Gartner Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2023

There are 13 speakers on the call.

Operator

Good morning, everyone. Welcome to Gartner's First 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 Safian, Gartner's Chief Financial Officer, there 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 Q1 2023 financial results and Gartner's outlook for 2023 is 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 adjustments as described in our earnings release and supplemental. Our contract values and associated growth rates we discuss are based on 2023 foreign exchange rates and exclude contributions related to

Speaker 1

the recent divestiture and the Russia exit.

Operator

All growth rates in Gene's comments are FX neutral unless stated otherwise. All references Share counts are for fully diluted weighted average share counts unless stated otherwise. Reconciliations for all non GAAP numbers we use are available in the Investor Relations section of the gartner.com website. As set forth in more detail in today's earnings release, certain statements made on this call may 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 10 ks and quarterly reports on Form 10 Q as well as in other filings with the SEC.

Operator

I encourage all of you to review the risk factors listed in these documents. Now, I will turn the call over to Gartner's Chief Executive Officer, Gene Hall.

Speaker 2

Good morning

Speaker 1

and thanks for joining us today. Gartner drove strong performance in the Q1 with double digit growth in contract value, Revenue, EBITDA and EPS. The rate of change and uncertainty in the world continues to accelerate. The tech sector is adjusting to post pandemic demand. Banking industry is grappling with rising interest rates.

Speaker 1

Many industries have been impacted by rising inflation and more. Enterprise leaders and their teams need actionable objective guidance. Gartner is the best source of the insights, tools and advice that makes the difference between success and failure for these leaders and enterprises they serve. We continue to be agile with the changing times. We're helping our clients make better decisions and achieve their mission critical priorities, whether they're thriving, struggling or anywhere in between.

Speaker 1

Research continues to be our largest and the most profitable segment. We guide leaders across all major enterprise functions. Our market opportunity is vast across all sectors, sizes and geographies. And we're delivering more value than ever. In the Q1, we helped clients with a range of topics, including cybersecurity, Data analytics, artificial intelligence, remote work, cost optimization and more.

Speaker 1

Research revenue grew 9%. Total contract value growth was 10%. Contract value growth was affected by slower than average growth with our technology vendor clients. This also affected the non subscription portion of our research business. End user contract value for both GTS And QBS continue to grow at strong double digit rates.

Speaker 1

We serve executives and their teams through 2 distinct sales channels. Global Technology Sales or GTS serves leaders and their teams within IT. GTS also serves leaders at technology vendors, including CEOs and product managers. GTS contract value grew 9%. Global Business Sales or GBS serves leaders and their teams beyond IT.

Speaker 1

This includes HR, supply chain, finance, Marketing, sales, legal and more. QBS contract value grew 16%. Through relentless execution of proven practices, we're able to deliver unparalleled value to our clients. Clients continue to prioritize Gartner research. Our business remains resilient despite a volatile and complicated external environment.

Speaker 1

Gartner Conferences deliver extraordinarily valuable insights to an engaged and qualified audience. This will be the 1st full year of in person conferences since 2019. We're off to a great start. Attention is strong, advanced bookings are at record levels and feedback continues to be excellent. Gartner Consulting is an extension of Gartner Research.

Speaker 1

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 14% in the Q1. Our business is fueled by our highly talented associates. We have carefully aligned our hiring with recent demand and our long term opportunity.

Speaker 1

We are well positioned to drive long term sustained double digit growth. We finished Q1 ahead of our expectations despite volatility in the global environment. We're increasing our outlook for 2023, while still allowing for a higher than normal level of uncertainty in the world. Craig will take us through our guidance in more detail. In closing, Gartner achieved another strong quarter of growth.

Speaker 1

We deliver unparalleled value to enterprise leaders and their teams across every major function, whether they're thriving, struggling or anywhere in between. We're exceptionally agile and continuously adapt to the changing world. We know the right things to do to be successful in any environment. Looking ahead, we are well positioned to continue our sustained record of success far into the future. We expect margins to increase modestly over time and we generate significant free cash flow well in excess of net income.

Speaker 1

Even as we invest for future growth, we'll return significant levels of excess capital to our shareholders, which reduces shares outstanding and increases returns over time. With that, I'll hand the call over to our Chief Financial Officer, Craig Sapien.

Speaker 3

Thank you, Gene, and good morning. 1st quarter results were strong with double digit growth in contract value, revenue, EBITDA and adjusted EPS. FX neutral growth was even stronger than our reported results. We also again delivered better than planned EBITDA margins. The upside reflected stronger conferences and consulting revenue and disciplined cost management.

Speaker 3

In addition, total contribution margin was 69%, down 103 basis points versus the prior year. EBITDA was $379,000,000 up 15% year over year and up 19% FX neutral. Adjusted EPS was $2.88 up 24%. And free cash flow in the quarter was $144,000,000 We finished the quarter with 19,830 associates, up 15% from the prior year and 2% from the end of the Q4. We are well positioned from a talent perspective with low levels of open territories and our new associates coming up the 10 year curve.

