Gartner Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2022

There are 12 speakers on the call.

Operator

Morning, everyone. Welcome to Gartner's Second Quarter 2022 Earnings Call. At this time, all participants are in a listen only mode. 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 Please be advised that today's conference is being recorded. This call will include a discussion of Q2 2022 financial results and Gartner's updated outlook for 2022 as disclosed in today's earnings release and earnings supplement, both posted to our website, investor.

Operator

Gartner.com. On the call unless stated otherwise. All references to EBITDA are for adjusted EBITDA, but the adjustments is described in our earnings release and supplement. All 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.

Operator

Reconciliations for our non GAAP numbers we use are available in the Investor Relations section of the gartner.com website. Finally, our contract values and associated growth rates we discuss are based on 22 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 2021 Annual Report on Form 10 ks 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.

Operator

Now, I'll turn the call over to Gartner's Chief Executive Officer, Gene Hall.

Speaker 1

Good morning. Thanks for joining us. Gartner had a strong performance in the 2nd quarter. We delivered double digit growth in contract value, revenue, EBITDA and EPS. And we continue to return excess capital to our shareholders through our buyback programs.

Speaker 1

Research continues to be our largest and most profitable segment. Gartner Research provides actionable objective insight to executives and their teams across all major enterprise functions in every industry around the world. Our expert guidance and tools enable faster, smarter decisions and stronger performance on our clients' mission critical priorities. We continue to have a vast market opportunity across all sectors, sizes and geographies, and we're delivering more value than ever. The rate of change in the world is the fastest I've ever seen.

Speaker 1

Against this backdrop, Gartner continues to get even more agile. We're generating new insights to address timely and pressing issues such as leveraging emerging technologies, optimizing costs, attracting and retaining talent in a hybrid world, Managing cybersecurity risk and more. We deliver incredible value whether our clients are thriving, struggling or somewhere in between. As a result, demand for our services remained strong. Q2 research revenue grew 17% in the 2nd quarter.

Speaker 1

Total contract value growth was 15%. Retention remained very strong and new business was near all time highs. We're also growing our sales teams. Global Technologies sales headcount was up 9% And global business sales headcount was up 17% year over year. Global Technology Sales or GTS source leaders and their teams within IT.

Speaker 1

GTS contract value grew 14%. Global Business Sales or GBS serves leaders in their teams beyond IT. This includes HR, supply chain, finance, marketing, sales, legal and more. GBS contract value grew 23%. Across every function, IT, supply chain, marketing, sales, HR, finance and more, leaders and their teams benefit from our incredible value proposition.

Speaker 1

As a result, the enterprises we support see measurable progress on their mission critical priorities. Leveraging the extraordinary value of our research insights, Our conferences business brings the power of Gartner to life for an engaged and highly qualified audience. During Q2, we delivered our 1st in person destination conferences Since the start of the pandemic, this conference has covered IT, Finance and Supply Chain in Europe, Australia and the U. S. Attendee feedback has been resoundingly positive.

Speaker 1

They deeply value the opportunities to connect, engage and learn in person. Bookings continue at a strong pace for both exhibitors and attendees. Gartner Consulting is an extension of Gartner Research. Consulting helps clients execute their most strategic technology initiatives through deeper extended project based work. Consulting had a strong quarter With revenue up 20%.

Speaker 1

Bookings were also strong, driving backlog up 45%. In closing, we saw strong growth across the business. We continue to generate significant free cash flow well in excess of net income. We returned excess capital to shareholders, which reduced our shares outstanding. Looking ahead, we are well positioned for strong double digit top line growth.

Speaker 1

Our underlying margins are in the low 20s, well above pre pandemic levels, and we expect them to modestly increase over time. And we continue to generate free cash flow well in excess of earnings, which we will deploy to further drive shareholder value. With that, I'll hand the call over to our Chief Financial Officer, Craig Sathian. Craig? Thank you, Gene, and good morning.

Speaker 1

2nd quarter results were strong with double digit growth in contract value, revenue and adjusted EPS. With results above our expectations, we are again increasing our 2022 guidance. The improved outlook reflects the better than expected second quarter top line results, Strong demand for second half conferences and a successful balance between cost discipline and investing for future growth. 2nd quarter revenue was $1,400,000,000 up 18% year over year as reported and 22% FX neutral. In addition, total contribution margin was 69%, down 70 basis points versus the prior year as costs returned towards normal.

Speaker 1

EBITDA was $389,000,000 up 10% year over year and up 14% FX neutral. Adjusted EPS was $2.85 up 27%. And free cash flow in the quarter was $395,000,000 Adjusting for insurance proceeds received last year, free cash flow was down 2 percent year over year for the quarter and up 5% on a rolling 4 quarter basis. Research revenue in the 2nd quarter grew 14% year over year as and 17% on an FX neutral basis, driven by our strong contract value growth. 2nd quarter research contribution margin was 74%, about in line with 2021.

