Gartner Inc

NYSE:IT

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Gartner Third Quarter 2020 Earnings Results 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 is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, David Cohen, Gartner's GVP of Investor Relations. Thank you. Please go ahead, sir.

[David Cohen, Group Vice President, Investor Relations]

Good morning, everyone. We appreciate you joining us today for Gartner's third quarter 2020 earnings call, and hope you are well. With me on the call today are Gene Hall, Chief Executive Officer; and Craig Safian, Chief Financial Officer.

This call will include a discussion of third 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. 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.

[Eugene Hall, Chief Executive Officer]

Good morning. Welcome to our quarterly earnings call. Thanks for joining us. Business leaders need help in all times. But turn [ph] highly uncertain times like today, they need help more than ever. [Indiscernible] partner know we in fact [ph] source for how to survive and thrive in these difficult times.

Beginning in Q1 we made significant changes in response to the pandemic and technology downturn [ph]. Our strategy is to ensure our research content addresses the most critical priorities of our clients at any point in time. When the pandemic hit, the rate of change in the world increased radically. We responded with agility. We accelerated the creation of new highly relevant content for our clients across every function.

Topics included adapting to COVID-19, shifting to remote work, accelerating transition to digital business, strengthening diversity, equity, and inclusion across the enterprise and more. Clients have highly valued this content addressing their mission-critical priorities. Client engagement with our experts rose significantly.

During Q3 client interactions increased more than 20% year-over-year to over 120,000 interactions. Government conferences delivered the same unparalleled insights and advise to those who wanted immersive [ph] experience. Seat holders who attend our conferences received great value which results in higher retention. Non-seat holders equally receive great value and are a great source of highly qualified leads for our research sales force.

Once the pandemic hit, we pivoted to virtual conferences to replace our traditional in-person destination conferences. So far we've delivered seven personal conferences through October and the performance of these conferences has exceeded our expectations. IT Symposium/Xpo is our flagship conference series for senior IT executives.

We recently held our IT Symposium Americas virtually. It was a resounding success. More than 15,000 executives attended and that's about double the number that attended Orlando Symposium in person last year. Attendees were highly engaged and participated in an average of 11 wide sessions. More than 80% of IT Symposium Americas' attendees rate the conference as meeting or exceeding their expectations. Attendees tours [ph] for the keynotes were on par with the in-person conferences from last year.

Exhibitors are also an important element of our conferences. We've been working with them to create a great experience for both attendees and themselves. While exhibitor revenues were lower when compared to our in-person conferences from last year, they exceeded our expectations.

Early on, there was great uncertainty as to whether virtual conferences would be viable. The results of the seven virtual conferences we've held to date demonstrate that we can achieve attendance while delivering high value to both attendees and exhibitors. We're early in the virtual conference journey and each one we've held has been better than the last. We're learning organization [ph]. We will continue to get even better by taking the experience from each conference and improving on the next.

We have eight more virtual conferences planned for 2020 and have already have more than 21,000 attendees registered. So we were extremely agile in serving the needs of our clients while adapting our content and pivoting to virtual conferences. We were just as agile in adapting our operations for the new environment.

We went from an in-office to complete remote and we have now achieved the same level of operational effectiveness as we had in the office. We entered early and decisively at the beginning of the pandemic to optimize our costs and prepare for a wide range of scenarios. We've achieved strong cost savings by working smarter, not just by getting [indiscernible].

For example, we have established specialized teams to handle some tasks, such as background research. Previously this was done individually by all our experts, by the specialized teams. The specialized teams do this research in fewer hours and ultimate higher quality because of the specialization. In addition, we have automated some of this work through technologies such as web mining which further lowers the cost and increases the overall quality. Though these changes did not begin during the pandemic, but because of the pandemic we've accelerated the pace.

In addition to cost savings and operational efficiencies, we also took several steps to preserve liquidity and maintain financial strength. We now have a capital structure with less security risks and more flexibility. So we accelerated the creation of new, highly relevant content for our clients across every function. We successfully pivoted to virtual conferences which were well attended and delivered high value to our clients.

Our clients are more engaged than ever. Beyond client engagement, we adapted our operations to work remotely just as effectively as we do from our offices and we combined this with early and decisive actions to optimize our cost structure and our balance sheet. The combination of these factors has resulted in improvements across most of our operational metrics compared to Q2. The improvement in our operational metrics in turn has resulted in improvements in our Q3 financial metrics and guidance compared to Q2.

Revenue and EBITDA are performing better than we expected and free cash flow generation is very strong. To provide more details on our financial performance, and increased guidance, I'll now turn the call over to our CFO, Craig Safian.

[Craig Safian]

Thank you, Gene and good morning. I hope everyone remains safe and well. Third quarter results were ahead of our expectations and we raised our full year guidance to reflect the modestly better demand environment and strong cost management. We had another successful bond offering during the quarter and amended and extended our credit facility through 2025.

As of September 30, we have a stronger balance sheet than we did at the start of the year. We have significant liquidity which gives us financial flexibility. We reduce our material risk and our annual interest expense will be lower staring in 2021. As we have gotten more clarity on the economy and gauged our business performance over the past several months, we resumed targeted spending. While we continue to manage our costs carefully, we remain focused on positioning ourselves to rebound strongly as the economy recovers.

