Gartner, Inc.

Good morning, everyone. Welcome to Gartner's second 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 second 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 the adjustments as described in our earnings release and supplement. All contract values and associated growth rates we discuss are based on 2023 foreign exchange rates. and exclude contributions related to the first quarter divestiture and the 2022 Russia exit. All growth rates in 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. To step forward 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 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, and thanks for joining us today. Gartner drove another strong performance in Q2. We delivered double-digit revenue growth and high single-digit growth in contract value. EBITDA, EBITDA margins, and adjusted EPS came in above expectations as a result of modest revenue upside and disciplined cost management. Free cash flow in the quarter was excellent. The environment remains highly uncertain. The tech sector continues to adjust to post-pandemic demand. The banking industry is grappling with rising interest rates Many industries continue to be impacted by supply chain challenges and more. Enterprise leaders and their teams need actionable, objective insight. Gartner is the best source for the insight, tools, and advice that make the difference between success and failure for these leaders and the enterprises they serve. We're helping our clients make better decisions, whether they're thriving, struggling, or anywhere in between. We do this through consistent execution of operational best practices. 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. We estimate our opportunity at around $200 billion. 95% of our addressable market is with enterprise function leaders like chief information officers, CFOs, heads of supply chain, and more. The balance of the market opportunity is with technology vendors. In the second quarter, we helped clients with a wide range of topics, including cybersecurity, data analytics, artificial intelligence, remote work, cost optimization, and more. Research revenue grew 7% in Q2. Subscription revenue grew 9% on an organic basis. Total contract value growth was 9%. Contract value for enterprise function leaders continued to grow at double-digit rates. We serve executives and their teams through distinct sales channels. Global technology sales, or GTS, serves leaders and their teams within IT. GTS also serves leaders at technology vendors, including CEOs, chief marketing officers, and senior product leaders. GTS contract value grew 7%. GTS sales to enterprise function leaders performed well in the quarter. GTS sales to leaders and technology vendors were affected by technology sector dynamics and tough year-over-year comparisons. We expect sales to technology vendors will return to our target growth rates over the medium term. 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 15%. Through relentless execution of proven practices, we're able to deliver unparalleled value to our clients. Our business remains resilient, despite a persistent, complicated external environment and tough compares for the technology vendor market. 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, and we're off to a great start. Attendance is strong. Exhibitor bookings are at record levels, and feedback continues to be excellent. We had a great first half, and the outlook for the year is strong. 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 6% in the second quarter. We updated our 2023 guidance, increasing EBITDA and free cash flow. We've revised our non-subscription research revenue to reflect technology vendor dynamics, and our outlook for conferences is higher. Craig will take you to the details. 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. 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. Our client value proposition and addressable market opportunity will allow us to drive long-term, sustained, double-digit revenue growth. We expect margins will expand modestly over time, and we generate significant free cash flow well in excess of net income. Even as we invest for future growth, we'll return significant levels of excess capital to our shareholders. This reduces shares outstanding and increases returns over time. With that, I'll hand the call over to our Chief Financial Officer, Craig Sapien.

