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

This call is not for media representatives or Bank of America Securities investment bankers or commercial bankers, including corporate and commercial FX. All such individuals are instructed to disconnect now. A replay will be available for Bank of America Securities investment bankers and commercial bankers, including corporate and commercial FX. The replay is not available to the media. Good day, and welcome to the Information Services Conference Gartner fireside chat. Today's call is being recorded. For opening remarks and introductions, I'd like to turn the call over to Gary Bisbee. Please go ahead, sir.

Thank you very much, and welcome, everybody, who's dialing in and listening on the webcast. I'm Gary Bisbee. I cover business and information services space here at Bank of America. We're happy to have the management team of Gartner here and have you all for, I guess, what's now, we should call, the Bank of America Virtual Information Services Conference 2020. From Gartner, we have the CFO, Craig Safian; and David Cohen from Investor Relations. I'm going to turn the floor over to Craig for a quick opening remark, and then we will get into the questions. Due to the sort of format of the call, we're not going to have people be able to ring in. So to the extent you have questions, please e-mail or [ Bloomberg ] them to me, and I'll do my best to get through all of those requests during the time we've got here. So with that as the intro, Craig and David, thank you for participating. And I'll turn the floor over to you.

Thanks, Gary, and good afternoon, everyone. I just wanted to give a very brief sort of high-level introduction of Gartner before we jump into the detailed questions from Gary. So at the highest level, Gartner is predominantly a syndicated information business. And the way we serve our clients is essentially for every major functional area in the enterprise, whether it's IT, which we're best known for; HR; finance; supply chain; marketing; sales; legal; all your major functions, our goal is to understand the mission-critical priorities of the executives and leaders in those functions and help them actually accomplish them. And the primary way we do that is through our syndicated information business. And so if you look at our total revenue base, about 80% of our revenues come from our Research business. And if you think about the simple way to define the value proposition of what we do for our clients, well, I boil it down to really 4 elements. Number one, and this is helping them on their most important priorities, we save time. We help them get to the best decisions, whether it's the right application, the right strategic planning process, the right decision or operating framework, whatever it may be, we save them time. We also save them money. We can actually help them negotiate purchases of applications, of software, of cloud services, whatever it may be, because we know so much about the market, we can actually help them save real money. We help them gain resources. Most companies can't afford to have hundreds of additional experts on SaaS, but when you have a Gartner subscription, you're actually gaining resources. And lastly, we help them gain confidence. The Gartner stamp of approval is often very much appreciated from CEOs, other C-level executives and Boards. So again, 80% of the revenue comes through that Research business, 11% of our revenues roughly come through our Conferences business and about 9% come through our Consulting business. We're a growth company. We've been a growth company for a very long time, and we expect to be a strong growth company into the future. So with that, Gary, happy to now take your questions.

Yes. Thanks for that overview. So given the news of the day, I think it makes sense to start with just asking about potential impact from the coronavirus situation here, both on your Conferences business and, more broadly, the company overall. Now you put out -- issued a release earlier this week quantifying the impact on Q1 from events you've canceled. So maybe that's a good place to start. The question I've gotten most since that release is, can you just help us understand the economics of a canceled event? How does that work? What costs are you still left with? What costs can you get out of in that scenario? And how do we think about how that impacts the business model?

Yes, sure. Absolutely. So when you kind of zoom back and look at the overall Conferences business, it's important to understand that we do have certain costs related to the business that are not specific to any one conference. So think about our sellers, marketing costs. So the marketing people and the marketing programs, to some extent, and all of our people who actually have to deliver the conferences. And so those costs are essentially fixed. And regardless of what's happening in the market right now, and we have canceled conferences and we can talk about that a little bit later, our full expectation is that when the environment does improve, we're going to go right back to delivering world-class conferences for our clients and prospects. Then we have costs that are specific to conferences. And so these are the costs you'd imagine like the actual space or the venue, food and beverage, audiovisual. Some portion of these costs are fixed rather and others we're actually able to either reduce if we cancel or defer an event or apply to a future conference. It's really almost on a conference-by-conference basis, the situation is different in each conference. It depends on the amount of business we do with a certain venue or the amount of leverage we may have or the relationship we may have with the vendors. And so we're working through all of that with the conferences that we did have to postpone or cancel in the first quarter. The other point to mention is, when we present our Conferences business contribution, that does not include sales costs. And so we do have sales teams that sell both tickets for attendees and sponsorships for exhibitors that fit within the SG&A line on our overall P&L. And so when you kind of then boil that all together, the net result is that there are some costs, and it's not an insignificant amount of cost that we incur, whether we run the conference or not. It's a great business for us. It's under, obviously, pressure at the moment, and it's clearly an unusual situation. But again, we want to make sure that when we do come out of this, we are ready to be able to continue to run these conferences and drive real value to both the attendees and the exhibitors that come to our conferences.

