Gartner, Inc.

Good morning, everyone. Welcome to Gartner's second 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 Safey, 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 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 adjustments as described in 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 and less 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 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 2024 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 Chairman and Chief Executive Officer, Gene Hall.

Good morning, and thanks for joining us today. There are two things I'd like you to take away from today's discussion. First, AI is an important opportunity for Gartner across several dimensions. And second, we're making adaptations that give us a clear path back to double-digit growth. AI is one of the most pervasive changes happening around the world. It was the single largest demand area across all the topics we cover for virtually every role. Clients see large potential in AI, and they need help in determining the best way to capture that potential. Across functions, geographies, and industries, clients are looking to Gartner to provide that help. And we're the best solution to support clients' AI journeys. While AI was the largest single topic, there were others that were vision critical to clients. including cybersecurity, cost optimization, data governance and management, IT strategy and digital transformation, risk management, finance transformation, HR talent planning, and more. We also experienced some headwinds during Q2. Measures of CEO confidence fell to recessionary levels, among the fastest drops ever recorded. And in a Gartner survey, 78% of CEOs indicated they're implementing cost-cutting measures to safeguard performance. We have a high degree of confidence in what caused these headwinds because we tracked the reason for every loss for both renewals and potential new business. The largest headwind in Q2 was with the US federal government. Initiatives from the Department of Government Efficiency, or DOGE, made it more challenging for clients to purchase or renew many of our products. In addition, there were impacts from tariff policies. With the prospect of higher tariffs, many companies implemented strong cost saving measures. Even companies not directly impacted by tariffs began implementing these measures. Precious decisions that were previously made by functional leaders are now being escalated to the CFO or even the CEO. These changes occurred at a record pace, impacting our performance during Q2. One of Gartner's core strengths is agility in responding to change. So we're making adaptations to accelerate our performance going forward. With the U.S. federal government, we're ensuring we stay aligned to the changing priorities. especially improving efficiency. Of course, we'll also continue to support critical issues such as cybersecurity, and we're working with our clients to adjust to new procurement processes. We're also adapting to industries impacted by changing tariffs. A portion of our clients are always interested in cost optimization. We have great expertise in helping clients on this topic. Clients highly value our guidance because it results in quantifiable cost savings. Now, with tariff changes, the number of clients interested in cost optimization has increased dramatically, so we've expanded our capabilities, including certifying our client-facing associates on delivering these services. We're also helping clients determine how to optimally reconfigure supply chains for tariff changes. Even industries not directly impacted by tariffs will get strong value from enhanced cost optimization capabilities. We're making several other changes to reaccelerate growth. In research, we redesigned our insight processes to ensure we create content relevant to the broadest possible audience and that delivers the biggest impact. We're also incorporating additional proprietary data to enhance the value clients receive from our insights. We've begun rolling out Ask Gartner, an AI-powered tool for our clients to access trusted insights from Gartner. Ask Gartner has been in development for almost two years to ensure clients get the high-quality results they expect from Gartner. It's based on best-in-class large language models. Ask Gartner quickly breaks down a client's question into topic and intent and provides structured answers through natural language processing. Answers can contain direct references to our distinctive insights. Unlike other AI tools, which provide answers based on public information from the internet, Ask Gartner's responses are fully grounded and are world-class, proprietary, independent, and objective insights. Ask Gartner also provides users with relevant images and recommends follow-up questions, making our insights more discoverable and fully immersing clients in the Gartner platform. Ask Gartner is unique because it marries the power of Gartner insights with AI, and our teams are focused on making sure it gets better and better. We've been testing it with internal teams and a pilot group of clients. One client referred to Ask Gartner as, quote, a game changer for Gartner. Some mentioned time savings of up to 75% on the platform. We're also leveraging AI internally. We've introduced within 50 applications that use AI to improve associate productivity and effectiveness. Finally, we appointed a strong tenured Gartner leader to head up our research organization. We're also making adaptations in sales and services to accelerate growth. We recently launched a new program to better equip client-facing associates with comprehensive knowledge on hot topics, including AI and cost optimization. And we're certifying our associates on these critical topics to ensure a high level of capability. Not all of our