Thank you, Gene, and good morning. Second quarter results were strong with high single-digit growth in contract value and double-digit FX-neutral revenue growth. EBITDA, EBITDA margins, and adjusted EPS were better than expected as a result of modest revenue upside and disciplined cost management. Free cash flow in the quarter was excellent. With good visibility into the balance of the year, we are increasing our 2023 EBITDA and free cash flow guidance. Second quarter revenue was $1.5 billion, up 9% year-over-year as reported and 10% FX neutral. In addition, Total contribution margin was 68%, compared to 69% in the prior year as we caught up on hiring during 2022. EBITDA was $384 million, ahead of our guidance and about in line with last year. Adjusted EPS was $2.85, consistent with Q2 of last year. And free cash flow was $410 million. We finished the quarter with 20,104 associates, up 12% from the prior year and 1% from the end of the first quarter. We remain well-positioned from a talent perspective, with low levels of open territories and our new associates coming up the 10-year curve. 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 second quarter grew 6% year-over-year as reported and 7% on an FX-neutral basis. Subscription revenue grew 9% on an organic, FX-neutral basis. Second quarter research contribution margin was 73%, compared to 74% in the prior year period, as we have caught up on hiring and return to the new expected levels of travel. Contract value, or CV, was $4.6 billion at the end of the second quarter, up 9% versus the prior year. The second quarter last year was one of our strongest research quarters ever, with outstanding performance on nearly every metric we provide. CP growth is FX neutral and excludes the first quarter 2023 divestiture. EV from enterprise function leaders across GTS and GBS grew at double-digit rates. EV from tech vendors grew low single digits compared to mid-teens growth in the second quarter of 2022. Quarterly Net Contract Value Increase, or NCVI, was $41 million. As we've discussed in the past, there's notable seasonality in this metric. TV growth was broad-based across practices, industry sectors, company sizes, and geographic regions. Across our combined practices, the majority of industry sectors grew at double-digit rates, again led by the transportation, retail, and public sectors. We had high single-digit growth across all of our enterprise size categories other than the small category, which grew mid-single digits. This category has the largest tech vendor mix. We also drove double-digit or high single-digit growth in the majority of our top 10 countries. Global technology sales contract value was $3.5 billion at the end of the second quarter, up 7% versus the prior year. GPS had quarterly NCVI of $14 million. Wallet retention for GTS was 102% for the quarter, which compares to 107% in the prior year when we saw a record high for this metric. IT enterprise function leaders' wallet retention remained above historical GTS levels during the second quarter. GTS new business was down 4% versus last year. New business with IT enterprise function leaders increased high single digits compared to the prior year against the tough compare. GTS quarter-bearing headcount was up 13% year-over-year, reflecting the catch-up hiring we did in 2022. 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 $1 billion at the end of the second quarter, up 15% year-over-year, which remains towards the higher end of our medium-term outlook of 12% to 16%. All of our GBS practices grew at double-digit or high single-digit rates, again led by supply chain and HR. GBS CV increased $27 million from the first quarter. While our retention for GBS was 109% for the quarter, which compares to 115% in the prior year when we saw one of the highest ever results for this metric. GBS new business was up 2% compared to last year against a strong compare. GBS quarter-bearing headcount was up 15% 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 second quarter was $169 million, ahead of our expectations as we saw strong performance with both exhibitors and attendees. Contribution margin in the quarter was 58%, consistent with typical seasonality. We held 17 destination conferences in the quarter, all in person. Second quarter consulting revenues increased by 5% year-over-year to $126 million. On an SX neutral basis, revenues were up 6%. Consulting contribution margin was 37% in the second quarter. Labor-based revenues were $104 million, up 9% versus Q2 of last year and up 11% on an SX neutral basis. Backlog at June 30th was $172 million, increasing 17% year-over-year on an FX-neutral basis with continued booking strength. Our contract optimization business is highly valuable. We delivered $22 million of revenue in the quarter, and the pipeline for both contract optimization and labor-based revenues remained strong. Consolidated cost of services increased 15% year-over-year in the second quarter as reported and 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 costs year-over-year with the return to in-person conferences. STNA increased 12% year-over-year in the second quarter, as reported, and 14% on an FX mutual basis. STNA increased in the quarter as a result of headcount growth. EBITDA for the second quarter was $384 million, compared to $389 million in the year-ago period. Second quarter EBITDA upside to our guidance reflected revenue exceeding our expectations and conferences and prudent expense management. Appreciation