Gartner, Inc.

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. Please be advised that today's conference is being recorded. This call will include a discussion of first quarter 2023 financial results and Gartner's outlook for 2023 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 adjustments as described in our earnings release and supplement. All contract values and associated growth rates we discussed. are based on 2023 foreign exchange rates and exclude contributions related to the recent divestiture and the Russia exit. All growth rates and genius 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-GAF 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-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, and thanks for joining us today. Gartner drove strong performance in the first quarter 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. The banking industry is grappling with rising interest rates. 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 the 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. Research continues to be our largest and 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 first quarter, we helped clients with a range of topics, including cybersecurity, data analytics, artificial intelligence, remote work, cost optimization, and more. 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 GBS continued to grow at strong double-digit rates. We serve executives and their teams through two 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. This includes HR, supply chain, finance, marketing, sales, legal, and more. GBS 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. Gartner conferences deliver extraordinarily valuable insights to an engaged and qualified audience. This will be the first 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. 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 first quarter. Our business is fueled by our highly talented associates. We have carefully aligned our hiring with recent demand and our long-term opportunity. We were 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. 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, and 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 fit 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. With that, I'll hand the call over to our Chief Financial Officer, Craig Sapien.

Thank you, Gene, and good morning. First 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. With results ahead of our expectations, we are increasing our 2023 guidance. First quarter revenue was $1.4 billion of 12% year-over-year as reported and 14% FX neutral. In addition, total contribution margin was 69%, down 103 basis points versus the prior year. EBITDA was $379 million, 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 million. We finished the quarter with 19,830 associates, up 15% from the prior year and 2% from the end of the fourth quarter. We are well positioned from a talent perspective with low levels of open territories and our new associates coming up the 10-year curve. 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 first quarter grew 7% year-over-year as reported and 9% on an FX-neutral basis. Subscription revenue grew 11%, FX neutral. First 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 $4.5 billion at the end of the first quarter, up 10% versus the prior year. The first quarter 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 first quarter of 2022. Quarterly net contract value increase, or NCVI, was $26 million. 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, 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. Global technology sales contract value was $3.5 billion at the end of the first quarter, up 9% versus the prior year. GTS had quarterly NCVI of $10 million. 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. New business with tech vendors declined versus very strong performance last year. GTS quota-bearing headcount was up 22% year-over-year and 11% on a two-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 GPS metrics can be found in the appendix of our earnings supplement. Global business sales contract value was $983 million at the end of the first quarter of 16% year-over-year, which is at the high end of our medium-term outlook of 12% to 16%. All of our GBS practices, other than sales and marketing, grew at double-digit rates. Supply chain and HR both continue to grow faster than 20%. GBS CV increased $16 million from the fourth quarter. While 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 two-year compound annual growth rate for new business was 6%. 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 first quarter was $65 million, ahead of our expectations, as we saw strong performance with both exhibitors and attendees. The first quarter is always a seasonally small quarter, but we are off to a strong start for the year. Contribution margin in the quarter was 41%, consistent with typical seasonality. We held 10 destination conferences in the quarter, all in person. First quarter consulting revenues increased by 10% year-over-year to $127 million. On an FX neutral basis, revenues were up 14%. Consulting contribution margin was 40% in the first quarter, consistent with the incremental hiring and return to travel. Labor-based revenues were $97 million of 1% versus Q1 of last year and up 5% on an FX neutral basis. Backlog at March 31st was $161 million, increasing 14% year-over-year on an FX neutral basis, which 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 valuable. Consolidated cost of services increased 15% year-over-year in the first quarter as reported and 17% on an FX-neutral basis. The biggest driver of the increase was higher headcount to support our continued strong growth. We also saw an increase in cost year-over-year with the return to in-person conferences. SG&A increased 6% year-over-year in the first quarter as reported and 9% on an FX-neutral basis. SG&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 first quarter was $379 million, up 15% year-over-year on a reported basis and up 19% FX neutral. First quarter EBITDA upside through our guidance reflected revenue exceeding our expectations in conferences and consulting and prudent expense planning. Depreciation in the quarter of $24 million was up modestly compared to 2022. Net interest expense, excluding deferred financing costs in the quarter, was $26 million, down $4 million versus the first quarter 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 used for the calculation of adjusted net income, was 18% for the quarter. The tax rate for the items used to adjust that income was 35% for the quarter. Adjusted EPS in Q1 was $2.88, up 24% year over year. We had 80 million shares outstanding in the first quarter. This is a reduction of close to 3 million shares, or about 3% year over year. We exited the first quarter with about 80 million shares on an unweighted basis. Operating cash flow for the quarter was $165 million, down 2% compared to last year. CapEx for the quarter was $21 million, up 22% year-over-year as a result of an increase in technology modernization investments and equipment for new associates. Free cash flow for the quarter was $144 million. Free cash flow as a percent of revenue on a rolling four-quarter basis was 18% of revenue and 65% of EBITDA. Adjusted for the after-tax impact of the divestiture 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 accelerating. At the end of the first quarter, we had $894 million of cash. Our March 31st 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, available 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. Our balance sheet is very strong, with $1.9 billion of liquidity, low levels of leverage, and effectively fixed interest rates. We repurchased more than $100 million of stock during the first quarter. We had about $950 million remaining on our share purchase authorization at March 31st. 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. We are increasing our full year guidance to reflect the strong Q1 performance while still allowing for 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 two. 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 conference's calendar, which is different than the historical pattern. 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 second quarter 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 fourth quarter. 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. 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 billion, 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 million, which is growth of about 21%. We have increased our outlook for conferences by $25 million. We expect consulting revenue of at least $505 million, 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 $5.90 billion, which is FX neutral growth of 8%. Overall, we've increased our revenue outlook by $35 million. 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 $1.33 billion, up $70 million from our prior guidance, and an increase in our margin outlook as well. 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 million. This reflects a conversion from gap net income of almost 140%, excluding the after-tax divestiture proceeds. Our guidance is based on 80 million fully diluted weighted average shares outstanding, which reflects the repurchases made through the end of March. Finally, for the second quarter of 2023, we expect EBITDA of at least $350 million. We had a strong start to the year despite continuing global macro uncertainty with notable performance in conferences and overall profitability. Contract value grew double digits. EPS grew more than 20%. We repurchased over $100 million in stock during the first quarter 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 billion available to deploy on behalf of our shareholders in 2023. 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 over time, 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 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?

