Gartner, Inc.

Welcome to Gartner's second quarter 2024 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 Chairman and 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 2024 financial results and Gartner's outlook for 2024 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 2024 foreign exchange rate. 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. To set forth in more detail on 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 2023 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 Chairman and Chief Executive Officer, Gene Hall. Good morning, and thanks for joining us today. Gardner remains resilient in a complex environment. In Q2, contract value grew high single digits. Financial results for the second quarter were ahead of expectations. And we delivered strong profitability and free cash flow. The external environment remains volatile, uncertain, complex, and ambiguous. Leaders across every enterprise face more simultaneous challenges than ever before. For example, small technology companies continue to face funding challenges. Supply chain shifts are impacting many industries. The banking industry continues to deal with higher interest rates. There are budget challenges in the public sector. Persistent cybersecurity threats. The potential impacts of generative AI. The list goes on. Enterprise leaders and their teams know they need help. And they know Gartner is the best source for the actionable, objective insight they need to drive smarter decisions and achieve stronger performance on their mission critical priorities. Our value proposition helps our clients save time, save money, gain confidence, manage risk, develop leadership skills, enhance their teams, and achieve success. Research continues to be our largest and most profitable segment. Our research business serves leaders across all major enterprise functions, in every industry and in every geography. Our market opportunity is vast. Within our research business, contract value with enterprise function leaders grew 10%, and our tech vendor clients returned to growth. We continue to guide clients through a wide range of topics, including generative AI, supply chain optimization, leader and manager development, cost optimization, cybersecurity, and the recent CrowdStrike outage. Through a relentless execution of proven practices, we deliver unparalleled value, whether our clients are thriving, struggling, or anywhere in between. Our research business serves executives and their teams through distinct sales channels. Global technology sales, or GTS, serves leaders and their teams within IT. GTS new business grew 8%. Contract value grew 6%. Contract value with GTS enterprise function leaders grew high single digits. Global business sales, or GBS, serves leaders and their teams beyond IT. This includes HR, supply chain, finance, marketing, legal, sales, and more. GBS new business grew 16%. GBS contract value grew 12%. Gartner conferences deliver extraordinarily valuable insights to an engaged and qualified audience. Revenue grew 11% in the second quarter, and the outlook for conferences remains strong. Gartner Consulting is an extension of Gartner Research. Consulting helps clients execute their most strategic initiatives through deeper project-based work. Consulting is an important complement to our IT research business. Consulting revenue grew 15%. People are at the heart of everything we do. We get better, faster, stronger every year because we work effectively as one team to deliver unparalleled value to our clients. And our teams are committed to driving relentless execution of the best practices that will fuel long-term, sustained, double-digit growth. In closing, Gartner delivered financial results ahead of expectations. We delivered 10% contract value growth with enterprise function leaders. Our client value proposition and addressable market opportunity will allow us to drive long-term, sustained, double-digit revenue growth. We'll continue to create value for our shareholders by providing actionable, objective insight to our clients, prudently investing for future growth, and returning capital to our shareholders through our share repurchase program. We expect to deliver modest margin expansion over time, and we'll continue to generate significant free cash flow well in excess of net income. All of this and more positions us to continue our sustained track record of success far into the future. With that, I'll hand the call over to our Chief Financial Officer, Craig Safian.

