Gartner, Inc.

Good morning, everyone. Welcome to Gartner's second quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After comments by Gene Hall, Gartner's chief executive officer, and Craig Safian, Gartner's chief financial officer, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require further assistance, press star zero. This call will include a discussion of second quarter 2022 financial results and Gartner's updated outlook for 2022, as disclosed in today's earnings release and earnings supplement, both posted to our website, investor.gartner.com. On the call, unless stated otherwise, all references to EBITDA are for adjusted EBITDA, with the adjustments as described in earnings release and supplement. All growth rates and jeans comments are FX neutral, unless stated otherwise. All references to share counts are for fully diluted weighted average share counts. unless stated otherwise. Reconciliations for all non-GAAP numbers we use are available in the Investor Relations section of the Gartner.com website. Finally, all contract values and associated growth rates we discuss are based on 22 foreign exchange rates, unless stated otherwise. As set forth in more detail in today's earnings release, certain statements made on this call may constitute forward-looking statements. Forward-looking statements can vary materially from actual results and are subject to a number of risks and uncertainties including those contained in the company's 2021 annual report on Form 10-K and quarterly reports on Form 10-Q, as well as in other filings with the SEC. I encourage all of you to review the risk factors listed in these documents. Now, I'll turn the call over to Gartner's Chief Executive Officer, Gene Hall.

Good morning. Thanks for joining us. Gartner had a strong performance in the second quarter. We delivered double-digit growth in contract value, revenue, EBITDA, and EPS. and we continue to return excess capital to our shareholders through our buyback programs. Research continues to be our largest and most profitable segment. Gartner Research provides actual objective insight to executives and their teams across all major enterprise functions in every industry around the world. Our expert guidance and tools enable faster, smarter decisions and stronger performance on our clients' mission-critical priorities. We continue to have a vast market opportunity across all sectors, sizes, and geographies. and we're delivering more value than ever. The rate of change in the world is the fastest I've ever seen. Against this backdrop, Gartner continues to get even more agile. We're generating new insights to address timely and pressing issues, such as leveraging emerging technologies, optimizing costs, attracting and retaining talent in a hybrid world, managing cybersecurity risk, and more. We deliver incredible value, whether our clients are thriving, struggling, or somewhere in between. As a result, demand for our services remains strong. Q2 research revenue grew 17% in the second quarter. Total contract value growth was 15%. Retention remained very strong, and new business was near all-time highs. We're also growing our sales teams. Global technology sales headcount was up 9%, and global business sales headcount was up 17% year over year. Global technology sales, or GTS, serves leaders and their teams with NIT. GTS contract value grew 14%. Global business sales, or GBS, serves leaders and their teams beyond IT. This includes HR, supply chain, finance, marketing, sales, legal, and more. GBS contract value grew 23%. Across every function, IT, supply chain, marketing, sales, HR, finance, and more, leaders and their teams benefit from our incredible value proposition. As a result, the enterprises we support see measurable progress on their mission-critical priorities. Leveraging the extraordinary value of our research and Our conferences business brings the power of Gartner to life for an engaged and highly qualified audience. During Q2, we delivered our first in-person destination conferences since the start of the pandemic. These conferences covered IT, finance, and supply chain in Europe, Australia, and the U.S. Attendee feedback has been resoundingly positive. They deeply value the opportunity to connect, engage, and learn in person. Bookings continue at a strong pace for both exhibitors and attendees. Gartner Consulting is an extension of Gartner Research. Consulting helps clients execute their most strategic technology initiatives through deeper, extended project-based work. Consulting had a strong quarter, with revenue up 20%. Bookings were also strong, driving backlog up 45%. In closing, we saw strong growth across the business. We continued to generate significant free cash flow, well in excess of net income. We returned excess capital to shareholders, which reduced our shares outstanding. Looking ahead, we are well positioned for strong double-digit top-line growth. Our underlying margins are in the low 20s, well above pre-pandemic levels, and we expect them to modestly increase over time. And we continue to generate free cash flow well in excess of earnings, which we will deploy to further drive shareholder value. With that, I'll hand the call over to our Chief Financial Officer, Craig Safian. Craig?

