Gartner : Earnings Document

Gartner, Inc. NYSE:IT

FQ3 2023 Earnings Call Transcripts

Friday, November 03, 2023 12:00 PM GMT

S&P Global Market Intelligence Estimates

		-FQ3 2023-		-FQ4 2023-	-FY 2023-	-FY 2024-
	CONSENSUS	ACTUAL	SURPRISE	CONSENSUS	CONSENSUS	CONSENSUS
EPS Normalized	1.96	2.56	30.61	2.57	10.29	11.34
Revenue (mm)	1391.12	1408.80	1.27	1578.42	5877.89	6350.78
Currency: USD

Consensus as of Oct-17-2023 10:06 PM GMT

		- EPS NORMALIZED -
	CONSENSUS	ACTUAL	SURPRISE
FQ4 2022	2.58	3.70	43.41 %
FQ1 2023	2.06	2.88	39.81 %
FQ2 2023	2.50	2.85	14.00 %
FQ3 2023	1.96	2.56	30.61 %

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Contents

Table of Contents

Call Participants	3
Presentation	4
Question and Answer	9

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GARTNER, INC. FQ3 2023 EARNINGS CALL | NOV 03, 2023

Call Participants

EXECUTIVES

Craig W. Safian

Executive VP & CFO

David Cohen

Group Vice President of Investor Relations

Eugene A. Hall

CEO & Director

ANALYSTS

Andrew Owen Nicholas

William Blair & Company L.L.C.,

Research Division

Heather Nicole Balsky

BofA Securities, Research Division

Jeffrey Marc Silber

BMO Capital Markets Equity Research

Jeffrey Meuler

Joshua K. Chan

UBS Investment Bank, Research Division

Keen Fai Tong

Goldman Sachs Group, Inc., Research Division

Manav Shiv Patnaik

Barclays Bank PLC, Research

Division

Seth Robert Weber

Wells Fargo Securities, LLC, Research Division

Toni Michele Kaplan

Morgan Stanley, Research Division

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GARTNER, INC. FQ3 2023 EARNINGS CALL | NOV 03, 2023

Presentation

David Cohen

Group Vice President of Investor Relations

Good morning, everyone. Welcome to Gartner's Third Quarter 2023 Earnings Call. I'm David Cohen, SVP of Investor Relations. [Operator Instructions] After comments by Gene Hall, Gartner's Chief Executive Officer; and Craig Safian, Gartner's Chief Financial Officer, there will be a question-and-answer session. Please be advised that today's conference is being recorded.

This call will include a discussion of third quarter 2023 financial results and Gartner's outlook for

2023 as disclosed in today's earnings release and earnings supplement, both posted to our website, investor.gartner.com.

On the call, unless stated otherwise, all references to EBITDA are for adjusted EBITDA, with the adjustments as described in our earnings release and supplement, while contract values and associated growth rates we discuss are based on 2023 foreign exchange rates and exclude contributions related to the first quarter divestiture and the 2022 Russia exit. Our growth rates in Gene's comments are FX-neutral unless stated otherwise. All references to share counts are for fully diluted weighted average share counts unless stated otherwise. Reconciliations for all non-GAAP numbers we use are available in the Investor Relations section of the gartner.com website.

As set forth in more detail in today's earnings release, certain statements made on this call may issue 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 2022 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'll turn the call over to Gartner's Chief Executive Officer, Gene Hall.

Eugene A. Hall

CEO & Director

Good morning, and thanks for joining us today. Gartner drove another strong performance in Q3. We delivered high single-digit growth in contract value. Revenue, EBITDA and adjusted EPS came in above expectations. Free cash flow in the quarter was excellent.

The external environment remains volatile and uncertain. The tech sector is still adjusting to post- pandemic demand. The banking industry continues to grapple with rising interest rates. Supply chain challenges are still in many industries. There's heightened geopolitical volatility, and more. Leaders know they need help, and they know Gartner is the best source for that help.

Gartner delivers actionable, objective insight to drive smarter decisions and stronger performance on our clients' mission-critical priorities. Whether they're thriving, struggling or anywhere in between, our insights, tools and advice often mean the different success and failure for leaders and the enterprises they serve.

We continue to be agile and adapted to the changing environment. Research continues to be our largest and most profitable segment. We got leaders across all major enterprise functions in every industry around the world. Our market opportunity is vast across all sectors, sizes and geographies. We estimate our opportunity at around $200 billion.

