Gartner, Inc.

Good morning, everyone. Welcome to Gartner's third quarter 2022 earnings call. I am 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. Please be advised that today's conference is being recorded. This call will include a discussion of third 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, but the adjustments as described in our 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 Gardner.com website. Finally, all contract values and associated growth rates we discuss are based on 2022 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 will turn the call over to Gartner's Chief Executive Officer, Gene Hall.

Good morning. Thanks for joining us. We continue to deliver incredible value to more than 15,000 enterprises around the world, This led to another strong performance in the third quarter. We achieved double-digit growth in contract value, revenue, EBITDA, and EPS. We had strong growth in all practices, all industry sectors, across every size client and in every region. In addition, through Q3, we repurchased over a billion dollars of stock. Our clients continue to face a rapidly changing world. Things like digital transformation, future of work, high inflation, shifting customer needs, supply chain disruptions, and more. Our clients know they need help on these issues, and they know Gartner is the best source of help. Through our actual objective insights, we help executives and their teams across all major enterprise functions achieve their mission-critical priorities. We know how to help, whether our clients are thriving, struggling, or somewhere in between. With all of this, demand for our services remains strong. Research continues to be our largest and most profitable segment. Total research revenue grew 15%. Contract value growth was 14%. We serve executives and their teams through distinct sales channels. Global technology sales, or GTS, serves leaders and their teams within IT. We help chief information officers achieve mission-critical priorities, such as leading digital transformations, managing talent in the challenging labor market, and fueling innovation. GTS contract value grew 13%. Global business sales, or GPS, serves leaders and their teams beyond IT. This includes HR, supply chain, finance, marketing, sales, legal, and more. We help leaders across these functions achieve their mission-critical priorities. For example, we help HR leaders engage employees in a hybrid world Evolve organizational design with the transition to digital business. Manage compensation in an inflationary environment. Manage employee expectations on divisive social issues. And reimagine the future of work. GPS contract value grew 21%. Across GTS and GPS, we're driving relentless execution of proven practices, which in turn is driving our sustained results. Gartner conferences deliver valuable insights to an engaged and qualified audience we continued our return to in-person conferences. In October, we hosted two of our flagship conferences, IT Symposium and Reimagine HR, both in Orlando, Florida. Compared to 2019, attendance at IT Symposium was up 12%, and Reimagine HR attendance doubled. The feedback from our in-person conferences has been resoundingly positive. Gartner Consulting is an extension of Gartner Research. Consulting helps clients execute their most strategic initiatives through deeper, extended, project-based work. Consulting revenue grew 21% in the third quarter. Over the past few quarters, the rapid growth of our business outpaced hiring. This quarter, our associate base grew 18% year over year. This provides the capacity we need to serve our rapidly growing base of licensed users and positions us for sustained future growth. In closing, Gartner delivered another strong performance. We've caught up on hiring and are positioned to deliver sustained future growth. Our underlying margins are in the low 20s, comfortably above pre-pandemic levels. We expect them to modestly increase over time. We'll continue to generate significant free cash flow in excess of net income, and we'll continue to return significant levels of capital to our shareholders. With that, I'll turn the call over to our Chief Financial Officer, Craig Sapien.