That's helpful. And as we look beyond Q1, if I read the release right, you've canceled events through the end of Q1. But clearly, this looks like it will go beyond that. Q1, I think, is a seasonal low point for conferences. The good news is Q4 is most of the revenue and profit, but Q2 is the more important quarter, I guess. Is proportionally the impact that you called out for Q1 -- would that be a good guide for Q2? Or is there some other moving parts around ability to pull cost out or other costs that one might expect if we wanted to think about this persisting longer?

Yes. So a couple of thoughts there. One is seasonally, historically, Q1, Q3 are the 2 smallest quarters, Q2 medium quarter. And as you point out correctly, Q4 is by far the largest quarter. If you also look at the -- our conference calendar, you'll note, April is pretty light, and the bulk of the conferences that we actually have on the calendar for Q2 occur in May and June. So we do have a little bit of time to make decisions on that. And we're watching it every day. We have meetings on it every day. We will do whatever the right thing to do is by our associates in terms of keeping them safe and healthy, our clients and everyone involved. As of today, we're still looking at running that schedule, but we continue to reassess it each and every day. As you think about the economic impact, again, I would consider -- or the potential economic impact, I would consider typical seasonal revenue mix for Q2. And then the one thing I'd say is we went through kind of line-by-line on the previous question around what can we reduce or defer and what are we stuck with. The one thing I would say is the longer the runway we have between making the decision and the actual schedule of the conference, the longer we have, the more time we have to actually impact favorably the amount of cost that we end up incurring in that quarter. So we continue to look at it. And as we have changes, we'll report that back out to investors.

Great. If I could shift to the Research business, probably the second most asked question I've got in the last couple of weeks is how important are the events and holding the events for driving new subscription sales for the Research business? Obviously, we know the one supports the other, but should we think that a meaningful amount of new sales come from the conferences? Or is that not really a fair statement?

So conferences are definitely a part of our value proposition from a prospect conversion perspective. What I'd say is conferences definitely contribute to our new business, but they generally represent a pretty small portion of the gross new business dollars we generate in any year. But we are not just sitting by and letting these things happen. We are trying to make -- or we are making an experience for conferences that have been canceled, whether it's doing the one-on-ones with our analyst and advisor day schedule, doing them virtually. We're looking at ways that we can actually deliver the content that we had planned to deliver at these conferences virtually. So there will be opportunities for us to consistently and continuously engage with both clients and prospects, anyone who is set to be an attendee at a conference that ends up getting canceled or postponed. So they don't get nothing. We're definitely -- we're working very hard to make sure that there is some value and engagement derived, even if the conference doesn't physically run.

And just one last question on the coronavirus before we move on to the more -- arguably more important stuff. I guess, with the Research business driven by annual subscriptions and your salespeople out all year long meeting with clients, how much impact could delays in sales meetings and engagement amid the travel restrictions, clients working from home, et cetera, quarantines, if we get there in parts of the country, should we think that, that has the potential to meaningfully impact bookings or sales in Research? Or given that we're fairly early in the year, a lot of this stuff comes online on a calendar year basis? Would a reasonable expectation be you thought you could make that up?

So I think about it a couple of different ways. So first off, we do have a pretty large segment of our sales force that calls on, we call it, Midsize Enterprise clients, so clients with roughly under $1 billion of revenue. And they are essentially a telesales channel. And so we expect minimal disruption from that perspective, because they've always sold over the phone. They've always talked to clients and prospects over the phone, and they're continuing to do that. The other, I think, good thing is, broadly speaking, our field sales teams, so these are our account executives who are calling on $1 billion-plus revenue clients, for the most part, they are -- they live where the clients are. And so if you are serving clients in Boston, generally, you're located in Boston, same thing in Chicago, same thing in London and so on. And so there's not huge amounts of travel involved for a large portion of our sales force. They are actually -- they live and work in the same geographic area where their clients are. And so if their clients are open and accepting visitors, we can continue to meet in person. The other thing I would say is we actually deliver a lot virtually. And so I mentioned the Midsize Enterprise sales team. Essentially, all of our research analysts interactions, whether it's inquiries, doing proof of concepts as a part of the sales process, that is all done virtually and has been done virtually for a few years now. And so we're flexing muscles that we're very comfortable flexing and that we've done for a while. One example I'll give you is China. And in the China market, because of government regulations, offices have been shut down for several weeks now. So our offices have been closed and our clients and potential clients offices have been closed. But the sales team continues to work, work real hard and set up meetings and make sure our clients are engaged and getting value and make sure that we are pitching the value proposition to new potential clients. And so the business has not stopped there. It's probably a little too early to really see or feel what the full impact is going to be. But to date, we've seen continued activity, continued engagement, it's just happening in slightly different ways.