In the third quarter, we continue to help clients with a wide range of topics, such as cybersecurity, data analytics, artificial intelligence, remote work, cost optimization and more. In the third quarter, Research revenue grew 5%. Subscription revenue grew 8% on an organic basis. Total contract value growth was 8%. Contract value for enterprise function leaders continued to grow at double-digit rates.

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GARTNER, INC. FQ3 2023 EARNINGS CALL | NOV 03, 2023

We serve executives and their teams through distinct sales channels. Global Technology Sales, or GTS, serves leaders and their teams within IT. GTS also serves leaders at technology vendors, including CEOs, Chief Marketing officers and senior product leaders. GTS contract value grew 7%. GTS sales to enterprise function leaders performed well in the quarter. GTS sales to leaders at technology vendors were affected by technology sector dynamics and tough year-over-year comparisons. We expect sales to technology vendors will return to normal growth rates over the next 12 to 18 months.

Global Business Sales, or GBS, serves leaders and their teams beyond IT. This includes HR, supply chain, finance, marketing, sales, legal and more. GBS contract value grew 14%.

Through a relentless execution of proven practices, we're able to deliver unparalleled value to our clients. Our business remains resilient despite a persistent, complicated, external environment and top compares for the technology vendor market.

Gartner Conferences deliver extraordinarily valuable insights to an engaged and qualified audience. This will be the first full year of in-person conferences since 2019. We're having a great year. In-person attendance and advanced bookings are at record levels. The fourth quarter is off to a great start, and our outlook for the year remains strong.

IT Symposium/Xpo is our flagship conference in series. I recently attended this conference in Orlando. Attendance was strong. Our sales teams were highly engaged with clients and prospects, and feedback from the conference continues to be excellent.

Gartner Consulting is an extension of Gartner Research. Consulting helps clients execute their most strategic initiatives through a deeper extended project-based work. Consulting is an important complement to our IT research business. Consulting revenue grew 23% of the quarter, with record results in contract optimization.

Given the strong performance across business, we've increased our 2023 guidance for revenue, EBITDA and free cash flow. Craig will take you to the details. We're well positioned to strong close to the year and get off to a fast start in 2024.

In closing, Gartner achieved another strong growth. We deliver unparalleled value to enterprise leaders and their teams across every major function, whether they're thriving, struggling or anywhere in between. We're exceptionally agile and continuously adapt to the changing world. We know the right things to do to be successful in any environment. Looking ahead, we are well positioned to continue our strong record of success far into the future.

Our client value proposition and addressable market opportunity will allow us to drive long-term, sustained double-digit revenue growth. We expect margins will expand modestly over time, and we generate significant free cash flow well in excess of net income. Even as we invest for future growth, we'll return significant levels of excess capital to our shareholders. This reduces shares outstanding and increases returns over time.

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

Craig W. Safian

Executive VP & CFO

Thank you, Gene, and good morning. Third quarter results were strong with high single-digit growth in contract value. Revenue, EBITDA, adjusted EPS and free cash flow were better than expected with outstanding performance in consulting and disciplined cost management. With strong results in the quarter and good visibility into Q4, we are increasing our 2023 guidance. Third quarter revenue was $1.4 billion, up 6% year-over-year as reported and 5% FX-neutral.

In addition, total contribution margin was 68% compared to 69% in the prior year as the 2022 hiring catch-up continued to flow through the P&L as expected. EBITDA was $333 million, ahead of our guidance and about in line with last year. Adjusted EPS was $2.56, up 6% from Q3 of last year. And free cash flow was $302 million.

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GARTNER, INC. FQ3 2023 EARNINGS CALL | NOV 03, 2023

We finished the quarter with 20,253 associates, up 6% from the prior year and 1% from the end of the second quarter. We remain well positioned from a talent perspective as our associates continue to move up the 10-year curve.

Research revenue in the third quarter grew 6% year-over-year as reported and 5% on an FX-neutral basis. Subscription revenue grew 8% on an organic FX-neutral basis. Non-subscription revenue performance was similar to Q2. Third quarter Research contribution was 73% compared to 74% in the prior year period as we have caught up on hiring and returned to the new expected levels of travel.

Contract value, or CV, was $4.7 billion at the end of the third quarter, up 8% versus the prior year. The third quarter last year was a very strong research quarter with outstanding performance across most key metrics. CV growth is FX-neutral and excludes the first quarter 2023 divestiture.

CV from enterprise function leaders across GTS and GBS grew at double-digit rates. New business with enterprise function leaders increased double digits as well. CV from tech vendors grew low single digits compared to mid-teens growth in the third quarter of 2022. Quarterly net contract value increase, or NCVI, was $101 million. As we've discussed in the past, there is notable seasonality in this metric.