Thank you, Gene, and good morning. Third quarter results were strong with double-digit growth in contract value, revenue, and adjusted EPS. FX neutral growth was even stronger than our reported results. We also delivered better than planned EBITDA margins. Reflecting the strong third quarter, enthusiastic demand for our in-person conferences, and continued success in balancing cost discipline with investing for future growth, we are again increasing our 2022 guidance. Third quarter revenue was $1.3 billion, up 15% year over year as reported, and 20% FX neutral. In addition, total contribution margin was 69%, down 20 basis points versus the prior year. EBITDA was $332 million, up 9% year over year, and up 15% FX neutral. Adjusted EPS was $2.41, up 19%. And free cash flow in the quarter was $283 million. Research revenue in the third quarter grew 11% year-over-year as reported and 15% on an FX neutral basis driven by our strong contract value growth. Third quarter research contribution margin was 74%, modestly below last year. The continued higher than normal contribution margin reflects improved operational effectiveness, increased scale, travel expenses still modestly below our post-pandemic expectations, and research-related headcount with a bit more catch-up still to go. Contract value, or CV, was $4.5 billion at the end of the third quarter, up 14.5% versus the prior year. CV growth is always FX neutral. Excluding the impact of exiting Russia, growth for Q3 would have been 14.9%. Quarterly net contract value increase, or NCVI, was $128 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 $128 million was driven by the combination of continued strong retention rates and near record new business of almost $250 million, similar to the second quarter of this year and the third quarter of 2021. The 14.9% contract value growth was broad-based across practices, industry sectors, company sizes, and geographic regions. Our technology practice grew 13% and all of our business practices led by HR and supply chain grew at double digit growth rates. All industry sectors, including technology, grew at double digit rates with the fastest growth in transportation, retail, and manufacturing. We had double digit growth across all of our enterprise size categories with our medium category growing the fastest. In the small category, the technology sector continued to grow at double digit rates. We also drove double digit growth across all of our top 10 countries other than China, where we saw continued single digit growth. Across our North America and Europe, Middle East, and Africa regions, all industry sectors had double digit growth rates. Global technology sales contract value was $3.5 billion at the end of the third quarter, up 13% versus the prior year. GTS had quarterly NCVI of $88 million, driven by strong retention and near record levels of new business for a third quarter. Wallet retention for GTS was again strong at 107% for the quarter, up about 310 basis points year over year. GTS new business was down 5% versus last year, up against another tough compare. The two-year compound annual growth rate was about 9%. GTS quota-bearing headcount was up 16% compared to September of last year. Our continued investments in our sales teams will drive long-term sustained double-digit growth. Our regular full set of GTS metrics can be found in the appendix of our earnings supplement. Global business sales contract value was $977 million at the end of the third quarter, up 21% year over year, which is above the high end of our medium term outlook of 12 to 16%. GBS CV increased $40 million from the second quarter. Wallet retention for GBS was 114% for the quarter, up about 120 basis points year over year. GBS new business was up 1% compared to last year against the strong compare. The two-year compound annual growth rate for new business was 18%. GBS quota-bearing headcount increased 19% 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 third quarter was $77 million, ahead of our expectations, as attendees and exhibitors were excited to get back to the in-person experience. Contribution margin in the quarter was 52%. We held 10 in-person conferences and three virtual conferences in the quarter. We held Avanta meetings in both virtual and in-person formats. We plan to run nine in-person destination conferences in the fourth quarter and have updated our guidance to reflect the strong demand we are seeing. Third quarter consulting revenues increased by 13% year-over-year to $107 million. On an FX neutral basis, revenues were up 21%. Consulting contribution margin was 35% in the third quarter, up 210 basis points versus the prior year, with better than expected revenue and higher utilization rates. Labor-based revenues were $90 million, up 16% versus Q3 of last year, and up 26% on an FX neutral basis. Backlog at September 30th was $162 million, increasing 33% year-over-year on an FX neutral basis with another strong bookings quarter. The inclusion of multi-year contracts in our backlog calculation, a change we described earlier in the year, contributed about 11 percentage points to the year-over-year growth rate. Our contract optimization business declined 3% as reported and 1% 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 16% year-over-year in the third quarter as reported and 21% on an FX-neutral basis. The biggest drivers of the increase were higher headcount to support our continued strong growth and the return to in-person destination conferences. SG&A increased 20% year-over-year in the third quarter as reported and 24% on an FX-neutral basis. SG&A increased in the quarter as a result of added headcount for sales and G&A functions and higher commissions following a strong CV growth in 2021. 