Thank you, Gene, and good morning. Second quarter contract value grew 7% year-over-year, accelerating about 50 basis points from Q1. We believe the first quarter marked the bottom for CV growth this cycle, barring a meaningful shift in the macro or geopolitical environment. Growth may vary from quarter to quarter, but we expect the overall trend will be higher from the 6.9% we delivered in the first quarter. Over the medium term, we expect both GTS and GBS to grow 12 to 16%. Second quarter revenue, EBITDA, and EPS all came in ahead of our expectations. We are updating our guidance based on the Q2 results, FX, and a change in non-subscription research revenue. We have repurchased $565 million of stock through June and remain eager to buy back stock opportunistically. Second quarter revenue was $1.6 billion, up 6% year-over-year as reported and 7% FX neutral. In addition, total contribution margin was 68%, about in line with last year. EBITDA was $416 million, up 8% as reported and 10% FX-neutral versus second quarter 2023. Adjusted EPS was $3.22, up 13% from Q2 of last year. And free cash flow was $341 million. Research revenue in the second quarter grew 5% year-over-year as reported and 6% on an FX-neutral basis. Subscription revenue grew 7% FX-neutral. The year-over-year change in non-subscription revenue was similar to Q1 2024. Second quarter research contribution margin was 74%, consistent with last year. Contract value was $4.9 billion at the end of the second quarter, up 7% versus the prior year, and up about $67 million from the first quarter. CV from enterprise function leaders across GTS and GBS grew 10%. Contract value and CV growth are FX neutral. CV 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 or high single-digit rates, led by the energy, manufacturing, and public sectors. CV grew double-digit or high single-digit rates across all enterprise sizes, except small, which 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 $3.8 billion at the end of the second quarter, up 6% versus the prior year. GTS Enterprise Leader CV increased high single digits. Tech Vendor CV returned to growth in the quarter. GTS CV increased $40 million from the first quarter. Wallet retention for GTS was 101% for the quarter up from Q1. Enterprise leader wallet retention was consistent with historical levels. GTS new business was up 8% compared to last year. GTS quota bearing headcount was down 2% year over year as we managed tech vendor focused sales territories in response to near term industry dynamics. Across GTS, we continue to aggressively optimize our territories to align with where we have the best growth opportunities. and we are investing for future growth. We continue to expect mid-single-digit QBH growth by the end of the year. We have the headcount we need to meet our commitments for this year. Our regular, full set of GTS metrics can be found in our earnings supplement. Global business sales contract value was $1.1 billion at the end of the second quarter, up 12% year-over-year. All of our GBS practices grew a double-digit or high single-digit race other than marketing, which grew mid-single digits. Growth was led by the finance, legal, and supply chain practices. GBS CV increased $27 million from the first quarter. Wallet retention for GBS was 106% for the quarter, which compares to 109% in the prior year. GBS new business was up 16% compared to last year. GBS quarter-bearing headcount was up 6% year-over-year, and we continue to target high single-digit growth for 2024. As with GTS, our regular full set of GBS metrics can be found in our earnings supplement. Conferences revenue for the second quarter was $186 million, increasing 10% as reported and 11% FX neutral compared to Q2 of 2023. Adjusting for the movement of conferences across the year, revenue increased about 15% in the quarter. Contribution margin was 58%. Q2 is our seasonally strongest margin quarter of the year. We held 16 destination conferences. Second quarter consulting revenue increased by 13% year over year to $143 million. On an FX neutral basis, revenue was up 15%. Consulting contribution margin was 38% in the second quarter. Labor-based revenue was $107 million, of 3% versus Q2 of last year as reported, and 5% on an FX neutral basis. Backlog at June 30th was $199 million, increasing 16% year-over-year on an FX neutral basis with continued booking strength. In contract optimization, we delivered $36 million of revenue in the quarter, up 62% versus the prior year. Our contract optimization business is highly variable. Consolidated cost of services increased 5% year-over-year in the second quarter as reported and 6% on an FX-neutral basis. The biggest driver of the increase was higher compensation costs. SG&A increased 5% year-over-year in the second quarter as reported and on an FX-neutral basis. SG&A increased in the quarter as a result of headcount growth, which contributed to higher compensation costs. EBITDA for the second quarter was $416 million, up 8% from last year as reported, and up 10% FX neutral. We outperformed in the second quarter through effective expense management and a prudent approach to