Gartner, Inc. (IT) Earnings Call Transcript & Summary

Okay. Let's go ahead and get started. I'm George Tong. I cover Business and Information Services at Goldman Sachs. I'm very pleased to be joined by Craig Safian, CFO of Gartner. Craig, thank you for being here.

My pleasure. Good morning, George. Good morning, everyone.

So let's start at a high level. Some investors here may be newer to the Gartner story. Craig, could you provide just a brief overview of what Gartner does and what your client value proposition is?

Sure, absolutely. So the Gartner has been in business since 1979, and we really got our start providing technology, research. And back in 1979, that basically meant covering IBM. And obviously, there's -- the technology world has expanded significantly since then. So in 2019, we did around $4.2 billion of revenue. We essentially go-to-market with 3 distinct business segments: Research, which represents about 80% of our business; Consulting, which represents about 9% of our business; and Conferences, which represents about 11% of our business. And ultimately, the biggest part of our business Research is a -- it's a subscription-based recurring revenue business. And in essence, what we do is we provide research and insight and advice and tools and templates that help business executives across every enterprise function accomplish their most important mission-critical priorities. And Gartner obviously started, as I mentioned, serving IT professionals, so think Chief Information Officers and their teams. In 2009, 2010, we got into serving Chief Supply Chain Officers and their teams. In 2012, organically, we launched a suite of products serving Chief Marketing Officers and their teams. And then in 2017, we bought a company called CEB, which allowed us to get into essentially every other enterprise functions. So think HR, finance, legal, sales, et cetera. And so today, we are serving essentially every enterprise function. IT being by far the largest since that is our heritage. But in each of those functions, we are selling annual subscriptions to individual seat holders and our whole reason for being is to help those executives and their teams accomplish their most important mission-critical priorities over the life of the contract. And the way we think about it is at a relatively low price point. And so the least expensively, you can buy into Gartner is for a what we would call reference seat where you have read-only access to everything, think in the range of about $20,000 per year. For about $40,000 a year, you get that plus the ability to talk to one of our research analysts whenever you like. And then as we move up the executive chain, we have higher level premium offerings for like Chief Information Officers, where you'll have a dedicated service person who often will have been a former CIO in one of their -- in their previous career. And again, those products can range from $100,000 per year up to about $150,000 per year. But in each of those, the core reason for being is to help those executives with their most important mission-critical priorities.

Right. So the sustainability of Gartner's growth is dependent on its ability to penetrate the markets for IT and non-IT research. Can you talk a little bit about your addressable market? How much of that market remains underpenetrated? And this is a question that I get asked often by investors. How mission-critical would GBS solutions be compared to GTS? And can GBS similarly have such a large opportunity ahead of itself?

