Gartner Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 6, 2024

There are 14 speakers on the call.

Operator

Good morning, everyone. Welcome to Gartner's 4th Quarter 2023 Earnings Call. I'm David Cohen, SVP of Investor Relations. At this time, all participants are in a listen only mode. After comments by Gene Hall, Gartner's Chief Executive Officer and Craig Safeen, Gartner's Chief Financial Officer, will be a question and answer session.

Operator

Please be advised that today's conference is being recorded. This call will include a discussion of Q4 2023 financial results And Gartner's outlook for 2024, 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. All contract values and associated growth rates we discuss are based on 2023 foreign exchange rates and exclude contributions related to the Q1 divestiture accounts are for fully diluted weighted average share counts unless stated otherwise.

Operator

Reconciliations for all non GAAP numbers we use are available in 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 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 2022 annual report on Form 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.

Speaker 1

Good morning, and thanks for joining us today. Gartner drove another strong performance in the 4th quarter. We delivered high single digit growth in contract value. Revenue, EBITDA, adjusted EPS and free cash flow came in above expectations. Gartner delivers incredible client value in any macroeconomic environment.

Speaker 1

In 2023, the world experienced multiple disruptions. They impacted enterprises in dramatically different ways. For example, high interest rates affected capital intensive industries At financial institutions such as regional banks, high inflation rates had an outsized effect on industries such as healthcare. Geopolitical polarization and conflict drove increases in military and defense spending, while affecting supply chains. More shifts in how and where people work affected real estate, live events and entertainment and other industries.

Speaker 1

Cybersecurity attacks became even more frequent, while getting stronger and more disruptive. And we saw a significant leap in the capabilities of artificial intelligence or AI, which fueled even more complexity. We serve leaders in every enterprise, across every industry, and every geography. They know they need help, and they know Gartner is the best source for the help they need. Gartner delivers actionable objective insight to drive smarter decisions and stronger performance on an organization's mission critical priorities.

Speaker 1

We guide the leaders who shape the world. Our insights often make the difference between success and failure, the leaders we work with and the enterprises they serve. As we move into 202024, Our ability to execute operational best practices consistently is the strongest it's ever been. We have the lowest proportion of open positions ever. Our recruiting capability and capacity are world class.

Speaker 1

We have a strong associate value proposition And our teams have higher tenure than in 2023, which will allow us to drive strong performance well into the future. Research continues to be our largest and most profitable segment. Our market opportunity is vast across all sectors, sizes and geographies. Our business remains resilient in a complex external environment. Through relentless execution of proven practices, we're able to deliver unparalleled value to our clients.

Speaker 1

In the Q4, we helped clients with a wide range of topics, including cybersecurity, data analytics, artificial intelligence, remote work, cost optimization and more. Research revenue grew 5% in Q4. Subscription revenue represented more than 75% of our consolidated global revenue in 2023. We delivered subscription revenue growth of 8% on an organic basis in the 4th quarter. Total contract value growth was 8%.

Speaker 1

Across GTS and GBS, Contract value from enterprise function leaders grew at double digit rates. New business with enterprise function leaders also grew at double digit rates. Garner serves 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.

Speaker 1

GTS contract value grew 6%, led by growth with IT's enterprise function leaders. GTS sales to leaders at technology vendors continue to be affected like Technology Sector Dynamics. Exiting the year, we began to see some improvement. New business with tech vendors grew at high single digits. We expect new business to lead retention and contract value growth.

Speaker 1

Global Business Sales or GBS source leaders and their teams beyond IT. This includes HR, Supply chain, finance, marketing, legal, sales and more. GBS contract value grew 13%. GBS new business was up double digits. Gartner Conferences deliver extraordinarily valuable insights to an engaged and qualified audience.

Speaker 1

2023 was the 1st full year of in person conferences since 2019. We had a great year and we drove a strong finish in the Q4. In Q4, we held some of our largest destination conferences, including IT Symposium in Orlando and Barcelona and Reimagine HR in Orlando. These conferences were spectacular. Across all our destination conferences, attendance was up year over year with many at or near capacity.

Speaker 1

Looking ahead to 2024, advanced bookings continue to be very strong and feedback continues to be excellent. Gartner Consulting is an extension of Gartner Research. Consulting helps clients execute their most strategic initiatives Through deeper extended project based work, consulting is an important complement to our IT Research business. Consulting revenue grew 8% for the full year. We saw growth in labor based consulting and record results in contract optimization for the full year.

Speaker 1

We are introducing 2024 guidance, which we view as achievable across a wide range of economic geopolitical scenarios with opportunity for upside. In closing, Gartner achieved another strong quarter of growth. We deliver incredible client value, whether our clients are struggling, thriving or anywhere in between. We're exceptionally agile and continuously adapt to the changing world, and we know the right things to do to be successful in any environment. Looking ahead, we're well positioned to continue our sustained record of success far into the future.

Speaker 1

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. As we invest for future growth, we will 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, Greg Sapien.

Speaker 2

Thank you, Gene, and good morning. 4th quarter revenue, EBITDA, adjusted EPS and free cash flow were better than expected as we continue to execute very well in a complex environment. Our financial performance for the full year 2023 included global contract value revenue growth of 8%, EBITDA of $1,500,000,000 diluted adjusted EPS of $11.33 and free cash flow of $1,100,000,000 We are introducing 2024 guidance, which we view as achievable across a wide range of economic and geopolitical scenarios with opportunity for upside. 4th quarter revenue was $1,600,000,000 up 5% year over year as reported and 4% FX neutral. In addition, total contribution margin was 67%.