Speaker 1

Higher than normal contribution margins reflect improved operational effectiveness, increased scale, Continued temporary avoidance of travel expenses and continuing to catch up on headcount to support the Research business. Contract value or CV was $4,300,000,000 at the end of the second quarter, up 15% versus the prior year. As we discussed previously, CV reflects our decision to exit the Russian market, which contributed about $13,000,000 in the Q2 2021 number. This reduced the headline growth by about 40 basis points. Quarterly net contract value increase or NCVI was $97,000,000 Quarterly NCVI is a helpful way to measure contract value performance in the quarter, even though there is notable seasonality in this metric.

Speaker 1

The sequential increase in CV of $97,000,000 was driven by the combination of continued strong retention rates and near record new business of close to $250,000,000 We saw broad based CV growth across all of our practices. Our technology practice grew 14% and all of our business practices grew at double digit growth rates with many of them growing more than 20% year over year. From an industry perspective, retail, media and manufacturing led RCV growth. Global Technology sales contract value was $3,400,000,000 at the end of the second quarter, up 14% versus the prior year. GTS had quarterly NCVI of $60,000,000 driven by strong retention and near record levels of new business for our Q2.

Speaker 1

Wallet retention for GTS was 107% for the quarter, up about 5.30 basis points year over year and near record levels. GTS new business was down 1% versus last year, up against a very tough compare. The 2 year compound annual growth rate was about 16%. GTS quota bearing headcount was up 9% year over year. We are on track to get to double digit growth by the end of 2022 as we have successfully brought turnover down and our investments in recruiting are delivering results.

Speaker 1

We will continue to invest in our sales team to drive long term sustained double digit growth, while also delivering strong margins. Our regular full set of GTS metrics can be found in the appendix of our earnings supplement. Global business sales contract value was $936,000,000 at the end of the second quarter, up 23% year over year, which is above the high end of our medium term outlook of 12% to 16%. GBS CV increased $37,000,000 from the Q1. Wallet retention for GBS was 115% for the quarter, up about 5 percentage points year over year.

Speaker 1

GBS new business was up 3% compared to last year, reflecting robust growth across the full portfolio and against a very strong compare. The 2 year compound annual growth rate for new business was 35%. GBS quota bearing headcount increased 17% year over year. Headcount we hire in 2022 will help to position us for sustained double digit growth in the future. As with GTS, our regular full set of GBS metrics can be found in the appendix of our earnings supplement.

Speaker 1

Conferences revenue for the Q2 was $114,000,000 ahead of our expectations as attendees and exhibitors enthusiastically return to in person. Contribution margin in the quarter was 65%. We held 6 in person conferences and 8 virtual conferences in the quarter. We held Avanta meetings in both virtual and in person formats. We plan to run 19 in person conferences for the balance of the year.

Speaker 1

2nd quarter consulting revenues increased by 14% year over year to $121,000,000 On an FX neutral basis, revenues were up 20%. Consulting contribution margin was 42% in the 2nd quarter, up 120 basis points versus the prior year with better than expected revenue, higher utilization rates and a mix benefit from strong growth in contract optimization. Labor based revenues were $95,000,000 up 11% versus Q2 of last year and up 18% on an FX neutral basis. Backlog at June 30 was $152,000,000 increasing 45% year over year on an FX neutral basis with another strong bookings quarter. The inclusion of multi year contracts, a change we described last quarter, contributed about 12 percentage points to the year over year growth rate.

Speaker 1

Our contract optimization business was up 28% as reported and 31% on an FX neutral basis versus prior year. As we have detailed in the past, this part of the consulting segment is highly variable. Consolidated cost of services increased 21% year over year in the 2nd quarter as reported and 25% on an FX neutral basis. The biggest driver of the increase was higher headcount to support our continued strong growth and the return to in person destination conferences. SG and A increased 24% year over year in the Q2 as reported and 27% on an FX neutral basis.

Speaker 1

SG and A increased in the quarter as a result of increased hiring and sales and G and A functions, higher commission expense following strong CV growth in 2021 and a $12,000,000 one time real estate charge. We expect SG and A expenses to increase as a percentage of revenue over the near term as our catch up hiring continues. EBITDA for the Q2 was $389,000,000 up 10% year over year on a reported basis and up 14% FX neutral. 2nd quarter EBITDA upside to our guidance reflected revenue exceeding our forecast and expenses at the low end of our expectations. Depreciation in the quarter of $23,000,000 was down modestly versus 2021.

Speaker 1

Net interest expense, excluding deferred financing costs in the quarter, was 29,000,000 Net income was 25.7 percent for the quarter. The tax rate for the items used to adjust net income was 25% for the quarter. Adjusted EPS in Q2 was $2.85 growth of 27% year over year. The average share count for the Q2 was 81,000,000 shares. This is a reduction of about 5,600,000 shares or about 6.5% year over year.