Speaker 3

And we will continue to carefully calibrate headcount and operating expenses based on near term revenue growth and opportunities to invest for the future. Research revenue in the Q1 grew 7% year over year as Reported and 9% on an FX neutral basis. Subscription revenue grew 11%, FX neutral. 1st quarter research contribution margin was 74%, down about one point as we have caught up on hiring and returned to the new expected levels of travel. Contract value or CV was $4,500,000,000 at the end of the Q1, up 10% versus the prior year.

Speaker 3

The Q1 last year was one of our strongest research quarters ever with outstanding performance on nearly every metric we provide. CV growth is FX neutral and excludes both Russia and the recent divestiture. CV from enterprise function leaders across GTS and GBS grew at double digit rates. CV from tech vendors grew mid single digits compared to high teens growth in the Q1 of 2022. Quarterly net contract value increase or NCVI was $26,000,000 As we've discussed in the past, there is notable seasonality in this metric.

Speaker 3

CV growth was broad based across practices, industry company sizes and geographic regions. Across our combined practices, all industry sectors grew at double digit rates other than technology and media, which both grew at mid single digit rates. The fastest growth was in the transportation, retail and public sectors. We had high single digit growth across all of our enterprise size categories. We also drove double digit or high single digit growth in all of our top 10 countries.

Speaker 3

Global Technology sales contract value was $3,500,000,000 at the end of the Q1, up 9% versus the prior year. GTS had quarterly NCVI of $10,000,000 Wallet retention for GTS was 104% for the quarter, which compares to 107% in the prior year when we saw a record high for this metric. While tech vendor wallet retention remained under pressure, On a net basis, our clients spent more with us compared to the prior year. GTS new business was down 1% versus last year. New business with IT function leaders increased compared to the prior year against the tough compare.

Speaker 3

New business with tech vendors declined versus very strong performance last year. CTS quota bearing headcount was up 22% year over year and 11% on a 2 year compound annual growth rate basis. We will continue to manage hiring based on both short term performance and the medium term opportunity. Our regular full set of GTS metrics can be found in the appendix of our earnings supplement. Global business sales contract value was $983,000,000 at the end of the Q1, up 16% year over year, which is at the high end of our medium term outlook of 12% to 16%.

Speaker 3

All of our GBS practices other than sales and marketing grew at double digit rates. Supply chain and HR both continued to grow faster than 20%. GBS CV increased $16,000,000

Speaker 2

from the

Speaker 3

4th quarter. Wallet retention for GBS was 110% for the quarter, which compares to 115% in the prior year when we saw the highest ever result for this metric. In addition to continued strong client retention, our clients spent significantly more with us than they did a year ago. GBS new business was down 4% compared to last year against a very strong compare. The 2 year compound annual growth rate for new business was 6%.

Speaker 3

GBS quota bearing headcount was up 18% year over year. This excludes headcount associated with the Q1 divestiture. As with GTS, our regular full set of GBS metrics can be found in the appendix of our earnings supplement. Conferences revenue for the Q1 was $65,000,000 ahead of our expectations as we saw strong performance with both exhibitors and attendees. The Q1 is always a Seasonally small quarter, but we are off to a strong start for the year.

Speaker 3

Contribution margin in the quarter was 41%, consistent with typical seasonality. We held 10 destination conferences in the quarter, all in person. 1st quarter consulting revenues increased by 10% year over year to $127,000,000 On an FX neutral basis, revenues were up 14%. Consulting contribution margin was 40% in the Q1, consistent with the incremental hiring and return to travel. Labor based revenues were $97,000,000 up 1% versus Q1 of last year and up 5% on an FX neutral basis.

Speaker 3

Backlog at March 31 was $161,000,000 increasing 14% year over year on an FX neutral basis with continued booking strength. Our contract optimization business had another very strong quarter, up 53% as reported and 56% on an FX neutral basis versus the prior year. As we have detailed in the past, this part of the consulting segment is highly variable. Consolidated cost of services increased 15% year over year in the Q1 as Reported 17% on an FX neutral basis. The biggest driver of the increase was higher headcount to support our continued strong growth.

Speaker 3

We also saw an increase in cost year over year with the return to in person conferences. SG and A increased 6% year over year in the Q1 as reported and 9% on an FX neutral basis. SG and A increased in the quarter as a result of headcount growth. This increase was partially offset by lower charges associated with real estate rationalization. EBITDA for the Q1 was $379,000,000 up 15% year over year on a reported basis and up 19% FX neutral.

Speaker 3

1st quarter EBITDA upside to our guidance reflected revenue exceeding our expectations in conferences and consulting and prudent expense planning. Depreciation in the quarter of $24,000,000 was up modestly compared to 2022. Net interest expense excluding deferred financing costs in the quarter was $26,000,000 down $4,000,000 versus the Q1 of 2022 resulting from higher interest income on our cash balances. The modest floating rate debt we have is fully hedged through maturity. The Q1 adjusted tax rate, which we use for the calculation of adjusted net income was 18% for the quarter.