Third quarter revenue was $995 million down 1% both as reported and FX neutral. Excluding conferences, our revenues were up 5% year-over-year and FX neutral. In addition, contribution margin was 67% up more than 300 basis points versus the prior year. EBITDA was $168 million up 20% year-over-year and up 19% FX neutral. Adjusted EPS was $0.91. And free cash flow in the quarter was a very strong $229 million.

Research revenue in the third quarter grew 6% year-over-year on a reported and FX neutral basis. Third quarter research contribution margin was 72% benefiting in part from the temporary cost avoidance initiatives we put in place starting in the first quarter. As we have improvements in the macro environment, we have resumed growth spending and started to restore some of the compensation and benefit programs which we had put on hold when the pandemic first hit.

Total contract value was $3.4 billion at September 30, representing FX neutral growth of 5% versus the prior year. Global technology sales contract value at the end of the third quarter was $2.8 billion, up 5% versus the prior year. The more challenging selling environment that began in March continued in the third quarter and had an impact on most of our reported metrics.

Client retention for GTS was 80%, down about 160 basis points year-over-year, but up modestly from last quarter. While retention for GTS was 99% for the quarter, down about 600 basis points year-over-year, GTS new business declined 7% versus last year. We ended the third quarter with enterprises down about 3% from last year. The average contract value for enterprise continues to grow. It now stands at $227,000 for enterprise in GTS up 9% year-over-year. Growth in CV per enterprise reflects the combination of upsell, increased number of subscriptions and price. In addition we continue to see higher churn among lower spending clients.

At the end of the third quarter, the number of quota-bearing associates in GTS was down about 8% 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 of quota-bearing headcount was $41,000 per salesperson, down about 60% versus the third quarter of last year. Despite the challenging macro environment, GTS CV grew in nearly all of our 10 largest countries and similar to last quarter was up double digits in Brazil, Japan, France and the Netherlands. CV grew across all sectors except for transportation and media. Across our entire GTS sales team 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, although not quite enough to offset dollar attrition. This speaks to the compelling client value proposition we offer in both strong and challenging economic environments. Overall, GTS retention and new business improved in the third quarter as compared to the second quarter.

Global business sales contract value was $656 million at the end of the second quarter. That's about 20% of our total contract value. CV growth was 6% year-over-year as reported and 5% on an organic basis. CV growth in the quarter was led by our supply chain and human resources teams. All practices positively contributed to the 6% CV growth rate for GBS, with the exception of marketing.

GBS new business was strong up 14% over last year. As we've discussed in the last three 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.

GxL is now more than 50% of GBS total contract value, an important milestone on the path to long term sustained double-digit growth in GBS. Client retention for GBS was 82%, up 170 basis points year-over-year, while retention for GBS was 99% for the quarter, up 220 basis points year-over-year. We ended the third quarter with GBS enterprises, down about 9% from last year as we continue to see churn of legacy clients. The average contract value for enterprise continues to grow. It now stands at $140,000 per enterprise in GBS up 16% year-over-year.

Growth in CV for enterprise reflects upsell, an increased number of subscriptions, penetration of new functional areas, and price. Despite the pandemic, our retained clients are continuing to spend more with us every year, although not quite enough to offset dollar attrition.

At the end of the third quarter, the number of quarter bearing associates in GBS was down 7% year-over-year. We expect to end 2020 with roughly flat headcounts at the end of 2019 in GBS. For GBS the year-over-year net contract value increase or NCVI divided by the beginning period quarter bearing headcount was $38,000 per salesperson, up from last year. Overall GBS had a good third quarter, driven by strong double-digit year-over-year improvement in new business.

As you know, the Conferences segment has been materially impacted by the global pandemic. We canceled all in-person destination conferences for the remainder of 2020. We pivoted to producing virtual conferences with a focus on maximizing the value we deliver for our clients. We held two virtual conferences in the third quarter after producing pilots in the second quarter. We also held a number of virtual Evanta meetings, shifting these one day local conferences online due to the pandemic.

Conferences revenue for the quarter was $13 million dollars, a combination of the two virtual conferences and a number of virtual Evanta meetings. We are still in the early stages of all forms of virtual conferences and we'll continue to leverage customer feedback as we develop, refine and grow our virtual conference offerings.

The revenue mix of our virtual conferences is different from the mix from in-person conferences. First, in Q3, our revenues were split between virtual conferences and virtual Evanta meetings with a higher mix from Evanta meetings than last year. Attendee revenue at virtual conferences is from two sources, tickets that are purchased as a standalone item, either online or through our sales teams or an entitlement associated with a broader research contract.

As we detailed in the past, a small portion of many research contracts gets attributed to the Conferences segment. The vast majority of the Q3 and expected Q4 attendee revenue is from subscription contract entitlements. These are entitlements which would have been applied to in-person conferences in 2020 or in some cases in 2021.

We continue to refine our exhibitor offerings for virtual conferences. We expect Q4 exhibitor revenue to be a much smaller part of overall conferences revenue than in the past. 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.

Lastly, the timing of receiving conference cancellation insurance claims remains uncertain, so we will not record any recoveries in expenses incurred until the receipt of the insurance proceeds.

Third quarter Consulting revenues decreased by 4% year over year to $89 million. On an FX neutral basis, revenues declined 6%. Consulting contribution margin was 32% in the third quarter, up over 300 basis points versus the prior year quarter. Margins were up primarily due to cost reduction actions. Labor based revenues were $74 million, down 5% versus Q3 of last year, or 6% on an FX neutral basis. Labor based billable headcount of 737 was down 9%. Utilization was 60%, up about 300 basis points year-over-year.