Speaker 2

EBITDA was $386,000,000 ahead of our guidance primarily as a result of disciplined cost management. Adjusted EPS was $3.04 and free cash flow was $196,000,000 We finished the quarter with 20,237 associates, up 5% excluding the 2023 divestiture and about the same as Q3. We have a great team across Gartner driven by a very compelling associate value proposition. Moving into 2024, we are in excellent position from a talent and tenure perspective. Research revenue in the Q4 grew 6% year over year as reported and 5% FX neutral.

Speaker 2

Subscription revenue grew 8% on an organic FX neutral basis. Non subscription revenue performance in the quarter reflects a shift to higher quality traffic. While this action has a short term effect on revenue, we expect it will drive higher prices and increase revenue over time. 4th quarter research contribution margin was 74%, consistent with the prior year period as we have caught up on hiring and return to the new expected levels of travel. For the full year 2023, research revenues increased by 6% both as reported and FX neutral.

Speaker 2

The gross contribution margin for the year was 74%. Contract value or CV was $4,800,000,000 at the end of the 4th quarter, up 8% versus the prior year. CV growth is FX neutral and excludes the Q1 2023 divestiture. We expect new business to be a leading indicator for retention and in turn contract value growth. We had the highest 1 month of new business dollars ever December 2023.

Speaker 2

For the Q4, 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 was about Flat versus the prior year and up sequentially. Tech vendor CV continued the quarterly improvement we saw in Q3. Tech vendor new business was up high single digits in Q4, marking the 1st year over year increase in 2023.

Speaker 2

Quarterly net contract value increase or NCVI was $180,000,000 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 or high single digit rates led by the energy, manufacturing and public sectors. We had high single digit growth across almost all of our enterprise size categories. The small category, which has the largest tech vendor mix grew modestly.

Speaker 2

We also drove double digit or high single digit growth in the majority of our top 10 countries. Global Technology sales contract value was $3,700,000,000 at the end of the 4th quarter, up 6% versus the prior year. GTS CV increased $134,000,000 from the 3rd quarter. Wallet retention for GTS was 101% for the quarter, reflecting net growth even before the addition of new clients. In the Q4, IT enterprise function leaders' wallet retention was consistent with historical GTS levels.

Speaker 2

GTS new business increased 12% versus last year. New business with IT enterprise function leaders increased mid teens compared to 2022. New business with tech vendors increased high single digits in the quarter. GTS quota bearing headcount was about flat year over year. With the dynamic territory planning we introduced a few years ago, catch up hiring we did last year and our teams moving up 10 year curve were well positioned for growth moving into 2024.

Speaker 2

Operationally, we are continuously allocating resources to the best near term opportunities even as we ensure we are well positioned to capture the large addressable market opportunity over time. Our regular full set of GTS metrics can be found in the earnings supplement. Global business sales contract value was $1,100,000,000 at the end of the 4th quarter, up 13% year over year. The majority of our GBS practices grew at double digit rates. Growth was led by supply chain, legal and HR.

Speaker 2

GBS CV increased $46,000,000 from the 3rd quarter. Wallet retention for GBS was 107% for the quarter, reflecting strong net growth with our existing clients. GBS new business was up 13% compared to last year. GBS quota bearing headcount was up 8% versus the Q4 of 2022. This excludes headcount associated with the Q1 divestiture.

Speaker 2

As with GTS, our regular full set of GBS metrics can be found in the earnings supplement. As we do each year at this time, we've provided 2 years of quarterly historical contract value data updated to 20 24 FX rates in the appendix of the earnings supplement. Conferences revenue for the Q4 was $214,000,000 up 14% year over year. Contribution margin in the quarter was 50%, consistent with typical seasonality. We held 11 destination conferences in the quarter, all in person.

Speaker 2

For the full year 2023, we delivered an all time high revenue of $505,000,000 which was an increase of 30% on a reported basis and 29% FX neutral. Gross contribution margin was 50%. 4th Quarter consulting revenues were $128,000,000 compared with $138,000,000 in 2022 when we saw record performance in the contract optimization business. Consulting contribution margin was 27% in the 4th quarter affected by revenue mix and growth hiring. Labor based revenues were $99,000,000 up 3% versus Q4 of last year as reported and on an FX neutral basis.

Speaker 2

Backlog at December 31 was $162,000,000 increasing 21% year over year on an FX neutral basis with continued booking strength. We delivered $29,000,000 of contract optimization revenue in the quarter. This part of our business is highly variable. For the second half of twenty twenty three, revenues were $62,000,000 up from the second half of twenty twenty two when we delivered our largest ever quarter in Q4. Full year consulting revenue was up 7% on a reported basis and 8% FX neutral.

Speaker 2

Gross contribution margin was 35% compared to 39% in 2022. Consolidated cost increased 11% year over year in the 4th quarter as reported and 10% on an FX neutral basis. The biggest driver of the increase was Higher headcount to support our future growth. SG and A increased 9% year over year in the 4th quarter as reported and 8% on an FX neutral basis. SG and A increased in the quarter as a result of headcount growth.

Speaker 2

EBITDA for the Q4 was $386,000,000 compared to $421,000,000 last year. 4th quarter EBITDA upside to our guidance primarily reflected disciplined expense management. EBITDA for the full year was almost $1,500,000,000 a 1% increase over 2022 on a reported basis and up 2% FX neutral. Depreciation in the quarter of $26,000,000 was up modestly compared to 2022. Net interest expense excluding deferred financing costs in the quarter was $19,000,000 This was down $9,000,000 versus the Q4 of 2022 due to higher interest income on our cash balances.