Thank you, Gene, and good morning. Second quarter results were strong with double digit growth in contract value, revenue, and adjusted EPS. With results above our expectations, we are again increasing our 2022 guidance. The improved outlook reflects the better than expected second quarter top line results, strong demand for second half conferences, and a successful balance between cost discipline and investing for future growth. Second quarter revenue was $1.4 billion, up 18% year over year as reported and 22% FX neutral. In addition, total contribution margin was 69%, down 70 basis points versus the prior year as costs returned towards normal. EBITDA was $389 million, up 10% year-over-year and up 14% FX neutral. Adjusted EPS was $2.85, up 27%. And free cash flow in the quarter was $395 million. Adjusting for insurance proceeds received last year, free cash flow is down 2% year-over-year for the quarter and up 5% on a rolling four-quarter basis. Research revenue in the second quarter grew 14% year-over-year as reported and 17% on an FX neutral basis, driven by our strong contract value growth. Second quarter research contribution margin was 74%, about in line with 2021. Higher than normal contribution margins reflect improved operational effectiveness, increased scale, continued temporary avoidance of travel expenses, and continuing to catch up on headcount to support the research business. Contract value, or CV, was $4.3 billion at the end of the second quarter, up 15% versus the prior year. As we discussed previously, CV reflects our decision to exit the Russian market, which contributed about $13 million in the second quarter 2021 number. This reduced the headline growth by about 40 basis points. Quarterly Net Contract Value Increase, or NCVI, was $97 million. Quarterly NCVI is a helpful way to measure contract value performance in the quarter, even though there is notable seasonality in this metric. The sequential increase in CV of $97 million was driven by the combination of continued strong retention rates and near record new business of close to $250 million. We saw broad-based CV growth across all of our practices. Our technology practice grew 14%, and all of our business practices grew at double-digit growth rates, with many of them growing more than 20% year over year. From an industry perspective, retail, media, and manufacturing led our CV growth. Global technology sales contract value was $3.4 billion at the end of the second quarter, up 14% versus the prior year. GTS had quarterly NCVI of $60 million, driven by strong retention and near record levels of new business for a second quarter. While retention for GTS was 107% for the quarter, up about 530 basis points year-over-year and near record levels. GTS new business was down 1% versus last year, up against a very tough compare. The two-year compound annual growth rate was about 16%. GTS quota-bearing headcount was up 9% year-over-year. We are on track to get to double-digit growth by the end of 2022 as we have successfully brought turnover down and our investments in recruiting are delivering results. We will continue to invest in our sales team to drive long-term sustained double-digit growth while also delivering strong margins. A regular full set of GTS metrics can be found in the appendix of our earnings supplements. Global business sales contract value was $936 million at the end of the second quarter, up 23% year-over-year, which is above the high end of our medium-term outlook of 12% to 16%. GBS CV increased $37 million from the first quarter. Wallet retention for GBS was 115% for the quarter, up about 5 percentage points year-over-year. GBS new business was up 3% compared to last year, reflecting robust growth across the full portfolio and against a very strong compare. The two-year compound annual growth rate for new business was 35%. GBS quota-bearing headcount increased 17% year-over-year. Headcount we hire in 2022 will help to position us for sustained double-digit growth in the future. As with GTS, our regular full set of GBS metrics can be found in the appendix of our earnings supplement. Conferences revenue for the second quarter was $114 million, ahead of our expectations as attendees and exhibitors enthusiastically returned to in-person. Contribution margin in the quarter was 65%. We held six in-person conferences and eight virtual conferences in the quarter. We held Avanta meetings in both virtual and in-person formats. We plan to run 19 in-person conferences for the balance of the year. Second quarter consulting revenues increased by 14% year-over-year to $121 million. On an FX-neutral basis, revenues were up 20%. Consulting contribution margin was 42% in the second quarter, up 120 basis points versus the prior year, with better-than-expected revenue, higher utilization rates, and a mixed benefit from strong growth and contract optimization. Labor-based revenues were $95 million, up 11% versus Q2 of last year, and up 18% on an FX neutral basis. Backlog at June 30th was $152 million, increasing 45% year-over-year on an FX neutral basis with another strong bookings quarter. The inclusion of multi-year contracts, a change we described last quarter, contributed about 12 percentage points to the year-over-year growth rate. Our contract optimization business was up 28% as reported and 31% 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 21% year-over-year in the second quarter as reported and 25% on an FX neutral basis. The biggest driver of the increase was higher headcount to support our continued strong growth and the return to in-person destination conferences. SG&A increased 24% year-over-year in the second quarter, as reported, and 27% on an FX-neutral basis. SG&A increased in the quarter as a result of increased hiring and sales in G&A functions, higher commission expense following strong CV growth in 2021, and a $12 million one-time real estate charge. We expect SG&A expenses to increase as a percentage of revenue over the near term as our catch-up hiring continues. EBITDA for the second quarter was $389 million, up 10% year-over-year on a reported basis and up 14% FX neutral. Second quarter EBITDA upside to our guidance reflected revenue exceeding our forecast and expenses at the low end of our expectations. Depreciation in the quarter of $23 million was down modestly versus 2021. Net interest expense excluding deferred financing costs in the quarter was $29 million, up $2 million versus the second quarter of 2021 due to an increase in total debt balances. The Q2 adjusted tax rate, which we used for the calculation of adjusted net income, was 25.7% for the quarter. The tax rate for the items used to adjust net income was 25% for the quarter. Adjusted EPS in Q2 was $2.85, growth of 27% year-over-year. The