Backlog at September 30th was $96 million, down 12% year-over-year on an FX neutral basis. Our backlog provides us with about four months of forward revenue coverage. As we discussed last quarter, we had a small workforce action in the Consulting business to align our billable headcount with our revenue outlook for the balance of the year.

Our contract optimization business was down 3% on a reported basis versus the prior year quarter. This compares to a 74% growth rate in the third quarter of last year. As we've detailed in the past, this part of the Consulting segment is highly variable. SG&A increased 2% year-over-year in the third quarter and 1% on an FX neutral basis. SG&A as a percentage of revenue increased in the quarter as we restored certain compensation and benefits costs. EBITDA for third quarter was $168 million up 20% year-over-year on a reported basis, and up 19% FX neutral.

As I mentioned earlier, we had stronger than expected top line performance and continued our disciplines focused on expenses. We also continue to see a meaningful benefit from significantly lower than normal travel costs. Depreciation in the quarter was up approximately $2 million from last year, although flat with the second 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 $29 million, up from $22 million in the third quarter of 2019. Net interest expense is up because our interest rate swaps had higher fixed rates than the ones which expired last year. The Q3 adjusted tax rate, which were used for the calculation of adjusted net income, was 20% for the quarter. Tax rate for the items used to adjust net income was 26.4% in the quarter. Adjusted EPS in Q3 was $0.91 cents.

Operating cash flow for the quarter was $244 million compared to $220 million last year. The increase in operating cash flow was primarily driven by cost avoidance initiatives, partially offset by an earlier interest payment due to the refinancing. CapEx for the quarter was $15 million down 59% year-over-year. Lower CapEx is largely a function of lower real estate expansion needs, due to the pandemic. We define free cash flow as cash provided by operating activities and less capital expenditures.

Free cash flow for the quarter was $229 million, which is up 25% versus the prior year. This includes outflows of about $10 million of acquisition, integration and other non-recurring items. Pre-cash flow as a percent of revenue or free cash flow margin was 15% on a rolling fourth 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 285%. Free cash flow benefited from continued strong collections combined with reductions in outflows from our cost avoidance initiatives, lower capital expenditures, and lower cash taxes and deferrals of certain tax payments. While we've seen timing benefits to our free cash flow margin from significantly lower CapEx and our ability to defer certain tax payments, even excluding these, LTM free cash flow margin is still up about 200 basis points versus the prior year.

During the quarter, we took advantage of historically attractive high yield bond pricing and issued $800 million of new 10-year senior unsecured notes with a 3.75% coupon. We used the proceeds from this new issuance to extinguish our 2025 bonds which carry a 508% [ph] coupon. We also amended and extended our credit facility to September 2025 with attractive financial terms, increased flexibility and fewer less restrictive covenants.

The overall impact of the financing activities resulted in a 50 basis point reduction to total cost of borrowing. The combination of the capital markets activities in the past six months has extended our debt maturity profile to nearly eight years, versus less than three years pre-pandemic. Our September 30th debt balance was $2 billion. Our reported gross debt trailing 12 months EBITDA is about 2.5 times. Our total modified net debt covenant leverage ratio was 2.3 times at the end of the third quarter, well within the five times covenant limit.

At the end of third quarter we had $554 million of cash. After pausing share repurchases at the start of the pandemic, we are in a position to resume our normal capital allocation programs. Going forward, we will deploy excess cash for share purchases and strategic tuck-in acquisitions. At the end of the quarter we had about $1 billion of revolver capacity and have around $680 million remaining on our share repurchase authorization.

We are updating our full year outlook to reflect Q3 performance, a marginally better demand environment, including the successful launch of virtual conferences and cost restoration plans. Last quarter when updating guidance, we were cautious because we had only been through one full quarter of the pandemic and we had two quarters remaining in the year. With more experience, better performance, and more visibility, we have updated our guidance accordingly. We now forecast research revenue of at least $3.57 billion for the full year. This is growth of almost 6% versus 2019, and reflects the continuation of third quarter new business, and retention trends.

For the Conferences segment, we are generating revenue from our virtual conferences. We now expect revenue of $110 million for the full year. This reflects our initial success in launching virtual conferences and virtual Evanta meetings. The majority of the incremental revenue we expect from conferences is from entitlements included in some of our subscription contracts, as we discussed earlier.

We now forecast Consulting revenue of at least $370 million for the full year or a decline of about 6%. The Consulting outlook continues to contemplate a slowdown in labor based demand. The timing of revenue in the contract optimization business can be highly variable as you know. Overall we expect consolidated revenue of at least $4.05 billion. That's a reported decline of about 5% versus 2019.

Excluding conferences, we expect revenue growth of at least 4.5% 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 started to resume certain spending late in the second quarter as the operating environment appears to have at least stabilized. We want to ensure we are well positioned for an economic normalization.

We expect full year adjusted EBITDA of at least $740 million, that's full year margins about 18.3% up from the 16.1% margins we had in 2019. We expect the full year 2020 net interest expense to be $106 million. We continue to expect an adjusted tax rate of around 22% for 2020. This does imply a higher fourth quarter rate than we've seen throughout 2020 consistent with our experience in recent years. We expect 2020 adjusted EPS of at least $4.07. For 2020, we expect free cash flow to be $625 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 the details of our full year guidance are included on our Investor Relations site. In summary, despite a very uncertain economic environment, we delivered better than planned financial results in the third quarter, which has allowed us to update our full year outlook favorably.