Speaker 1

We exited the 2nd quarter with about 80,000,000 shares standing on an unweighted basis. Operating cash flow for the quarter was $416,000,000 Adjusting for the insurance proceeds we received in the Q2 of 1, operating cash flow was down 2% compared to last year. CapEx for the quarter was $21,000,000 up 76% year over year as a result of an increase in capitalized software, laptops and other infrastructure. Free cash flow for the quarter was $395,000,000 Free cash flow growth continues to be an important part of our business model with modest CapEx needs and upfront client payments. As many of you know, we generate free cash flow well in excess of net income.

Speaker 1

Our conversion from EBITDA is very strong with the differences being cash interest, Cash taxes and modest CapEx, partially offset by strong working capital cash inflows. Adjusting for the insurance proceeds we received last year, Free cash flow as a percent of revenue or free cash flow margin was 21% on a rolling 4 quarter basis. On the same basis, free cash flow was 81% of EBITDA 146 percent of GAAP net income. At the end of the second quarter, we had $360,000,000 of cash. Our June 30 debt balance was $2,500,000,000 Our reported gross debt to trailing 12 month EBITDA was under 2 times.

Speaker 1

Our expected free cash flow generation, unused revolver and excess cash remaining on the balance sheet provide ample liquidity to deliver on our capital allocation strategy of share repurchases and strategic tuck in M and A. We repurchased around $930,000,000 of stock through the first half of this year. We had about $700,000,000 remaining on our authorization at the end of June. We expect the Board to continue to refresh the repurchase authorization as needed going forward. Since the end of 2020 through the end of this June, we have reduced our shares outstanding by 9,000,000 shares.

Speaker 1

This is a reduction of 11%. As we continue to repurchase shares, we expect our capital base will shrink. This is accretive to earnings per share and combined with growing profits Also delivers increasing returns on invested capital over time. Our medium term outlook is for double digit revenue growth. While margins have been very strong in the past 2 years, we are continuing to catch up hiring and to resume travel spending.

Speaker 1

We estimate our underlying margins to be in the low 20s, well above pre pandemic levels, and we expect them to increase modestly over time. We will give 2023 specific guidance in February, consistent with our usual practice. Strong top line growth, modest margin expansion, low capital intensity and working capital as a source of cash will allow us to deliver strong free cash flow now and in the future. We are increasing our full year guidance to reflect strong Q2 performance and an improved outlook for the second half despite incremental FX headwinds. We now expect an FX impact to our revenue growth rates of about 3 70 basis points for full year.

Speaker 1

This is up from 260 basis points based on rates when we guided in May. As we discussed in the last two quarters, 2021 research performance benefited from several factors, including QBH tenure mix and CVI phasing within the quarters and the year, Record retention rates and strong non subscription growth. We continue to assume that those benefits do not persist at the same levels through 2022. The growth compares will continue to be challenging as we move through the year. We continue to take a measured approach based on historical trends and patterns, which we've reflected in the updated guidance.

Speaker 1

For conferences, we assume we will be able to run all the in person conferences as planned. Consistent with our commentary the past couple of quarters, Our assumptions for consolidated expenses continue to reflect significant headcount increases during the year to support current and future growth. We have modeled higher labor costs and T and E well above 2021 levels, as we've previously indicated. We also have higher commission expense during 2022 due to the very good selling performance we delivered in 2021. Finally, we continue to invest in our tech, both client facing and internal applications as part of our innovation and continuous improvement programs.

Speaker 1

Our updated guidance for 2022 is as follows. We expect research revenue of at $4,575,000,000 which is FX neutral growth of about 15%. The FX neutral growth is up about 120 basis points from our prior guidance due to We expect conferences revenue of at least $335,000,000 which is growth of about 63% FX neutral. We expect consulting revenue of at least $440,000,000 which is growth of about 11% FX neutral. The result is an outlook for consolidated revenue of $5,350,000,000 which is FX neutral growth of almost 17%.

Speaker 1

The FX neutral growth is up about 2.90 basis points from our prior guidance to strong performance in the Q2. Without the strengthening U. S. Dollars since May, our revenue guidance would have been about $138,000,000 than previous guidance. We now expect full year EBITDA of at least $1,235,000,000 up $100,000,000 from our prior guidance and an increase in our margin outlook as well.

Speaker 1

Without the strengthening U. S. Dollars since May, our EBITDA guidance would have been about $120,000,000 higher than previous guidance. We now expect 2022 adjusted EPS of at least $8.85 For 2022, we now expect free cash flow of at least $985,000,000 Our guidance is based on 81,000,000 shares outstanding, which reflects year to date repurchases. All the details of our full year guidance are included on our Investor Relations site.

