Gartner, Inc.
Q2 2016 Earnings Call Transcript

Published: 4 Aug 2016

[Operator:]

Good morning, ladies and gentlemen, and welcome to Gartner's Earnings Conference Call for the Second Quarter of 2016. A replay of this call will be available through September 4, 2016. The replay can be accessed by dialing 888-286-8010 for domestic calls and 617-801-6888 for international calls and by entering passcode 21946131. This call is being simultaneously webcast, and will be archived on Gartner's website at www.gartner.com for approximately 30 days. I will now turn the conference over to Sherief Bakr, Gartner's Group Vice President of Investor Relations, for opening remarks and introductions. Please go ahead, sir.

[Sherief Hassan Bakr:]

Thank you, Sue, and good morning everyone. Welcome to Gartner's second quarter 2016 earnings conference call. With me today in Stanford is our Chief Executive Officer, Gene Hall; and our Chief Financial Officer, Craig Safian. This call includes a discussion of Q2 2016 financial results as disclosed in today's press release, as well as our outlook for 2016. After our prepared remarks, you'll have an opportunity to ask questions. I'd like to remind everyone that the press release is available on our website, investor.gartner.com. Before we begin, I'd like to remind you that certain statements made in this call may constitute forward-looking statements. Forward-looking statements can vary materially from actual results and are subject to a number of risks and uncertainties, including those contained in the company's 2015 Annual Report on Form 10-K and 2016 Quarterly Report on Form 10-Q, as well as in other filings with the SEC. I'd encourage all of you to review the risk factors listed in these documents. With that, I'd like to hand the call over to Gartner's Chief Executive Officer, Gene Hall.

[Eugene A. Hall:]

Good morning, everyone, and welcome to our quarterly earnings call. Q2 was a robust quarter with strong performances across our business. As on prior calls, I'll review our key operating metrics on an FX neutral basis. We do business in more than 90 countries around the world. And with ongoing currency fluctuations, that's the best way to understand the underlying health of our business. For the second quarter of 2016, total company revenues grew 12% and we continue to see robust demand for our products and services. Research, which is our largest and most profitable segment, achieved 17% revenue growth over the same quarter last year. These results were driven by double-digit contract value growth and contributions from our recent acquisitions. Our contact value grew 13% with double-digit growth in every region, across every client size and in, virtually, every industry. Client retention and wallet retention were strong at 83% and 104% respectively, while down modestly from our recent all-time highs. Our Consulting segment deepens relationships with our largest clients. And for Q2, our Consulting business achieved 6% revenue growth with utilization up 1-point over the same quarter last year. Backlog, which is a leading indicator of future revenue growth for this business segment, grew 15% over this time last year. Our Events segment continues to drive strong growth by extending our brand. For the second quarter 2016, Event revenues were up 16% on a same events basis. We hosted more than 15,000 attendees across 25 events that we held in the quarter. Our results reflect the tremendous value we deliver to our clients. Technology is critical for every enterprise around the world. Every enterprise has cybersecurity risks. Every enterprise is worried about technology disruption. And technology is the key to fueling cost reduction, whether enterprise is funding new growth initiatives or improving margins. Enterprises know they need help. And Gartner is the best and most cost-effective source for that help. Our clients rely on us for independent, objective, fact-based insights for making critical technology decisions. Our services deliver tremendous value, and in most cases pay back many times over. There're a number of factors in the global economy today that impact our clients. Economic growth has slowed in countries around the world. Oil and other commodity prices have fallen dramatically. Exchange rates are at levels that challenge U.S. exporters and challenge non-U.S. importers. And most recently, there's Brexit. As a result of these factors, we see a higher proportion of our clients with financial challenges compared to the past few years. In the U.S., the S&P 500 is having its fourth consecutive quarter of negative earnings growth. In Europe, the S&P 350 is expected to have negative earnings growth this year. In any of our markets, we always have clients who are doing great, clients who are doing okay and clients who are in economic distress. We know how to be successful with all clients, whether they're thriving or in financial distress, which is why we've consistently delivered double-digit growth in every geography, in virtually every industry and across every client site segment. However, when clients are in distress, decisions like those can get extended as they scrutinize every expense. Because of the pervasive criticality of technology and the incredibly strong value we deliver, we win with these clients. The decisions like those can take longer, which has led to a modest reduction in our growth rate. With an enterprise that's thriving or facing economic challenges, Gartner is the insight and advise our clients need to achieve the success in their mission-critical priorities. So summarizing, we had a very robust Q2 with strong performances across our business. Our client base is highly diversified with more than 10,000 client enterprises, in every size from the largest in the world to the smallest, and more than 90 countries and across every industry. We had double-digit contract value growth in all geographies, all client sizes and virtually all industries. We've a huge untapped market opportunity. We've robust demand for offerings and our pipeline is strong, and we're not standing still. We attract the best talent in the industry. We continue to invest in innovations to improve our content, products, hiring, training and tools to drive continued improvement in our operational effectiveness. We're committed to enhancing shareholder value through investment in our business, strategic acquisitions and share repurchases. Our 2016 and long-term outlook is strong. And with that, I'll hand the call over to Craig.

