Gartner, Inc.

Good morning, everyone. Welcome to Gartner's first quarter 2025 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'll 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 2025 financial results and Gartner's outlook for 2025 is 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 2025 foreign exchange rates. 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. As set forth in more detail in today's earnings release, certain statements made on this column 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 2024 annual report on Form 10-K and quarterly reports on Form 10-Q, as well as in other filings with the SEC. encourage all of you to review the risk factors listed in these documents. Now, I will turn the call over to Gartner's Chairman and Chief Executive Officer, Gene Hall.

Good morning, and thanks for joining us today. Gartner remains resilient in a complex environment. In Q1, contract value grew 7%. First quarter revenue, EBITDA, EPS, and free cash flow were ahead of our expectations. We increased headcount across our sales organizations by 4%. As we navigate another year of volatility, uncertainty, complexity, and ambiguity, we'll continue to be agile. And we'll target our investments to support long-term, sustained, double-digit growth. Research continues to be our largest and most profitable segment. Research contract value grew 7%. Excluding the U.S. federal business, contract value grew 8%. Within research, we serve executives and their teams through distinct sales channels. Global technology sales, or GTS, serves leaders and their teams within IT. GTS contract value grew 6%. Excluding the U.S. federal business, contract value grew 7%. Contract value with tech vendor clients improved for the fourth consecutive quarter. Global Business Sales, or GBS, serves leaders and their teams beyond IT. This includes HR, supply chain, finance, marketing, legal, sales, and more. GBS contract value increased 11%. Gartner conferences deliver extraordinarily valuable insights to an engaged and qualified audience. On a same conference basis, revenue grew 12%. 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 compliment to our IT research business. Consulting revenue grew 5% against a strong compare from Q1 2024. Revenue from contract optimization grew a robust 38% and consulting backlog grew 16%. Overall, our Q1 financial results were ahead of expectations. Gartner has a unique client value proposition. We deliver actionable, objective insight, guidance and tools that help our clients succeed with their mission critical priorities. We practice disciplined cost management while remaining agile and prudently investing for future growth. We generate free cash flow well in excess of net income, and we return capital to our shareholders through our repurchase program. Over the past five years, we've seen persistent elevated levels of volatility in the macroeconomic environment. The COVID-19 pandemic, the bursting of a tech spending bubble, the highest inflation in 40 years, a sharp rise in interest rates, the first ground war in Europe in 80 years. Now, government policy and tariff changes are affecting enterprises across the U.S. and around the world in different and complex ways. There's a high level of macroeconomic uncertainty. Executives know they need help. Gartner is the best, most cost-effective source for the insight, guidance, and tools they need to succeed. We help our clients make smarter decisions that address mission critical priorities, such as cost optimization, managing through public policy changes, leveraging AI innovation, cybersecurity, and more. And we do this while helping them manage risk, save time, save money, and build confidence. Gartner helps senior executives make smarter decisions to achieve their mission critical priorities. Today, one urgent priority for the majority of our clients is harnessing the potential of artificial intelligence. Of course, Gartner is one of the world's leading experts in AI. We help thousands of end-user enterprises determine the best uses and business cases for AI. With our in-depth understanding of end-user business cases, we also advise thousands of technology vendors on how to compete in the AI marketplace. And finally, we use AI internally to support our business. We develop proprietary insight, guidance, and tools to help senior executives make smarter decisions on their mission critical priorities. Our 2,500 experts develop these proprietary insights, guidance, and tools by analyzing our more than 500,000 one-on-one conversations that we hold with clients every year. In addition, we conduct proprietary primary research, which is only available through Gartner to supplement these conversations. All of this creates a valuable data set that is massive, proprietary, and constantly updated. Finally, we incorporate publicly available data where helpful, often using AI. The combination of our 2,500 experts, hundreds of thousands of conversations with end users and technology vendors, and proprietary data methodologies and process makes our insights, guidance, and tools highly valuable, highly unique, and highly differentiated from any other source. A core element of our strategy is continuous improvement and innovation, which we will apply to further increase our value and differentiation over time. Our powerful client value proposition gives us