Speaker 2

The modest floating rate debt we have is fully hedged through maturity. The Q4 adjusted tax rate which we use for the calculation of adjusted net income was 24% for the quarter. The tax rate for the items used to adjust that income was 15% for the quarter. The full year tax rate for the calculation of adjusted net income was 22%. Adjusted EPS in Q4 was $3.04 compared with $3.70 last year.

Speaker 2

We had 79,000,000 shares outstanding in the 4th quarter. This is a reduction of about 1,000,000 shares or about 1% year over year. We exited the 4th quarter with about 79,000,000 shares on an unweighted basis. For the full year, adjusted EPS was $11.33 up modestly from 2022. Operating cash flow for the quarter was $224,000,000 up 10% compared to last year.

Speaker 2

CapEx for the quarter was $28,000,000 down $4,000,000 as a result of catch up spend on technology investments in 2022, which normalized this year. Free cash flow for the quarter was $196,000,000 up 19% compared to last year. Free cash flow for the full year was almost $1,100,000,000 a 6% increase versus 2022. Free cash flow on a rolling 4 quarter basis was 18% of revenue and 71% of EBITDA. Adjusting for the Q1 divestiture, The full year free cash flow conversion from GAAP net income would have been 138%.

Speaker 2

Our free cash flow conversion is generally higher when CV growth is accelerating. We have a new slide in the earnings supplement, which shows the conversion from both EBITDA and GAAP debt income to free cash flow on a rolling 4 quarter basis. The past 2 years have had some unusual items affecting the conversion, including insurance proceeds related to pandemic conference cancellations and the 2023 divestiture. We expect about 4 to 6 point difference between EBITDA margin and free cash flow margins in a typical year. The normal free cash flow conversion from GAAP net income is 140% to 160%.

Speaker 2

At the end of the Q4, we had about $1,300,000,000 of cash. Our December 31 debt balance was about $2,500,000,000 Our reported gross debt to trailing 12 month EBITDA was under 2 times. Our expected free cash flow generation, available revolver And excess cash remaining on the balance sheet provides ample liquidity to deliver on our capital allocation strategy of share repurchases and strategic tuck in M and A. Our balance sheet is very strong with $2,300,000,000 of liquidity, low levels of leverage and effectively fixed interest rates. We repurchased $158,000,000 of stock during the Q4 and more than $600,000,000 for the full year.

Speaker 2

At the end of December, we had about $1,000,000,000 of authorization for repurchases remaining and we expect the Board will continue to refresh the repurchase authorization going forward. 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. Before providing the 2024 guidance details, want to discuss our base level assumptions and planning philosophy for 2024. For research, we continue to innovate and a very compelling value proposition for clients and prospects.

Speaker 2

Executives and their teams face uncertainty and challenges and they recognize how Gartner can help regardless of the economic environment. The outlook for 2024 research revenue growth is a function of 3 primary factors. 1st, 2023 ending contract value second, the timing of growth bottoming and the slope of the reacceleration and third, the performance of non subscription revenue. Starting with the research subscription revenue, which was 76% of 2023 consolidated revenue. Our guidance reflects CV bottoming and reaccelerating during 2024.

Speaker 2

1st quarter and first half NCVI are important inputs to calendar 2024 revenue growth. We've taken a prudent view of NCVI phasing because Q1 is a seasonally important quarter for tech vendor renewals. With the majority of our contracts being multiyear, some haven't come up for renewal during the tech sectors recalibration. And research subscription revenue will likely bottom about 1 quarter after contract value growth bottoms. If new business continues to perform well and retention is better than we've incorporated into the plan, there would be upside to our guidance.

Speaker 2

The non subscription revenue was about 6% of consolidated revenue in 2023. In this part of the business, we help small business buyers find the best software for their needs and help sellers find customers. This adds a lot of tangible value for both groups. The outlook built into the 2024 guidance reflects a shift to higher quality traffic sources. As I mentioned, this affects revenue in the short term, but we expect it to drive higher prices and increase revenue over time.

Speaker 2

For conferences, which is about 9% of 2023 revenue, we are basing our guidance on the 51 in person nation conferences we have planned for 2024. We expect similar seasonality to what we saw in 2023 with Q4 the largest quarter followed by Q2. We have very good visibility into 2024 revenue with a majority of what we've guided already under contract. This is consistent with last year and ahead of historical levels. For consulting, which was also about 9% of 2023 revenue, we have more visibility into the first half based on the composition of our backlog and pipeline as usual.

Speaker 2

Contract optimization has had several very strong years. It's also seasonally slower in the Q1 and remains highly variable. We've incorporated a prudent outlook for this part of the segment. We remain focused on aligning expense growth with CV growth. This is the best way for us to balance short term margins while investing for long term sustained double digit growth.

Speaker 2

Our base level assumptions for consolidated expenses reflect a more typical cadence than we've seen in a while. We are investing for future growth even as we have taken a prudent view of the timing of revenue flowing into the P and L. We recommend thinking about expenses sequentially with notable seasonality driven by the conferences calendar and merit increases. Our plan for mid to high single digit sales headcount growth for 2024 reflects our commitment to invest for future growth while delivering on our margin targets. We have the recruiting capacity to go faster depending on how the year plays out And we have other levers like increased tenure to support CV growth in 2024.