Most of our key operating metrics improved in the quarter and we were able to successfully launch and monetize virtual conferences and virtual Evanta meetings. 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?

[Operator]

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

[Jeffrey Meuler, Robert W. Baird & Co.]

Yes, thank you. Good morning. So I always find your sales productivity metric, NCVI per beginning AD a little bit challenging during periods of a lot of acceleration or deceleration. One of the things that jumped out to me today was the year-over-year trends in new business sold relative to the year-over-year trends in sales headcount for each of the segments. Curious if you use that as an internal metric? And then just what you kind of say about that trend and anything in how you're managing sales headcount between the zero CV folks and the people that have a book of existing business that are looking to expand that? Thanks.

[Eugene Hall, Chief Executive Officer]

Hi Jeff, Gene. The first, we definitely look at new business per salesperson as one of our key metrics. At the end of the day, the reason we look at NCVI per salesperson is because that's what net results in growth, but we manage the pieces of it, which are, retention of our clients and the new business as we absolutely manage new business, per salesperson. And the trend, there has been, has improved significantly between Q2 and Q3 as the numbers you saw from credit.

[Jeffrey Meuler, Robert W. Baird & Co.]

And anything you'd say in terms of how you're managing headcount in terms of the zero contract value associates, and those that have a book of business, like are there any big shifts occurring among those?

[Eugene Hall, Chief Executive Officer]

So, it varies depending on the specific market, and we tailor it to the market. And so in markets where we have not that much contract value, because it's a relatively immature market, we'd have more business developers, people that have zero contract value accounts, in a much more mature market like the United States for, especially for GTS. For GBS across the board, we have a lot more business developers because those markets are so relatively under penetrated. So you don't need as many people that are what we call account managers that have existing clients, just because the business is so much smaller in each of the disciplines.

[Jeffrey Meuler, Robert W. Baird & Co.]

Okay. And then anything else you can say about what avoided costs are still left to be brought back? And in the past, you made some comments about expecting 2021 margins to be down year-over-year, do you still expect them to be down relative to the implied margins from the prior guidance or are we now using the baseline of this 18.1% or 18.3% margin this year to be down from and similar question on free cash flow, obviously, as you said outstanding this year, should that step back next year? Thanks.

[Eugene Hall, Chief Executive Officer]

So let me just start and then Craig can fill in. So, prior to 2020, we were going through an investment period. We were investing really to position GBS to have great future growth and we ended that investment period in 2019. We came into 2020, before the pandemic even hit focused on improving our margins over time. And part of the reason the margins are better in 2020 compared to 2019 is that we were already focusing on how do we get the return on the investments that we had put in place over the previous three years. We're still going be focused on that going into the future.

Having said that, there are some expenses in 2020 that are lower than they might get a normal year and the biggest example in my mind is travel expenses where we basically have very low travel expenses compared to a normal year. And I can imagine, and once the pandemic is over, we can travel again, our travel expenses will be, I wouldn't say go back to where it was before. I think we've learned how to work more efficiently, but sort of be larger than it would be in a year like 2020. And Craig, if you want to fill in?

[Craig Safian]

Yes, good morning, Jeff. Only a few things I would add are that, in terms of the cost avoidance, we were very aggressive in the early days of the pandemic, when we really didn't know what the outcome was going to look like. As we stabilized, we obviously started turning certain expenses back on particularly related to compensation and benefits, expenses for our associates, as well as backfilling open roles and actually sprinkling in a little bit of headcount growth in GTS and GBS salesforces.

And so, we were first focused on just making sure that we could preserve profitability and then once we had eye line to that or eyesight to that, we started selectively turning certain expenses back on. To Gene’s point, 2020 is hardly a normal year by any definition. And so, the way we've been managing the business, and again, we have been restoring a lot of cost in the back half of the year and we were able to get virtual conferences launched and monetized. That's obviously playing a large role in the margin profile for 2020.

You know as we look forward, the way we sort of think about it from a medium term perspective is that, we can absolutely drive double-digit top line growth, and modestly expand margins. Over at least the medium term, we will expand margins from the 2019 levels, which is our last normal year benchmark, if you will. And to the point Gene made, we are very committed to maintaining tight cost controls, like you've seen from us this year. We will have to turn certain things back on, but things like travel, we will have to travel more. We will have more expense there, but it will probably not run all the way back up to what we did in 2019.

Similarly, with facilities, we've obviously had a lot of operational benefits this year from not having to keep and cool and run our facilities as we've been working from home. Hopefully, we will be back in facilities at some point and those expenses will come back, although I will say that, as we look forward, we probably won't need to expand our facilities footprint at the same pace that we did in the past. And so, there's a lot of moving parts there. But I think the key point is that over the medium term, we believe that we can drive double-digit top line growth, and modestly expand our margins.

[Jeffrey Meuler, Robert W. Baird & Co.]

Thank you both.

[Operator]

Thank you. Our next question comes from the line of Toni Kaplan from Morgan Stanley. Your line is now open.