guidance. Depreciation in the quarter of $28 million was up 16% compared to 2023. Net interest expense, excluding deferred financing costs in the quarter, was $19 million. This is favorable by $4 million versus the second quarter of 2023 due to higher interest income on our cash balances. The modest floating rate that we have is fully hedged through the third quarter of 2025. The Q2 adjusted tax rate, which we used for the calculation of adjusted net income, was 24% for the quarter. The tax rate for the items used to adjust that income was 25% for the quarter. Adjusted EPS in Q2 was $3.22, up 13% compared with last year. We had 78 million shares outstanding in the second quarter. This is a reduction of more than 1.5 million shares, or about 2% year over year. We exited the second quarter with about 78 million shares on an unweighted basis. Operating cash flow for the quarter was $370 million, compared with $436 million in Q2 of 2023. The change reflects working capital timing, which we expect to reverse in the second half. CapEx for the quarter was $29 million, in line with our expectations. Free cash flow for the quarter was $341 million. Free cash flow on a rolling four-quarter basis was 17% of revenue and 66% of EBITDA. Free cash flow conversion from GapNet income was 121%. 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 $1.9 billion of liquidity, low levels of leverage, and effectively fixed interest rates. We repurchased $340 million of our stock during the second quarter. We have more than $1 billion of repurchase capacity after the board recently increased our share buyback authorization by $600 million. 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. We are updating our full-year guidance to reflect recent performance and trends. The outlook for subscription research is higher based on the latest FX rates. We increased the outlook for conferences and consulting. And our EBITDA guidance primarily reflects Q2 upside, partially offset by our updated non-subscription research outlook. For subscription research, which was about 76% of revenue in 2023, we continue to innovate and provide a very compelling value proposition for clients and prospects. Executives and their teams face uncertainty and challenges, and they recognize how Gardner can help regardless of the economic environment. For subscription research revenue, based on Q2 results and our outlook for the balance of the year, our FX neutral guidance is unchanged. We have very high visibility into the subscription research revenue at this point in the year. Per non-subscription research, which was about 6% of 2023 revenue, we helped small businesses find the right software. We've updated our outlook for this portion of the segment given the most recent trends. We now expect non-subscription revenue of about $305 million for 2024. As a reminder, about one-third of our revenue and operating expenses are denominated in currencies other than the U.S. dollar. Based on recent FX rates, we expect currency to be roughly neutral in the back half of the year with a modest benefit in Q4. Our updated 2024 guidance is as follows. We expect research revenue of at least $5.105 billion, which is FX neutral growth of about 5%. This reflects subscription research revenue growth of about 7%. We expect conferences revenue of at least $565 million, which is FX neutral growth of about 12%. We expect consulting revenue of at least $530 million, which is growth of about 4% FX neutral. The result is an outlook for consolidated revenue of at least $6.2 billion, which is FX neutral growth of 5%. We now expect full-year EBITDA of at least $1.460 billion, up $5 million from our prior guidance. We expect 2024 adjusted EPS of at least $11.05. For 2024, we expect free cash flow of at least $1.08 billion, consistent with our prior guidance. This reflects a conversion from gap net income of 138%. After the second quarter ended, we reached the settlement related to pandemic or event cancellation insurance. We expect pre-tax proceeds of $300 million during the third quarter. This is not yet included in the cash flow or GAAP EPS guidance. Our guidance is based on 78 million fully diluted weighted average shares outstanding, which reflects the repurchases made through the end of June. And finally, for the third quarter, we expect adjusted EBITDA of at least $295 million. Our financial results through the first half have been ahead of our plan despite continuing global macro uncertainty. CV grew high single digits in the quarter, and we believe Q1 was the bottom for CV growth in this cycle. We repurchased $565 million in stock here to date through June and remain eager to return excess capital to our shareholders. We will continue to be price sensitive, opportunistic, and disciplined. Looking out over the medium term, our financial model and expectations are unchanged. With 12% to 16% research CV growth, we've delivered double-digit revenue growth. With gross margin expansion, sales costs growing about in line with CV growth, and G&A leverage, we will deliver modest EBITDA margin expansion over time. 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?