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again.

Please stand by while we compile the Q&A roster.

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

Yeah, 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 two. 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, 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.

Hey, Jeff, it's Gene. I think you characterized it right, which is the two biggest factors going on are the year-over-year comparison is very tough because it was such a strong four-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, but those are the big things that are going on that are affecting our business.

Okay, but are those smaller things, including like the banking challenges, are they causing incremental deterioration or is that not a meaningful factor for you?

Yeah, 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. 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.

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 AI. Thanks.

Yeah, so we see generative AI as being really helpful for our business. As you said, you know, there are a lot of internal efficiencies where we've had, you know, five years ago, we had teams of humans combing 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. 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 you know, public situations. And so I'd say, first of all, it's great for internal efficiencies in every part of our business. Even like, you know, you mentioned if a salesperson wants to get, you know, synthesized publicly available information, it's a great tool to help with that. It's going to be, so it'll help their internal efficiencies. It'll provide a better interface over time with our clients. And frankly, it's an area where clients need help 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. And of course, we're independent objective. So we say generational AI has really been a lot of help, both with internal efficiencies, with providing a better interface with our clients, helping clients with it, et cetera.

Appreciate the comprehensive answer.

Thank you. One moment for our next question.

We have a question from Heather Balsky from Bank of America. Your line is open.

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 fourth quarter? Just what's based into your sales outlook? Thanks.

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 first quarter of the year and our most amount of new business dollars in the fourth quarter of the year. And there's a lot of reasons for that. You know work through our pipelines in the fourth quarter We've got a lot of conferences that we leverage in the fourth quarter We make a lot of promotions and changes to positions in the first quarter But first quarter generally lowest amount of new business fourth quarter a lot more new business and that sort of builds over the course You know in terms of the way the CV flows First quarter and fourth quarter 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, just about every measure you can look at was the peak and or the toughest comparison for us, whether it was overall contract value growth, while 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. So Q1, I'd say, was a tough comparison across the board, 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, et cetera, still a very tough comparison there as well. The comparisons do ease a little bit, but it's still a 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. And as Jean 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.

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

Yeah, it's a great question. So we're always focusing our research on the things that are most important to our clients. If you think about today, it would be things like cybersecurity. You know, there are a few enterprises today that can let their card down with cybersecurity. They need all the help they can get. So that's an area that we're really focused on. Another 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 commercial digital business. We also see a lot of demand on things like optimizing cloud computings. So those are some examples. But 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've still got to deal with things like cybersecurity and data analytics, optimizing cloud computing. And so it's something that applies whether clients are struggling or whether they're thriving.