clients are aware of the full suite of high value capabilities they're entitled to. So we're training our teams to ensure clients benefit from the full range of services. We're also expanding and refining our sales development program, which we've discussed before. This is an apprentice type program that pairs early career talent with experienced sales professionals. Program graduates then take on their own sales territories and have higher productivity than those hired directly into role. We expect these and other adaptations will get us back to double-digit growth. Gartner's strategy and the foundation of our business is to guide executives on their journeys to achieve their mission-critical priorities. Addressing these priorities usually requires long, complex journeys. Through our high-value proprietary business and technology insights, we guide our clients at every stage of their journeys. Partner insights are derived from a vast pool of highly proprietary data. Every year, we hold more than 500,000 two-way conversations with more than 80,000 executives across every major function in every industry. We learn what they care about most, what's working and what isn't. All this amounts to several hundred terabytes of highly proprietary data. We also conduct more than 27,000 briefings annually with technology provider executives. This gives us unique insights into the technology industry that no one else has. We supplement this data with additional terabytes of information from proprietary surveys, tools, models, benchmarks, and more. Our data is real-time and continuously updated, reflecting the latest information and challenges our clients are experiencing. Our more than 2,500 world-class experts use this vast proprietary data in highly developed processes to create unique and valuable insights. These insights aren't available anywhere else. We know we need to get better every year, so we continually develop new proprietary data sources and constantly innovate our processes. The segment that develops these insights has historically been called research. To better describe the value we deliver, we're changing the name of this segment. Going forward, our research business will now be called Business and Technology Insights, or Insights for short. Summarizing, there are two things I'd like you to take away from today's discussion. First, AI is an important opportunity for Gartner across several dimensions. It's the highest demand topic that we're helping our clients with today. We're rolling out Ask Gartner to provide faster, easier access to our insights, and we're improving internal efficiency with AI tools. And second, we're making adaptations that will give us a clear path back to double digit growth. With that, I'll hand the call over to our Chief Financial Officer, Craig Sapien.

Thank you, Gene, and good morning. Second quarter contract value, or CV, grew 5% year over year. Revenue, EBITDA, adjusted EPS, and free cash flow were better than expected. We remain highly focused on delivering extraordinary value to our clients. The challenging Q1 selling environment, which was affected by Doge and tariff-affected industry spending changes, continued through the second quarter. we are updating our guidance to reflect the Q2 results and the outlook for the balance of the year. With our disciplined expense management, we will continue to deliver strong profitability and free cash flow. Since the end of the first quarter, we've increased the pace of share repurchases. We bought $274 million in Q2 and an additional $282 million since the end of the second quarter. This brings the year-to-date repurchase total to approximately $720 million. we will generate more free cash flow and have fewer shares outstanding over the course of the next several years. This, coupled with return to double-digit growth, will create significant value for shareholders. After reviewing the results for the second quarter and updating the guidance, I will take you through some of the numbers related to our path back to double-digit CV growth that Gene highlighted. Second quarter revenue was $1.7 billion, up 6% year-over-year as reported and 5% FX-neutral. In addition, total contribution margin was 68%, up 70 basis points from last year. EBITDA was $443 million, up 7% as reported, and 5% FX neutral versus the second quarter of 2024. Adjusted EPS was $3.53, up 10% from Q2 of last year. And free cash flow was $347 million, another strong performance. As Gene just highlighted, we renamed the research segment to Business and Technology Insights or Insights to reflect the nature of the value we provide to clients. Insights revenue in the quarter grew 4% year-over-year as reported and 3% FX neutral. Subscription revenue grew 5% FX neutral. Non-subscription Insights revenue continues to be affected by shifts in traffic volumes. Second quarter Insights contribution margin was 74%, up 20 basis points versus last year. Contract value was $5 billion at the end of the second quarter, up 5% versus the prior year. Contract value and CV growth are FX neutral. Excluding the U.S. federal government, CV growth was about 150 basis points faster at around 6%. Global NCVI in the quarter, excluding the U.S. federal government, was positive $13 million. CV growth was broad-based across practices, industry sectors, company sizes, and geographic regions. Across our combined practices, all the industries except public sector grew at high single or mid-single digit rates. Energy, banking, transportation, and healthcare led the growth. CV grew at mid-single or high single digit rates across all commercial enterprise sizes. We drove double digit growth in half of our top 10 countries. CV declined on a year-over-year basis in Canada and Australia, which combined represents around 6% of global contract value. Nearly all of our