the second quarter with 12,381 GTS enterprises, down slightly from last year. The average contract value per enterprise continues to grow. It now stands at $223,000 per enterprise in GTS, up 10% year-over-year. Growth and CV per enterprise reflects the combination of upsell, increased number of subscriptions and price. At the end of the second quarter, we had 3,089 quota-bearing associates in GTS or a decline of 4% year-over-year. We expect to end 2020 with more than 3,100 quota-bearing associates, a slight decline from the end of 2019. We entered this year with a large bench which we have now fully deployed. For GTS, the year-over-year net contract value increase, or NCVI, divided by the beginning period quota-bearing headcount was $58,000 per salesperson, down 48% versus the second quarter of last year. Despite the challenging macroenvironment, GTS CV grew in nearly all of our 10 largest countries and was up double digits in Brazil, Japan, France and the Netherlands. CV grew across all sectors except for transportation, which was down modestly. The smallest enterprises we serve saw double-digit CV growth through the strong efforts of our mid-sized enterprise sales teams. Across our entire GTS sales team, we sold significant amounts of new business in the quarter, to both existing and new clients. New logos continued to be a significant contributor to our CV growth. Finally, despite some net churn in clients, we continue to see increased spending by retained clients on average. This speaks to the compelling client value proposition we offer in both strong and challenging economic environments. Global business sales contract value was $643 million at the end of the second quarter. That's about 20% of our total contract value. CV growth was 7% year-over-year as reported and 6% on an organic basis. CV growth in the quarter was led by supply chain and the human resources practice. All practices positively contributed to the 7% CV growth rate for GBS, with the exception of marketing. GxL CV grew 40% to $319 million and legacy CV declined 14% year-over-year to $324 million. Total GBS new business was $36 million in the quarter, down 8%. However, we saw strong new business in our finance and sales practices. As we've discussed the last two quarters, in the marketing practice, we are transitioning away from some lower margin products. This has created short-term headwinds, but is expected to improve profitability in a normal environment. Because GxL will comprise the majority of GBS CV, starting next quarter, we will be reporting total GBS only. In the second quarter, total GxL new business was $31 million, while legacy new business was $5 million. Also in the second quarter, GxL attrition was $19 million and legacy attrition was $20 million. GxL retention performance year-over-year was consistent with GTS. Client retention for GBS was 83%, up about 170 basis points year-over-year, while retention for GBS was 100% for the quarter, up about 520 basis points year-over-year. We ended the second quarter with 4,789 GBS enterprises, down about 7% from last year. The average contract value per enterprise continues to grow. It now stands at $134,000 per enterprise in GBS, up 15% year-over-year. Growth in CV per enterprise reflects upsell and increased number of subscriptions and price. Despite the pandemic, our retained clients are continuing to spend more with us every year. At the end of the second quarter, we had 834 quota-bearing associates of GBS, down 9% year-over-year. Headcount was down sequentially and year-over-year as we optimized our territories and then temporarily froze hiring as part of our cost avoidance program. We now expect to end 2020 with roughly flat headcount to the end of 2019 in GBS. For GBS, the year-over-year net contract value increase, or NCVI, divided by the beginning-period quota-bearing headcount was $43,000 per salesperson, up from last year. As you know, the Conferences segment has been materially impacted by the global pandemic. We have canceled all destination conferences for the remainder of 2020. We are pivoting to producing virtual conferences with a focus on maximizing the value we deliver for our clients. We held three virtual conferences in the second quarter, which were used as pilots for the rest of the year. We also held a number of our one-day local conferences with a virtual format. We expect our local conferences business to rebound faster than the destination conferences given the smaller size of the gatherings, no need for travel and strong relationships and sense of community among the participants. With the cancellation of the fourth quarter destination conferences, unfortunately, we had to reduce the number of associates in the business. We continue to incur costs both in cost of services and SG&A to support the virtual conferences and to be in a position to resume in-person conferences when it is safe and permitted. The second quarter is a reasonable run rate for how to think about conferences costs for the rest of the year. I also wanted to provide you with an update on potential termination or sunk costs on canceled conferences as well as situation with our event cancellation insurance. We expect to recover the majority of sunk and potential termination costs for future conferences through either force majeure clauses in our vendor contracts, other arrangements with vendors or event cancellation insurance claims. Timing of receiving insurance claims is uncertain, so we will not record any recoveries in excess of expenses incurred until the receipt of the insurance proceeds. Our guidance for 2020 continues to assume no conferences will be held for the remainder of the year. Second quarter consulting revenues decreased by 6% year-over-year to $97 million. On an FX neutral basis, revenues declined 5%. Consulting contribution margin was 34% in the second quarter, up over 130 basis points versus