in the quarter of $24 million was up modestly compared to 2022. Net interest expense excluding deferred financing costs in the quarter was $23 million. This was down $5 million versus the second quarter of 2022 due to higher interest income on our cash balances. The modest floating rate debt we have is fully hedged through maturity. The Q2 adjusted tax rate, which we used for the calculation of adjusted net income, was 25% for the quarter. The tax rate for the items used to adjust net income was 27% for the quarter. Adjusted EPS in Q2 was $2.85, in line with last year. We had 80 million shares outstanding in the second quarter. This is a reduction of close to 1 million shares, or about 1% year over year. We exited the second quarter with about 80 million shares on an unweighted basis. Operating cash flow for the quarter was $436 million, up 5% compared to last year. CapEx for the quarter was $26 million, up 21% year-over-year as a result of an increase in technology investments. Free cash flow for the quarter was $410 million. Free cash flow as a percent of revenue on a rolling four-quarter basis was 17% of revenue and 66% of EBITDA. Adjusted for the after-tax impact of the Q1 divestiture, free cash flow conversion from gap net income was 119%. Our free cash flow conversion is generally higher when CV growth is accelerating. At the end of the second quarter, we had about $1.2 billion of cash. Our June 30th debt balance was about $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 $2.2 billion of liquidity, low levels of leverage, and effectively fixed interest rates. We repurchased $132 million of stock during the second quarter. We had about $830 million remaining on our share purchase authorization at June 30th. We expect the board to continue to refresh the repurchase authorization as needed going forward. As we continue to repurchase shares, our capital base will shrink. Over time, this is accretive to earnings per share and combined with growing profits also delivers increasing returns on invested capital over time. We are increasing our full-year conferences, EBITDA, and free cash flow guidance to reflect the strong Q2 performance. We are updating our research revenue guidance to reflect tech vendor market dynamics on the non-subscription part of the business. For research, we continue to innovate and provide a very compelling value proposition for clients and prospects. We've got tough compares across most of the segment for another quarter. We expect stronger growth from subscription business than the non-subscription part of the segment, as we indicated last quarter. The non-subscription part of the business has direct exposure to tech vendor spending. The outlook continues to be based on all 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 still expect Q4 to be the largest quarter of the year. We expect Q3 will be the smallest revenue quarter of the year, as I noted in May. For consulting revenues, contract optimization remains highly valuable. We had a very strong year in 2022, especially in contract optimization in the fourth quarter. We will continue both to manage expenses prudently to support future growth and deliver strong margins. Our updated 2023 guidance is as follows. We expect research revenue of at least $4.855 billion, which is FX neutral growth of about 6% or 7%, excluding the Q1 divestiture. The update to research revenue guidance reflects the effect of tech vendor market dynamics on the non-subscription part of the business. We expect conferences revenue of at least $490 million, which is growth of about 26%. We have increased our outlook for conferences by $20 million. We expect consulting revenue of at least $505 million, which is growth of about 5% effect neutral, consistent with the outlook we gave in May. The result is an outlook for consolidated revenue of at least $5.85 billion, which is effect neutral growth of 7%. The guidance reflects an update to non-subscription research revenue, partially offset by an increase to conferences. We now expect full-year EBITDA of at least $1.36 billion, up $30 million from our prior guidance, and an increase in our margin outlook as well. We will deliver on our margin guidance in most economic scenarios. If revenue is stronger than our outlook, EBITDA would be better than our guidance. We now expect 2023 adjusted EPS of at least $10. For 2023, we now expect free cash flow of at least $975 million, up $55 million from our prior guidance. This higher free cash flow reflects a conversion from gap net income of about 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 June. Finally, for the third quarter of 2023, we expect EBITDA of at least $275 million. We had a strong first half despite continuing global macro uncertainty in a dynamic tech vendor market. CB and revenue grew high single digits in the quarter. Conferences and EBITDA performance exceeded our expectations, and we increased our guidance as well. Margins are strong, consistent with our prior commentary. Free cash flow was strong in the quarter, and we increased the guidance for the full year. We repurchased over $230 million in stock during the first half and remain committed to returning excess capital to our shareholders. And we have ample liquidity that we are ready to deploy on behalf of shareholders over the coming quarters. 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 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 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?