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 third quarter was $332 million, up 9% year-over-year on a reported basis and up 15% FX-neutral. Third quarter EBITDA upside to our guidance reflected revenue exceeding our forecasts and expenses at the low end of our expectations. Depreciation in the third quarter of $23 million was down modestly versus 2021. Net interest expense, excluding deferred financing costs in the quarter, was $29 million, down a little over $1 million versus the third quarter of 2021, mainly due to lower interest rate swaps costs. The modest floating rate debt we have is fully hedged through maturity. The Q3 adjusted tax rate, which we used for the calculation of adjusted net income, was 24.7% for the quarter. The tax rate for the items used to adjust net income was 20.2% for the quarter. Adjusted EPS in Q3 was $2.41, growth of 19% year-over-year. The average share count for the third quarter was 80 million shares. This is a reduction of about 4.7 million shares, or about 5.6% year-over-year. We exited the third quarter with about 80 million shares outstanding on an unweighted basis. Operating cash flow for the quarter was $315 million, down 9% compared to last year. CapEx for the quarter was $32 million, up about $18 million year-over-year, led by increases in capitalized technology labor costs and catch-up laptop spend. Free cash flow for the quarter was $283 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 19% on a rolling four-quarter basis. On the same basis, free cash flow was 76% of EBITDA and 137% of GAAP net income. At the end of the third quarter, we had $529 million of cash. Our September 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 repurchases and strategic tuck-in M&A. Our balance sheet is very strong with $1.5 billion of liquidity, low levels of leverage, and effectively fixed interest rates. We repurchased more than $1 billion worth of stock through the end of the third quarter. We had about $600 million remaining on our authorization at the end of September, which we expect the board will continue to refresh as needed going forward. Since the end of 2020 through the end of this September, we've reduced our shares outstanding by 10 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. We are increasing our full year guidance to reflect strong Q3 performance and an improved outlook for the fourth quarter despite incremental FX headwinds. We now expect an FX impact to our full year revenue growth rates of about 420 basis points for the full year. This is up from 370 basis points based on rates when we guided in August. As we discussed the last three quarters, 2021 research performance benefited from several factors, including QBH tenure mix and CVI phasing within the quarters and year, record retention rates, and strong non-subscription growth. The growth compares will continue to be challenging for a few more quarters. 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 nine 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 fourth quarter to support current and future growth. We continue to model 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 exceptional 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 $4.58 billion, which is FX neutral growth of about 16%. The FX neutral growth is up about 60 basis points from our prior guidance due to strong NCVI performance in the third quarter. We expect conferences revenue of at least $375 million, which is growth of about 84% FX neutral. We expect consulting revenue of at least $450 million, which is growth of about 14% FX neutral. The result is an outlook for consolidated revenue of at least $5.40 billion, which is FX neutral growth of almost 19%. The FX neutral growth is up about 180 basis points from our prior guidance due to strong performance in third quarter and an improved outlook for Q4. Without the strengthening US dollar since August, our revenue outlook would have been about $85 million higher than previous guidance. We now expect full-year EBITDA of at least $1.36 billion. up $125 million from our prior guidance and an increase in our margin outlook as well. Without the strengthening U.S. dollar since August, our EBITDA guidance would have been about $136 million higher than previous guidance. We now expect 2022 adjusted EPS of at least $10.06 per share. For 2022, we now expect free cash flow at least $1.025 billion. Our EPS guidance is based on 81 million shares, which reflects year-to-date repurchases. As a result, we expect to deliver at least $310 million of EBITDA in the fourth quarter of 2022. All the details of our full-year guidance are included on our investor relations site. Our strong performance in 2022 continued in the third quarter with momentum across the business. Contract value grew 14%. Adjusted EPS increased 19%, fueled in part by the significant reduction of shares over the past year. We are adding associates across the business to keep up with our growth and to position us well heading into 2023. Our continued investments in our teams will drive long-term sustained double-digit growth. We repurchased more than $1 billion in stock this year through September and remain committed to returning excess capital to our shareholders over time. 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?