the prior-year quarter. Margins were up due to favorable mix and cost reduction actions. Labor base revenues were $69 million, down 13% versus Q2 of last year or 12% on an FX neutral basis. Labor base billable headcount of 796 was up 3%. Utilization was 59%. Backlog at June 30 was $99 million, down 10% year-over-year on an FX neutral basis. Our backlog provides us with about four-and-a-half months of forward revenue coverage. We had a small workforce action in the Consulting business in the second quarter to better align our billable headcount with our revenue outlook for the balance of the year. Our Consulting business is seeing demand in three broad areas – digital, cost optimization, and data and analytics. Demand in digital spans several areas, including digital strategy, digital talent and digital workplace. Cost optimization also spans several areas such as sourcing and vendor management, infrastructure and operations, and application rationalization. Our contract optimization business, which is a part of our broader cost optimization offerings, had a strong quarter. Revenues were up 17% on a reported basis versus the prior-year quarter. As we've detailed in the past, this part of the Consulting segment is highly variable and we face continuing tough compares as we move through the year. SG&A decreased 4% year-over-year in the second quarter and 2% on an FX neutral basis as the cost avoidance initiatives we put in place last quarter continued to generate savings. SG&A as a percentage of revenue increased in the quarter, driven by recognition of commissions from canceled conferences and severance. EBITDA for the second quarter was $192 million, up 4% year-over-year on a reported basis and up 6% FX neutral as we offset loss conference margins with significant cost avoidance and cost reductions. Depreciation in the quarter was approximately $3 million from last year, although about flat with the first quarter as a result of additional office space that had gone into service before the pandemic hit. Amortization was about flat sequentially. Net interest expense, excluding deferred financing costs, in the quarter was $27 million, up from $23 million in the second quarter of 2019. Net interest expense is up because we had higher debt balances in the quarter and our interest rate swaps had higher fixed rates than the ones which expired last year. The Q2 adjusted tax rate, which we use for the calculation of adjusted net income, was 15.3% for the quarter. The tax rate used for the items used to adjust net income was 22.8% in the quarter. The adjusted tax rate for the quarter was affected positively as expected by an intercompany sale of intellectual property which resulted in a material favorable impact on the adjusted tax rate. This benefit was already reflected in our full year guidance. Adjusted EPS in Q2 was $1.20 cents. As a reminder, last quarter, we updated the definition we use for free cash flow to be cash provided by operating activities, less capital expenditures, and we will no longer be adding back adjustments or non-recurring items. This free cash flow definition provides a measure that reflects cash available for capital allocation, like debt repayment and share repurchases. Operating cash flow for the quarter was $343 million compared to $227 million last year. The increase in operating cash flow was primarily driven by cost avoidance initiatives and lower tax payments. CapEx for the quarter was $21 million, down 46% year-over-year. Free cash flow for the quarter was $322 million, which is up 71% versus the prior year. This includes outflows of about $10 million of acquisition, integration and other non-recurring items. Free cash flow as a percent of revenue or free cash flow margin was 13% on a rolling four quarter basis, continuing the improvement we've been making over the past few years. Free cash flow as a percent of GAAP net income was about 230%. During quarter, we issued $800 million of new senior unsecured notes with a 4.5% coupon. We use the proceeds from the notes along with $200 million of balance sheet cash to repay $1 billion of debt on a revolver and term loan A during March 2022. We reduced maturity risk while providing more financial flexibility at a relatively low cost. Our June 30 debt balance was $2 billion. Our total debt covenant leverage ratio was 2.8 times at the end of the second quarter, well within the 5 times covenant limit. Our other financial covenants are also well within compliance levels. At the end of the second quarter, we had $357 million of cash. As we discussed last quarter, we paused our share repurchase activity. As we get increased clarity on how the pandemic and economic downturn will play out, we will deploy excess cash for debt repayment, share repurchases and strategic acquisitions. We also have about $1.2 billion of revolver capacity. In addition to our strong cash position, balance sheet flexibility and access to capital, we have taken steps to align our cost with our revenue, allowing us to continue to generate positive free cash flow. Going into the current situation, we had already built a plan for 2020 that aligned cost growth with revenue growth. As we outlined last quarter, we took additional steps to ensure our long-term financial health and operational Excellence through a number of cost avoidance initiatives. These decisive actions helped ensure our ongoing financial flexibility in this challenging and uncertain environment without compromising on the quality of the insight, advice and service we provide to our clients. We remain well positioned to reaccelerate and drive future growth once the timing of the economic recovery from this pandemic becomes more evident. Before I go through the outlook assumptions for each segment, I'll review the overall approach we've taken to developing the updated outlook for 20201. First, we've analyzed our experience and results