[Craig W. Safian:]

Thank you, Gene, and good morning, everyone. Gartner's second quarter performance continues our long-term trend of double-digit growth. Despite challenges in the economic environment, we see robust demand for our products and services, and our sales pipeline is strong. The combination of the tremendous value we provide to our clients around the world, the investments we're making to capture our vast market opportunity and our exceptional business model allows us to consistently deliver double-digit revenue, earnings and free cash flow growth. Our first half performance, combined with our expectations for the balance of the year, indicate that we are well on track to continue that trend for the full-year 2016. On an FX neutral basis, our year-on-year financial performance for the second quarter 2016 included

[Operator:]

Thank you. And your first question comes from the line of Timothy McHugh from William Blair. Please proceed.

[Timothy J. McHugh:]

Thank you. I guess, first, just wanted to ask on your comment about the little bit longer sales cycle. I guess, it's understandable in this environment, but can you maybe elaborate, I guess, I know you grew double digits in every kind of region and client size, but were there areas of the world where you saw this more and less, and I guess was it any more pronounced later in the quarter surrounding Brexit and some of that volatility than, I guess, earlier in the quarter?

[Eugene A. Hall:]

Right. Hey, Tim. It's Gene. So, to get to the last part first, we didn't see in the quarter anything we could directly trace to Brexit on anything. So, within Q2, I'd say, we couldn't pick up any direct impact of Brexit. With regard to sort of elaborate a little, if you think about selling – I'll use Brazil as an example. If you're selling to an enterprise in Brazil, whether it's public sector or private sector, the economy is just terrible. It's shrinking. They have a lot of problems. And they still buy. We're actually growing in Brazil still, but it's a lot lower than it was before. And so, what happens is, client may want to take – this happens in public sector frequently, client will want to renew because the government revenues are down so much, there's a lot of scrutiny and sometimes that renewal will extend for, call it, three months longer than we would have normally had wherever it is right on time. That's an example of what the kind of things going on. And it's in the areas you'd expect, which is like where oil and gas has been really affected. Again, in the oil and gas by the way, in aggregate, we were growing. In Brazil, we were growing. In fact, it's a lot slower growth than it used to be. And that's kind of an example of the extended decision-making cycle. So, it's exactly we'd expected.

[Timothy J. McHugh:]

Are you surprised though, it was kind of a volatile world in the first quarter as well. And I guess, so, what feels different, I guess, in 2Q than 1Q that you're highlighting it a little bit more?

[Eugene A. Hall:]

I think it's not that there is a dramatic change between first quarter and second quarter. I think that it's kind of an incremental change where these – when things get bad, companies hope that they're going to get better. And when they stay better – again, I'll use Brazil as an example, when it becomes clearer and clearer that there's problems, incrementally things get a little worse. By the way, my sense in Brazil is it's bottomed out, but I do think that it was a little worse in Q2 than it was in Q1, and Q1 was a little worse than it was in Q4. And so that's just an example.

[Timothy J. McHugh:]

Okay. Thanks. And, Craig, just real quick numbers on. Can you give us any sense for the contract value or revenue for SCM?