[Toni Kaplan, Morgan Stanley]

That's great. Thank you. Gene, you mentioned higher demand that you're seeing from clients. Can you just dive a little bit more into that within research, which regions have been strong? And basically, when regions have either, somewhat recovered from COVID and started to open up I'm thinking maybe China or even in the U.S. over the summer, when things were a little bit better, how quickly can the business rebound or should we be viewing this more as a slow recovery? Just wanted to get some color on the strengthening demand that you mentioned. Thanks.

[Eugene Hall, Chief Executive Officer]

Yes, hi, Toni. I don't know how fast the pace of recovery will be. But we certainly saw meaningful improvements between, Q2 and Q3 in terms of demand as the numbers that Craig went through in terms of like new business and so forth. China is interesting, because they have recovered relatively quickly, like the new business growth in mostly Japan and China. In China it has been quite good. Japan the same thing, actually. And so, if the rest of the world kind of goes the way of China, Japan, then we'll have a relatively quick recovery for us.

[Toni Kaplan, Morgan Stanley]

That's great. And I wanted to ask also about the GTS hiring strategy. I think Craig mentioned the 3,100 expected by year end. In general, I guess, are you thinking about hiring ahead of CV growth turning around or little bit more of a wait and see kind of pattern, just trying to understand on the strategy of hiring through the rest of the year and maybe through next year, in terms of how you're thinking about it? Thanks.

[Eugene Hall, Chief Executive Officer]

Yes, Gartner sales force is an important part of our growth strategy and so over time, we expect to grow our sales force and kind of in line with our contract value growth. And so that's kind of the long term strategy. We came into this year, you saw at the end of last year, we added a substantial amount of headcount, as we came to this year for and to allow our growth during 2020.

Now, obviously the pandemic hit and we hadn't realized that growth switch. We have a lot of the sales capacity that we think as the market improves, will give us good uplift. And then, so we're going to use that and leverage that. We will also then grow our sales headcount in, you think about in line with CV as we go forward to support future growth.

[Craig Safian]

The one other thing I'd add, Toni is if you just think about the capacity we've invested in building over the last several years in both GTS and GBS is pretty substantial. And so with that selling capacity, again if we can approach 2019 productivity levels or claw back half the gap between where we are today and 2019 productivity levels, we can actually drive really nice CV growth just from that capacity.

And as Gene mentioned, our strategy because of the market opportunity we have is to continue to grow the sales force, which we will do to go capture that opportunity. But again, we always look at really two levers to drive the CV growth over the medium term or long term. It's growing sales headcount to capture the market opportunity and driving productivity improvements at the same time.

[Toni Kaplan, Morgan Stanley]

Thanks so much.

[Operator]

Thank you. Our next question comes from the line of Gary Bisbee from Bank of America Securities. Your line is now open.

[Gary Bisbee, BofA Merrill Lynch]

Hey, guys, good morning. I guess I just want to start by asking about the GBS contract value growth and new bookings really no deceleration sequentially, and the bookings were strong. Can you give us any more color on sort of what the key drivers are where you're really succeeding? And I know you didn't give the GxL breakout anymore, as you said you wouldn't, but when you look at those metrics, are you sort of past that inflection point where the GxL is meaningfully enough, bigger that that's really, the key driver from here and if you could address that?

[Eugene Hall, Chief Executive Officer]

Yes, hi it’s Gene. The GxL exclude the key driver in GBS going forward. We have crossed the threshold of 10,000 seats in GBS, which internally was a major milestone. The GBS to business is being driven by the fact that, what we talked about all along. Basically in each of the functions around the business the executives have mission critical priorities they need help with. And they see Gartner's being able to help them and our sales force has been extremely effective at reaching out to prospects and explained how we can help and the prospects have responded.

And that's fundamentally what's driving the new business growth. And in fact, the -- it's really, we're seeing the benefit of now, even during the pandemic, but we talked about it earlier, the investments we made over the last two or three years before 2020, it is really starting to come back from all those investments in GBS.

[Craig Safian]

And Gary, good morning, I would just add, as I mentioned in my remarks, GxL now represents more than 50% of the contract value within GBS. So it really is a GxL story going forward that is the predominant amount of contract value within the portfolio. And then the other nice thing I would add is that we're seeing really good contribution across the GBS practice portfolio. So it's not just supply chain or it's not just the HR. We're seeing really good contribution in finance, in HR, in supply chain, in sales, et cetera. And so that, it's not just one story there, it's across the portfolio.

[Gary Bisbee, BofA Merrill Lynch]

And just as a follow up if I can dig into that, I'm trying to get more, do you have, is there any way to tell how much of the improvement there in the CV holding up quite well is sort of easy comps because you've pushed so much change over the last couple of years. So it's sort of the maturity of the sales force and improved productivity as they're more used to selling GxL versus end market dynamics. And really what I'm trying to get at is that are those two factors strong enough to continue that, continue to drive outperformance if the economic environment does remain, weakened and choppy in the near term? Thank you.

[Craig Safian]

Yes, I'll start and then Gene if I miss anything you can fill in the blanks. I know, I think that if you look back at the GBS performance, we really started to see a nice acceleration in the business in Q3 of last year. And so, it's not the easiest compare we've had for sure. I think there's definitely a benefit to having a more tenured sales force and having them have significant experience with selling the standard set of products we have and so that is absolutely a benefit.

But I really do believe that I'd echo what Gene said earlier, it's really about the value we're providing to the end users in each of these markets, as opposed to an easy comp or more experience. And so those things help, but I think ultimately it is because we provide a great value and help business leaders across each of those enterprise functions, really solve and win on their mission critical priorities.