Great. Thanks very much. Thank you. One moment. We have a question from Toni Kaplan with Morgan Stanley.

Your line is open.

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, or is that just a, you know, maybe it was a tough comp or, you know, I'm sure each quarter, you know, some are more positive and some are more negative. So is it sort of normal or anything to call out there?

Yeah, Tony, it's a great question. So if you look at 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 GPS functions. But there's nothing sort of intrinsic. There's nothing in the marketplace or something like that. It's all about making sure that we have all the pieces really working together well. It still had great growth, but it's not as great. The GPS growth was really extremely strong, and they were just kind of not as strong as the strongest parts of GPS.

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 tighter labor market. 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.

It's a great question. And salespeople 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 a very low number of open positions. And our turnover is among the lowest we've ever seen with our salespeople. It takes our salespeople about three years to get the full productivity. So all these sales people that we've added recently, if you think about it, are really going to be powering the growth of the business in 2024 and 2025 when they get up to full productivity. And so 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 sales people is fantastic. We can get really fantastic sales people. We always see great salespeople, but it's one of the best markets for hiring for us we've ever seen.

Perfect. Thank you. Thank you.

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

Hi. Good morning. I wanted to ask you about the raised EBITDA margin outlook for the year. 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 last quarter? Thanks.

Hey, good morning, Seth. So 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 million, most notably in conferences. And we reduced our OpEx expense outlook by about $35 million. And that's what drove the $70 million 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. And now that we've got three or four 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 were able to raise the revenue by 35 and reduce the OPEX outlook by 35 million as well. And, again, the math on that yielded margins a little bit higher than we had initially guided to.

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

Yeah, it's a good call out. So, you know, I think Stepping back for a second, the free cash flow is still a very large number. The conversion numbers look very strong as well, both on a rolling four-quarter basis and as we extrapolate it out of the 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. You know, we had a very strong profit year last year, which results in more cash taxes this year, which was based 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.

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

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

Hi, good morning. Thanks for taking my questions. I wanted to follow up on a few of the earlier questions to start. First, I guess, Craig, on the margins, could you spend a bit of time talking on first quarter upside or where some of that upside came from on the cost side? And then Understanding that the EBITDA guidance bridge or the change versus last quarter still seems like there's a pretty significant ramp up in 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 was now in the run rate. So just trying to figure out where else the increased expense comes from over the next couple quarters.

Yeah, absolutely, Andrew. Thanks for the question. 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 expenses and the phasing of our business, if you use the Q1 adjusted operating expense number as sort of a baseline, You know, remember that, like, three-quarters of our expenses are people-related, and our merit increase goes into effect on April 1. And so that causes a step up in the op-ex 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. And so again, I think we've planned our revenue outlook pretty carefully. And again, keeping in mind the pretty volatile macro environment, And the op-eds, 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 two probably being the merit increase going into effect and the conference calendar impacting you know, OpEx Q2 through Q4.

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, you know, a year ago maybe? 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 CB growth? Just how you're thinking about those dynamics. Thank you.

Yeah, Andrew. So the reason the market is so good is, first, I mean, we're an employer of 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. 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 have really scaled back hiring a lot. And so we're using that as an opportunity to make sure we hire really great people. As we look forward, as Craig and I both said in our remarks, we want to make sure our net hiring incorporates the turnover we have as well as our CV growth so that we are hiring a bit behind our CV growth. so that we, you know, it doesn't impact our margins negatively.

Understood. Thank you. Thank you.

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

Hi, thanks. Good morning. You talked about research CV 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? How are client budgets performing? And what are you seeing with skill cycles?

So, uh, Hey George. So what I'd say is that it's kind of what we normal in the sense that there are some companies that are thriving. There's some things 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. And then let's also make sure that our sales people, our service delivery people know what those topics are. It can be right up front and helping clients. And so as I mentioned before, it's things like cybersecurity, data analytics, cost optimization, building a digital business, optimizing cloud computing. Not every company has all of those, but 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.

Got it. And then as it relates to your research sales headcount expectations, can you outline what 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?

Yeah, George, good morning. You know, essentially, again, as Gene and I both mentioned in prepared remarks, we are, with a lot of agility, making sure that we are calibrating appropriately where we exit this year from an overall headcount perspective across all of Gartner and, you know, in particular in terms of frontline sellers in both GTS and GBS. And so, you know, there's a range of outcomes for the full year from both a contract value growth perspective, but also from a headcount perspective. And, you know, given all the dynamics we talked about in the labor markets and the fact that we've got, you know, world-class recruiting, our talent acquisition organization, And we've got a great, you know, associated value 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.