[Craig W. Safian:]

Hey, Tim. Good morning. Yeah. It's small. It's a relatively small acquisition as you've seen from the purchase price. It doesn't contribute all that much to the overall. And we typically don't break out the contract value from small businesses or from small acquisitions, but suffice it to say, we think it's a great deal for us. It really helps us and enhances our supply chain business selling into the key executives from a supply chain perspective, but relatively small from a contract value perspective.

[Timothy J. McHugh:]

Okay. Thanks.

[Operator:]

Thank you. And your next question comes from the line of Jeff Meuler from Baird. Please proceed.

[Jeff P. Meuler:]

Yeah. Thank you. Good morning. I guess, just given that you cite a lot of the research metrics on a rolling LTM basis, but given all of the commentary in the prepared remarks, just to confirm, it does sound like if you just look at the quarterly metrics, things are trending, I guess, a little bit worse or a little bit slower growth in Q2 just on a quarterly metric basis than they were three quarters, four quarters ago. Is that an accurate interpretation?

[Craig W. Safian:]

Yeah, Jeff. That's 100% accurate. And, again, I think a lot of it relates to what Gene just described both in his prepared remarks and in the Q&A, as the sales cycles lengthen and things crossover quarters, as I've described. We will often take down business that will impact the renewal rate. We stay in touch with the client. The client still really needs our value. We win back that business over subsequent months and quarters, but your assertion is correct that Q2 you would see a slowdown in the contract value growth rate as well as the retention measures.

[Jeff P. Meuler:]

Okay.

[Eugene A. Hall:]

Yeah.

[Jeff P. Meuler:]

Good ahead, Gene.

[Eugene A. Hall:]

I'm sorry. Go ahead, Jeff.

[Jeff P. Meuler:]

No. Please add what you were going to.

[Eugene A. Hall:]

So, like I said, keep in mind, again, we had great double-digit contract value growth. And so, I don't want to overplay the point which is, we have tremendous market opportunity. Clients love our products. We had great double-digit growth. I mentioned our retention metric was down a little bit, but it's still at great – you compare to any metric externally, it's terrific measure and it's down slightly from our all-time high. So, actually, we're seeing great demand for our products. Just, as you said, a little different than it was a year ago.

[Jeff P. Meuler:]

Okay.

[Eugene A. Hall:]

In the places you'd expect.

[Jeff P. Meuler:]

Understood. And then on capital deployment, asking this question in the context of slower first half share repurchases coupled with the increased credit line. Anything that should be read into putting those two things together in terms of appetite for a larger deal? Or is there something about the credit facility that will help facilitate more aggressive share repurchases that was an obstacle in the first half or anything like that?

[Craig W. Safian:]

Hey, Jeff. It's Craig. I think when we look at capital deployment, there's really no change to how we think about the approach. We're, as always, we remain very focused on ensuring that we deploy our cash flow and our balance sheet flexibility and our capital to drive value for shareholders. We always talk about, and this has not changed, we have two priorities. Our number one priority is shareholder value enhancing strategic M&A. And we've proven over the last two years, two-and-a-half years that we've been able to do that and get really great properties and bring them into Gartner and drive really great growth and really great value for our shareholders. In absence of those value-enhancing M&A, we still believe that return of capital to shareholders through share repurchase program is a great way to do that. And those remain the two top priorities. But number one is still that value-enhancing strategic M&A. From a credit facility perspective, it's one of those things where when you look at our growth and where we're going and making sure that we have access to capital to do the value-enhancing things we want to do, we looked at the markets and we just wanted to make sure we took advantage of being able to upsize the credit facility, push out the term at extraordinarily attractive rate. So, it's really a combination of we're growing and we want to make sure we have the right size credit facility, and then also being strategically opportunistic around making sure we locked in at very attractive pricing.

[Jeff P. Meuler:]

Okay. And then just final one from me, can you remind us how you calculate retention and, specifically, I'm wondering, is there some sort of adjustment made for when a client drops out for a two-months or three-months period, or is it just a pure mathematical calculation with no adjustment made for factors like that? Thank you.

[Craig W. Safian:]

It varies, Jeff. It's kind of situational depending on the client situation. But generally speaking, if we take the business down, so if the client does not renew on time, generally speaking that will come out of the retention in that given quarter. And then as we work it back, it goes back into the contract value base when they resume their services.