Speaker 3

The tax rate for the items used to adjust net income was 35% for the quarter. Adjusted EPS in Q1 was $2.88 up 24% year over year. We had 80,000,000 shares outstanding in the Q1. This is a reduction of close to 3,000,000 shares or about 3% year over year. We exited the Q1 with about 80,000,000 shares on an unweighted basis.

Speaker 3

Operating cash flow for the quarter was 165,000,000 down 2% compared to last year. CapEx for the quarter was $21,000,000 up 22% year over year as a result of an increase in technology modernization And interest rate swap gains, free cash flow conversion from GAAP net income was 120%. Our free cash flow conversion is generally higher when CV growth is At the end of the Q1, we had $894,000,000 of cash. Our March 31 debt balance was $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.

Speaker 3

Our balance sheet is very strong with $1,900,000,000 of liquidity, low levels of leverage and effectively fixed interest rates. We repurchased more than $100,000,000 of stock during the Q1. We had about $950,000,000 remaining on our share repurchase authorization at March 31. As we continue to repurchase shares, 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.

Speaker 3

We are increasing our full year guidance to reflect a strong Q1 performance while still allowing a higher than normal level of uncertainty in the world. As we move through the year, we have more visibility into the revenue outlook and the corresponding expenses needed to support the business and drive growth. For research, we continue to innovate and provide a very compelling value proposition for clients and prospects. Our plan for 2023 allows for a higher than normal range of outcomes as we discussed last quarter. We've got tough compares across the business and particularly with tech vendors and in GBS for another quarter or 2.

Speaker 3

We've taken a prudent approach based on historical trends, which we've reflected in the guidance. We expect stronger growth from the subscription business than the non subscription part of the segment. The non subscription part of the business faces tough compares and has more direct exposure to tech vendor spending. The outlook continues to be based on 100% of our 47 destination conferences for 2023 running in person. There is seasonality to the business based on the conferences calendar, which is different than the historical pattern.

Speaker 3

We expect Q4 to be the largest quarter and Q3 to be the smallest of the year. For consulting revenues, we have more visibility into the Q2 than the second half based on the composition of our backlog and pipeline as usual. Contract optimization remains highly variable. We had a very strong year in 2022, especially in contract optimization in the Q4. With Q1 behind us, we are comfortable we can run the business successfully for this year while investing for future growth with lower consolidated expenses than we built into the original guidance.

Speaker 3

We will continue both to manage expenses prudently to support future growth and deliver strong margins. Our updated guidance for 2023 is as follows. We expect research revenue of at least $4,925,000,000 which is FX neutral growth of about 7% or 8% excluding the Q1 divestiture. Research revenue guidance is up modestly from February. We expect conferences revenue of at least $470,000,000 which is growth of about 21%.

Speaker 3

We have increased our outlook for conferences by 25,000,000 We expect consulting revenue of at least $505,000,000 which is growth of about 5% FX neutral and a modest increase from February. The result is an outlook for consolidated revenue of at least $5,901,000,000 which is FX neutral growth of 8%. Overall, we've increased our revenue outlook by $35,000,000 As I mentioned last quarter, we've taken a prudent approach to planning for 2023. This applies to revenue, operating expenses and free cash flow. We now expect full year EBITDA of at least $1,330,000,000 up $70,000,000 from our prior guidance and an increase in our margin outlook as well.

Speaker 3

We expect to be able to deliver on our margin guidance in most economic scenarios. If revenue is stronger than our outlook, we expect upside to EBITDA. We now expect 2023 adjusted EPS of at least $9.50 For 2023, we still expect free cash flow of at least $920,000,000 This reflects a conversion from GAAP net income of almost 140%, excluding the after tax divestiture proceeds. Our guidance is based on 80,000,000 fully diluted weighted average shares outstanding, which reflects the repurchases made through the end of March. Finally, for the Q2 of 2023, we expect EBITDA of at least $350,000,000 We had a Strong start to the year despite continuing global macro uncertainty with notable performance in conferences and overall profitability.

Speaker 3

Contract value grew double digits. EPS grew more than 20%. We repurchased over $100,000,000 in stock during the Q1 and remain committed to returning excess capital to our shareholders. Combining our expected free cash flow generation with the after tax proceeds of our recent divestiture, We have more than $1,000,000,000 available to deploy on behalf of our shareholders in 2023. Looking out over the medium term, our financial model and expectations are unchanged.

Speaker 3

With 12% to 16% research CV growth, we will deliver double digit revenue growth. With gross margin expansion, sales costs growing in line with CV over time 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 up 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 4

Thank you. Our first question comes from Jeffrey Mueller from Baird. Your line is open.

Speaker 5

Yes. Thank you. So I thought CV was good considering the macro and the comp. I know that you said, comps are still tough another Quarter or 2, I don't know what macro is going to do later in the year, but it sounds like the relative weakness is still just concentrated in the tech Vendor channel? So I guess as you look at retention trends on business that's coming up for renewal on a quarterly basis or New business sold trends in a quarter on a seasonally adjusted sequential basis.