a vast, untapped market opportunity, and we know the right things to do to capture that opportunity. Gartner has proven best practices that address how we serve our clients, recruit, hire, train and deploy our salespeople, create our insights, guidance and tools, host attendees at our conferences and support our largest technology clients through consulting. We also have best practices that address how we approach expense management to optimize flexibility while increasing selling capacity. For the remainder of 2025, we plan to grow sales headcount in the mid-single digits, excluding directly impacted areas. This reflects our commitment to invest for future growth while delivering strong margins and free cash flow. Our plan is to exit the current environment better, faster, and stronger than before. With continued sales headcount growth and a return to historically strong productivity, we're well positioned to accelerate growth as the external environment evolves. We expect to re-accelerate CV growth to our target of 12 to 16% when the macroeconomic environment returns to normal. And we expect EBITDA margins to expand through the natural operating leverage in the business. Gartner has a highly diversified client base. The US federal government represents approximately 4% of our total contract value. Our US federal business has been impacted by the recent policy changes. Nearly all of our US federal contracts are up for renewal in 2025. Roughly 40% of these were transacted in Q1, the largest quarter of the year, and we renewed roughly half that business. We remain laser focused on creating and delivering value for our US federal clients. As the US federal government modifies and refines their priorities, we believe that we will be a core part of helping them achieve critical priorities such as cybersecurity, cost optimization, digital transformation, and more. Stock buybacks are an important way we return value to shareholders. We remain eager to repurchase shares aggressively. Our approach is designed to optimize returns by being price sensitive, opportunistic, and disciplined. In closing, Gartner delivered financial results ahead of expectations. Tech vendor CP growth continued to accelerate. We have a powerful client value proposition and a vast addressable market opportunity. We will continue to create value for our shareholders by providing actionable, objective insight, guidance, and tools to our clients, prudently investing for future growth, remaining agile and disciplined in our approach to expenses, and returning capital to our shareholders through our share repurchase program. We expect to deliver modest margin expansion over time alongside double-digit top-line growth and will continue to generate significant free cash flow well in excess of net income. All of this and more positions us to drive long-term, double-digit growth and sustain our 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. First quarter contract value, or CV, grew 7% year over year. Revenue, EBITDA, adjusted EPS, and free cash flow were better than expected as we continued to execute well in an increasingly complex environment. We were resilient in a quarter affected by macro factors. Since we reported Q4 2024 results in early February, there were notable changes in the U.S. federal government and market. The broader selling environment also shifted during the quarter as many company decision makers started to adjust to the evolving global macro economy. We are updating our guidance to reflect Q1 performance, the new macro landscape, the benefit from the move in FX rates, and our own expense agility. We repurchased $163 million of stock in the quarter, maintaining flexibility as the market digests the changes in the macro landscapes. we remain eager to repurchase shares, which we will do opportunistically. First quarter revenue was $1.5 billion, up 4% year-over-year as reported and 6% FX neutral. In addition, total contribution margin was 69%, up 20 basis points from last year. EBITDA was $385 million, up 1% as reported and 3% FX neutral versus the first quarter of 2024. Adjusted EPS was $2.98, up 2% from Q1 of last year. And free cash flow was $288 million, a very strong performance for our first quarter. Research revenue in the quarter grew 4% year-over-year as reported and 6% FX neutral. Subscription revenue grew 8% FX neutral. Non-subscription research revenue was in line with our expectations. First quarter research contribution margin was 74%, consistent with last year. Contract value was $5.1 billion at the end of the first quarter, up 7% versus the prior year. Contract value and CV growth are FX neutral. Excluding the U.S. federal government, CV grew 8%. Contract value growth with tech vendors continued to improve. Global CV was $63 million lower than Q4 2024, with around 80% of the change attributable to the U.S. federal government and market. CV growth was broad-based across practices, industry sectors, company sizes, and geographic regions. Across our combined practices, all of the industry sectors except two grew at high single-digit rates, led by the energy, healthcare, and manufacturing sectors. CV grew at high single-digit rates across all enterprise sizes, except small, which grew low single digits. We also drove double-digit or high single-digit growth in the majority of our top 10 countries. Canada, which represents about 