from March through June to drive forecasts for the balance of the year. Second, our guidance does not assume a recovery for 2020. Third, our overall outlook assumes that we will not be able to run conferences for the balance of the year. We are operationally planning to deliver one day conferences in the fourth quarter in geographies where it is safe and possible. And fourth, we will continue to calibrate our cost reduction programs with our top line results. Given the second quarter business performance, we've already restored some of the spending we deferred starting in March. We are updating our full year outlook to reflect Q2 performance, cost restoration considerations and, finally, a weaker US dollar compared to when we gave guidance in May. We now forecast Research revenue, including the FX update, of at least $3.48 billion for the full year. This is growth of about 3% versus 2019 and reflects a continuation of late March and second quarter new business and retention trends through the rest of the year. While the full second quarter was modestly better than what we saw in late March and April, there are still macro risks to the second half, largely for the non-subscription portion of the segment. We continue to expect total CV to decelerate through the year. CV changes earlier in the year have a larger impact to full-year Research revenue growth. There's a lag effect on Research revenue, so slower CV growth exiting this year will lead to slower Research revenue growth in 2021. As we ramp our spending back up to position ourselves for long term success, there will be a short term headwind to margins next year due to a lag between CV and revenue growth. We expect that, in a normal 2022, we will see margins of at least the 16.1% we delivered in 2019. For the Conferences segment, our guidance is based on not running any conferences for the duration of 2020. This will result in revenue of about $35 million for the full year. We will continue to incur costs in the Conferences business, both cost of services as well as SG&A. Within the business, we have direct expenses that relate to specific conferences and other expenses that don't. We won't be incurring the direct costs related to specific conferences that are canceled. Wherever possible, we expect to roll forward conference participation by exhibitors and attendees to future conferences. We now forecast Consulting revenue including the FX update of at least $365 million for the full year or decline of about 7%. The Consulting outlook continues to contemplate a slowdown in labor-based demand and reflects very challenging compares for the contract optimization business through most of the year. The timing of revenue in the contract optimization business can be highly variable, as you know. Overall, we expect consolidated revenue including the FX update of at least $3.88 billion. That's a reported decline of about 9% versus 2019. Excluding Conferences, we expect revenue growth of 2% versus 2019 on a reported basis. The cost avoidance programs we put in place in March have allowed us to protect profitability and conserve cash. We have started to resume certain spending as the operating environment appears to at least stabilize and we want to ensure we are well positioned for an economic recovery. The implied operating costs in our outlook are not a new run rate, but reflect planning assumptions for a cautious view of the revenue outlook. We expect adjusted EBITDA of at least $635 million, which includes $10 million of projected FX benefit. While we are raising our revenue outlook for the full year, we are leaving the EBITDA outlook unchanged before the FX benefit consistent with our comments last quarter. The full-year margin before updating for FX are about 16.3%, up from the 16.1% margins we had in 2019. We remain committed to full year margins of at least 16.1%. We also want to maintain the flexibility to be able to resume growth hiring and to restore certain expenses we deferred starting in March. These are important for us to accelerate out of the recession and position us to drive CV growth in 2021 and beyond. As we have discussed, 2021 margins are likely to be down versus 2020 as CV reaccelerates because of the lag between CV and revenue. There may be upside to 2020 EBITDA depending on top line results and the timing and magnitude of our cost restorations. Our weighted average interest rate will increase as we continue to have the run out of our interest rate swaps through the respective maturities. We continue to expect an adjusted tax rate of around 22% for 2020. We expect 2020 adjusted EPS of at least $3.08, including an $0.08 benefit from FX. The lower Q2 tax rate benefit was due to timing. For 2020, we expect free cash flow of at least $425 million. Our free cash flow of at least $425 million. Our free cash flow guidance reflects both the P&L outlook we just discussed, strong CapEx management and better-than-previously forecasted collections. All of the details of our full-year guidance are included on our Investor Relations site. Finally, for the third quarter of 2020, we expect adjusted EBITDA of about $130 million to $135 million. While we expect revenues to decline sequentially, we expect operating expenses to increase significantly as we begin to restore some of the costs we deferred starting in March. In summary, we delivered strong financial results in the second quarter despite a very uncertain economic environment. Cash flow was outstanding and we have taken a number of measures to increase our financial flexibility, reduce maturity risk and ensure we have ample liquidity. We will continue to balance cost avoidance programs with targeted investments and restoration of certain expenses to ensure we are well positioned to rebound when the economy recovers. With that, I'll turn the call back over to the operator and we'll be happy to take your questions. Operator?