Speaker 5

I guess the question is, Have those metrics kind of stabilized after stepping down, concentrated in the tech vendor channel Last year or have you seen any sort of incremental weakening, including with the recent banking sector challenges and any derivative effects from it?

Speaker 2

Hey, Jeff, it's Gene. I think you characterized it right, which is the 2 biggest factors going on are The year over year comparison is very tough because we had such a strong quarter a year ago. And then the whole tech industry is realigning and that's impacting the business, just as you described. And there are smaller things going on, those are the big things that are going on impacting our

Speaker 3

business. Okay. But are those

Speaker 2

smaller things including like the banking challenges, are they

Speaker 5

causing incremental deterioration or Challenges, are they causing incremental deterioration or is that not a meaningful factor for you?

Speaker 2

Yes, I don't think it's I characterize it as small as opposed to meaningful. So clearly, we're selling less to Silicon Valley Bank or Republic, But that's pretty isolated. And so we have isolated things like that that are going on with regional banks, some countries like China. But there's always things like that going on. There's always things in particular industries and segments that are not perfect.

Speaker 5

Got it. Good to hear. And then I just love your perspective, Gene, on, I guess the opportunities and risks from generative AI, including anything on how far along you are with implementing it. To me, I could see potential benefits on a number of fronts, sales productivity, research productivity, I guess improving the client experience on your platform given the High quality content library as well as, you mentioned among the hot topic areas that could drive demand and client engagement. Also curious just on how you think about any potential risks if publicly available content becomes a lot easier to curate via generative

Speaker 1

AI, thanks.

Speaker 2

Yes. So we see generative AI as being really helpful for our business. As you said, there are a lot of Internal efficiencies where we've had 5 years ago, we had teams of humans coming through publicly available information. Now we actually today use generative AI to improve our efficiency on those kinds of things and we'll continue to. The second area that we are Testing and I'm sure we'll get to at some point is having more of a natural language interface for our clients.

Speaker 2

And we're testing now just to make sure it all works correctly and doesn't have any surprises as you've seen in some of the public situations. And so I'd say, 1st of all, it's great for internal efficiencies in every part of our business. Even like you mentioned, if a salesperson wants to get synthesized publicly available information, it's a great tool to help with that. It's going to be so it will help our internal efficiencies. It will provide a better interface over time with our clients.

Speaker 2

And frankly, it's an area where clients need hip on as well. And so that's an area that Helps with our basic client demand as well. You asked about kind of our situation competitively there. I'd say, we're highly differentiated from kind of the public information you get, because we have a lot of proprietary information, proprietary insights. We have a research process, which is quite important in generating these proprietary insights.

Speaker 2

And of course, we're independent objective. So we say generational AI has really been a lot of help both with internal efficiencies, with probably to better interface with our clients, helping clients with it, etcetera.

Speaker 5

Appreciate the comprehensive answer. Thank you.

Speaker 4

One moment for our next question. We have a question from Heather Balsky from Bank of America. Your line is open.

Speaker 6

Hi, good morning. Thank you for taking my question. Can you help us think about the cadence of CV as we move through the year, both taking into account the sort of environment right now, especially with your tech vendors, as well as just sort of comparisons year over year. Just curious kind of Do you expect to kind of soften as the year progresses and improve into the Q4? Just what's baked into your sales outlook?

Speaker 6

Thanks.

Speaker 3

Hey, good morning, Heather. This is Craig. Great question. So as we think about the way the business rolls, I guess just zooming back a little bit, a couple of points just around historically how things look. So, we typically generate Our least amount of new business dollars in the Q1 of the year and our most amount of new business dollars in the Q4 of the And there's a lot of reasons for that.

Speaker 3

We work through our pipelines in the 4th quarter. We've got a lot of conferences that we leverage in the Q4. We make a lot of promotions and changes to positions in the Q1. But 1st quarter generally lowest amount of new business, 4th quarter a lot more new business and that sort

Operator

of builds over the quarters.

Speaker 3

In terms of the way the CV flows, Q1 and Q4 tend to be A little bit more heavily weighted in terms of the amount of CV that is expiring. It can vary a lot. Our sales teams will also often Pull forward business as they see opportunities, but Q1 and Q4 are typically our highest expiration quarters. In terms of the comps and the comparisons, I think if you look back Q1 of 2022 On just about every measure you can look at was the peak and or the toughest comparison for us, whether it's overall contract value growth, wallet retention, productivity, you name it. The comparisons are still Pretty tough through Q2 and Q3, most notably with our tech vendor clients and with GBS.

Speaker 3

So Q1, I'd say, was a tough comparison across the board, Yes, across the entire research business, again, most notably with tech vendors and with GBS. Q2 is still again, if you go back and look at the metrics and CV growth, etcetera, still a very tough comparison there as well. The comparisons do ease a little bit, but it's still pretty high comparison point, even as we get into the second half of the year. But Again, if you think about our normal cadence, we'll be building our new business pipelines and building our new business dollars over the course of the year. We've got a full slate of in person conferences as well.