CV growth was broad-based across practices, industry sectors, company sizes and geographic regions. Across our combined practices, the majority of the industry sectors grew at double-digit rates, led by the transportation, services and public sectors. We had high single-digit growth across all of our enterprise size categories other than the small category, which has the largest tech vendor mix, and grew low single digits. We also drove double-digit or high single-digit growth in the majority of our top 10 countries.

Global Technology Sales contract value was $3.6 billion at the end of the third quarter, up 7% versus the prior year. GTS CV $65 million from the second quarter. While retention for GTS was 102% for the quarter, which compares to 107% in the prior year, when we saw a near-record high for this metric. IT enterprise function leaders wallet retention remained above historical GTS levels during the third quarter.

GTS new business was up 7% versus last year. New business with IT enterprise function leaders increased mid-teens compared to the prior year. GTS quota-bearing headcount was up 5% year-over-year. With the dynamic territory planning we introduced a few years ago, the catch-up hiring we did last year and our teams moving up the tenure curve, we're well positioned for growth moving into 2024. Our regular full set of GTS metrics can be found in the appendix of our earnings supplement.

Global Business Sales contract value was $1 billion at the end of the third quarter, up 14% year-over-year. All of our GBS practices grew at double-digit or high single-digit rates, other than sales, which grew mid- single digits. Growth was again led by supply chain and HR. GBS CV increased $36 million from the second quarter.

While retention for GBS was 108% for the quarter, which compares to 114% in the prior year when we saw one of the highest-ever results for this metric. GBS new business was up 10% compared to last year. GBS quota-bearing headcount was up 10% year-over-year. This excludes headcount associated with the Q1 divestiture. As with GTS, our regular full set of GBS metrics can be found in the appendix of our earnings supplement.

Conferences revenue for the third quarter was $57 million, ahead of our expectations during a seasonally small period. We delivered strong growth for the conferences we held in Q3 compared to the same conferences in 2022. The calendar shifted significantly from 2022 to 2023 with the return to in-person. Contribution margin in the quarter was 36%, consistent with typical seasonality and reflecting investments for future growth. We held 9 destination conferences in the quarter, all in-person.

Third quarter Consulting revenues increased by 24% year-over-year to $133 million. On an FX-neutral basis, revenues were up 23%. Consulting contribution margin was 37% in the third quarter. Labor- based revenues were $100 million, up 10% versus Q3 of last year as reported and on an FX-neutral basis. Backlog at June 30 was $180 million, increasing 15% year-over-year on an FX-neutral basis with continued booking strength. Our contract optimization business is highly variable. We delivered $33 million of revenue in the quarter with some of the revenue pulled forward from the fourth quarter relative to our prior outlook.

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GARTNER, INC. FQ3 2023 EARNINGS CALL | NOV 03, 2023

Consolidated cost of services increased 8% year-over-year in the third quarter as reported and 7% on an FX-neutral basis. The biggest driver of the increase was higher headcount to support our future growth. SG&A increased 8% year-over-year in the third quarter as reported and 7% on an FX-neutral basis. SG&A increased in the quarter as a result of headcount growth.

EBITDA for the third quarter was $333 million, about in line with last year. Third quarter EBITDA upside to our guidance primarily reflected revenue exceeding our expectations in consulting and prudent expense management.

Depreciation in the quarter of $25 million was up modestly compared to 2022. Net interest expense excluding deferred financing costs in the quarter was $21 million. This was down $8 million versus the third quarter of 2022 due to higher interest income on our cash balances. The modest floating rate debt we have is fully hedged through maturity.

The Q3 adjusted tax rate, which we use for the calculation of adjusted net income, was 22% for the quarter. The tax rate for the items used to adjust net income was 35% for the quarter.

Adjusted EPS in Q3 was $2.56, up 6% compared with last year. We had 80 million shares outstanding in the third quarter. This is a reduction of close to 1 million shares or about 1% year-over-year. We exited the third quarter with about 79 million shares on an unweighted basis.

Operating cash flow for the quarter was $331 million, up 5% compared to last year. CapEx for the quarter was $28 million, down 11% year-over-year as a result of catch-up spend on technology investments

in 2022 which normalize this year. Free cash flow for the quarter was $302 million. Free cash flow as a percent of revenue on a rolling 4-quarter basis was 18% of revenue and 67% of EBITDA, adjusted for the after-tax impact of the Q1 divestiture, free cash flow conversion from GAAP net income was 122%. Our free cash flow conversion is generally higher when CV growth is accelerating.