Thank you. [Operator Instructions]. Our first question comes from the line of Jeff Meuler from Baird. Your line is now open.

I guess the short version of the question is to quantify modestly better [indiscernible]. CV looks pretty good to me. The commentary sounds positive, lots of pockets of good growth. So, just any help kind of reconciling that language with a fairly modest increase to the full year revenue guidance at a point in the year where I would think it's early enough in the year where you'd see the benefits? So, would love any quantification on what modestly better in June means and any other considerations that could be a headwind other than just the generally uncertain environments and, I guess, the point-in-time revenue decline.

Hey, Jeff. It's Gene. So, we can't really quantify the difference, but what I'll tell you is, if we look at kind of the performance during the quarter, June was definitely a trend. It was a better selling environment than the previous couple months. And so, that's kind of what we said in our remarks. And I think we can't quantify it any more than that.

Any just other kind of reconciliation factors you would provide or just something I'll end up be considering on why the revenue guidance increase looks fairly modest? Maybe it's just the methodology of assuming the late March into Q2 kind of trends continue for the balance of the year.

Absolutely. The way I think about it is obviously we have the experience from March and April, which we talked about in the last earnings call. You saw the Q2 experience. And so, what I'd say overall is, from a new business perspective, I think we were modestly better than what we experienced in March and April. When we talked about new business being down in the 20-ish – down year-over-year around 20%. As you saw, GTS was down 14% and GBS was down 8%. So, new business definitely outperformed our expectations from that perspective. Retention was a little more challenging than we had seen in March and April. And so, again, we've sort of dialed those two new updates through our exploration skew and normal trending of bookings and new business for the balance of the year. The one thing I would add, though, is that – I think I made this comment in the prepared remarks – there's certainly more risk on the non-subscription pieces of the research business. Obviously, we've got great forward visibility on the subscription run out and feel really good about those numbers. But because of the macroenvironment, there's definitely more uncertainty on the non-subscription pieces.

And then last, just GBS, if you'll permit a favorable question about GBS, it's been a while. I guess I was surprised at how resilient it's been and how little it decelerated year-over-year. And I know you've been saying forever that it's a bigger, bigger opportunity than GTS. But I was thinking there's less cost optimization research in the library, less tenured staff, the marketing challenges you're working through. So, I don't know if you were equally surprised by that, but would love any additional color on I guess the relative GBS performance.

Basically, we've been saying long, as you mentioned, that the value proposition in GBS is really the same value proposition in GTS, meaning that we identify clients' mission critical priorities and we help them with those mission critical priorities. And every function has priorities that are just as important. They're different by function. Again, you're not worried about cybersecurity and HR, but you may be worried about building a more effective diversity and inclusion program. And it's just as important to the HR leaders. And so, our research is focused on what are the mission critical priorities that these leaders are going to face and helping them to address those mission critical priorities in the best and most cost effective way you can. That's been kind of what we've been saying all along. And I guess you kind of see it there in terms of what's going on with GBS.

Our next question comes from the line of Toni Kaplan from Morgan Stanley.

Craig, you beat the 2Q EBITDA guide by $30 million and raised the full year by the $10 million FX benefit. And I know you sort of look at things on a full year basis and maybe spending was just a little bit lighter than you thought in 2Q. Is that the reason for why the full year guide wasn't raised by the $30 million? And I guess just in conjunction with that, the ramp down in margin guidance in the second half of the year seems like a lot. So, just help us understand the big ramp down in margins in the second half.