U.S. federal contracts will come up for renewal during 2025, with over 60% having transacted in the first half of the year. Dollar retention year-to-date was around 47%. At June 30th, we had approximately $200 million of U.S. federal CV. Global technology sales contract value was $3.8 billion at the end of the second quarter, up 4% versus the prior year. Excluding the U.S. federal government from both periods, GTS CV grew about 180 basis points faster, or 5% in the quarter. The U.S. federal business NCVI was negative $26 million. While retention for GTS was 99% for the quarter, excluding the U.S. federal business, while retention was over 100%. GTS new business was down 8% compared to last year. GTS quarter-bearing headcount was up 3% year-over-year. Our 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 second quarter, up 9% year over year. Excluding the U.S. federal government, GBS-CV grew about 60 basis points faster at around 10%. 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 NCVI was positive $14 million in the second quarter. Excluding the U.S. federal government, GBS NCVI was positive $18 million. Wallet retention for GBS was 104% for the quarter. GBS New Business was down 3% compared to last year. GBS quarter-bearing headcount was up 10% year-over-year. As with GTS, our regular full set of GBS metrics can be found in our earnings supplements. Conferences revenue for the second quarter was $211 million, increasing 14% as reported and 12% FX neutral compared to Q2 of 2024. Adjusting for the three conferences which moved from Q1 or Q3 last year to Q2 this year, revenue growth was around 6% FX neutral. Contribution margin was 57%, consistent with typical Q2 seasonality. We held 19 destination conferences in the second quarter as planned. Q2 consulting revenue was $156 million, compared with $143 million in the year-ago period, up about 9% as reported and 6% FX-neutral. Consulting contribution margin was 40% in the second quarter. Labor-based revenue was $110 million. This part of the segment was up 3% versus Q2 of last year's reported and about flat FX-neutral. Backlog at June 30th was $191 million. down about 2% year-over-year FX neutral. In contract optimization, we delivered $46 million of revenue in the quarter, up 26% versus Q2 of last year and 24% FX neutral. A quarter was ahead of our expectations. Our contract optimization revenue is highly variable. Consolidated cost of services increased 4% year-over-year in the second quarter as reported and 2% FX neutral. The biggest driver of the increase was higher compensation costs. SG&A increased 9% year-over-year in the second quarter as reported, and about 8% on an FX-neutral basis. SG&A increased in the quarter as a result of headcount growth. EBITDA for the second quarter was $443 million, up 7% from last year as reported, and up 5% FX-neutral. We outperformed in the second quarter through modest revenue upside, effective expense management, and a prudent approach to guidance. Depreciation in the quarter of $31 million was up 11% compared to 2024. Net interest expense excluding deferred financing costs in the quarter was $11 million. This is favorable by $8 million versus the second 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 Q2 adjusted tax rate, which we used for the calculation of adjusted net income, was 24% for the quarter. This compares to last year's rate of 23%. The tax rate for the items used to adjust that income was 25% for the quarter. Adjusted EPS in Q2 was $3.53, up 10% compared to Q2 last year. We had 77 million shares outstanding in the second quarter. This is an improvement of about 1 million shares or approximately 1% year-over-year. We exited the second quarter with just under 77 million shares on an unweighted basis. Operating cash flow for the quarter was $384 million, up 4% compared with last year. CapEx was $36 million, up about $7 million year over year. This was primarily due to real estate-related costs and in line with our expectations. Second quarter free cash flow was $347 million, up 2% compared with Q2 in 2024. Free cash flow on a rolling four-quarter basis was 119% of GapNet income, and 95% of EBITDA. As we noted previously, there were several items that affect rolling four-quarter net income and free cash flow, including after-tax insurance proceeds in 2024, two real estate lease termination payments, and tax planning benefits last year. Adjusting for these items, free cash flow on a rolling four-quarter basis was 20% of revenue, 83% of EBITDA, and 157% of GAAP net income. At the end of the second quarter, we had about $2.2 billion of cash. Our June 30th 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 $2.9 billion of liquidity, low levels of leverage, and effectively fixed interest rates. We repurchased $274 million of stock during the second quarter. Since the end of June, we have bought back an additional $282 million worth of shares, bringing us to about $720 million year-to-date. Last week, the Board increased the repurchase authorization to about $1 billion. We expect they will refresh the authorization as needed. As we continue to repurchase stock, we create value for shareholders through EPS accretion and increasing returns on invested capital. We are updating our full-year guidance to reflect recent performance and trends. We are remaining agile in managing our cost structure while also ensuring we have enough selling capacity now and in the future. This includes QBH and other sales-related roles, which are key inputs into our algorithm for future sustained double-digit growth. Based on July FX rates, we expect revenue growth to benefit by about 95 basis points and EBITDA growth to benefit by about 190 basis points for the full year. As a reminder, about one-third of our revenue and operating expenses are denominated in currencies other than the U.S. dollar. For the Insights subscription revenue in 2025, our guidance reflects an expectation that Q2 trends for new business and retention continue through the second half. At this point in the year, we have very high visibility into the Insight subscription revenue for calendar 2025. 