[Eugene Hall, Chief Executive Officer]

And the only thing I'd add Gary is that the, we also took a while to roll out all the GxL products and then the sales teams had to learn how to sell those products. And so, I think they're now getting to the good part of that curve.

[Gary Bisbee, BofA Merrill Lynch]

Great, Got it, thanks.

[Operator]

Thank you. Our next question comes from the line of Andrew Nicholas from William Blair. Your line is now open.

[Andrew Nicholas, William Blair]

Hi, good morning. With a few more months under your belt, and what I thought was a solid third quarter result, did you feel like you have a better sense for how CV might churn over the next couple of quarters? And is there any change to how you're thinking about the potential trough in CV growth across both GTS and GBS both in terms of timing and magnitude?

[Craig Safian]

Yes, good morning, Andrew. With CV being a rolling four quarter metric, we do still expect some deceleration in the contract value growth rate, probably over the next quarter or two, predominantly because it's going up against a tough compare quarter in the fourth quarter of last year. And so if you look back at fourth quarter of last year, we've had significant growth and NCVI in both GTS and GBS and given the environment, our current expend and extrapolating what we've seen in Q3 and March through the end of Q2 as well, we do not expect as much new business or similar renewal rates and so we do expect some continued deceleration.

The trough, if you think about it, just based on looking at it that way is probably Q1 of next year. Again, we could outrun that if the economy improves significantly or if there's a vaccine, and people go back to the office and everything like that, but we still remain cautious and are using really our last three months performance as a guide, as we think about what CV can do and how we're building our operational plans for the end of this year and for next year.

[Andrew Nicholas, William Blair]

Great, that's helpful. Thank you. And then, just wanted to switch over to conferences. If I look at guidance or implied guidance for Q4, it looks like you're guiding to about $80 million, $85 million of conference revenue versus about $218 million or somewhere around there last year. If I do the math there, it looks like about 40% or so I know there's two less conferences versus last year, but I guess, I'm just wondering, is that 40% number a reasonable ratio for us to use? And we're thinking about revenue for 2021 in the instance that in person conferences haven't returned or there are other factors that I'm not thinking about that I should?

[Craig Safian]

Yes, it's hard to say Andrew, predominantly because we have moved a number of conferences that we would have produced in person earlier in the year into the fourth quarter. And so we've obviously turned the portfolio and we've gone with a series of very important and very impactful conferences globally. And in addition, if you look at the Q4 implied guide, you have to also keep in mind that there's a hunk of Evanta virtual meetings in there as well which are pretty nice contributor to the overall number.

I think that as we roll into, we're in the process of building out 2021 plans under a number of scenarios for next year. As Gene mentioned, and I mentioned as well, we're getting better and smarter with each virtual conference that we actually deliver. And the next one, gets better and better and better. And we're still really working on that exhibitor value proposition as well. As I mentioned, we expect the exhibitor contribution in the fourth quarter to be significantly lower than what you would see historically, and obviously we want to work really hard to improve that and deliver value to both our attendees who get value from being exposed to the exhibitors and the exhibitors who get the corresponding value.

So I wouldn't plug in a formulaic 40% yet. We're still working through all those scenarios and again, there are, a number of different scenarios where we could be in person later in the year or virtual beginning of the year, it could be virtual all year long. When we guide for 2021, in February it will be very clear about what our assumptions include and will really be driven by, what the environment allows us to do?

[Andrew Nicholas, William Blair]

Makes sense? Thank you.

[Operator]

Thank you. Our next question comes from the line of Jeff Silber from BMO Capital Markets. Your line is now open.

[Jeff Silber, BMO Capital Markets]

Thanks so much. In your prepared remarks, you talked about some of the portion of the growth that both GBS and GTS was pricing related. I'm just curious, what kind of price increases have been able to put through in terms of renewals? And if there's been pressure or pushback from clients on that? Thanks.

[Craig Safian]

Yes. Hey, good morning, Jeff. So, we, for most of our, most of the world, we do our pricing creates in November, actually yesterday, the first day of November. As we went through the renewal cycle, leading up to this November, obviously we were dealing with our standard price increase. In this environment, there was probably or there's definitely a little bit more pushback, than we historically see. Our price increase, as you know, ranges has ranged in the 3% to 4% range, historically, and it's typically not big dollars for the client, and we are always improving our products and our experience.

This year, given the environment, we were a little more modest on the price increase, think, around, between 2.5% to 3% price increase, again was just into effect now. We generally, our clients understand that we are improving the product each and every year. The people that deliver the service, their costs go up every year. And so, generally speaking, we haven't seen the kind of pushback on the pricing, but definitely in this environment, it's a little more challenging than what we normally see, but generally speaking, it's modest dollars that we're pushing through.

[Jeff Silber, BMO Capital Markets]

Okay, great. That's helpful. If I could shift over to conferences, in terms of the shift to virtual, I'm just also wondering, from a price perspective, what do you charge attendees relative to the in person conference? I know there's some entitlements, they're in the same thing on the exhibitor side, I'm just curious on a relative basis, what the delta is? Thanks.

[Craig Safian]

Yes, if you take a look at the -- you can see this pricing online, the attendee pricing is about 40% of what we would get from an in person conference ticket. So think about it in roughly that range in terms of the -- if you're buying a cash ticket as a standalone item, again, either online or through one of our sales teams. On the exhibitor side, as we mentioned, it's still really early days. And we're working through all that and so there's really not an apples-to-apples comparison from an exhibitor perspective.