Sure. So the way to think about our market opportunity and the way we've thought about it is we're selling to individuals and enterprises. We're ultimately selling to individuals. And we have an estimate, in each of the functions in which we sell to, in each of the geographies in which we sell to in all the different size clients, we potentially sell to of the number of users in each of those segments. And so we essentially come up with a quantity of potential users in each of the enterprise functions. And then depending on their level, we have an average price point per product. And so it's more complicated than this, but it's essentially a P-times-Q calculation to come up with the total addressable market. When we ran the math last year, and we have not updated it since we estimate there was about a $198 billion market opportunity across all the major functions. IT was about $55 billion of that, but then each of the individual -- additional functions like sales and marketing and finance and HR make up the balance to get to that $198 billion. So even in IT, which we've been at for 30-plus years, where we've got really nice scale, and yes, we closed 2019 with about $2.8 billion of contract value of the $55 billion, we're very, very, very lowly penetrated. And in the other enterprise functions that we serve through our GBS sales force, we have even lower penetration. And so our firm belief is that through continuing to grow our sales force, through continuing to drive the productivity of our sales force, that's the way we capture that market opportunity. And the other way to think about the market opportunity is it's not just net new enterprises. We have consistently grown or expanded within existing accounts. And in fact, on the GTS side, traditionally about 2/3 of our gross new business growth has come from further penetration of existing enterprises, 1/3 of that gross new business growth has come from brand-new logos, and we expect that to continue as well. And so it is a combination of growing sales force, driving sales force productivity, expanding within existing accounts and finding new logos. And given that the opportunity, at least in our view, is so expansive, we feel like we can do that on the GTS side for a really long time, and we're even earlier innings on that on the GBS side. Now for your question on, is the research as mission-critical on the GBS side as it is on the GTS side. I would argue, yes, absolutely. And here's the way we sort of think about it. So we've done a great job on the GTS side, consistently growing at double-digit growth rates, really strong retention levels, super strong wallet retention levels. And again, consistent expansion of our business through new logos and our growth through existing enterprises. And we wouldn't be able to do that if our stuff wasn't great, right? And mission-critical. On the GBS side, with our new product set, which we call GxL. So Gartner for HR leaders, Gartner for finance leaders, Gartner for marketing leaders, we believe that the product set as constructed has as much value as it does on the IT side. And our early returns on that when looking at usage rates and retention rates on our GxL products that have come up for renewal is they're roughly on par with what we've seen on the GTS side. The other thing I'd say is that the uptake of our new products has been really strong as well. And so the market -- at least the market -- the portion of the market that we're speaking to right now has embraced the GxL products. And they wouldn't sign up for a $50,000 year contract or $100,000 year contract if they didn't feel like the value proposition was actually mapping to stuff that was really important to them. And as we've gone through renewal cycles, we've seen essentially roughly same stickiness with clients.

Got it. So staying at a high level, Gartner recently modified the way it presented some medium-term financial targets. It used to target 10% to 14% revenue, EBITDA, free cash flow growth, and now it's basically revenue growth of greater than 10%, greater than or equal to. And EBITDA growth greater than equal to revenue growth and free cash flow growth greater than equal to EBITDA growth. So what motivated this change? And is your view on your medium-term targets in any way altered from what it was before?

No. So it's the same view and greater than equal to 10%. We were just trying to simplify the way we talked about and presented. Nothing has changed on our view on the market opportunity. Nothing has changed on our view on how fast we can grow. 80% of our business, which is the Research business of GTS and GBS. And so it's just -- it's pure simplification. We have the same conviction in the market and the same conviction in our ability to go capture that market. So we believe that, again, if you kind of flow through the entire medium-term guidance that we can consistently grow our top line at double-digit growth rates. We can grow our EBITDA at the same rate or potentially a little bit faster. And we can continue to generate great free cash flow and great EPS returns for our shareholders as well.

Yes. Got it. You've historically grown your sales force double digits and CV growth in your Research business has essentially matched that level of growth. Over the near term, however, you're scaling back your sales force growth. What's motivating this slowdown near term in terms of sales force headcount growth? And has anything structurally changed in terms of how you go-to-market within your Research business?

Yes. No, it's a good question. So the way we think about overall contract value growth, there are 2 primary levers that drive the contract value growth: growing our headcount and driving productivity. And we believe that the combination of growing our headcount and driving productivity can consistently drive contract value growth in the medium-term objective ranges that we've laid out. I think for 2020, we have reviewed that in 2018 and the first half of 2019, we invested ahead of our top line growth rates. And all we're doing is trying to get a little bit better alignment between our cost growth and revenue growth, but we are continuing to invest in each of our businesses. And so we talked about this on our earnings call a couple of weeks or last week. We're still targeting high single-digit headcount growth in GTS. So it's not like it's going from 13% to 0. It's going from 13% or 14% to 8% or 9%. And similarly, with GBS, where we've invested so much over the last 3 years, we are taking the opportunity to digest that growth, drive real productivity around all the investments we've made, and we said mid-single-digit growth for GBS. And so we continue to make sure we are seeding both of those businesses and both sales forces with growth to support future growth, but we also want to focus on that other lever, which is sales productivity as well.