Speaker 3

And as she mentioned, our clients and potential clients really need our help as well. So we're focused on making sure we deliver great value to our clients to drive those renewal rates and also work all our opportunities through the pipeline as well, so we can deliver the new business that we need to deliver as well.

Speaker 6

Thank you. I appreciate that. And as my follow-up, in an environment like we're seeing right now, whether it's The tech industry realigning, what's going on in banks. From both the GBS and GTS perspective, what are you doing on the research side To stay engaged with customers, keeping them active, Guardant customer, hopefully keeping that retention strong. Thanks.

Speaker 2

Yes, it's a great question. So we're always focused on our research on the things that are most important to our clients. You think about today, it would be things like cybersecurity. There are few enterprises today that can let their card down is cybersecurity. They need only help they can get.

Speaker 2

So that's an area that we're really focused on. The other one is using data analytics in their business. The other one is cost optimization, making sure they understand How to optimize the cost that they do have in a little tougher environment perhaps. We still see a lot of demand on conversion to digital business. We also see a lot of demand on things like optimizing cloud computing.

Speaker 2

So those are some examples. The way we're focusing on research is Making sure our research is focused on the really tough issues that senior leaders and our clients have to wrestle with, which these are some of the examples. And those issues are really important even for organizations that are struggling. You still got to deal with things like cybersecurity, data analytics, optimizing cloud computing. And so it's something that applies whether clients are struggling or whether they're thriving.

Speaker 6

Great. Thanks very much.

Speaker 4

Thank you. One moment. We have a question from Toni Kaplan with Morgan Stanley. Your line is open.

Speaker 7

Thanks so much. I wanted to ask about GBS. I know you mentioned in the prepared remarks that all of the areas grew double digits Except for sales and marketing. Could you just give maybe a little bit of color on what slowed there? Anything you're seeing?

Speaker 7

Or is that just Maybe there's a tough comp or I'm sure each quarter some are more positive and some are more negative. So is it sort of normal or anything to call out there?

Speaker 2

Yes, Tony, it's a great question. So if you look at in any business, There's always some units that are doing very well because they have all the pieces are working well together. There's other units that aren't working quite as well. And that's what's going on with sales and marketing is it's more Operational and kind of our own operational effectiveness isn't as good as in some of the other TPS functions. But there's nothing sort of intrinsic, there's nothing in the marketplace or It's all about making sure that we have all the pieces really working together well.

Speaker 2

It still had great growth, but it's not as great. The GBS growth was really extremely strong and they

Speaker 1

were just kind of

Speaker 2

not as strong as the strongest parts of GBS.

Speaker 7

Great. I wanted to also ask about the Retention of salespeople, I imagine it's a lot better now than it was in recent history when we had the sort of tighter Labor market. I guess, how are you thinking about that with regard to maturity of salespeople? Could that have upside potential for the guide this year? And maybe talk about Sort of if we should see productivity improvement as a result?

Speaker 2

Yes, Tony, it's a great question. I mean sales people are critical to our business to both current business and future growth. We got behind in hiring over the last couple of years. We're now fully caught up, which is fantastic. We have very low number of open positions and our turnover is among the lowest we've ever seen with our salespeople.

Speaker 2

It takes our salespeople about 3 years to get to full productivity. So all these sales people we've added recently, if you think about are really going to be powering the growth of business in 2024 2025 when they get up to full productivity. As we see this lower retention rate, I'm sorry, higher retention, lower turnover rate as being really advantageous to the business. The other thing is that as we do have hiring needs either from turnover or from growth, the market for us hiring salespeople is fantastic. We can get really fantastic salespeople.

Speaker 2

We always take great salespeople, but it's one of the best markets for hiring for us we've ever seen.

Speaker 7

Perfect. Thank you.

Speaker 4

Thank you. And our next question will come from Seth Weber with Wells Fargo. Your line is open.

Speaker 8

Hi, good morning. I wanted to ask you about the raised EBITDA margin outlook for the year. Is Is that just a function of higher revenue flowing through? Or is there something else that you feel like has changed there relative to how you were thinking about the business

Speaker 3

Hey, good morning, Seth. So the if you look at the outlook raise Based on the Q1 performance and based on the for the balance of the year, we took revenue up by $35,000,000 most notably in conferences. And we reduced our OpEx expense outlook by about $35,000,000 And that's what drove the $70,000,000 increase in the overall EBITDA outlook. I'd say, We are still dealing with a pretty uncertain macro environment as we've all talked about. We took a pretty prudent approach to, in particular, planning our operating expenses as we entered the year.