Okay. That's all very helpful commentary. If I could shift back to the business, aside from the short-term coronavirus questions. Coming out of your last call and the 2020 guidance, the thing I still struggle with the most is just understanding the Research revenue growth guidance of 9.5% relative to the year-end contract value exit rate of 11.7%. Attempting to pull out M&A in the past, it looks to me like the largest deceleration from CV to the next year revenue in a decade -- and you clearly called out the runoff of some noncore and less profitable revenue within marketing, expectations for slower nonsubscription revenue and a bit more challenging operating environments in a number of markets. That obviously is probably worse since the guidance with the coronavirus. But if those were 3 primary issues, can you size any of those or maybe at least help us rank order which ones you think have the biggest impact in 2020 on the Research revenue growth?

Yes. So I think taking a step back for a moment, when we went into developing the plan and putting in place all the operational planning for 2020, one of our primary objectives was making sure we were aligning our expectations with investor expectations. And so that was kind of a super key theme for us as we were developing all of our operational plans, including through to the guide for 2020. If you kind of then zoom in, generally speaking, the difference between ending CV growth and revenue growth and why there could be some differences, first is, we have tickets that are a part of the research contract, which are in contract value because it is part of the contract, but they actually flow into the Conferences segment from a revenue recognition perspective. Second big thing, as you alluded to, is the nonsubscription research revenue, which isn't part of CV. And then the third is the way attrition and new business flows over the course of the year. And then the last thing I'd say on the guide is we also wanted to make sure we built in known risks and left a little bit of room for unknown risks as well.

Okay. When I think about a more difficult operating environment, both that you called out in a couple of countries and that we've seen evolving recently, I think back to 2 periods of slowdown in CV growth in the core technology business. 2013, when Europe double-dipped, that caused some moderation in growth. And then in 2015, when we had the oil market sell off and, obviously, some difficulty selling in energy mining companies in a couple of exposed geographies. In both cases, we saw several quarters to sort of a year of a bit more moderate CV growth and then reacceleration thereafter. I know there's a lot going on within the numbers right now. But do you see -- some of the things you called out, and let's leave coronavirus impact out of the question and answer, but do you see sort of a similar phenomenon going on today? Or are there any meaningful differences in the drivers of the deceleration that the guidance implies versus one of those periods where it got a little tougher, but then you were back on track at your prior growth rates, actually accelerated both times, once you got through that couple of quarter period of more challenging environment?

Yes. So again, kind of coronavirus aside, we ended 2019 with our GTS business at 12.3% year-over-year growth, which objectively and unobjectively is pretty strong growth. When we look at the market opportunity across both GTS and GBS, we still have tremendous conviction in that market opportunity. And so our conviction in that market opportunity is unchanged, whether we look at it by sector, size or geography. And while we don't provide near-term contract value guidance, we do have medium-term guidance of 12% to 16% growth for both GTS and GBS and what we very firmly believe to be a very long runway for growth. The only change in the business today compared to the times in '13 and '15 that you referenced is that we serve many more enterprise functions today than we did back then. But to be frank, we're significantly underpenetrated from a market opportunity perspective in all those functions. And so, again, we still believe 12% to 16% growth for both GTS and GBS over the medium term is there for us to get based on that market opportunity.

Okay. That's helpful. And so the other thing that I struggled with a bit coming out of the quarter and then I've heard from investors about is, I think, clearly, the market appreciates the commitment to flat or improving margins this year. But the slowdown or deceleration in sales headcount growth that you've called for just has me feeling like you're slowing expense growth to deliver flat margins. And given the significant amount of spend in the last 2.5 years to both put CEB on better footing and to accelerate growth across your business, it feels like you should be able to deliver flat margins because of getting a return on that significant investment in sales heads over the last couple of years, particularly given that chart you've shown in the past that shows year 2 and then year 3 productivity improved meaningfully from year 1. So is that right that part of the slowdown is to deliver flat margins? And -- or if you'd rather -- I think maybe the bigger issue is, why aren't we seeing in the numbers a bigger return on the significant investment over the last couple of years?