[Jeff Silber, BMO Capital Markets]

Okay, thanks for the color.

[Operator]

Thank you. Our next question comes from the line of Manav Patnaik from Barclays. Your line is now open.

[Manav Patnaik, Barclays]

Thank you. Good morning. I was just hoping if you could give color may be sticking to GBS [indiscernible] the client in a reaction, even with the wallet retention and the facts that she comes down, just some color there around, how much of that is number which seemed to be uncomfortable [indiscernible] your clients and in this new wave or lockdown in the fourth quarter and see if you anticipate any problems though?

[Eugene Hall, Chief Executive Officer]

Yes, hi, Manav. I’ll get started with it. So first, the biggest change in the wallet retention it was that our existing clients are buying fewer additional seats. And so it's actually less that people are reducing seats than it is. In normal times, a substantial portion of growth comes from existing clients adding more seats. We see existing clients in GTS particularly, adding fewer seats than they are still having seats, but fewer seats than they would do in a normal year. And that's one of the biggest piece of the well retention. And Craig, do you have anything to that?

[Craig Safian]

No, I think that's right, again, and it's, a combination and Gene went into detail of this last quarter in Q2, and actually, as we rolled into Q3, each of these measures actually improved. And so, the point on fewer clients increasing or increasing at lower rate, that trend continued into Q3, but it was definitely better than what we experienced in Q2, and the same could be said around clients that were reducing their spend. So we still saw that trend happen in Q3, but it was much less pronounced than what we experienced in Q2.

[Manav Patnaik, Barclays]

Got it. And Craig just on the event side, would you be willing to share what the Evanta year-to-date revenues were and your expectation on the, call that a big chunk of revenues in the fourth quarter?

[Craig Safian]

Yes, I mean, historically, if you go back to the last normal year, we had an event, the revenues were in the roughly 15% of the revenue range. This year, given what's happening, they're running closer to around a quarter of the conference revenue, just to put it in rough perspectives.

[Manav Patnaik, Barclays]

All right, thank you guys.

[Operator]

Thank you. Our next question comes from the line of George Tong from Goldman Sachs. Your line is now open.

[George Tong, Goldman Sachs]

Hi, thanks good morning. I wanted to drill into the demand environment, which you noted is stronger than you previously expected. Can you elaborate on which specific client segments you're seeing the upside in GTS and GBS? And what specific macro or shutdown assumptions are embedded in your full year guidance?

[Eugene Hall, Chief Executive Officer]

So I'm going to get started on. As Craig mentioned in his remarks, that in GTS, CV grew nearly in all of our 10 largest countries, and was up double-digits in Brazil, Japan, France, and Netherlands. And CV grew across all sectors, except for transportation and media. And it grew across every sized enterprise. And so that kind of gives you a flavor for GTS. In GBS, we found we had growth basically, we had contributions from all the practice areas, meaning like, HR, supply chain, sales, et cetera, except marketing, as Craig mentioned, his remarks the marketing piece, we have some products that we're just continuing which pulled that piece down, but the rest is quite strong.

[Craig Safian]

And George, in terms of the outlook, it's been choppy all along. It varies by region and geography, in terms of lock downs and relock downs and things of that nature. And so, we've, the good news for a business like ours is, the hunk of the revenue on the research line is banked based on where we finished Q3, and so the guide doesn't really doesn't get impacted all that significantly from whether, there are new lockdowns or otherwise obviously, it could have an impact on next year.

But I think our sales teams are really focused on working through this. They've proven they can work through it in a lockdown or non-lockdown environment. And we'll just continue, working through the selling cycles and renewal cycles, as we close the year to book as much NCVI and as much contract value growth is as possible.

[Eugene Hall, Chief Executive Officer]

It's George. Actually with regard to lockdowns, we've, with our sales teams, we've had a discussion on what impact does it have like in certain European countries now they're going back to shorter lockdowns, at least our sales teams perspective on it is that both we and our clients have learned to work in a lockdown environment and they don't anticipate the increased lockdowns you're seeing like in Europe, having an impact on our bookings, no tumbled tail but that's the sales team's perspective.

[George Tong, Goldman Sachs]

Got it. That's helpful. You're guided to full year EBITDA margins of slightly over 18% that's up from 16% last year. Can you discuss how incremental margins may trend over the next two to four quarters and some of your costs like T&E [ph] and sales force hiring from that?

[Craig Safian]

Yes, George, a lot of it will be dependent on where we finished this year from a contract value growth perspective. I think that has a pretty material or very material impact on the revenue run out for next year. We have started to restore a lot of expenses related to compensation and benefits, which continue to run, consistently and so there won't be a hurt or should be significant, one time hurt, when we flip those back on you.

I think, we'll obviously provide full color on 2021 guidance in February when we get there, but for now, we're just really focused on making sure that we finish the year strong. Obviously, we have been able to take up our guidance on just about every count, pretty nicely. And teams are just focused on making sure we finish the year strong and well address what the front margins look like and what the overall outlook looks like in February.