Right. And then related to productivity, of course, is margins, and then, again, staying sort of high level. If you look at your medium-term target, your expectations are for EBITDA growth to be at least revenue growth, which implies flat to expanding margins. Your definition of medium term is 3 to 5 years. So between now and year 3, what could potentially cause margins to decline further? And are there any catalysts that can drive margins higher?

So our view is, given the market opportunity and all the things we talked about and given that we are continuing to invest in future growth that we can drive nice double-digit top line growth with at least 16.1% EBITDA margins. And we are committed to -- absent any crazy global macroeconomic changes that impact everyone that at a minimum, stabilizing those EBITDA margins. As we pivot to the future and think about what's possible from a margin perspective and which of the margin profile of the company look like, our view is, let us stabilize margins first, and then we're happy to have those conversations. But let's stabilize margins first, which is essentially what the outlook for 2020 does.

Right. So basically 2019 is the low watermark for EBITDA margins?

I wouldn't necessarily frame it that way, but we believe, yes. So we do believe that 16.1%, we want to be at least 16.1% or potentially better.

Got it. Okay. So if we dive into some of the contract value performance, GTS CV growth in 4Q did moderate to about 12% change from low to mid-teens growth earlier. To what extent would you say this moderation in GTS CV growth reflects IT spending pressures?

I don't think it does at all. So first off, we've created a pretty high bar, by which we measure GTS contract value growth. And so 12.3% is still very good. We did see a little bit of a slowdown in the second half of 2019. As we talked about on the call, there were 3, 3 to 4 kind of big drivers that impacted that growth rate, again, and 12.3% is still very healthy. And so no, when we look at IT spending and our IT spending forecast and both our internal view and external views on IT budgets and things of that nature, they still seem relatively healthy for 2020. And we fundamentally believe that even if that weren't the case, we can still grow our business because we can help our clients. If they're in a flat budget scenario, we can help them find cost in their existing operating budgets so that they can invest in the digital transformation initiatives that they need to do or the upgrades they need to do or the move to the cloud that they need to do. And so we fundamentally believe that we can grow in tougher environments, whether it's related to macroeconomic, geopolitical or IT spending. But the outlooks for 2020 are fine and should not provide any sort of impediment to our growth rate.

You mentioned 3 or 4 headwinds to the GTS business. One of those headwinds is changing how you sell to smaller technology clients. Why does it make sense to sell to these clients, if they're less economical? What are some of the changes you're making? And when do you expect some of these headwinds to lap?

Yes. Well, so it's a small segment of our overall market opportunity and our overall business. However, it had provided really nice growth in -- particularly in 2017 and 2018. Starting in 2019, we changed the way we were selling. And so at a very high level, what was happening is, we were able to generate really nice growth selling and then we had trouble retaining and -- or collecting, or any sort of negative things were happening that look good when it came in and hurt us when it came time for renewal. These still represent really good opportunities for us, and we can provide a lot of value to these clients. So what we've decided to do is essentially carve off that piece of the business and sell it and service it in a different way. I'll give you a couple of different examples of what we're doing. So one thing we're doing is requiring full upfront payment. We're requiring -- or strongly encouraging multiyear contracts. Just doing things that insulate us from some of the challenges we had with that business as we ramped it up pretty significantly in 2017 and 2018. The second thing we're doing is we've created separate selling and servicing function for that contract value because these clients are just different, structurally different than the rest of our client base, and we want to treat them as such. And then the third thing I'd say is we do start to lap those changes in the first half of 2020. So it provided a little bit of a headwind for our growth rates in 2019. Economically, it was beneficial for us or will be beneficial for us going forward, and we start lapping those in 2020.

Right. You recently had leadership changes in the sales force in Germany and India, that was one of the other factors that weighed on near-term GTS contract value growth. Can you talk about some of the KPIs that you're seeing with those new leaders? And how long it might take for them to get back to the productivity levels from the leaders that recently lost...