Speaker 3

And now that we've got 3 or 4 months behind us and have a better outlook for what the top line is going to look like for the full year, we were able to Refine the expenses a bit. And so again, that's why we're able to raise the revenue by $35,000,000 and reduce the OpEx outlook by $35,000,000 as well. And again, the math on that yielded margins a little bit higher than we had initially guided

Speaker 8

Right. That makes sense. Thanks. And then, maybe just on the maintained free cash flow outlook, Anything you'd call out there? I seem to remember over the last couple of quarters, there were some hiccups with collections and things like that.

Speaker 8

Is there anything Notable that you'd cite for not raising the free cash flow guide?

Speaker 3

Yes. No, it's a good call out. I think stepping back for a second, the free cash flow is still a very large number. The conversion numbers Looks very strong as well both on a rolling 4 quarter basis and as we extrapolated out forecast. The main thing there though is we would have been able to raise our free cash outlook if not for an additional cash tax burden That we calculated associated with the divestiture.

Speaker 3

So we had a very strong profit year last year, which Results in more cash taxes this year, which was baked into the initial guidance. We sold a small non core business in February and got proceeds from that. Our initial guide didn't dial in enough cash taxes associated with that divestiture. And so the main thing here is free cash flow is still really, really strong, would have raised, but for an additional cash tax burden associated with our recent divestiture.

Speaker 8

Got it. That's helpful. Thank you, guys. I appreciate it.

Speaker 4

Thank you. One moment for our next question. Andrew Nicholas from William Blair, your line is open.

Speaker 9

Hi, good morning. Thanks for taking my questions. I wanted to follow-up on a few Earlier questions to start. First, I guess, Craig, on the margins. Could you spend a bit of time talking On Q1 upside or where some of that upside came from on the cost side?

Speaker 9

And then understanding that the EBITDA Guidance bridge or the change versus last quarter, it still seems like there's a pretty significant ramp up and implied expenses through the remainder of the year. If you could just give a little bit more color on that, I was under the impression that second half hiring activity It was now in the run rate. So just trying to figure out where else the increased expense comes from over the next couple of quarters?

Speaker 3

Yes, absolutely, Andrew. Thanks In terms of Q1, I'd say it was a combination of modest revenue Most notably in conferences, but a little bit in consulting as well and prudent Expense planning in the quarter. So I think that's the way I would describe The Q1 margin performance. In terms of looking forward, if you think about the composition of our And the phasing of our business, if you use the Q1 Adjusted operating expense number as sort of a baseline. Remember that like 3 quarters of our expenses Our people related and our merit increase goes into effect on April 1.

Speaker 3

And so that causes a Step up in the OpEx rolling out in Q2, Q3, Q4. Our conference calendar also picks up, most notably Q2 and Q4. And so there's a step up in operating expenses associated with that. Our travel tends to pick up and we spend more seasonally Q2 and Q4. And so that's a pickup in the OpEx as well.

Speaker 3

So again, I think we're we've planned our revenue outlook pretty carefully. And again, keeping in mind the Pretty volatile macro environment. And the OpEx, to your point, we've already got a lot of the Hiring from last year, that is now in the Q1 run rate for sure. We've got a modest amount of growth hiring set for the balance of this year just to continue and support the growth. And then you've got those dynamics I just listed out earlier, The biggest 2 probably being the merit increase coming into effect and the conference calendar impacting OpEx Q2 through Q4.

Speaker 9

Very helpful. Thank you. And then for my follow-up, I just wanted to ask a little bit more on headcount growth and kind of talent environment. I guess, Gene, you mentioned it being fantastic. I guess, one, can you talk a little bit about why you think The environment for hiring sales talent is so good today versus a year ago maybe?

Speaker 9

And then also, how much does that Impact your ability to be nimble on the headcount front? It would seem like if there's a bunch of supply, you can Be a little bit more careful and not feel like you need to hoard all the best people right away? Or is it a different dynamic where You decide to take advantage of all that's out there and potentially have a little bit narrower gap between headcount growth and CV growth. Just how you're thinking about those dynamics? Thank you.

Speaker 2

Yes, Andrew. So the reason the market is so good is, first, I mean, we're an employer choice. We have a great brand in the marketplace and we have great recruiting teams. So there's a lot of operational reasons why things are going well. On top of that then, the whole tech realignment, The talent market that we compete most in for our people is with technology companies.

Speaker 2

And so when they're Laying people off and not as aggressive about hiring, obviously, it helps us if that's the primary talent market. So it's a combination of We're a great place to work. We have a great reputation. We have great recruiting teams combined with the fact that our traditional talent competitors are just really scaled have really scaled back hiring a lot. And so we're using that as an opportunity to make sure we hire really great people.

Speaker 2

As we look forward,

Speaker 1

as Craig and I both said

Speaker 2

in our remarks, We want to make sure our net hiring incorporates the turnaround we have as well as our CV growth, so that we You know, are hiring a bit behind our CV growth, so that we you know, it doesn't impact our margins negatively.

Speaker 9

Understood. Thank you.