average share count for the second quarter was 81 million shares. This is a reduction of about 5.6 million shares or about 6.5% year over year. We exited the second quarter with about 80 million shares outstanding on an unweighted basis. Operating cash flow for the quarter was $416 million. Adjusting for the insurance proceeds we received in the second quarter of 2021, operating cash flow was down 2% compared to last year. CapEx for the quarter was $21 million, up 76% year-over-year as a result of an increase in capitalized software, laptops, and other infrastructure. Free cash flow for the quarter was $395 million. Free cash flow growth continues to be an important part of our business model with modest CapEx needs and upfront client payments. As many of you know, we generate free cash flow well in excess of net income. Our conversion from EBITDA is very strong with the differences being cash interest, cash taxes, and modest capex partially offset by strong working capital cash inflows. Adjusting for the insurance proceeds we received last year, free cash flow as a percent of revenue or free cash flow margin was 21% on a rolling four-quarter basis. On the same basis, free cash flow is 81% of EBITDA and 146% of GAAP net income. At the end of the second quarter, we had $360 million of cash. Our June 30th debt balance was $2.5 billion. Our reported gross debt to trailing 12-month EBITDA was under two times. Our expected free cash flow generation, unused revolver, and excess cash remaining on the balance sheet provide ample liquidity to deliver on our capital allocation strategy of share purchases and strategic tuck-in M&A. We repurchased around $930 million of stock through the first half of this year. We had about $700 million remaining on our authorization at the end of June. We expect the board to continue to refresh the repurchase authorization as needed going forward. Since the end of 2020 through the end of this June, we have reduced our shares outstanding by 9 million shares. This is a reduction of 11%. As we continue to repurchase shares, we expect our capital base will shrink. This is accretive to earnings per share and combined with growing profits, also delivers increasing returns on invested capital over time. Our medium-term outlook is for double-digit revenue growth. While margins have been very strong the past two years, we are continuing to catch up hiring and to resume travel spending. We estimate our underlying margins to be in the low 20s, well above pre-pandemic levels, and we expect them to increase modestly over time. We will give 2023 specific guidance in February, consistent with our usual practice. Strong top line growth, modest margin expansion, low capital intensity, and working capital as a source of cash will allow us to deliver strong free cash flow now and in the future. We are increasing our full year guidance to reflect strong Q2 performance and an improved outlook for the second half despite incremental FX headwinds. We now expect an FX impact to our revenue growth rates of about 370 basis points for the full year. This is up from 260 basis points based on rates when we guided in May. As we discussed the last two quarters, 2021 research performance benefited from several factors, including QBH tenure mix, NCVI phasing within the quarters and the year, record retention rates, and strong non-subscription growth. We continue to assume that those benefits do not persist at the same levels through 2022. The growth compares will continue to be challenging as we move through the year. We continue to take a measured approach based on historical trends and patterns, which we've reflected in the updated guidance. For conferences, we assume we will be able to run all the in-person conferences as planned. Consistent with our commentary the past couple of quarters, our assumptions for consolidated expenses continue to reflect significant headcount increases during the year to support current and future growth. We have modeled higher labor costs and T&E well above 2021 levels, as we've previously indicated. We also have higher commission expense during 2022 due to the very good selling performance we delivered in 2021. Finally, we continue to invest in our tech, both client-facing and internal applications, as part of our innovation and continuous improvement programs. Our updated guidance for 2022 is as follows. We expect research revenue of at least $4.575 billion, which is FX neutral growth of about 15%. The FX neutral growth is up about 120 basis points from our prior guidance due to strong NCVI performance in the second quarter. We expect conferences revenue of at least $335 million, which is growth of about 63% FX neutral. We expect consulting revenue of at least $440 million, which is growth of about 11% FX neutral. The result is an outlook for consolidated revenue of at least $5.35 billion, which is FX neutral growth of almost 17%. The FX neutral growth is up about 290 basis points from our prior guidance due to strong performance in the second quarter. Without the strengthening U.S. dollar since May, our revenue guidance would have been about $138 million than previous guidance. We now expect full-year EBITDA of at least $1.235 billion, up $100 million from our prior guidance, and an increase in our margin outlook as well. Without the strengthening U.S. dollar since May, our EBITDA guidance would have been about $120 million higher than previous guidance. We now expect 2022 adjusted EPS of at least $8.85. For 2022, we now expect free cash flow of at least $985 million. Our guidance is based on 81 million shares outstanding, which reflects year-to-date repurchases. All the details of our full year guidance are included on our investor relations site. Finally, for the third quarter of 2022, we expect to deliver at least $255 million of EBITDA. Our strong performance in 2022 continued in the second quarter with momentum across the business. Contract value growth was very strong at 15%. Adjusted EPS grew 27% fueled by the significant reduction in shares over the past year. We repurchased around $930 million in stock this year through June and remain committed to returning excess capital to our shareholders. Looking out over the medium term, our financial model and expectations are unchanged. With 12 to 16% research CV growth, we will deliver double digit revenue growth. With gross margin expansion, sales costs growing in line with CV growth and G&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 front. And we'll continue to deploy our capital on share purchases, which will lower the share count over time, and on strategic value enhancing tuck-in M&A. With that, I'll turn the call back over to the operator, and we'll be happy to take your questions. Operator?