The way to sort of read the phasing and what's been going on, obviously, in March and April, when we really didn't know how bad or how deep or how broad the macro impact was going to be from the pandemic, we very quickly put the brakes on lots of spending across the board. And it was the right thing to do. We had to make sure that we were taking a balanced approach towards the balance of year, that we were maintaining liquidity, maintaining flexibility, all that stuff. And so, you really saw that start to flow through primarily in Q2. And some of the Q2 performance or overperformance was driven by revenue being modestly better than expected. And a lot of it was driven by us avoiding more costs than we had initially dialed in. Where we sit today is trying to find that balance between making sure that we're delivering on our financial commitments and delivering on our EBITDA and other targets, but also making sure that we are investing in the business and restoring expenses that we think are extraordinarily important for us to get through this year and, more importantly, serve as sort of a jumping off point when there is a recovery. And so, the way to think about the balance of the year is, as an example, in Q2, we weren't immediately backfilling open roles even in certain research or service positions. We've now stabilized ourselves and have good line of sight for the balance of the year. And so, we're backfilling those roles, and we're actually making selective growth hires where we think there's a high possibility for return and payback on that and also starting to restore certain expenses. And so, we are looking at it on a full year basis, not necessarily on a Q2 versus Q3 basis, but it's largely about, we stabilize the business, and we want to make sure that we are putting back into the business the right costs and targeted spends, so that when there is a macro recovery, we're poised to leap off of that.

Our next question comes from the line of Gary Bisbee from Bank of America.

Craig, maybe I'll follow up on that last point. So, can you just – Craig and Gene both, I guess, I should say. Can you help us think about what determines when you bring the cost back on? Is it really demand driven and seeing the near term opportunity for that? And I ask from this perspective. It's commendable given the margin performance of the last few years to maintain the margin target for this year. But I think one might argue given that a lot of investors are looking at this as sort of a throwaway year that if there are opportunities to bring them back this year, even if you were to have margins below that target, but that improved the pace of recovery into next year that that might be a wise decision. So, just how are you thinking about what's the factor that determines when you bring the investment back in business? Thank you.

If you think about the way that we have – Craig described this a bit earlier, which is, we didn't know how bad or how deep the downturn was going to be. So, we put on a pretty hard hiring freeze, very, very selective hiring, everything else frozen, that included research analysts, that included salespeople, product development, et cetera. And so, as we've seen kind of how our performance is and how the market is, we want to make sure we maintain, to your point, the right number of analysts, the right sales capacity, the ability to develop and introduce new products, et cetera. So, we're basically bringing back that capacity, so that we're very well positioned, especially beginning in 2021 to re accelerate growth. There are some expenses that we don't need to bring back, and that will be like travel expenses. Today, we're lucky, in that as an information services company, we can work with our clients – we're doing very, very well working with our clients remotely. And so, our travel expenses have dropped dramatically this year. That doesn't hurt our future growth or anything like that. It sort of goes with the environment. And so, for the things that really affect future growth, like research, sales, product development, that's the places that we are making sure we have the investments in place. And that's reflected in the forecast. For the things that kind of go with the environment like travel or the reductions in our Conferences business, that's the other category.

And Gary, I guess the one thing I'd add is, I think we can do both, which is manage for profitability and great free cash flow performance now, and also make sure that we're making those targeted spend, so that when there is a recovery, as Gene and I both mentioned, we're ready to rebound very quickly with it. So, it's not an either/or for us, we think, in this environment. We can do both.

Just to follow-up, on the Conferences business, I think, Gene, you said this remains an important part of Gartner or something to that effect. How are the digital pilots going? Any sort of learnings on how you might monetize that? If we look beyond this year, do you have the ability for a while to get back to the prior conference, whether it's attendance levels or exhibitor performance, or is that is that still a work in progress, figuring out how to monetize digital?

So, it's clearly a work in progress. But we've done some pilots, as we've mentioned before. Those went very well in terms of understanding how clients feel about it. And what we found is that attendees still want to go to conferences. And in this environment, virtual, they're very happy to go to. And so, we think we can get really good attendance at conferences. With exhibitors, one of their best sources of clients is conferences. So, they're very interested in working with us to find ways that work for them as well as the attendees. And I feel very good that we will find some of those things as we experiment throughout the remaining months of the year. Looking to the future, actually, this whole move to virtual will be good for us because we're kind of seeing that, in the future, there's probably going to be a mix of both in-person and virtual conferences, and we'll develop those virtual conference skills during this period.

Our next question comes from the line of Bill Warmington from Wells Fargo.

So, you've mentioned a couple of times the spending to position for a recovery. I wanted to ask, functionally, from a planning standpoint, what's the timing you're assuming for recovery? Are we thinking third quarter 2021?