Speaker 4

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

Speaker 8

Hi, thanks. Good morning. You talked about ResourceCV being relatively stable in end markets outside of tech vendors, just going back to that topic. Can you elaborate on what you're seeing in other verticals? How would you characterize the selling environment?

Speaker 8

How are client Budgets performing and what are you seeing with sales cycles?

Speaker 2

So, hey, George. So what I'd say is that it's kind of what we normal in In the sense that there are some companies that are thriving, there are some companies that are more challenged and we have to tailor the problems that we're working on with what the company situation is. And again, it gets back to the strategy I talked about earlier, which is let's make sure our research is focused on the most important issues for our clients. Then let's also make sure that our sales people or service delivery people know what those topics are and can be right upfront in helping clients. And so as I mentioned before, It's things like cybersecurity, data analytics, cost optimization, building the digital business, optimizing cloud computing.

Speaker 2

And not every company has all of those, but the if you look at each kind of a company, depending on where they are, we help them with the issues that are most important for them.

Speaker 8

Got it. And then as it relates to your research sales headcount expectations, can you outline What's the cadence of hiring should look like in GBS and GTS over the remainder of this year now that the bulk of hiring is behind you?

Speaker 3

Yes, George, good morning. Essentially, again, as Gene and I both mentioned in prepared remarks, we are, With a

Speaker 1

lot of

Speaker 3

agility, making sure that we are calibrating appropriately where we exit this year From an overall headcount perspective across all of Gardner and in particular in terms of frontline sellers in both TTS and GBS. And so there's a range of outcomes for the full year from both a contract value growth perspective, but also from a headcount perspective. And given all the dynamics we talked about in the labor markets and the fact that we've got World class recruiting, our talent acquisition organization, and we've got a great Associate's patent proposition as well. We feel like we can be pretty agile on this and just make sure that we are appropriately calibrated so that we enter next year with enough investment to make sure that we can sustain growth, but also deliver really strong margin performance as well.

Speaker 1

Got it. Thanks for the color.

Speaker 4

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

Speaker 10

Thanks so much. I wanted to focus on the research pricing environment. If you can remind us what price increases you've been pushing So far this year, what your expectations are for the rest of the year. And I know others in this space may not necessarily be direct competitors, But we're seeing some companies extending terms of their contract renewals, but taking lower price. Is that something that you're doing or considering?

Speaker 10

Thanks.

Speaker 3

Good morning, Jeff. In terms of our pricing, the bulk of our pricing goes into effect On November 1, and so which impacts this current year. And so if you recall back to November ish Of 2021, we were increasing prices in the 5% to 6% range. This past cycle, it was more Closer to 5%, again, given a little bit of a less inflationary environment. And again, We want to make sure that at a minimum, we are pricing to offset the wage inflation that we are seeing.

Speaker 3

And in 2021, we were seeing Much more pressure on wage inflation, and so we went a little bit harder on the price increases then. This year, a little less, and so roughly around 5%. In terms of the environment and Giving on terms or anything like that, generally, I'd say, we've managed to You know, hold to our terms and so we're not giving away extra days or months in terms of When we could get paid, we're still pushing very hard on getting paid upfront, which is obviously A core part of our free cash flow machine, as Jean and I have all talked about in the past, generally our contracts are Relatively smaller or smallish ticket items for our clients representing a pretty portion of their overall budgets. And so we're generally able to Again, not without negotiations and not without conversations, but hold to our pricing structure, So no discounting and holding strong on our terms as well.

Speaker 10

Okay, that's helpful. If Switch to the consulting segment. I know it can be choppy, but utilization was down pretty significantly in the Q1. Can you talk about what's going on there and what your expectations are for the rest of the year on that metric? Thanks.

Speaker 3

Yes, great question. On On the consulting side, we like in a lot of our business, we're playing catch up on headcount and hiring over the course of last year. And so we did grow the team based on the demand we were seeing Yes, fairly aggressively over the back half of last year. We're still seeing really good Demand, we're in a really good backlog position, exiting Q1. And I'd say, we ran a little bit Hotter than normal in utilization, last year, particularly in the first half of the year, but overall last year.

Speaker 3

So It's a tough comp from that perspective. And again, just like the rest of the business, we are making sure that we are appropriately calibrated from Headcount perspective and a demand perspective and we feel like we're in that situation right now with consulting. We've got strong demand. We've got good backlog and we'll continue to monitor it to make sure that we can both deliver on the top line, but also make sure we're delivering Strong margins there as well.

Speaker 10

Okay. Appreciate the color. Thanks so much.

Speaker 4

Thank you. Our next question comes from Manav Panek with Barclays, your line is open.

Speaker 5

Thank you. Good morning.

Speaker 11

Craig, I was just hoping on the expense side specific to SG G and A, you could help us with just the cadence through the quarters there and is The SBAR still like 2 thirds of that mix right

Speaker 3

now? Good morning, Manav. Yes. So if you look at the SG and A line, again, think of it running Yes, mid-40s to high-40s as a percent of revenue on a rolling 4 quarter basis. About 2 thirds of it is the S or the selling portion, most notably GTS and GBS selling, although We do have our conference sales organizations and a few other sales organizations in the S line as well.