Speaker 1

Finally, for the Q3 of 2022, we expect to deliver at least $255,000,000 of EBITDA. Our strong performance in Adjusted EPS grew 27% fueled by the significant reduction in shares over the past year. We repurchased around $930,000,000 in stock this year through June and remain committed to returning excess capital to our shareholders. 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.

Speaker 1

With gross margin expansion, sales costs growing in line with CV growth and G and A leverage, We can modestly expand margins. 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 enhancing tuck in M and A. With that, I'll turn the call back over to the operator and we'll be happy to take your questions.

Speaker 2

Operator? Thank you. Our first question comes from Jeff Meuler with Baird. Your line is now open.

Speaker 3

Yes, thanks. Just first a clarifying question On the underlying margin, so when you say low 20s, could that include like 21% or 22%, you're not saying like low 20.x percent? And if we will have a recession at some point, would you expect to be able to at least maintain those underlying margins through a recession And again as well.

Speaker 1

Hey, good morning, Jeff. Thanks for the questions. In terms of the underlying margin, no, it wasn't locked in on 20.0 as low 20s. Yes, as we've looked at the business over the last few years, Yes, we've learned a lot through the pandemic, etcetera. And so we're now comfortable that the underlying margins of the business Are in the low 20s and again, we can grow the top line double digit growth rates into the future and we can modestly expand margins from that point as well.

Speaker 1

In terms

Speaker 4

of the recession Including Yes,

Speaker 1

I was just going

Speaker 3

to say including maintain at least that margin in a recession?

Speaker 1

Yes. So that was the second part of the question. So again, the way we are thinking about running the business is, again, we believe That there still is a huge untapped market opportunity. We believe one of the ways that we go capture that untapped market opportunity It's by continuing to grow the sales force and again making sure we've got the right insights and the right number of analysts and advisors, etcetera. If there were to be a recessionary impact on the business, we would toggle the investment growth rates in each of those areas To ensure that we could deliver those underlying margins and also ensure that we could drive modest margin expansion into the future as well.

Speaker 3

Got it. And then I think you're being anticipatory on the commentary around the new business giving us the 2 year CAGRs and such. But Just any comments on what you're seeing in real time from a macro perspective, whether it's Pipeline build and conversion in June July or the topics of client content demand, just any other business Kind of metrics just given the near record when we are, I guess, use the fresh records from the growth company that Gartner is.

Speaker 1

Hey, Jeff. It's Gene. So the selling environment has been Quite, I think, stable and good compared to Q1. Again, as you said, we had near record new business levels. We have near record retention levels.

Speaker 1

Our conferences booking for both exhibitors and attendees was very strong. That's been reflected in our guidance going forward. I believe the consulting business had one of the best quarters we've ever had with revenues up 20%, backlog up 45%. And there's kind of nothing if we look under That would lead you to believe in Q2 that anything other than selling and product was quite robust. And Jeff, I would just echo Having read briefly your report earlier this morning, the compares are super tough in Q2 And they remain pretty tough throughout the balance of the year.

Speaker 1

We're still growing TV at a great growth rate. You heard some of the Yes, other metrics around our underlying businesses in conferences and consulting as well. And so very tough compares for the balance of this year, but You'll feel good about the momentum of the business.

Speaker 4

Yes, got it. Thank you.

Speaker 2

Thank you. Our next question comes from Heather Balsky with Bank of America. Your line is now open.

Speaker 5

Hi. Thank you for taking my question. I guess on the topic du jour in terms of what happens in the downturn, Can you talk a little bit more about how your business today is more resilient in a downturn when you look back to, I guess other periods of macro decline, maybe COVID crisis or even going further back, the financial crisis, And kind of how you feel about the sales line going into something potentially happening near term?

Speaker 1

Hi, Heather, it's Jeanie. So we're very cognizant always of the environment around us, and we try to make sure that we're as a business prepared for Kind of where the world is going and clearly being concerned about a macroeconomic downturn is one of those things. And first thing is, at any given point in time, we have clients that are Growing clients that are shrinking and clients in between. So we always have clients that are struggling. What we see in the macroeconomic downturn is just more of those clients, but we do it all the time.

Speaker 1

Now, as I mentioned earlier, we've constantly adjust to try and make sure we are prepared for whatever economic environment comes. And we do this in a number of ways. One of them is we actually do surveys for our clients to understand kind of where their mindset is, what they're concerned about. In fact, in July, we did a survey of more than 150 Chief Financial Officers of our clients to see what was on their mind and therefore how she respond. And they have 3 priorities.

Speaker 1

1 was securing talent. They're still seeing that it's hard to hire talent and they're concerned about the wages for the talent. The second one is they want to keep accelerating digital even in downturn. In fact, we asked these CFOs what are they going to do in the downturn. 69% said they are going to continue to increase spending on technology to downturn, 28% said they're going to maintain it and 3% said they're going to decrease it.