[Eugene Hall, Chief Executive Officer]

George I would add that, we made a bunch of investments coming into 2020. And, sort of the '17, '18, '19 period, and 19 margins reflected that. We came into 2020, focused on getting return on those investments and having tight cost controls. And we expect to keep getting return on those investments over the next few years, as I mentioned earlier, and we intend to keep tight cost controls as well. And so we're very focused on managing our margins in future years as well.

[George Tong, Goldman Sachs]

Very helpful. Thank you.

[Operator]

Thank you. Our next question comes from the line of Hamzah Mazari from Jefferies, Your line is now open.

[Hamzah Mazari, Jefferies]

Hey, good morning. My first question is just on sales force productivity. Maybe if you could just talk about, getting back to 2019 levels on productivity, what's sort of under your control, what's not under your control? And what kind of timeframe is realistic to get there? I know you talked about CV troughing in Q1. So maybe you could just give your best guess on, when sales force productivity drops.

[Eugene Hall, Chief Executive Officer]

So the it's hard to forecast exactly when sales first person is going to trough is, as we've mentioned in terms of the call, we've certainly seen this year between Q2 and Q3 and improving, all the kind of underlying and virtually all the underlying operational metrics that drive sales productivity. I talked about one of them, like client engagement, which ultimately drives retention, and new business performed better than in Q3 then in Q2.

And so, those are things that are going to kind of drive over time. I think we are learning how to sell in the pandemic has a factor. And so that will continue to get better. They also, obviously, the more companies that go out of business and can't fire products, because they're out of business, that has an impact on productivity as well, so those kinds of factors.

[Hamzah Mazari, Jefferies]

Got it.

[Craig Safian]

And Hamzah, I would just add that, it's going to really correlate, very, very tightly to CV growth. And so, again it's sort of an output of CV growth or if you're running back the other way into the overall CV growth, but given that we have gotten disciplined around - much more disciplined around the headcount growth and headcount investments and Gene’s point, getting yield on those investments and that, we'll start having “easier” compares in Q2, the CV growth trough and the productivity growth trough should be aligned.

[Hamzah Mazari, Jefferies]

Got it, very helpful. And just my follow up question is just two quick ones. One is the territory optimization kind of behind you is that sort of ongoing process. And then just on the research side, anything to call out on the non-subscription piece, how that trended? I know it's small, 10% or so of research, but just on those two points anything to add? Thanks so much.

[Eugene Hall, Chief Executive Officer]

The territory optimization is really important to us, because different territories have different structural characteristics that make them better or worse. Kind of simple and it varies over time. A simple example is a territory selling to restaurants in this day, today doesn't have as much upside potential as the territories selling to tech companies.

And so, we will time shift our territories around to the territories that are away for the ones that have less potential to ones that have a lot more potential. So it's not a onetime thing. We just implemented kind of the most sophisticated versions of our territory planning this year. And it's something we're going to do on an ongoing basis as the economy around us changes. And it's an important driver of sales productivity.

[Craig Safian]

And then on the non-subscription piece, it's actually holding up pretty well. It was down 3% year-over-year in the quarter, which is better than we had initially forecasted. So the non-sub piece your point relatively small piece, but it's holding up better than we had initially thought down 3% year-over-year.

[Hamzah Mazari, Jefferies]

Great, thank you.

[Operator]

Thank you. Our next question comes from the line of Jake Williams from Wells Fargo. Your line is now open.

[Jake Williams, Wells Fargo]

Thank you and good morning, everyone. Can you share some of the lessons that you've learned from hosting virtual conferences so far? And if you think there are any opportunities to expand the reach or the breadth of future conferences through a hybrid in person virtual model?

[Eugene Hall, Chief Executive Officer]

Hey, Jake Gene, so we've learned a lot of lessons virtual conferences. As Craig mentioned, we started with some pilots in Q2 and then have held our virtual equivalents of our larger conferences this year, same thing is true actually of the Evanta conferences, when the past were in person, and now are all virtual.

And we've learned things about like what technologies to use, some technologies work better than others. And each time we have, things didn't work as quite well as we planned, we'd fix those technology problems. We've been experimenting with things like how long each session should be, because in a virtual environment people will have different session links. We experimented with how long the conference itself should be. Should it be two days, four days for the longer conferences, and getting customer feedback or tweaking the length of the conferences.

The content is pretty much the same. And the production values are very similar if you go to any of our conferences, and that has worked pretty well. So those are kind of the key learnings I'd say. And in terms of opportunity expand, the way we look at it is, if there's demand going forward, when in person conferences return, if there's still demand for virtual conferences, we're going to be really well positioned to do that and we will certainly do it if demand is there. And like what I believe is demand will be there, but we're going to be flexible based on what the market says.

[Jake Williams, Wells Fargo]

Got it. Thank you very much.

[Operator]

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

[Eugene Hall, Chief Executive Officer]

So summarizing, what you heard us say on this call, we accelerated the creation of new highly relevant content for our clients across every function. We successfully pivot to virtual conferences, which were well attended and delivered high value to our clients. Our clients are more engaged than ever. The outline engagement we adapted our operations to work remotely just effectively as we do from our offices, and we combined this with early decisive actions to optimize our cost structure.

The combination of these factors has resulted in improvements across most of our operational metrics compared to Q2. The improvement in our operational metrics in turn has resulted improvements in our Q3 financial metrics in Gartner’s compared to Q2, revenue and EBITDA are performing better than we expected. And free cash flow generation is very strong. Thanks for joining us, and I look forward to updating you again later, again in the New Year.

[Operator]

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