[Jeff P. Meuler:]

Okay. Thanks, guys.

[Operator:]

Thank you. And your next question comes from the line of Gary Bisbee from RBC Capital Markets. Please proceed.

[Gunnar Hansen:]

Hey, guys. Good morning. This is Gunnar Hansen in for Gary. Gene, you mentioned just some in the post Brexit comment that 2Q wasn't impacted. Now that we're kind of a month, little over a month beyond the vote, has there been any incremental kind of headwind or slowness there in that region that you want to mention?

[Eugene A. Hall:]

Well, I'd say, it's too early to tell. So, again, it's too early to tell.

[Gunnar Hansen:]

Okay. Fair enough. And I guess, Craig, just with the sales force hiring, and obviously, you said that there is a big class, I guess, toward the end of the month in June. Is it still the expectations, I guess, any updated commentary on the guidance for the sales head count for the year? It seems like that it is likely to be a touch below kind of the 15% that you guys were guiding for earlier on. Is that fair?

[Craig W. Safian:]

Yeah. Hey, Gunnar. Good morning. We're still targeting in that 15% range, give or take. As I mentioned, if you normalize for the timing of that class, we're at 14%. We were at 16% in Q1 and 16% for full year last year. So, based on everything we're looking at, and again, as I mentioned, we are looking at the growth at a team by team level, but based on everything we're looking at now, we would expect to be in that 15% range.

[Gunnar Hansen:]

Okay. And then just last one, on a positive note, I'll move away from some of the other challenged sectors, but any regions or sectors or industries that you guys want to highlight that had particular strength in the quarter? Maybe something along the lines of productivity has improved and where you are making incremental additions to the sales force there?

[Eugene A. Hall:]

So, it's Gene. Yeah, we have lots of areas that are doing well. First, if you look at like Asia is doing well, very well for us sort of – not every country in Asia, but Asia overall is doing very well for us. A lot of the emerging markets are doing very well for us. If you look within the U.S., there're certain industries that are doing very well. I won't break it out, but there're certain industries that are doing very well. In Europe, again, there're certain countries that are doing well.

[Gunnar Hansen:]

Okay. Fair enough. Thanks.

[Operator:]

Thank you. And your next question comes from the line of Manav Patnaik from Barclays. Please go ahead.

[Manav Patnaik:]

Thank you. Good morning, gentlemen. So, I think, obviously, the deceleration in some of the markets and so forth is probably not surprising given the macro challenges out there. But I guess going forward, is the way we should think about it is, given all the positive commentary you had to say, Gene, and the hiring is still on track for 15% that, irrespective of the deceleration, you guys will still just power on with the 15% sales head count growth even if that impacts productivity?

[Eugene A. Hall:]

So, where we start from is this. As you know, we have this incredibly large untapped market opportunity. And we approach our businesses long-term, which is, we want to make sure we continue to capture that market opportunity and position ourselves well for double-digit growth every single year. Having said that, as you know, we also then take that and we look at each individual sales team, we go down to an individual manager level and say, based on the macroeconomic environment they're facing, (39

[Manav Patnaik:]

Okay. Fair enough. Thanks for that color. And then, Craig, did you say that 27% of your revenues is UK or is that Europe as well, because I guess, I think in the past you guys has said all your country exposures mirror GDP and that seemed a little outside. So, maybe you can just help us there?

[Eugene A. Hall:]

Yeah. I'm sorry, Manav. I said 7%. Nothing in front of the 7%, so, yeah, just 7% of our revenue is in the UK.

[Manav Patnaik:]

Got it. And then just, since guys are calling out Brazil and oil and gas, any sense of what those exposures are?

[Craig W. Safian:]

Yeah. We've talked about them in the past. I think both are well below 5% of total contract value or total revenue. So, they still represent very small exposures for us. Like I said, they were – before they had those macro challenges, were two very fast-growing areas for us. A little bit of an overlap with oil and gas in Brazil, but they had been very fast growing. And as Gene mentioned, they are continuing to grow, just not at the same rate, but they're growing as previously.