3% of total CV, had a more challenging selling environment in the quarter. Nearly all of our US federal contracts will come up for renewal during 2025, with about 40% having transacted in Q1, the largest quarter of this calendar year. In the first quarter, the dollar retention was almost 50%. At March 31st, we had $225 million of U.S. federal CV. Global technology sales contract value was $3.9 billion at the end of the first quarter, up 6% versus the prior year. Excluding the U.S. federal government from both periods, GTS CV grew 7% in the quarter as the tech vendor market continued to improve. $44 million of the $58 million change in GTS CV from Q4 was due to the U.S. federal government. While retention for GTS was 101% for the quarter, GTS new business was down 4% compared to last year. GTS quota-bearing headcount was up 3% year-over-year. A regular full set of GTS metrics can be found in our earnings supplement. Global business sales contract value was $1.2 billion at the end of the first quarter, up 11% year-over-year. All of our major GBS practices grew at double-digit or high single-digit rates. Growth was led by the sales, finance, and legal practices. GBS CV was $5 million below the fourth quarter. Excluding the U.S. federal government, GBS CV was largely unchanged from Q4. Wallet retention for GBS was 105% for the quarter. GBS new business was down 3% compared to last year. GBS quota-bearing headcount was up 9% year-over-year. As with GTS, our regular full set of GBS metrics can be found in our earnings supplement. Conferences revenue for the first quarter was $73 million, increasing 4% as reported and 5% FX neutral compared to Q1 of 2024. Adjusting for the two conferences we moved to Q2 this year, revenue increased around 12% FX neutral. Contribution margin was 38%, consistent with typical Q1 seasonality. We held 10 destination conferences in the first quarter, as planned. Q1 consulting revenue was $140 million, compared with $135 million in the year-ago period of about 4% of reported and 5% FX neutral. Consulting contribution margin was 38% in the first quarter. Labor-based revenue was $104 million. This part of the segment was down 4% versus Q1 of last year's reported and 2% FX neutral against the tough compare. Backlog at March 31st was $214 million, increasing 16% year-over-year FX neutral. This was driven by strength in multi-year contracts. In contract optimization, we delivered $36 million of revenue in the quarter, up 36% versus Q1 of last year, and 38% FX neutral. A quarter was ahead of our expectations. Our contract optimization revenue is highly variable. Consolidated cost of services increased 3% year-over-year in the first quarter as reported, and 4% FX neutral. The biggest driver of the increase was higher compensation costs. SG&A increased 6% year-over-year in the first quarter as reported and about 7% on an FX-neutral basis. SG&A increased in the quarter as a result of headcount growth. EBITDA for the first quarter was $385 million, up 1% from last year as reported and up 3% FX-neutral. We outperformed in the first quarter through modest revenue upside, effective expense management, and a prudent approach to guidance. Depreciation in the quarter of $29 million was up 10% compared to 2024. Net interest expense excluding deferred financing costs in the quarter was $12 million. This is favorable by $5 million versus the first quarter of 2024 due to higher interest income on our cash balances. The modest floating rate debt we have is fully hedged through the third quarter of 2025. The Q1 adjusted tax rate, which we used for the calculation of adjusted net income, was 21% for the quarter. This compares to last year's rate of 19%. The tax rate for the items used to adjust net income was 26% for the quarter. Adjusted EPS in Q1 was $2.98, up 2% compared to Q1 last year. We had 78 million shares outstanding in the first quarter. This is an improvement of over 1 million shares or about 1% year over year. We exited the first quarter with just under 78 million shares on an unweighted basis. Operating cash flow for the quarter was $314 million, up 66% compared with last year. CapEx was $26 million, up about $3 million year over year. This was primarily due to real estate-related costs and in line with our expectations. First quarter free cash flow was $288 million, up 73% compared with Q1 in 2024. Free cash flow on a rolling four-quarter basis was 120% of GAAP net income and 97% of EBITDA. As we noted last quarter, there were several items in 2024 that affect rolling four-quarter net income and free cash flow, including after-tax insurance proceeds, a real estate lease termination payment, and tax planning benefits. Adjusting for these items, free cash flow on a rolling four-quarter basis was 20% of revenue, 82% of EBITDA, and 155% of GAAP net income. At the end of the first quarter, we had about $2.1 billion of cash. Our March 31st debt balance was about $2.5 billion. Our reported gross debt to trailing 12-month EBITDA was well 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 disciplined share repurchases and strategic tuck-in M&A. Our balance sheet is very strong with $2.8 billion of liquidity, low levels of leverage, and effectively fixed interest rates. We repurchased $163 million of stock during the first quarter. At the end of Q1, our share repurchase authorization was approximately $870 