I'll start and then Gene can follow-up. So, we're not pegging any sort of timing for recovery as it stands right now. We're obviously watching the markets and watching everything going on just like you and everyone else on this call is doing. And so, there's no pinpointed time for recovery that we're planning around. I think what we want to make sure we do is, number one, continue to deliver great value to our clients who do really need us. And so, we don't want to do anything that degrades our ability to do that now. At the same time, we also don't want to make short-term decisions around reducing expenses that impinge upon our ability to actually rebound when there is a recovery. And so, again, what we're talking about now is not specifically when we pivot and when there is a rebound, but really about making sure that we have ample capacity from a selling perspective, from a servicing perspective, from a research analyst perspective, et cetera, so that when there is a rebound, we are poised to take advantage of it.

And then, the 6% to 7% growth that you're seeing in Research on a combined basis, GTS and GBS for CV, is that a good way to think about the type of CV growth that we can continue to see in this type of an environment until we see the recovery?

As we talked about a little bit earlier, we do expect, based on the running out or extrapolating the math that we have seen in the second quarter that CV will continue to decelerate. As we talked about last quarter, based on everything we see today, we don't think it will be anywhere near what we experienced in the last great recession, back a little over a decade ago. But with these sort of trends, we will continue to see, until there is stabilization or recovery, some glide down on the CV growth. As we talked about, the CV is holding up really, really nicely, both on the GTS and GBS side, both being around 7% for the quarter, but we would expect some continued modest degradation in those CV growth rates if current trends continue.

Our next question comes from the line of Andrew Nicholas from William Blair.

I was hoping just to follow-up quickly on the Conferences questioning a bit earlier, specifically as it relates to virtual versus in-person conferences. Is there anything you can say about how you're thinking about profitability differences between those two types and whether or not, in 2021 or 2022, to the extent that you get to a situation where you're holding more hybrid type conferences, if those could potentially be as profitable or even more profitable than what you've historically done in the years prior?

Andrew, as I said, we're kind of at the early stage with virtual conferences. The pilots have been successful, in the sense that we know that clients will come to them, we know clients – and the same kind of numbers are larger even than with in-person conferences because you don't have to travel. And we know clients rate them very highly. And we know they're less expensive to hold than destination conferences. In terms of the whole financial equation, we're still figuring that out. And so, I think it would be premature to kind of say we've got that figured out yet. I don't know, Craig, you want to add to that.

No, I would have said the same exact thing.

And then, in terms of the contract documentation business, obviously, really strong quarter. Just curious how you're thinking about the runway for that business. I know you mentioned that it's highly variable, and that makes sense. But just wondering if, at a high level, you'd expect that to be something that's more of a near term spike or something that can have a runway kind of heading out into next year. Thank you.

Well, as you know, our contract authorization business helps our clients save money. And in this kind of environment, there's a lot of interest in being able to save money. So, I think that we're getting – we're at a very good selling environment for that kind of a product. Having said that, at any point in time, even when the economy is booming, there's always companies, to their trouble, who want to save money and well-run companies want to save money as well. And so, I'd say I see that business as – it's a relatively small business in Gartner. It's going to stay relatively small business in Gartner. But I do think it will grow along with the rest of the company.

I would add one point. That business performed very well last year. So, there are tough compares in the back half of the year, but I would echo everything Gene said about the great value that it provides to clients in any sort of economic situation, but particularly in this one. Yeah, there's definitely real value there for clients. But again, tough compares in the second half of the year for that business.

Our next question comes from the line of Jeff Silber from being BMO Capital Markets.

I know it's tough to give guidance in this environment, but you did give us some color for the rest of the year. So, we do appreciate it. But if we keep on going at current trends and assumed you hit the guidance for the year, when do you think you'd hit the bottom in terms of CV growth and roughly what rate would that be?

You're right. It is tough to guide in this environment. So, thanks for the prelude there. So, we don't guide on contract value. And we're not changing that policy now. I think the way to sort of think about it is we're obviously now comparing our business trends to what was a normal year a year ago, first half of 2019 and second half of 2019. So, if the economy doesn't recover or we don't see broad-based recoveries around the world, when we get into 2021, we're now comparing to pandemic-impacted results. And so, you would expect, at that point, if we continue at current course and speed with sort of – this sort of retention result and this sort of new business pacing that the contract value growth would stabilize. I'm not going to peg a number where we think that is, as we've talked about. We do believe that, based on everything we're seeing, the trough is a lot higher than it was during the last downturn for us. But that's as close as you're going to get us sort of pegging a number on it. But, again, I think the thing that, as we look at the business, and it is tough out there, but our teams are doing a really fantastic job of sort of cutting through the tougher selling environment. And the sheer volume of new business that we're writing is really great. Yes, it's less than we did a year ago, but we're bringing on new logos, we're growing accounts, we're adding new seats, we're adding new subscriptions, doing that across the board. And so, again, I think if we have another 12 months of this, you would see the CV growth stabilize because we'd be comparing to a similarly impacted period when we get 12 months from now.