At the end of the third quarter, we had about $1.2 billion of cash. Our September 30 debt balance was about $2.5 billion. Our reported gross debt to trailing 12-month EBITDA was under 2x. Our expected free cash flow generation, available revolver and excess cash remaining on the balance sheet provide ample liquidity to deliver on our capital allocation strategy, our share repurchases and strategic tuck-in M&A. Our balance sheet is very strong with $2.2 billion of liquidity, low levels of leverage and effectively fixed interest rates.

We repurchased $209 million of stock during the third quarter and about $100 million in October. The Board increased authorization by $500 million earlier this week, and we expect they will continue to refresh the repurchase authorization as needed going forward. At the end of October, following the increased authorization, we had about $1 billion available for repurchases. As we continue to repurchase shares, our capital base will shrink. Over time, this is accretive to earnings per share, and combined with growing profits, also delivers increasing returns on invested capital.

We are raising our full year guidance to reflect the better-than-expected Q3 performance and good visibility into the fourth quarter.

For Research, we continue to innovate and provide a very compelling value proposition for clients and prospects. Subscription research growth will reflect recent trends in contract value. We continue to expect stronger growth in the subscription business than in the non-subscription part of the segment, consistent with the third quarter.

For Conferences, we still expect Q4 to be the largest quarter of the year. For Consulting revenues, the labor business continues to perform well. We have very tough contract optimization compares in Q4 and pulled some revenue into Q3 relative to our prior expectations. We will continue both to manage expenses prudently to support future growth and deliver strong margins.

Our updated 2023 guidance is as follows: We expect research revenue of at least $4.875 billion, which is FX-neutral growth of about 6%, or 7% excluding the Q1 divestiture. The update to the Research revenue guidance reflects better-than-planned NCVI performance in Q3. With continued stability in the non-

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GARTNER, INC. FQ3 2023 EARNINGS CALL | NOV 03, 2023

subscription part of the business, there is modest incremental upside relative to the expectations we built into the guidance last quarter.

We expect Conferences revenue of at least $500 million, which is FX-neutral growth of about 27%. We have increased our outlook for Conferences by $10 million to reflect a good start to the fourth quarter.

We expect Consulting revenue of at least $515 million, which is growth of about 8% FX-neutral, reflecting the very strong performance in Q3 and timing in the contract optimization business.

The result is an outlook for consolidated revenue of at least $5.89 billion, which is FX-neutral growth of 8%. We now expect full year EBITDA of at least $1.44 billion, up $80 million from our prior guidance. With the strong performance in Q3, we have increased confidence in the margin forecast for the fourth quarter. We expect typical operating expense seasonality from Q3 to Q4. We now expect 2023 adjusted EPS of at least $10.90 per share.

For 2023, we now expect free cash flow of at least $1.025 billion, up $50 million from our prior guidance. Higher free cash flow reflects a conversion from GAAP net income of 136%, excluding the after-

tax divestiture proceeds. Our guidance is based on 80 million fully diluted weighted average shares outstanding, which reflects the repurchases made through the end of October.

We are performing well this year despite continuing global macro uncertainty and a dynamic tech vendor market. CV grew high single digits in the quarter. Revenue and EBITDA performance exceeded our expectations, and we increased our guidance. Free cash flow was strong in the quarter, and we increased the guidance for the full year.

We repurchased about $550 million of stock year-to-date through October and remain eager to return excess capital to our shareholders. We will continue to be disciplined, opportunistic and price-sensitive.

Looking out over the medium term, our financial model and expectations are unchanged. With 12% to 16% Research CV growth, we will deliver double-digit revenue growth. With gross margin expansion, sales costs growing about in line with CV growth and G&A leverage, we will expand EBITDA margins modestly over time. We can grow free cash flow at least as fast as EBITDA because of our modest CapEx needs and the benefits of our clients paying us upfront. And we'll continue to deploy our capital on share repurchases which will lower the share count over time and on strategic value-enhancingtuck-in M&A.

With that, I'll turn the call back over to the operator, and we'll be happy to take your questions. Operator?

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GARTNER, INC. FQ3 2023 EARNINGS CALL | NOV 03, 2023

Question and Answer

Operator

[Operator Instructions] Our question is from Jeff Mueller with Baird.

Sir, can we continue with the next question? [Operator Instructions] Next question is from Heather Balsky with Bank of America.

Heather Nicole Balsky

BofA Securities, Research Division

I was hoping to ask a question about expense management. As you look into next year, you -- assuming that tech vendor spending potentially starts to lap with easier comparisons, there's an opportunity to win back those sales. Do you think you need to invest behind that? Or do you think you have an opportunity with your existing sales force? And then also just your thoughts around expense management as you head into 2024 more broadly.