Speaker 3

And the cadence of spending is similar to what I outlined With Andrew's question a few questions ago, look at the Q1 Rough OpEx run rate and SG and A, adjusted SG and A run rate, Merit goes into effect on April 1, and so that impacts that run rate for Q2, Q3, Q4. As I mentioned, travel we do travel more in Q2 and Q4. And so you bake that in. And if you bake those things in, you should have a pretty good view on how SG and A expense Should love Q2, Q3, Q4 of this year.

Speaker 11

Got it. Okay. That's helpful. And then just my second question was more, Can you remind us what your multiyear contract like how much of your business is now multiyear contract? What that average duration is?

Speaker 11

Because that should help You'd be obviously more resilient here.

Speaker 3

Yes, absolutely. So our overall multiyear contracts As a percent of the research business is around 70%. So about 70% of the contracts that we have in force or multiyear in nature. The bulk of them are 2 year contracts, although we do have a growing, but small segment of more than 2 year contracts. Important to note that some multiyear contracts will come due this year, obviously.

Speaker 3

But you're right, in terms of the resiliency of the business, clearly having a large portion of our contract value Tied up in multiyear contracts that are not up for renewal over the course of 2023 It's clearly a good thing for us. And we recognize the strategic importance and value of We're focusing on multiyear contracts. Our sales people do as well. Our clients do as well, quite frankly. It's good for them too.

Speaker 3

But it's clearly a strong element of business that we have so much tied up in multiyear contracts. But again, most of them are 2 year contracts.

Speaker 11

Got it. Thank you.

Speaker 4

Thank you. One moment. We have a question from Stephanie Moore with Jefferies. Your line is open.

Speaker 12

Yes. Hi, good morning. I just wanted to touch on the conference side of the business, clearly really strong growth. We'd love to

Speaker 6

get more color on what you're hearing

Speaker 12

from regards to Maybe advanced bookings and other demand, if that demand has changed at all versus maybe pre COVID levels,

Operator

just the amount of stuff that you're taking?

Speaker 2

Yes, Stephanie, it's a great question. So conferences are really an important part of our business and we're seeing very robust demand for conferences both from attendees and from exhibitors. My own take on it is that there's a lot of pent up demand to do in person Events of which our conferences are part of that. And so we're seeing very strong demand on all parts of business.

Speaker 12

Great. Thank you. And then just for a follow-up, I'm curious what you're seeing, in general on the So being said from just an overall upselling and cross selling standpoint, maybe any customers or clients I'm sorry that are pulling back at all And just number of seats just given the uncertain macro or you're still kind of seeing the same level of activity? Thank you.

Speaker 3

Hey, Stephanie, it's Greg. So just to clarify your question, because I'm not sure I heard it completely. I heard consulting at the beginning, but then I heard research. So could you just repeat the question? Would you mind?

Speaker 12

No, I'm sorry. I apologize. I was just Curious on what you're seeing from an upsell and cross sell standpoint and if you've seen any change in activity as of late, maybe kind of pulling back

Operator

at all. Thank you. Yes.

Speaker 3

So I think clearly with our tech vendor clients, as we've described in detail, The upsell is certainly more challenging in this environment given their recalibration and It's sort of a tumult in that space. We're still upselling wherever we can. I do think in the particularly challenged areas like tech vendors, what we are seeing are clients really Get huge value out of Gartner and so they don't want to fully cancel their relationships. And so they may reduce a license or 2 here or there. We're seeing that in some of the more challenged end user industries as well, like as Jean He mentioned regional banking or things like that.

Speaker 3

But overall, I think it all comes back to we're offering a really strong value proposition and our clients really, really need help. And as long as we're doing that, we'll be able to maintain our the investment level within clients. And in fact, If you look at the while, retention numbers increase on average the amount of spend each and every year. And then when things in those Impacted markets stabilize, we should get right back to the kind of growth that we've historically delivered.

Speaker 12

Great, understood. Thank you so much.

Speaker 4

Thank you. And there are no other questions in the queue. I'd like to turn it back to Gene Hall for closing remarks.

Speaker 2

Well, here's what I'd like you to take away from today's call. In the Q1 of 'twenty three, we again saw strong growth across the business. Gartner delivers incredible value to enterprises that are thriving, struggling or anywhere in between. Our insights address today's mission critical priorities. And by being exceptionally agile and adapting to changing world, we've delivered a sustained record of success.

Speaker 2

We've carefully aligned our hiring with recent demand and our long term opportunity. We know the right things to do to be successful in any environment. Looking ahead, we're well positioned to drive growth far into the future. We expect margins to increase modestly over time and we generate significant free cash flow well in excess of net income. Even as we invest for future growth, We'll return significant levels of excess capital to our shareholders, which reduces shares outstanding and increases returns over time.

Speaker 4

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

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Earnings Conference Call
Gartner Q1 2023
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