Speaker 2

At current rates, FX will be approximately neutral to growth for the full year. Our guidance for 2024 is as follows. We expect research revenue of at least $5,150,000,000 which is FX neutral growth of about 5%. The research revenue guidance reflects a prudent plan for NCVI performance and the recalibration of non subscription part of the business. The guidance reflects subscription revenue growth in the high single digits.

Speaker 2

We expect conferences revenue of at least $560,000,000 which is FX neutral growth of about 10%. We expect consulting revenue of at least $530,000,000 which is growth of about 3% FX neutral. The result is an outlook for consolidated revenue of at least $6,240,000,000 which is FX neutral growth of 5%. We expect full year EBITDA of at least $1,435,000,000 which results in EBITDA margin of at least 23%. We expect 2024 adjusted EPS of at least $10.55 per share.

Speaker 2

For 2024, we expect free cash flow of at least $1,065,000,000 This reflects a conversion from GAAP net income of above 140%. Our guidance is based on 79,000,000 shares, which only assumes repurchases to offset dilution. Finally, for the Q1 of 2024, we expect to deliver EBITDA of at least $335,000,000 We performed well this year despite continuing global macro uncertainty and a dynamic tech vendor market. Global CV grew high single digits in the quarter with enterprise function leader CV growing double digits. Revenue, EBITDA and EPS performance exceeded our expectations and we introduced achievable guidance with opportunity for upside.

Speaker 2

We repurchased more than $600,000,000 in stock during 2023 more than $3,000,000,000 in the past 3 years. We remain eager to return excess capital to our shareholders. We will continue to be price sensitive, opportunistic and disciplined. 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 2

With gross margin expansion, Sales costs growing about in line with CV growth and G and 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 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. Operator?

Speaker 3

Thank Our first question comes from the line of Jeff Meuler with Baird. Your line is now open.

Speaker 4

Yes, thank you. Just want to dig in first. I know it's not a huge business, but on the research non subscription Headwinds and need for recalibration. I know it's been weak all year, but I was interpreting that previously more as like cyclical headwinds and now it seems like you're responding more operationally to Higher quality traffic. So just I guess I don't know if there was like a business review or I guess the why now in terms of cyclicality of the business versus where there's an opportunity for operational improvement?

Speaker 5

Hey, good morning, Jeff. Thanks for the question. I'll give it a start and then Gene will chime in as well. I think starting with the facts, the non subscription part of the business was about 6% of 2023 revenue. Obviously, we have had the tech market pressure for the full year.

Speaker 5

And the way that mostly manifested itself through our results was real pressure on pricing throughout the full year. And we saw that we adjusted coming out of Q2 earnings. And the good news is pricing has been roughly stable since we made that adjustment. In Q4 though, one of the things we're always focused on is making sure that we are providing the highest value to both sides of the equation. And with these offerings, we are essentially small business buyers are coming to our sites to learn more about What software to buy and we actually help them with reviews and ratings and written research and things of that nature.

Speaker 5

And then we're matching them to the sellers. And again, so tangible value, as we mentioned, on both sides of the equation. We're always focused on driving even more value for our clients. And so one of the things we've done is really shift our focus and prioritization to higher quality forms of traffic. And again, short term impact on revenues, but over the long term, we think this is good for clients on both sides of the equation, will drive higher pricing over time, which will drive higher revenue, which is good for everybody.

Speaker 5

But one thing I would say just about the guidance is We've modeled in the real focus on higher quality traffic. We have not modeled in any real uptick in the pricing. Again, over the long term, we expect that to happen. We did not want to model that in. We actually see that manifesting itself in reality.

Speaker 4

Okay. And then I hear you loud and clear on the better tech vendor new business sold trends. Maybe talk through more on The retention for tech vendor, just like how you're thinking about the tail that has not yet renewed in a more difficult environment or just what's the typical lag time from when you've seen prior inflections in new business like how long it kind of takes for the retention trend to similarly improved.

Speaker 5

Hey, Jeff, it's Gene. So one way the biggest issue we have is in the small check vendors and a lot of the small check vendors are in markets that have changed and they have difficulty getting funding now. And for those vendors, if they signed a 2 or 3 year multi year a year or 2 ago, when that comes up for renewal, they don't have any funding. In fact, in many cases, they're out of business. And so what's happening there is that that's our biggest drag in the tech sector in terms of retention.

Speaker 5

The larger companies as you've seen are still laying off tens of 1,000 people. And so they haven't finished restructuring. As we mentioned, overall new business is up in the tech sector, mid single digits. And so we're Thinking that's a leading indicator that retention will follow once we work our way through these particularly these companies that have gone out of business since they signed the agreement and today. And by the way, that's a very still very robust business.

Speaker 5

It's just a different set of companies now that are Now they're getting funding, think AI.

Speaker 1

Got it. Thank you.

Speaker 3

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

Speaker 6

Thank you. Actually maybe following on a similar line to the last question, the Commentary around new business in the prepared remarks and this is beyond TechVender. So just in general, the enterprise new business sounded Very good. Even the tech vendor improvement in new business sounded good. Just wanted to understand If there was anything that could that is a risk to that sort of starting to flow through contract value in the next few quarters, and how quickly you could expect to see sort of that shift in contract value?

Speaker 6

I know you mentioned in the prepared remarks that you're expecting an inflection this year? Thanks.

Speaker 5

Good morning, Tony. Thanks for the question. Just to lay out the facts. So to your point, GTS, the HD vendor part of the business, new business grew at high single digit rates. The end user or enterprise function leader part of GTS grew new business mid teens year over year and GBS was up 13% over prior year on new business.