Speaker 1

So this continued investment technology to improve the economics of the business continues on. The 3rd priority was to manage spending on things like Operations, real estate, travel to pay to hire people and pay higher wages as well as to do these investments in digital. So what we're doing is we're taking our research content and aligning it with those kinds of priorities, helping clients making sure they secure talent and manage with inflation, making sure they can continue to accelerate the potential impact on their business. And thirdly, most importantly maybe, helping them to manage spend. That's a big part of our business all the time.

Speaker 1

And we recently updated our what we call cost optimization work to make sure we get healthy with it. So we've updated our research based on and I gave you the CFO survey. We do surveys to all C level executives to understand what their individual priorities are. We then update our research to make sure it's on those most consumer topics. And then in In fact, in July, Winsorant trained all of our sales people and our service people in terms of what are the most important issues today with clients like the things I just mentioned And how's our research changed so that we can match those needs?

Speaker 1

And then and we'll continue to do that going forward. And so this wasn't kind of a one time thing we do once, we do this on an ongoing basis. So part of our strategy is to make sure our content is always on the topics people find important. Now clearly one of those things is going to be how to manage And we will help them with that, but then making sure that all of our sales and service people are equipped to have conversations with Siebel executives on how we can help them with those priorities. And this agility is a core part of our business.

Speaker 1

We also do structural things in our business Like, if you the share of both of your contracts we have is quite high and we've got a strategy to grow that over time. And so it's those two things, making sure our content

Speaker 3

is great, our sales group preferred

Speaker 1

and making sure the underlying structural factors we can control are also there. That is, if you look over time, we perform better and better in each downturn. And so, we're certainly aware that might be a downturn and are preparing for it.

Speaker 5

Great. Thanks for answering that. And then another player, I guess, in the space recently mentioned Longer contract cycles, are you seeing anything like that in your market?

Speaker 1

So I think we have seen longer contracting cycles. I would say if we see escalations, it's more likely that a contract would be reviewed by a CFO than it was a year ago. We train our salespeople Should that that's likely to happen and you be prepared for it and to both prepare our immediate clients who might be like the Chief HR Executive and Chief Information Officer, They might have to go to their CFO and review it and make sure they have what we call a CFO ready packaging.

Speaker 5

Thank you. Thank you for answering my questions.

Speaker 2

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

Speaker 6

Hi, thanks. Good morning. The performance in GBS was noticeably stronger than GTS. If you look at CV growth, it was 23% GBS, 14% GPS and the headcount growth was faster at 17% of GBS compared to 9% at GPS. Does this difference in growth between the two businesses reflect priorities internally?

Speaker 6

Or does it reflect customer demand that might be different between GTS and GBS? Yes.

Speaker 1

Hey, George. I think it reflects the investments that we've made more than anything else. So if you Go back 5 years ago, we began investing pretty heavily in areas outside of IT. So think marketing, supply chain, finance, HR, legal, sales, those are areas that hadn't traditionally been strong for us. We were in a couple of them that had been strong.

Speaker 1

We upped our investments significantly both buying CEB and then after bought CEB with investments. And what we're seeing in the accelerated growth rate in GBS Now Is the outcome of those investments we kind

Speaker 4

of invested upfront?

Speaker 1

There was a lot of discussion about it at the time and we increased sales capacity, increased research capacity, service capacity, Developed a lot of content and we're seeing the

Speaker 4

benefits of those. And so

Speaker 1

I think that's the first piece. The second piece is one of the major factors to grow our business Clearly, with this huge market opportunity is growing our sales headcount. And while we increased sales productivity, we've had some good increases in productivity, Growing sales headcount is essential. And so the fact that we've grown our GBS sales headcount faster over time, Not with this quarter, but if you look at like over the last since 2019, we've grown our GBS sales head down a compound growth rate of about 60% a year I'm sorry, about 5% a year and that has which is faster than GTS, which is about flat. And so that's allowed the growth to be a lot higher in GBS.

Speaker 1

So those two things, the combination of the investments and the growth in sales force is what's really powered the faster CV growth. And the other thing I'd add, George, is just as we look out over the medium term, we believe given the market opportunity and our ability to go capture That market that both GTS and GBS can be consistent 12% to 16% growers. And so yes, GBS is growing a little bit Ahead of that right now, but we remain very, very, very confident that both GTS and GBS can continue to grow at very strong double digit growth rates.

Speaker 6

Got it. That's helpful. Last quarter, you increased your normalized EBITDA margin targets from 19% 20% to 20%. And now you're saying underlying margins will be in the low 20s. So just going back to clarify, are you increasing your underlying margin target over the medium term Are you reiterating it from the prior quarter?