[Manav Patnaik:]

Got it. Fair enough. Thanks a lot, guys.

[Operator:]

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

[Toni M. Kaplan:]

Good morning. Thanks for taking my questions. Just regarding elongated sales cycle, I just want to make sure I understand correctly, it's just taking a little bit longer to close the sales, but you are still closing the deals, meaning the pipeline isn't dramatically reduced, it's just that it's taking longer to actually close the sales. Is that correct?

[Eugene A. Hall:]

So, the most of our clients are doing fine. And our sales cycle has not extended or anything. It's just normal business. There are a few areas, like, I picked on Brazil, but like, Brazil oil and gas, where they're under stress. They're looking at every expense, and it does take a little longer. We do, actually, it's very unusual. Even if it's takes longer, we do get the sale. So, yeah, your question is right. We actually do get the sale, but that's just for the – this piece of our business that's under more distress, which isn't most of our business. And then our pipeline, actually, is way up compared to this time last year. It's way higher than our growth rate. And then, it's purposeful. We purposely have built a very strong pipeline. And so, our pipeline is very, very robust.

[Toni M. Kaplan:]

Okay. Great. And then, I think you mentioned sort of adjusting head count in different areas when you are seeing either really strong growth or really weak growth, adjusting it up and down. And so, are you doing that continuously? Do you do it sort of once a quarter? How quickly sort of can you adjust that? And, I guess, if you're adjusting up, maybe it takes a little bit of time for people to get to full productivity, but so, how should we think about that?

[Eugene A. Hall:]

So, we actually have a team that looks at that. We've a territory planning team that looks at that. And they do this on a continuous basis. And so, we make real-time adjustments to the year. So, it's not like we sort of a plan upfront for the year and then it doesn't change based on what's going on that we actually experience. We actually look at it at an ongoing basis and we have a hiring plan each quarter for how many people we want to hire and we make real-time adjustments based on what we're really seeing.

[Toni M. Kaplan:]

Okay. Great. And just lastly, Events margins actually looked really good this quarter. I know you had the three large events that moved into first quarter. So, I was actually thinking year-over-year margins would be down. Anything to call out in terms of the strength there? Thanks.

[Craig W. Safian:]

Hey, Toni. It's, Craig. We continue to grow that business really well. I think the right way to look at it is, look at it on a first half basis to judge the margins, we're actually up 2 points year-over-year on the year-to-date gross margin. And that's because we're driving really nice growth, organic growth into those events. And when we're able to do that, it does flow through at the margin level.

[Toni M. Kaplan:]

Thanks a lot. I appreciate it.

[Operator:]

Thank you. And your next question comes from the line of Anj Singh from Credit Suisse. Please go ahead. Anjaneya K. Singh - Credit Suisse Securities (USA) LLC (Broker) Hey. Good morning. Thanks for taking my questions. Gene, first off, I wanted to touch on your commentary that a larger portion of your client base is having problems versus a few years ago. So, in broad strokes, would you be able to characterize what that proportion looks like today versus a few years ago? And would you characterize the pressure you're seeing being higher on the new sales front, or is it more on the retention end? It seems your new business growth continues to be steady in the quarter despite the tough comp from a year ago. So, just wanted to get a better sense of where the pressure may be. Thanks.

[Eugene A. Hall:]

So, in terms of proportion, I'm not going to break it out in terms of 8%, because it's really a spectrum. It's not kind of they're either in trouble or not. My point is, just, if you look at things like oil and gas or Brazil or the major commodity producers, for example, they're under more stress they were in the past. And that's a different selling environment. Yeah, we do well there, but it's just a different selling environment. In terms of new versus renewal, the same thing is true, which is, we have a very large market opportunity. We are making sales in all kinds of industries. We already have sales teams, for example, in Brazil. We want them to sell new business. That new business in Brazil is harder just like renewals are harder. If I looked at some of the industries that are not under such stress like, I'll pick healthcare as the example; you see both new business and retention being easier in those industries. So, it's a matter of – where the industries are challenged and it's tough for new business and tough for renewals. Where it's not as much as it's easier. Again, I want to get back to even in these areas, where I'd characterize it's being tougher, as Craig said, take Brazil, it used to be much higher growth than average in the past. And now it's a bit lower than average. And so that big swing is what's going on. We're still growing there. We still get good retention compared to most of the world, and good do business. Anjaneya K. Singh - Credit Suisse Securities (USA) LLC (Broker) Understood. And then with regards to your SCM acquisition, could you talk about, perhaps, how big your supply chain related businesses today? I realize it's probably tiny and you've spoken to, I think, a $4 billion addressable market there, but hoping you can talk a bit about where you're having success today and where you see the low-hanging fruit on that front.