Got it.

Thanks for the call.

Thank you.

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

Thanks so much. I wanted to focus on the research pricing environment. If you can remind us what price increases you've been pushing through 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? Thanks.

Good morning, Jeff. You know, in terms of our pricing, the bulk of our pricing goes into effect on November 1. And so, you know, 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. you know, we want to make sure that at a minimum we are pricing to offset the wage inflation that we are seeing. And in 21, 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%. You know, in terms of the environment and, you know, you know, giving on terms or anything like that. You know, generally I'd say we've managed to, you know, hold to our terms. And so, you know, we're not giving away extra days or months in terms of, you know, when we could get paid. You know, we're still pushing very hard on getting paid up front, you know, which is obviously, you know, a core part of our free cash flow machine. Gene and I have all talked about in the past, generally our contracts are relatively small or smallish ticket items for our clients representing a pretty teeny portion of their overall budgets. And so we're generally able to, again, not without negotiations and not without conversations, hold to our pricing structure, so no discounting, and holding strong on our terms as well.

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

Yeah, great question. You know, on the consulting side, you know, 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, you know, based on the demand we were seeing, you know, fairly aggressively over the back half of last year. We're still seeing, you know, really good demand. You know, we're in a really good backlog position, you know, engineering 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. So it's a tough top from that perspective. And again, just like the rest of the business, we are making sure that we are appropriately calibrated from a headcount perspective and a demand perspective, and we feel like we're 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.

Okay, appreciate the callers. Thanks so much.

Thank you. Our next question comes from Manav Panak. With Barclays, your line is open.

Thank you. Good morning. Craig, I was just hoping on the expense side specific to SG&A, you could help us with just, you know, the cadence through the quarters there and, you know, is the S part still like two-thirds of that mix right now?

Good morning, Manav. Yeah, so if you look at the SG&A line, Again, think of it running mid-40s to high-40s as a percent of revenue on a rolling four-quarter basis. About two-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. And, you know, the cadence of spending is similar to, you know, what I outlined with Andrew's question a few questions ago. You know, look at the Q1 rough OpEx run rate and SG&A. adjusted STNA 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 STNA expense should look Q2, Q3, Q4 of this year.

Got it. Okay, that's helpful. And then just my second question was more, can you remind us what your multi-year contract, like how much of your business is now multi-year contract, what that average duration is? Because, you know, that should help you, you know, be obviously more resilient here.

Yeah, absolutely. So, you know, our overall multi-year contracts as a percent of the research business is around 70%. So about 70% of the contracts that we have in force are multi-year in nature. The bulk of them are two-year contracts, although we do have a growing but small segment of more than two-year contracts. Important to note that some multi-year contracts will come due this year, obviously, but you're right in terms of the resiliency of the business, clearly, having a large portion of our contract value tied up in multi-year contracts that are not up for renewal over the course of 2023 is clearly a good thing for us. And we recognize the strategic importance and value of focusing on multi-year contracts. Our salespeople do as well. Our clients do as well, quite frankly. It's good for them too. But it's clearly, you know, a, you know, a strong element of the business that we have so much tied up in multi-year contracts. But again, most of them are two-year contracts.

Got it. Thank you. Thank you. One moment. We have a question from Stephanie Moore with Jeffries. Your line is open. Stephanie, your line is open.

Yes. No. Hi. Good morning. I just wanted to touch on the conference side of the business. Clearly, really strong growth. We'd love to get more color on what you're hearing in regards to maybe advanced bookings and other demand, if that demand has changed at all versus maybe pre-COVID levels, just the amount of stuff that's been taking.

Yes, Stephanie, it's a great question. So conferences are a really 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.

Great, thank you.

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

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, if you mind?

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 clients pulling back at all. Thank you.

Yeah, 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 the 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 two here or there. You know, we're seeing that in some of the more challenged end user industries as well, like as Jean mentioned, regional banking or things like that. But overall, you know, 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 the investment level within clients. And in fact, if you look at the wallet 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.

Great, understood. Thank you so much.

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

Well, here's what I'd like you to take away from today's call. In the first quarter of 23, 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 the changing world, we've delivered a sustained record of success. 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. Thanks for joining us today. We look forward to updating you again next quarter.

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