Speaker 1

Yes. It's a great question. So let me attempt to clarify, Because it's a very important question. So number 1, I would say just as context, we can Grow our top line at double digit growth rates and modestly expand margins over time. And there is operating leverage in the business said another way, right?

Speaker 1

So those are kind of 2 key points. When we were discussing the 20% normalized margin, we were really looking back To 2021 and attempting to give a view on if things have been more normal, What would our operating or EBITDA margins, what would they have been in 2021? What we're now providing is more of a go A review around what do we believe the operating margins are that we can run the business at. And we've We have moved that higher over time to your point, because we've gotten increased visibility into Better ways to run our business. And so what is the new normal for travel expenses?

Speaker 1

What is the new normal for the amount of real estate we need? What does it look like when in person conferences come back into the portfolio? And what does it look like as we catch up on headcount and Continue to grow and invest to support and sustain future growth. And so the way to think about that low 20s number is, Yes, it's an update and but it's also a view towards what do we think the underlying margins of the business are that we can modestly expand on going forward.

Speaker 6

Got it. That's helpful color. Thank you.

Speaker 2

Thank you. Our next question comes from Tony Kaplan with Morgan Stanley. Your line is now open.

Speaker 7

Hey, this is Greg Parrish on for Tony. Thanks for taking our question and congrats on the strong quarter. Just wanted to talk about margin. You Ramped up hiring in the quarter a lot, but margins went up and understand a lot of those probably weren't in the expense base yet. But Just really, Craig, if you could kind of help us bridge on how you get to the margin in the back half given the sort of implied step down?

Speaker 1

Yes. No, absolutely. So you've hit on a number of the items that will impact The margins in the second half of the year. So we were very aggressive on hiring in the first half and we expect to Remain as aggressive in the second half as we continue to catch up from hiring from 2021 and we also make sure that we're investing appropriately for the future. So that's a big piece that goes into the cost base for the second half of the year.

Speaker 1

The second big thing is resumption of travel. And some of that is tied to us returning to in person destination conferences, but a lot of it is just normal. We run global teams and we want our leaders to be in front of those global teams. And so we'll see that ramp up in the second half of the year as well. Third thing is, our normal comp adjustment period happens April 1.

Speaker 1

So we only have 1 quarter of that in the first half of the year. We obviously have 2 quarters of that in the second half of the year. So those are The 3 biggies as you think about bridging the expenses. And then the 4th one is with the returned in person destination conferences, obviously, There's a lot of variable costs in delivering those in person.

Speaker 7

Great. Thanks for the color there. And I guess Just a quick follow-up on pricing. I think last quarter, Craig, you talked about getting more this year given the inflationary environment. I guess, The broad macro is a little bit different than it was 3 months ago.

Speaker 7

Are you still expecting sort of above normal pricing this year?

Speaker 1

Yes. I mean, I think, Greg, the way to think about it is We want to make sure that we are matching our price increases with wage inflation or cost inflation. The bulk of our costs are people related. So we feel good that we are matching our price increases with what we're seeing on our wages.

Speaker 4

Okay. Thank you.

Speaker 2

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

Speaker 8

Hi, good morning. Wanted to ask a question first on the headcount growth, really, really solid quarter over quarter increase there. I think in your prepared remarks, you touched on it briefly, but I hoping you could spend a bit more time on attrition trends, how that's kind of coming in relative to your expectations And the successful recruiting efforts, just a little bit more color there, because it does sound like you're still pretty happy with where that's trending and your goals for the full year.

Speaker 1

Yes, Andrew, quick question. So the first, in terms of our attrition, we want to retain our great associates. And attrition, like many companies, went up over the last couple of years. We worked hard to understand the causes and then making sure we address that. And actually, our Associate turnover has actually gone down now to kind of what we would call normal levels.

Speaker 1

And so we're very happy with that turnover. In addition to that, we have a very strong recruiting team. We have a truly world class recruiting team and that recruiting team has been doing a great job. And of course, we have a great employee value proposition Well, if you combine those three things, lower turnover, great employee value proposition, a crack recruiting team, that's allowed us to get our net Associate headcount growth back up to where we need to support the growth in our business.

Speaker 8

Great. Thank you. And then for my follow-up, I wanted to ask about strength in the U. S. Versus internationally.

Speaker 8

Obviously, it seems like there's pretty broad based growth across the practices and across the industries. But is there any difference in CB growth or how you're kind of able to sell In EMEA, for example, given the geopolitical uncertainty or anything to call out there in the quarter?

Speaker 1

Yes. Hey, there's what I say is there's nothing systematic. If you look at Europe, Europe is proceeding along. There are some countries that are doing very well. There are some countries that aren't and it's sort of typical of what we've seen and the head is kind of flat and the same thing for the rest of the world.