Speaker 5

So we actually saw pretty strong new business results across all of the markets we sell into in the Q4. And as we mentioned, we view new business as a real leading indicator for what's happening in the market in the moment, so to speak. And so again, we saw modest improvement in new business From Q2 to Q3, that continued from Q3 to Q4 with TechVendor actually growing for the first time in 2023 in the Q4. As you know, NCVI and CV growth are a function of the combination of new business and retention. And as we talked about in our prepared remarks and also in response to Jeff's question, There's still a lot of pressure and Gene alluded to this as well.

Speaker 5

So a lot of pressure on retention in the small tech vendor part of the market And we still have a lot of renewals that haven't been touched or coming renewals that haven't been touched Since the tech sector really started to recalibrate, call it, 3rd, Q4 of 2022. So Still a little bit of retention pressure. However, new business we definitely view as a leading indicator. Again, that's part of what gives us confidence to say that we expect CB to bottom during 2024 and start to reaccelerate during 2024 as well.

Speaker 6

Makes a lot of sense. And then just for a follow-up, I wanted to ask about headcount. I guess, what are your expectations for headcount growth in 2024 and just wanted to understand a little bit more about it seems like headcount growth has been slowing the last two quarters to like below normal levels. I know there was a catch up in sort of the prior year and earlier in 2023. So I guess, is this lower headcount sort of helping manage margin?

Speaker 6

Or is it, I guess an indicator that there's I don't think you're saying there's less opportunity, but just wanted to understand the sort of below normal headcount growth levels that we're seeing now?

Speaker 5

So Tony, we look at it as there's a Very enormous market opportunity. We intend to capture that market opportunity over the next many years. Part of our core strategy to capture that opportunity is growing our headcount capture it. That headcount growth is going to be faster or slower depending on the actual kind of selling capacity of the team we have. And right now, we believe we have a lot of selling capacity embedded actually in the capacity we have today.

Speaker 5

Over time though, that's going to grow as we grow our business. And as we mentioned during our remarks, we've actually got dialed into our plan combination GTS, GBS Quarter bearing headcount growth of mid to high single digits. And as always, we're prepared to go faster. As both Gene and I mentioned, we have recruitment capacity to go faster if we want to. And so we've got dialed in mid to high single digit growth in GTS and GBS Quarter bearing headcount and we can go faster if we see that rebound coming faster as well.

Speaker 6

Terrific. Thank you.

Speaker 3

Thank you. Our next question comes from the line of Heather Balsky with Bank of America, your line is now open. Heather, your line is open. Please check your mute button.

Speaker 7

Hi. I was muted. Sorry about that. I wanted to go back to the renewals on the tech vendor side Just ask you, are there any I mean, obviously, if companies are going under, there's nothing you can control there. But What you can do on that front?

Speaker 7

And can you help us in perspective how material the wave of renewals are? I know that's something curious about?

Speaker 5

Again, if you look at the larger companies in the market, Renewals are going kind of normally. It's a little slower than usual because again, they're laying off tens of thousands of people. We expect that will change. There's plenty of demand. Again, we expect Global IT spending initiative to grow by 7% to almost $5,000,000,000,000 So fully demand there, we expect over time that will normalize.

Speaker 5

So the real issue in retention is these very small tech vendors, which are over time a great market for us, but there's a shift going on now from What used to get funding to now what does get funding is, as I mentioned, there's a real focus on AI. And so those companies that are in Less popular segments for funding these days can't get funding and if they haven't as successful commercially, they even get acquired to go out of business in which case our retention affects our retention. The other thing I'd add Heather just on the larger tech clients typically what we see is A combination of maybe modestly less growth than we would normally buy or normally see through renewal cycles or modest cuts or reductions to spend, but they maintain a pretty significant Gartner presence always. And what we then do is make sure that we are there to win back that business and it actually does help drive the growth coming out of tougher macro environments. And that's sort of what we've always seen in tough macro environments, Tech vendor or otherwise, where we'll take some nicks from a retention perspective, but stay embedded, still delivering huge value to our clients and then win back and grow that business over the long term.

Speaker 7

And then, I'm just kind of asking another version of Probably something you've already said and the same question, but you were talking about CV on the tech vendor side normalizing. Last quarter, you talked about normalizing over 12 to 18 months. Is that still your outlook based on what you saw in the Q4? How are you thinking about that?

Speaker 5

So our long term view on this segment of the business is unchanged. We believe it can grow in line with our medium term objectives. We still believe that we are going to see reacceleration of this business over time, Whether it's 9 to 15 months or 12 to 18 or 24, It will be in that range that we actually see that reacceleration, but we the market here is still really strong. Our offerings still drive really huge value for our clients in this segment. And over the medium term, there's no reason why this can't get back So 12% to 16% growth consistent with our meeting internal objective for the Spartan business.

Speaker 7

Got it. Thanks.

Speaker 3

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

Speaker 8

Hey, guys. Good morning. I think maybe first just When you talk about your research revenue guide, I think backing into it, it kind of implies a non subscription Revenue growth is down like down low double digits. Is that the right way to think about what's baked into your model?

Speaker 5

Yes, that is the correct math, Seth. You got it.

Speaker 8

Okay. Thank you. And then just on the strong new business wins, can you just frame that a little bit. I mean, is that a function of comps are easier, productivity is better or are you actually seeing hearing better sentiment from your customers is are the sales cycles getting shorter? It just seems like the new business wins just really strong and I'm just trying to tie all these things together with your guidance.