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. Since we reported Q4 results in early February, the world has become significantly more dynamic. We are applying all the lessons we've learned from prior challenging environments. We are shifting our focus to the things our clients need the most in an extraordinarily uncertain operating environment. We're also remaining agile in managing our cost structure while also investing for future growth. In particular, we are preserving and growing our selling capacity outside of directly impacted areas, which is a key input into our algorithm for future sustained double-digit growth. The U.S. dollar weakened significantly during Q1. We now expect FX to benefit revenue growth by about 50 basis points and EBITDA growth by about 130 basis points in 2025. We've provided both the FX-driven and operational changes to guidance in our earnings supplement. As a reminder, about one-third of our revenue and operating expenses are denominated in currencies other than the U.S. dollar. For research subscription revenue in 2025, our guidance reflects an expectation that Q1 trends for new business and retention continue for the balance of the year. We've also incorporated the information we have about U.S. federal spending decisions to date. In addition, we've taken a prudent view of the outlook as the current environment remains very dynamic. For the non-subscription part of the research segment, we've built a continuation of recent traffic and pricing trends into the guidance. For conferences, we are basing our guidance on the 53 in-person destination conferences we have planned for 2025. We have good visibility into current year revenue with a majority of what we've guided already under contract. For consulting, we have more visibility into the next quarter or two based on the composition of our backlog and pipeline as usual. Given the shifts in the macro environment, we have been thoughtful about the outlook for the labor-based part of the business. Contract optimization has had several very strong years and the business remains highly variable. We've incorporated a prudent outlook for this part of the segment. Our base level assumptions for consolidated expenses have changed to reflect the revenue outlook. We have demonstrated our ability to manage costs prudently in any market environment and we will remain agile. We will do this while also investing for future growth. Our plan is to exit the current environment better, faster, and stronger than before. We can both deliver on our EBITDA margin commitments for this year while investing for future growth. Our plan for both GTS and GBS is for mid-single-digit sales headcount growth outside of directly impacted areas. This reflects our commitment to invest for future growth while delivering strong margins and free cash flow. We're maintaining recruiting capacity and are prepared to go faster on the hiring based on the macro-driven demand. And as the selling environment gets back to normal, we expect significant benefits from QBH productivity. Our updated 2025 guidance is as follows. We expect research revenue of at least $5.34 billion, which is FX-neutral growth of about 4%. This reflects subscription research revenue growth of about 5%. We expect conferences revenue of at least $625 million, which is FX-neutral growth of about 6%. We expect consulting revenue of at least $575 million, which is growth of about 2% FX-neutral. The result is an outlook for consolidated revenue of at least $6.535 billion, which is FX neutral growth of 4%. We now expect full-year EBITDA of at least $1.535 billion, up $25 million from our prior guidance. We expect 2025 adjusted EPS of at least $11.70, up about 25 cents from last quarter. For 2025, we expect free cash flow of at least $1.145 billion, This reflects a conversion from GAAP net income of 137%. Our guidance is based on 78 million fully diluted weighted average shares outstanding, which reflects the repurchases made through the end of the first quarter. For Q2, we expect adjusted EBITDA of at least $400 million. Our financial results through March were ahead of expectations, underscoring the resilience of our business model. While we updated the revenue guidance to reflect the macro landscape, we will also benefit from the latest FX rates. Our EBITDA margin outlook is now higher than it was in February. We have successfully navigated challenging macro environments before and know the right things to do. We are running our operational best practices, including delivering exceptional value for our clients, running our sales and services best practices playbooks, investing in sales capacity, which is a key ingredient for future sustained double-digit top-line growth, managing our expenses aggressively and thoughtfully to protect profitability and cash flow, and using our strong balance sheet and cash flow to buy our stock and for tuck-in M&A. Looking out over the medium term, in a normal macro environment, our financial model and expectations are unchanged. With 12% to 16% research CV growth, we will deliver double-digit revenue growth. There is operating leverage in the business, which allows us to expand margins. With gross margin expansion, sales costs growing about in line with CV growth, and G&A leverage, we will deliver modest EBITDA margin expansion. 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?