[Craig W. Safian:]

Hey, Anj. Good morning. It's Craig. So, as we've talked about in the past, our supply chain business, which is a great business, it is growing well faster than the average. We think it's a really big market opportunity, and with a combination now of where we had here at Gartner plus the SCM World capabilities and client base, we think it's a really great business on a go-forward basis. We believe that we can continue to grow that business at an accelerated rate. It is as underpenetrated as we are in the overall IT market. I think that over the long-term, because we can continue to grow our IT business, which is the bulk of it, at such a rapid rate, supply chain will continue to be a small piece of the overall portfolio. But clearly, it's a place where we think we can drive really great growth and drive really amazing value for our clients. It's the same business model as our Research business. It has high renewal rates, the same cash flow dynamics, et cetera. So, we're excited about it, but it still represents a small piece of the portfolio. Anjaneya K. Singh - Credit Suisse Securities (USA) LLC (Broker) Okay. Got it. And one final one from me, apologize if I'd missed this, but, you guys have had two quarters of strong backlog growth in Consulting. And I realize you guys increased your guidance last quarter. Is there a reason why you didn't tweak at this quarter in your flattish year-over-year outlook for the second half?

[Craig W. Safian:]

Yeah. The business continues to perform really well, particularly, on the labor-based side of the business, which is what the backlog supports. What I would say is, the range represents, the relevant range of outcomes as we look at things today, the outlook reflects that. And so, we didn't feel the need to update the guidance based on that. That said, the business continues to perform really, really well. And based on our managing partner investments and based on the backlog, it's really more about the long-term sustainability of the business, and we're investing for that future growth as well. Anjaneya K. Singh - Credit Suisse Securities (USA) LLC (Broker) Okay. Thanks a lot.

[Operator:]

Thank you. And your next question comes from the line of Joseph Foresi from Cantor Fitzgerald. Please proceed.

[Joseph Foresi:]

Hi. I was hoping you could help us kind of reconcile some of the metrics around the sales per enterprise. It looks like that number has been moving up pretty consistently, but the number of enterprises that you're adding is kind of decelerating. And, maybe you could just help us understand how you're able to kind of cross-sell into those areas, because it seems it's going actually pretty well and that versus the commentary about the elongated sales cycles.

[Craig W. Safian:]

Yeah, Joe. Good morning. It's, Craig. So, I think, when we think about our market opportunity, we think about it, it really is in two primary places. One is, obviously, those 100,000 enterprises in our market space that we're currently not doing any business with, and we've made really good progress over the last several years of going from probably 6,000 enterprises to almost or over 10,000 enterprises today. On top of that, when you look at the average contract value per enterprise, even today at a $167,000 per enterprise that is really low penetration. And as we look across our client base, we know that there are opportunities to drive significantly greater penetration within each of those existing enterprises. And we do that in a variety of ways. We have a tier of services. So, we can upgrade clients once we're in there. We find additional users within the clients and buying centers that we're doing business with, and then we find new buying centers as well within the clients. On top of that, our supply chain business and our marketing business allows us to even further penetrate those clients. So, again, when we think about that market opportunity, it is the combination of further penetration of existing enterprises, which we think that is an enormous opportunity, plus all that greenfield opportunity with the enterprises we currently don't do business with.

[Joseph Foresi:]

Okay. But do you feel like that's going to be more difficult in the present environment, given the sales cycle elongation? Or do you expect that trend to continue? Have you see any disruption there?

[Eugene A. Hall:]

So, I don't see it as being more difficult at all. Again, think about our clients in different segments, which is, we have clients that are doing just great, that are, figuratively speaking, not in Brazil. And it's kind of (52

[Joseph Foresi:]

Got it. And maybe – forgive me if I missed this maybe in the opening remarks, but can you give us some idea of what the impact from currency is? And is there any update for that for given kind of Brexit and some of the recent movements?