I'm going to stick out a little further and talk about 2021 since you kind of opened up the discussion. You had mentioned, given the rate of CV growth and the lagged impact, that we'd see some sort of margin decline in 2021. Again, just assuming you kind of hit your guidance at the end of the year, what kind of magnitude are we talking about? What would the impact be next year?

So, Jeff, we're not going to guide for next year. All we're saying is, we would expect when there is an economic recovery for our CV to rebound. And as you know, there's a lag between when that revenue comes, and so we're going to make sure that we scale our business and invest in core things in relation to the contract value, not necessarily the accounting revenue run out. And so, in doing that, that can create some us margin headwinds. That's what we're really saying about 2021. We fully expect to recover, we fully expect to return to growth. But because of the lag in the revenue recognition on the subscription based business, we could see some modest margin headwinds.

Our next question comes from the line of Manav Patnaik from Barclays.

I just wanted to ask if you could help us just break down GTS productivity a bit more. It's obviously been getting incrementally worse by the quarter. And this quarter obviously was down quite a bit as you've reported. But just curious, how much of that was more one time type roadblocks versus improvements? Gene, you talked about client activity is good and so forth. Can you just help how we should assume that should start trending up?

Let me give you a little color around it. So, if I think about GTS, the kind of deceleration that's going on, there's different components of it. One is that we sell new enterprises. There's clients that have never been a client of Gartner. That amount of business actually is about, for GTS, about the same year-over-year. So, we're not just seeing a deceleration in our ability to sell to new enterprises who've never been with Gartner. We saw about a third of the deceleration is from enterprises that left Gartner. They used to be with us and they left us. Another third is from enterprises that stay with us, but historically have grown, but they didn't grow. So, it looks like deceleration because instead of buying another seat or two, they actually stayed flat. Whereas in past years, that's a significant part of growth. And the last third is clients who might have four seats and they go to a less expensive – looking for seats, but use a less expensive seat. So, downgrade. So, going from one seat that had a higher service level to a lower service level. And so, what we're really seeing is new business with clients with new enterprises flat year-over-year. A little uptick in lost enterprises, which is about a third of the difference if you look at CD growth. And then, the other two-thirds from existing clients not growing that would have grown before or from clients that are still with us, same number of seats, but choose, for one of the seats, a lower service level, which obviously looks like a reduction in CV. And my interpretation of it is people see a lot of value. Most of the deceleration is not due to clients leaving us. In a tough environment, people make tough choices and sort of say, 'hey, I have four seats, I want to keep my four seats, but let's take one to a little lower service level,' et cetera. And so, that kind of gives you a little color in terms of what's going on under the covers. So, it would be wrong to think that our clients are leaving us more than they did before. There's some of that, and that's not the biggest piece of it. The biggest piece is we're not getting the upgrades, the growth we would have gotten from additional seats with existing clients. And secondly, some clients are – rather than giving up seats, downgrading the service level, but keeping the seats because the value they see.

And I guess, that one third/two thirds mix, that's more on the new business side, right? I guess, maybe if I could just ask, down 47% productivity like, how should that start picking back up? Like, was there just one-time distraction because of it being the April/May time period?

The numbers I was giving were not about new business per se. It was about the change in CV growth. So, it incorporates both existing and new business. If somebody chooses a lower price seat, that's a lower dollar retention.

And then, so maybe if I can just ask – Craig, in the Research business, the non-subscription revenue, can you just remind us how much that is and what that decline has been so far?

So, within the Research segment, about 10% of the research revenue, roughly, falls into the non-subscription category. And that is made up of a couple of different revenue lines. One is our online businesses, Capterra, Software Advice and GetApp. And then, there's some other non-subscription type research services that fall into that category as well. Last quarter, we talked about an expectation that that would be down about 10% to 15% year-over-year. That's sort of what the implied guide reflects as well for the balance of the year for those businesses. And so, about 10% of research revenue and down about 10% to 15% for the balance of the year.

Our next question comes from the line of George Tong from Goldman Sachs.