Speaker 8

Thanks.

Speaker 5

Yes. So first I'd say is we have a strong value proposition. And so when clients see the value they get from our offerings, they want to buy. So that's fundamentally what's driving demand. On top of that, we're always focused on things that impact sales productivity.

Speaker 5

There's things that and it's things like the tools that we have done, the process we have. And then as Craig mentioned in his remarks, tenure can affect it as well. We're having modest improvements in tenure as well. And so but the fundamental thing is driving it It's really intrinsic demand for clients because they have the need for our services to get a lot of value out of them.

Speaker 8

Right. But has sentiment has customer sentiment changed at all over the last quarter? Has it gotten better or have the sales cycles changed or anything you'd call out for the acceleration of new business wins here?

Speaker 5

I'd say the sort of selling environment modestly improved throughout 2023.

Speaker 8

Okay. All right. Thank you, guys. I'll pass it on.

Speaker 3

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

Speaker 9

Hi, good morning. Thanks for taking my question. I wanted to touch on artificial intelligence as a driver of new business. I realize it was one of the topics, Gene that you outlined at the front. Just kind of curious, is there any way to kind of quantify or maybe even subjectively talk about AI as a driver of new business, cross sell, new conversations with clients.

Speaker 9

I understand it's part of a ever evolving tech landscape, but I'm just wondering if there's been any boost or notable boost from that topic specifically as it relates to new client wins and new business?

Speaker 5

Yes. So Andrew, our we serve clients in a wide variety of areas, as you know, and they get value in all those areas. AI has had a lot of publicity over the last year. And so there is throughout the media, etcetera. And so the there is an unusually high level of interest understanding what AI is and how it can affect our clients' businesses.

Speaker 5

I'd say it's just like the other things that we help our clients with. It's not something that's like an extra 20% of demand or something. It's an area that is one of the things we cover that clients have interest in. Just clients that have cost problems, maybe or some cost acquisition as opposed to AI. So it kind of depends on the situation with individual client, It is certainly an area of robust demand.

Speaker 9

Great. And then For my follow-up, I just wanted to hone in on the CV growth bottoming part of your guidance. I recognize that 1st quarter and first half NCVI are important inputs and you've been conservative. Gene, I think in the press release, you said that you had an opportunity for upside and that guidance was achievable across a wide range of economic scenarios. So just kind of putting all these pieces together, is it fair for us to assume that The TV growth is bottoming in the second half in your guidance and then upside would be from that happening earlier or is there some other way for us to think about the underlying assumptions there.

Speaker 9

Thank you.

Speaker 5

Yes. Good morning, Andrew. I think The way to think about the CV and the revenue and obviously our revenue guide for the research segment and the subscription revenue piece, the revenue is always going to lag the contract value recovery. And on top of that, as you know, first half changes to NCBI are going to have a bigger impact on the 2024 revenue run out then big step ups in Q3 or Q4, which are great and drive great cash flow and will drive future revenue, but have minimal impacts on 2024 revenue. So we're not Guiding to a revenue RCV number for the year, nor are we pointing to specifically where the bottom is.

Speaker 5

But we have baked into our outlook a bottoming of that CV and reacceleration of that CV over the course of 2024.

Speaker 9

Understood. Thank you.

Speaker 3

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

Speaker 10

Hey, this is Brendan on for Manav. Just want to ask how you guys think about getting back to double digit CV growth. Obviously, if your QBH is mid to high single digit, Your new business is still pretty strong. So it seems like really it's just like a wallet retention, higher cancellation issue for now. Is it just that that kind of goes away over time?

Speaker 10

Or do you actually expect even more kind of new business productivity, if you will, from QBH or I guess how do you guys think about that?

Speaker 5

Good morning, Brendan. I mean the biggest thing impacting contract value and contract value growth right now is the tech vendor part of the business. And so as we mentioned, the enterprise function leader part of our business grew at double digit growth rates in the 4th quarter and actually hasn't been a consistent double digit grower through the course of 2023. And so if you look at that 7.7% overall contract value growth, the reality is the enterprise function leader portion of the business, which is more than 75% of total CV is growing at double digit growth rates and the tech vendor portion of the business, as we mentioned in our prepared remarks, was essentially flat for the year. And so as we start to see reacceleration of the tech vendor business, which again is a little less than 25% of total CV, That obviously has an impact on the overall CV growth.

Speaker 5

The other piece that I think is obviously super important is We caught up on our hiring quite a bit over the course of 2022. And so what that meant is over the course of 2023, we had a lot of people very early in their Gartner sales careers. And as you know, as people come up the tenure curve, their productivity increase. And so we feel confident that we've got enough capacity from a selling perspective heading into 2024, Given the combination of tech sector, rebound and probably more importantly, Our sales people coming up the 10 year curve that should provide the right amount of fuel, if you will, to drive value growth in 2024 and we're growing our GTS CBS headcount mid to high single digits during 2024 And that's really about accelerating and sustaining that growth as we roll into 2025 and 2026.

Speaker 10

Okay. And then just any callouts or growth rates you can give us within GBS? Obviously, it's still performing pretty well. So just anything any other color you can give us?

Speaker 5

Yes. I mean, it's still 12.9% or 13% year over year growth on a bigger base. And so getting bigger and bigger and sustaining growth within Our medium term objective for the segment, as I mentioned in my prepared remarks, Supply chain, legal and HR are the 3 fastest growing pieces of the segment. But obviously, all pieces have to be growing nicely for us to register 13% year over year CV growth.

Speaker 11

All right. Thanks.