Eugene A. Hall

CEO & Director

Heather, it's Gene. So as we look at our market opportunity, as you know, our market opportunity is very vast. Over time, we intend to grow our sales force in line with capturing that market opportunity. Over the last couple of years, we've grown our sales group dramatically, and we feel like we're in a really good position as we go into the end of '23 and '24 with the capacity we have. Again, over time, we will continue to grow that capacity.

Heather Nicole Balsky

BofA Securities, Research Division

And so -- just to clarify then. When you think about the tech vendor opportunity, do you think you can win back those sales with the sales force you have? That's the fair assumption?

Eugene A. Hall

CEO & Director

Yes. Over time, Heather, we think that the tech vendor market will return to the kind of growth we've seen historically. Again, as we -- our perspective on it, there's a lot of the business they had was pulled forward, their own sales, as a result -- they kind of overhired and have been having some retrenchment which is impacting our business. we think, again, that the tech business is going to grow over time. Their revenues will grow, and our business will get back to normal growth over time as well.

Craig W. Safian

Executive VP & CFO

And Heather, it's Craig. The other thing I would add is, as our tech business, as the contract value accelerated over the last 2 years, we also increased the number of territories we have serving that market. And so we did a lot of hiring across all of both GTS and GBS, as Gene mentioned, over the last couple of years, tech vendor market included.

And so a lot of new people joined the company in 2022 in selling positions and they are coming up for tenure curve. And so as we think about our territory coverage, if you will, heading into 2024 and beyond as well as the maturation of our sales force heading into 2024, we feel like we're in a really good position to return to the kind of target growth that we want to over the medium term.

Operator

[Operator Instructions] Next question comes from the line of Toni Kaplan.

Toni Michele Kaplan

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GARTNER, INC. FQ3 2023 EARNINGS CALL | NOV 03, 2023

Morgan Stanley, Research Division

I was hoping you could give us some metrics around the current average tenure of your salespeople compared to sort of a reference point, maybe it's year-over-year or pre-pandemic or versus a historical average. Just want to get a sense of where we are now versus some historical point.

Craig W. Safian

Executive VP & CFO

Toni, thanks for the question. So the way to think about it is, if you look at all of the net and gross adds we did in 2022, effectively, when we entered this year, we had the least tenured or least experienced sales force that we've ever had. Sort of order of magnitude, we're typically -- Gene and I have both talked about this in the past. Like in normal times, call it, 35% to 40% of our sales force is on the new-ish side. We were in the 50-plus percent range being brand new to Gartner.

As we've made our way through this year, obviously, all those people we hired in 2022 have gained experience and tenure. We did -- we were very back-end loaded last year in terms of the hiring. And so those people we hired in the third and fourth quarter of last year are now approaching or have just crossed over their 1-year anniversary.

And again, that's sort of getting back to Heather's question, Gene, around do we have enough capacity, et cetera. We have enough capacity, and the tenuring will look more "normal" as we roll into 2024, but significantly better than what we experienced -- or more tenured than we experienced over the course of 2023.

Toni Michele Kaplan

Morgan Stanley, Research Division

Yes. That makes sense. I wanted to ask about client retention, sort of a step down in both GTS and GBS. The levels, I think, are still pretty within historical range. But like, I guess, is there anything you're doing to put in place initiatives to address retention? Or do you feel like you're at sort of more normal levels?

And I guess, what's driving that? And any concern to call out?

Craig W. Safian

Executive VP & CFO

No. So on the GBS side, while we're still at or above historical levels, it's really tech vendor drag, and it's really small tech vendor drag there. If you actually broke apart our enterprise function leader in GTS, those client retention rates are at or above historical levels for GTS. And so it's really just the tech vendor market impacting that client retention rate.

On the GBS side, yes, it's down a little, but it's still 400, 500 basis points higher than GTS. And so we feel really good about that. That said, we're never done on retention. So I'll let Gene talk a little bit about that.

Eugene A. Hall

CEO & Director

Yes. Toni, as Craig said, even with the rates we have now, we are never satisfied. And so have a whole set of programs designed to improve those retention rates over time. And it includes things like how we use our conferences, the ads, the tools, the support tools we give to our service delivery associates, as well as the training we have with people first come on board and then current training throughout their careers, et cetera. So we are never satisfied with the -- no matter how good it is, we always want to be better.

Operator

[Operator Instructions] Next question comes from the line of Seth Weber with Wells Fargo.

Seth Robert Weber

Wells Fargo Securities, LLC, Research Division

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