Your GTS sales force account has declined 3.7%. And your GBS sales force account declined 9.2%. Can you provide more detail around your outlook for sales force hiring between these two segments and where you see headcount growth coming back faster?

Let me cover the numbers and then Gene can talk about the strategy and how we're thinking about headcount growth. So, a couple points, and I'll cover first GTS and then GBS. So, with GTS, as you mentioned, headcount growth is down about 4% year-over-year. Our intention for the balance of the year is to get that number back up well over 3,100 frontline quota-bearing people. So, we expect to exit the year over 3,100 people, which would put us down a little bit on a year-over-year basis. And part of the reason why it's not up necessarily or I would say optically is down is we actually exited 2019 with a pretty significant bench. So, people on our payroll, who were either in training or had just graduated from training, who weren't yet in territory, and over the first six months of the year, the team did a really good job of making sure we got all those people deployed. And so, our selling capacity is actually in pretty good shape because we've now deployed that bench and have them out there on the frontline selling. And so, we'd expect our year-over-year headcount growth to be down modestly, our year-over-year, as we exit 2020. But from a selling capacity perspective, we feel in pretty good shape. From a GBS perspective, we hit the brakes there hard. We did a lot of work around territory optimization, and we also froze hiring there when we were doing our cost avoidance and cost reduction programs. Our expectation is to get back to about flat for the full year for GBS. And so, while down 9% year-over-year now, we would expect to end 2020 in roughly where we ended 2019, which was – we ended 2019 with 869. So, think in that neighborhood is our target for where we want to end from GBS headcount perspective. Gene, I don't know if there's anything you want to add to that.

That did it well.

And then, to follow-up, on GBS, you mentioned a little bit of softness on the marketing side. Can you elaborate on any other one-time factors that could have impacted performance on the GBS CV performance, either to the positive or to the negative?

So, the marketing is something we obviously – we knew about and told everyone as we were exiting 2019 to expect it. So, that's sort of the one-time headwind that we knew about and are dealing with. And again, the goal of it is to improve the profitability of that business in a normal environment. And we're well on the way to being able to do that. I wouldn't call out any one-time benefits. I think that the team has done a really, really good job of, again, fighting through the tougher selling environment, with GBS new business only being down 8% year-over-year, I think was really strong relative performance for that business. We called out the fact that every major function is contributing to the overall seat growth, with the exception of marketing, which we just talked about. And so, the business is performing pretty well. And, again, as Gene elaborated, I think with the first question, it's because the value proposition is consistent with what we've done forever from a GTS perspective.

Our next question comes from the line of Hamzah Mazari from Jefferies.

Hi. This is Mario Cortellacci filling in for Hamza. Just within the Consulting business, I just wanted to know what lines of work you think are seeing better demand versus others? And how do you think COVID is impacting the sales cycle? As you get into July, are you seeing customer decision making getting pulled forward due to need for your service or are they still delaying out of caution?

So, first, I'd say that, in this environment, decision cycles are definitely longer than they were a year ago and we definitely see that. So, I would say there's less demand, so there are longer decision cycles because there's often another review. Like, for example, maybe the CIO made the decision before and now it's got to go to the CFO. And that may take another two weeks or 30 days to actually get a decision done. And we're seeing demand in areas you'd expect. So, it's things like cost optimization, building a digital business, things like that.

And then, looking at sales force productivity, could you give us a sense of what the productivity looks like regionally? Are you seeing any variations with lockdowns? Or has it been pretty consistent across the country as many businesses have still been operating in more of this work from home environment?

So, so there's clearly been both an industry and geography aspect of this. Craig went through some of the numbers earlier in terms of our overall business. We're seeing good overall demand. But as you can expect, there's tougher selling environments. If you're selling into some aspect of the travel business, so many of those companies are hit very hard and they're still buying from us, but it's a much tougher selling environment than it was a year ago.

At this time, I'm showing no further questions. I would like to turn the call back over to Gene Hall for closing remarks.

So, as you heard today, excluding the impact of Conferences, our company revenues were strong. We have an unparalleled value proposition across all major enterprise functions. Our clients are facing more disruptive change than ever before. And Gartner is the best source for the cost effective, relevant insights that empower leaders to succeed amid ongoing uncertainty. We continue to have an advanced untapped market opportunity and we know the right things to do to capture that opportunity in thriving or uncertain times. Looking ahead, we expect to come out of this recession strong and well positioned to drive long-term sustained double-digit growth in revenues, earnings and free cash flow for years to come. Thanks again for joining us. And I look forward to updating you again next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.