Speaker 1

So nothing really remarkable in terms of U. S. Versus different geographic regions. Yes. And Andrew, when we say broad based growth, it is broad based.

Speaker 1

So we look at it across our top 10 geographies, they're all growing at nice growth rates. When we look across industry cuts, Yes, they're all growing, a nice growth rate. And so, yes, there are always pockets where there may be a little bit of A challenge for us, but generally those are either like super micro challenges or our own operational challenges. But the growth has remained pretty broad based. The biggest indicator of what we've been growing and not growing is where headcount, our sales headcount has grown faster or slower.

Speaker 8

Makes sense. Thank you.

Speaker 2

Thank you. Our next question comes from Seth Weber with Wells Fargo. Your line is now open.

Speaker 9

Hey, good morning, everybody. Thanks for taking the question. I wanted to just ask another question on the expense side. I appreciate that travel, T and E and stuff like that is ramping up in the second half of the year. Do you think that the run rate by the end of the second year will kind of Get you back to par?

Speaker 9

Or do you think there will still be some kind of catch up headwinds into next year? Thanks.

Speaker 1

Yes, Seth. Good morning. It's a good question. So I think the second half of the year will be more indicative of normal travel. Starting off the year this year, given where we were with the pandemic, it was a little light in the first 3 or 4 months of the year, and has started to pick back up.

Speaker 1

And so, yes, second half is probably more indicative. I think the way we're thinking about it is as compared to the last normal year back in 2019, where We expect to spend probably at least 50% less than we did In 2019, and again, we just think that the company and our associate base has embraced and thrived operating virtually. We still do need to travel, but we don't need to travel at the same volume that we did back in 2019.

Speaker 9

Got it. Thank you. And then just as a follow-up, I was really surprised at the strength in some of the areas like The non subscription revenue and then the consulting backlog up 45%. I'm just Was there anything unusual there or is that just reflective of kind of what you were talking about earlier that The model is just for consulting backlog of 45%. I'm just Was there anything unusual there or is that just reflective of kind of what you were talking about earlier that The model is just more recession resistant or resilient than people might expect.

Speaker 9

And just any comment on those few line items? Thanks.

Speaker 1

Yes. Hey, Seth. I think it just reflects that our clients had challenges that they need help with And that our content and when we deliver the content with consulting conferences or research is really helpful in helping them solve their problems. And so I think think it's indicative that we have a great value proposition, just kind of what's going on.

Speaker 9

Okay. And just the non subscription revenue, Is that do you feel like that's a kind of a sustainable level or would you expect that to come off a little bit here going forward?

Speaker 1

Yes, Seth. It is we had a really strong year on that line last year. So tough compares there, which again we did model into our initial guidance and our updated guidance as well. But to Gene's point, The products and offerings we have there offer a very strong and compelling value proposition in good times or Rougher times. And so we still expect it to be a nice strong grower for us.

Speaker 1

But again, super tough compare against the 2021 performance.

Speaker 9

Got it. Okay. Thanks, guys. Appreciate it.

Speaker 2

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

Speaker 4

Hi, this is Ryan on for Jeff. I just had a quick question on the labor supply side. Is it still as tight to find potential employees as it was 3 months ago?

Speaker 1

Great question, Ryan. What I read in the press and what I see with a lot of other companies is Lot of challenges, like I mentioned in the CFO survey, one of the big concerns that CFOs have is their ability to hire talent. We've actually found that we've had no trouble hiring talent. Again, our employee value proposition is very strong. We have a great brand with associates.

Speaker 1

And so we've had no trouble hiring people at all and that's reflected in the hiring results that you saw.

Speaker 4

Got it. And then just a follow-up on the prior question. Should we look to non subscription revenues as a leading indicator If we're heading into a downturn?

Speaker 1

No, I don't think so. I mean, it's a relatively small line. It can be a little volatile. Again, I think as we look across I would look broadly across the business for Leading indicators not one of the smallest revenue lines that we actually have out there. So now I would guide you to Look at consulting, look at conferences and look at our research CV growth as the leading indicators.

Speaker 4

Got it. Thank you.

Speaker 2

Thank you. Our next question Comes from Manav Patnaik with Barclays. Your line is now open.

Speaker 10

Good morning. This is Brendan on for Manav. Just want to ask, obviously, some of your competitors for talent at least are freezing hiring and You may have an opportunity to catch up on headcount in the next few quarters as the labor market gets a bit more friendly. So for GTS specifically, obviously things are starting to improve this quarter. Is this a level where you grow 10% off of or are you you think you can really catch up the next couple over the next few quarters?

Speaker 1

Yes, Brennan, it's a great question. I mean, Our business grew really rapidly last year and more rapidly we'd expected. And so we had a lot of hiring to catch up on, including NGTS. And so we want to get that catch up hiring so that we can properly service our clients and also be prepared to sell more clients. And over time, we expect to grow our GTS Salesforce and GBS students by the way, think 3 to 5 percentage points slower than our CV growth.