Speaker 3

Thank you. Our next question comes from the line of Josh Chan with UBS. Your line is

Speaker 5

now open.

Speaker 11

Hi, good morning. Thanks for taking my questions. I know that you don't guide to CV trajectory or NCVI, but I guess it sounds like you are emphasizing more the tech vendor renewal dynamic here. So I guess, are we to interpret that as there being more of an impact of that on Q1 than normal? Can you just kind of explain the rationale behind Calling that specific dynamic out the way you did.

Speaker 5

Yes. Good morning, Josh. Thanks. Great question. So we're always looking at the SKU of contract end dates and contract value associated with that.

Speaker 5

And as we've talked about in the past, generally speaking, we're pretty evenly skewed across the year. This year, We actually have a little bit of a bubble and not a huge one, but just a little bit more than average in with our tech vendor clients in the Q1. And so you may have heard us use the word prudent several times during our prepared remarks. We just want to make sure that our guidance reflects our most recent performance and what we know about The next couple of quarters coming up and so we've taken a prudent view on our first half NCBI to take that into account. That said, again, I'll reiterate, we do expect CV growth overall to bottom during 2024 and begin to reaccelerate even with that first quarter focus on tech vendor renewals.

Speaker 11

Okay. I appreciate the color there. That's really helpful. If I can shift over to margins, could you talk about the different drivers of margins year over year. I mean, you have positive revenue growth, you have reaccelerating CV, The cost structure seems to be in a good spot.

Speaker 11

So are there more margin pluses than minuses? And how does that reconcile with the guidance? Thank you.

Speaker 5

Sure. Thanks, Josh. The simplest way to think about it is that with Our targeted headcount growth in GTS and GBS of mid to high single digits, and think about Not the only place that we're actually growing, but growing a little bit elsewhere combined with normal Merit and wage inflation combined with a growing conferences business, if you look at the implied operating expense in the guidance, It's up about 8% or 9% year over year, which aligns with the headcount growth and the conference growth that we've got dialed into guidance. And so as we mentioned, a much more normal cadence of operating expense in 2024 as compared to prior years where we fall behind and we're catching up, etcetera, etcetera. So much more normal quarter to quarter build of our operating expense.

Speaker 5

We are the biggest thing that drives our revenue For 2024 is the ending contract value for 2023. And obviously, as we talked about on Andrew's question, And the revenue will lag the recovery in contract value. And so the reality is and again, we've been Not guiding, but pointing this way for the last several quarters that this was going to be the reality for 2024, which is we're going to get back on our normal cadence of investing For the future and growing our sales force and growing other areas, we are dealing with the CV deceleration through 2023 and obviously that has an impact on 2024 revenues. Obviously, the non subscription revenue performance also mutes the overall revenue as well as does the consulting growth rate, which while Still within our medium term guidance, given we had such a strong year in contract optimization, we're being thoughtful about the growth rates there. And so it's a little bit of all of those factors impacting the top line with what I would consider normal operating expense growth baked into the 2024 guide.

Speaker 11

Perfect. Thanks for the color, Craig, and thanks both for your time.

Speaker 3

Thank you. Our next question comes from the line of Surinder Thind with Jefferies LLC. Your line is now open.

Speaker 12

Thank you. Just taking a step back, if we look at the big picture and what I would call the relative strength of the economy, Why do you think the clients on the tech side aren't spending more at this point? I guess in your conversations, What would get them to commit like what are they looking for at this point?

Speaker 5

So Surinder, on the tech side, I think it's really the so it's a combination of The recalibration of that market and also when I say recalibration, down to the things Gene was talking about where We actually have a really healthy business on the small end of tech. And there is Funding flowing, but it's not flowing to the same places that it may have been a year or 2 or 3 ago. And so we're just dealing with that. And again, we're going after the opportunities where the money is or we're fishing where the fish are. But as you've seen, there are still Large tech sector layoffs happening a year or almost even 15 months since they began And selling into that environment when they're in the process of cutting tens of thousands of jobs is a little more challenging than it would be, if they had completely recalibrated.

Speaker 5

And so I think we're still in. We're still driving huge value for the clients. They're still very important clients for us. We're going to be there to help them As they rebound and come through the recalibration, it's just going to take a little bit of time. But we're confident in the value we provide.

Speaker 5

We're confident, as I mentioned earlier, in the long term or medium term growth prospects for this part of the business. But The fact is they are still significantly recalibrating and we are along for that ride, so to speak. Just a little bit. Got it. Just a little bit.

Speaker 12

Yes, please continue.

Speaker 5

When you're selling into a company that is actively making layoffs, The attention of people is focused on who they're going to lay off or whether in fact they're going to get laid off. And so it takes a little while that's a much tougher that's kind of the toughest selling environment. They'll get through that and it will return to normal. That's the larger end. No, the small end Craig described very well.

Speaker 12

Got it. And then I guess if we think about that or advance that line of thinking, So as you kind of more broadly think about the business and all of these clients that you serve, so is there arguably more, I guess, cyclicality or potential volatility today in your business than maybe in prior cycles with maybe the reason being that there's more PEVC backed firms now that They're just a larger part of the ecosystem. So they're just more willing to make quicker strategic pivots or spending decision changes or Other things, is there something structural perhaps that we should be aware of or at least we should be thinking about?

Speaker 5

So our perspective is there's nothing structural about it. What happened was during the pandemic, there was a pull forward of tech spending. Many of the tech companies, probably most of them assume that was going to last forever, turned out to just pull forward. Now they're just adjusting to getting back to normal. And it's just simple as that.