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. While the selling environment remains challenging and we've seen longer sales cycles, we entered Q3 with double-digit year-over-year growth in both GTS and GBS new business pipelines. For the non-subscription part of the insight 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 at the 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. Contract optimization has had several very strong years and the business remains highly valuable. Our updated 2025 guidance is as follows. We expect insights revenue of at least $5.255 billion, which is FX neutral growth of about 2%. This reflects subscription insights revenue growth of about 4%. We expect around $210 million of non-subscription revenue. We expect conferences revenue of at least $625 million, which is FX neutral growth of about 5%. This is unchanged from last quarter. We expect consulting revenue of at least $575 million, which is growth of about 1% FX neutral. This is also unchanged from last quarter. The result is an outlook for consolidated revenue of at least $6.455 billion, which is FX neutral growth of 2%. We now expect full-year EBITDA of at least $1.515 billion, down $20 million from our prior guidance. This reflects margins of 23.5%, consistent with last quarter's outlook despite the lower revenue guidance. We expect 2025 adjusted EPS of at least $11.75, an increase from last quarter. For 2025, we expect free cash flow of at least $1.145 billion. This is unchanged from our prior guidance and reflects a conversion from gap net income of 141%. Our guidance is based on 77 million fully diluted weighted average shares outstanding, which incorporates the repurchases made through the end of the second quarter. For Q3, we expect adjusted EBITDA of at least $300 million. Our financial results through June were modestly ahead of expectations, underscoring the resilience of our business model. We've updated the revenue guidance to reflect continued challenges in the selling environment. Our EBITDA margin outlook remains higher than it was at the start of the year. We have successfully navigated challenging environments before and know the right things to do. We are adapting by making operational changes and renewing focus on leveraging our proven sales best practices. This will drive the return to historical levels of productivity. Some of the headwinds are related to temporary external factors, including U.S. federal government and tariff-affected industries. As productivity gets back to historical levels, we will accelerate QBH to capture the very large addressable market opportunity we have. Before we go to questions, I will take you through some of the numbers related to our path back to double-digit CV growth. If recent retention and new business trends continue in the second half, we would exit this year with CV growth in the low to mid-single digits. This reflects DOES, tariff-affected industry dynamics, and tech vendors only part of the way back to normal spending. There are four primary categories which will drive the return to double-digit growth. First, most of our US federal contracts will have come up for renewal this year. Removing the DOES-related headwinds with no assumption for net growth next year will add back around 200 basis points of CV growth in 2026. Second, As companies and tariff-affected industries get more clarity around trade policies, we expect them to get back to normal course planning and spending. This should add at least 100 basis points to growth. Third, tech vendor remains on a path back to double digits. We are encouraged in particular with the improvement in the small tech vendor part of the business. Within large tech vendors, the overall trend remains positive. The second quarter was affected by the timing of a few larger deals getting delayed and tariffs affecting some parts of the hardware subsegment. Continued reacceleration of tech vendor CV would add back another 100 basis points to growth. Finally, we are focused on improving our operations to drive faster growth, even in challenging selling environments. This includes more focus on cost optimization insights, the continued rollout of Ask Gartner, the initiatives Jean discussed, and more. We expect to add as much as 100 to 200 basis points to growth from these initiatives and better overall execution. All these factors would get us to at least high single-digit growth in 2026, well on our way back to double-digit growth in 2027 and beyond. Another take on the opportunity is to recognize that as the sales teams return towards historical levels of productivity, we will return to double-digit CV growth. With around 5,000 sellers, we can generate enough NCVI to grow high single to low double digits next year. This is the case without growing QBH and even at productivity levels lower than the historical $110,000 to $120,000 per seller. We are implementing programs to support the sales teams, to drive client and prospect engagement, and to grow our sales and sales support teams outside of direct frontline quota-bearing headcount. Based on recent trends, as I mentioned, CV growth this year will be in the low to mid-single digits. With the adaptations we are making and with the stabilization of our most acutely impacted end markets, we expect growth to accelerate next year and again in 2027. Based on this outlook, our overall medium-term growth algorithm, including double-digit revenue growth and modest margin expansion remains unchanged. We'll also 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?