Speaker 1

So if CV growth is 15%, you'd expect to see Over time, our target would be headcount growth of 10% to 12% growth. That's and Brendan, the way to think about that is that's sort of the normal Algorithm for how we want to make sure that we are investing for both current needs and future sustained growth. Obviously, this year, to Gene's point, we are doing a lot of catching up. And so you'll see those growth rates a little bit higher potentially, obviously, with GBS Yes, up at 17% and we're fully expecting both GTS and GBS to end the year with strong double digit

Speaker 10

Okay. And just another question here, Moving over to the conferences. Is the guidance increase really is it just like better attendance than you expected? Is Are the conferences all full? Is that what it is?

Speaker 10

Or is there something else driving that higher?

Speaker 1

Hey, Brendan. So the first piece of it is that We're seeing very, very robust demand for conferences. Exhibitors are find it a great way to meet Prospects for them and the attendees find tremendous value as well. So we're finding just very strong demand for our conferences continuing on. And Then I'll let Craig talk about how to disclose your guidance.

Speaker 1

Yes. So, I think, Brendan, obviously, the Q2 were our first In person destination conferences in a few years. And so we were pretty cautious about Our expectations around the number of exhibitors and number of attendees that would want to come, would be able to come. And as you heard in our comments, I think both groups enthusiastically returned in the second quarter. And as Gene mentioned earlier, our bookings leading through our Q3 events and even the advanced bookings on Q4 conferences look very strong as well.

Speaker 1

And so the update in the outlook is really just around You have some caution upfront because we hadn't delivered anything in person in essentially almost 3 years, And we saw an enthusiastic return from both revenue streams, attendees and our exhibitors.

Operator

Great. Thank you.

Speaker 2

Thank you. Our next question comes from Hamzah Mazari with Jefferies. Your line is open.

Speaker 11

Hi, good morning. This is actually Stephanie on for Hamzah. I was hoping you could talk a little bit about the tenure or your GTS sales force today versus pre pandemic, how much tenure can add to productivity? And right now, if you view the GTS sales force, productivity It's kind of back to those pre pandemic levels. Thank you.

Speaker 1

Hey, Stephanie, great question. So tenure is an important determinant of productivity. When we hire a new salesperson, it takes them time to fully get up to speed. And so a more senior salesperson is more productive. We're very focused on both hiring people to go up to speed quickly as well as having internal training and other systems that help those new sales people get up to speed even faster.

Speaker 1

If you look at it, because we hired fewer people during the pandemic, the average tenure in our sales force last year was pretty high, The highest it's been in recent memory. As we branch over hiring, in Q2, it was more towards a normal tenure level. As we keep hiring, we expect that to drop a bit as we go through the rest of the year and enter into 2023.

Speaker 11

Great. Thank you. And then kind of switching gears, could you talk a little bit about the M and A environment? How is the pipeline looking today and kind of where your focus is at?

Speaker 1

Hey, Stephanie, good morning. Yes, from an M and A perspective, obviously, we've got a team that is actively out there looking at And staying in touch with a few 100 companies and actually tracking well more than that. I think our strategy as we've articulated is number 1, we're an organic growth company and We believe we can achieve our medium term objectives of that double digit growth and modest margin expansion Organically, and so it does not require M and A to get there. That said, we do like to do M and A when it Fill a gap or catalyze us or add an asset or capability or things like that. And so I think as we look at Yes.

Speaker 1

The radar screen, we are looking at things that can catalyze us or fill in gaps or add assets to our Portfolio that can help us over the long term. I think there obviously over the last 2 or 3 quarters, Just like the equity markets has been a recalibration around valuations. I'm not sure every seller has completely recalibrated yet either. But again, we'll continue to be on the lookout for strong strategic value enhancing Tuck in opportunities that again can either catalyze growth, fill in a gap or add important assets for us.

Speaker 11

Great. Thank you so much.

Speaker 2

Thank you. And I'm currently showing no further questions at this time. I'd like to turn the Call back over to Gene Hall for closing remarks.

Speaker 1

Well, summarizing today's call, for the Q2, we drove strong performances Across every geography, every industry and every major function, we deliver incredible value. We have strong demand for our services. We have a vast untapped market opportunity. We can drive sustained double digit top line growth. As we invest for the future, we'll continue to return significant levels of excess Capital to our shareholders increased our 2022 guidance.

Speaker 1

Results, we increased our 2022 guidance. Thanks for joining us today, and we look forward to updating you again next quarter.

Speaker 2

This concludes today's conference call. Thank you for participating. You may now disconnect. The conference will begin shortly.

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Earnings Conference Call
Gartner Q2 2022
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