[Eugene A. Hall:]

Sure, Joe. We talked about our results, and what's happening from a foreign exchange perspective is -- and you probably see this in most global companies, we're starting to lap the major strengthening of the U.S. dollar that we saw from back half of 2014 into the first half of 2015. That's why in the quarter you don't see that much of a difference between our reported results and our FX-neutral results. They're pretty tight. As we look out for the balance of the year, our outlook reflects where exchange rates are as of earlier this week. And as you know, some are going one way and some are going the other way. And so, when we look at where we are with our major exchange rates compared to where we were when we started the year, when we did our initial outlook, and then where we were back in May when we updated our outlook, yeah, the pound is weaker, maybe the yen is a little bit stronger, but at the same time, there are other currencies that are going in both ways. So, the way we look at it right now is we expect back half of the year to look a lot like what we experienced in Q2 from an FX exposure perspective.

[Joseph Foresi:]

Okay. And then a last one for me, and I think just to get away from Brexit for a little bit, sales productivity. Maybe you can just give us an update on your latest thoughts there. And any way we should start thinking about that within an elongated sales cycle over, I guess, the next couple of quarters? Thanks.

[Eugene A. Hall:]

Sales productivity is one of our top focus areas. We spend a lot of time and effort on it. The things that we're doing, I think, are getting better all the time. And it falls into three main categories

[Joseph Foresi:]

Thanks.

[Operator:]

Thank you. And your last question comes from the line of Jeff Silber from BMO. Please proceed.

[Henry Sou Chien:]

Hey. Good morning. It's Henry Chien for Jeff. Just a quick one for me, thanks. Just looking at your Consulting revenues, can you just talk about what's driving some of these quarter-to-quarter shifts? It looks like backlog has been pretty strong over the past few quarters. I'm just wondering what's driving some of the deceleration in 2Q. Thanks.

[Craig W. Safian:]

Yeah, Henry. Good morning. It's, Craig. I think there's two things going on. So, one is the labor-based business, again, which makes up the bulk of the Consulting revenue, we've seen pretty consistent performance there. And we had strong bookings and strong backlog coming out of Q4. That translated into a strong labor-based revenue quarter in Q1. We also replenished that backlog and entered Q2 with a strong backlog position. I think that led to the strong labor-based growth which I talked about earlier. We were up 10% on our labor-based revenue in Q2 on an FX-neutral basis. I think some of the volatility still comes from the contract optimization business. As I mentioned in my prepared remarks, in Q2 we were actually down on a year-over-year basis in contract optimization. In Q1, we were up a little bit. On a year-to-date basis, we're up modestly on that business, but that's the place that consistently causes some of that volatility. I think if you peel the onion back a little bit, you'll see our labor-based business has been performing really nicely and really consistently. And again, that goes back to a lot of the investments we've made around managing partners and a lot of the things that the Consulting leadership team has done to make that business more predictable with people, relationships, et cetera. And so, I think, you're starting to see that – or not starting to. You're seeing that flow through in our results. And again, it gives us confidence around Q3 and Q4 given the backlog position we have entering Q3.

[Henry Sou Chien:]

Okay. Fair enough. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your question. So, I'd now like to turn the call over to Gene Hall for closing remarks.

[Eugene A. Hall:]

So, I'd like to summarize the key points of today's call. So, first, we're doing great as a company. We see robust demand for our services and our sales pipeline is incredibly strong. We've a huge untapped market opportunity. We attract the best talent in the industry. We continue to invest in improved recruiting capability training tools to drive sales productivity. We continue to invest in innovations in our content, products, hiring, training and tools to drive continuing improvements in our operational effectiveness. We're committed to enhancing shareholder value through investing in our business, strategic acquisitions and share repurchases. We're well on track to deliver another year of double-digit growth in contract value, revenue and earnings coupled with strong cash flow conversion. And our long-term outlook remains equally strong. Thanks for joining us today, and we look forward to updating you again next quarter.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you for joining and have a very good day.