Speaker 5

So Unless pandemics become cyclical, I think we're in pretty good shape. Yes. I also think Surendra just to sort of underscore that point. When we Talk about the overall business or market opportunity. I'll focus on the market opportunity.

Speaker 5

So roughly $200,000,000,000 market opportunity, $190,000,000,000 of that is outside of the tech vendor opportunity. So we remain very focused That big prize of $190 plus 1,000,000,000 market opportunity serving enterprise function leaders across GTS and GBS. And again, we're confident that the tech vendor market is a really strong market, but the reality is $190,000,000,000 out that $200,000,000,000 market opportunity is the enterprise function leader opportunity.

Speaker 12

Got it. Thank you.

Speaker 3

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

Speaker 13

Thanks. I know it's late. I'll just ask one, though it's multipart. Can we talk about the pricing environment? Can you just remind us what price increases you put in for this year?

Speaker 13

Are you getting any pushback? And others in this space have been providing some breaks for extending the length of the term. Is that something you're doing as well? Thanks.

Speaker 5

Hey, good morning, Jeff. Thanks for the quick question. On the pricing side, We're a little over 4%. We did our price increase in November of this year, which is when we typically do it, a little bit lower than What we did in 2021 2022 largely because we've seen inflation come down a little bit and most importantly wage inflation come down a little bit. And so we're in that around 4%, a little bit more than 4%.

Speaker 5

I think clients By and large, are not pushing back on it. Again, remember, the average spend per client is order of magnitude 250 dollars. So the difference between a 3% or 4% increase is pretty de minimis. And again, and we're very focused on making sure that our Products and services have incremental value each and every year. And we're continuing to sell With our upfront invoicing and a real focus on that, we're continuing to sell more and more multi year contracts with our focus on that.

Speaker 5

And I'd say, yes, the environment has been a little tougher, but we've been managing to stick to our guns on the things that we know drives huge economic value for the business, which is sticking to our pricing guns, not discounting, selling multiyear contracts and making sure we get the invoicing done upfront. And I think our teams have done a phenomenal job of sticking to our coordinating there.

Speaker 13

Thanks so much.

Speaker 3

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

Speaker 12

Hi, thanks. Good morning. You mentioned 1Q tech vendor renewals are especially important because of a little bubble there. Can you help quantify that? How much concentration is there compared to other quarters in the year?

Speaker 5

Yes. I think I mean, again, remember, Our tech vendor CV is a little less than 25% of total CV. Normally, Q1 represents a little bit more than 25% of total renewals on the overall franchise. This year with tech vendors, it's in the low to mid-thirty percent of overall CV. So it's not a huge bubble.

Speaker 5

Just a little bit of an overweighting more than normal in the Q1.

Speaker 12

Got it. That's helpful. And then you're guiding to EBITDA margins of 23% for the year. What do you see as the major driver of potential upside to that target?

Speaker 5

I think at this point, George, its revenue upside will drive the biggest potential for margin upside from that 23%. As we've talked about, I remember whose question it was, I think it was Josh's question. The OpEx is, again forgive me for using this term, more normal than has been for the last few years. We're back on our territory growth planning. We're back on our more normal merit increases kicking in on April 1.

Speaker 5

And so I feel really we feel really good about the OpEx plan we've got. And so I think revenue upside across the various business lines would be the place that could potentially unlock a little bit of margin upside. That said, if we are doing better from a revenue perspective, and again, Jean and I both alluded to this, we've got recruitment capacity to go faster. And so we want to make sure that not only are we doing well in 2024 that we are setting ourselves up to continue to perform really strongly in 2025 and 2016. And so if we have the opportunity to go a little bit faster on GTS and GBS headcount growth, we're going to take that opportunity

Speaker 12

Got it. Thank you.

Speaker 3

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

Speaker 5

So here are the takeaways from today's call. Gartner drove another strong performance in Q4. We delivered incredible value our clients are struggling, thriving or anywhere in between. We're exceptionally agile and continuously adapt to the changing world and we know the right things to do to be successful in any environment. Looking ahead, we're well positioned to continue our sustained record of success far into the future.

Speaker 5

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. 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. Thanks for joining us today and we look forward to updating you again next quarter.

Speaker 3

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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Key Takeaways

  • Gartner delivered 8% contract value growth in Q4 and beat expectations across revenue (US$1.6 billion, +5%), adjusted EBITDA (US$386 million), EPS (US$3.04) and free cash flow (+19% year-over-year).
  • Research remained the largest and most profitable segment, with Q4 revenue up 5% (6% reported) and subscriptions representing over 75% of total revenue; 2024 research revenue is guided to US$5.15 billion (+5% FX-neutral) with high-single-digit subscription growth.
  • Global Technology Sales saw contract value rise 6%—led by mid-teens new business growth in IT functions and high-single-digits in tech vendors—while Global Business Sales grew CV 13% with 107% wallet retention and 13% new business gains.
  • Conferences revenue surged 14% in Q4 (full-year up 30% to a record US$505 million) and consulting grew 8% FX-neutral for the year, albeit with variability driven by contract optimization projects.
  • 2024 guidance calls for consolidated revenue of at least US$6.24 billion (+5% FX-neutral), EBITDA ≥US$1.435 billion (≥23% margin), adjusted EPS ≥US$10.55, free cash flow ≥US$1.065 billion (>140% conversion) and continued share repurchases.
A.I. generated. May contain errors.
Earnings Conference Call
Gartner Q4 2023
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