So I think you've articulated it mostly right, which is we have made consistent, significant investments behind the business, particularly over the last '17, '18 and first half of '19. And what I would say is the rationale for modestly slowing down -- and so we are continuing to invest behind the business, just not as at -- as a fast rate as we have done previously. It's really to make sure that we are getting returns on those investments and we are driving productivity and we are getting cohorts within the sales force moving up that productivity ramp for -- that you mentioned. And so I think what we're doing is, I'd say, 2 things. So one is heavy investment. Now we want to focus on making sure while continuing to invest that we actually get returns on those investments over time. Two, I do think it's important to remember that there are 2 levers that drive our contract value growth. One is sales headcount and the second is sales productivity. And if you look at GBS as an example, while we've improved sales productivity significantly there, at the year-end, we were still at roughly 2/3 the productivity that GTS does. And so we've got to make sure we continue to close that gap as well. And so again, it's all about making sure that for the investments we've put in, we can actually drive really nice consistent returns out of them. And again, it's not a 1-year game for us. It's obviously a compounding gain that we're looking to get or return into the future as well.

Okay. And the productivity initiatives that you called for that were part of the reason for somewhat more moderate headcount growth at GTS. And my understanding, but you can correct this if this is not accurate, was that as of right now, you're thinking that as sort of a onetime opportunity and you might -- you would then likely reaccelerate headcount growth in the next year to maintain the long-term growth framework you target. But what is the risk that we see growth decelerate next year because of the lower investment this year? Or the other side of that would be that it's a 1-year margin stabilization period, but then declining again if headcount increases next year to get back to the historical pattern. Is it -- I know you give no guidance on next year, but it strikes me that those are the levers that if you've got to spend more, that becomes a margin headwind. And if you spend less and hire less, historically, that would have meant slower growth. Any thoughts on how to frame that?

No, I mean, you've framed the puzzle very well. And so what we are operationalizing is finding the balance between continuing to add selling capacity, meaning adding more salespeople, refining the way we recruit, hire, train and deploy them to drive productivity out of that and also driving productivity improvements on the productivity measure that we measure ourselves against internally and we -- you, as investors, measure us as well. And so it's a multivariate equation, and we are tweaking and tuning all the dials associated with essentially those 3 levers. And we believe that the innovations and improvements we're making around the way we recruit, the way we deploy territories, the way we train and then the way we get people deployed into the field, that will yield benefits for us. We believe the investments we've made and continue to make in the tools that our sales force has will help drive productivity. The investments we're making in improving our products or the innovations we're doing in terms of improving the products will help retention, which flows through to productivity. And so it's really about making sure that the multiple levers that drive contract value growth that we are essentially attacking each and every one of those. And some of those come with incremental cost, which, obviously, growing the sales force is probably the largest investment we've continually made over the last several years. And some of them come with corresponding either productivity cost or a combination of both benefit. And so again, for us, this is all about finding that right balance between those 3 levers.

Okay. And then one of the most asked questions coming right out of your last quarterly call was this concept of were you -- the change in presentation of the medium-term growth outlook for revenue. Was that a change to 10%-plus from the prior 10% to 14%? Can you clarify if you meant that as a change in the outlook? Or should we think of it as more just a change in presentation?

Solely -- it's both. It's interesting that, that's gotten so much attention. There's no change in the size of the market, the -- our client value proposition, our ability to execute. We simplified. Our belief was the math for consolidated revenue didn't change since we didn't really change the medium-term segment outlooks. And so our view was it was surely a presentation change, not a substantive or not even a material change. It was just a presentation change. And I guess the one thing I'd add, sorry, Gary, is I think that's obviously gotten a lot of attention. I think what got less attention is what we've clarified around EBITDA expectations and free cash flow expectations. And again, we fundamentally believe that driving free cash flow is what matters most to the value of the company over time.

That's a good segue to the next question, which was free cash flow generation improved nicely in 2019 and the guidance for 2020 calls for good year-over-year growth this year. And so with leverage down solidly and below 3x after having gone a lot higher to fund CEB, I guess, how are you thinking about capital allocation from here? And does the recent share price weakness play into the thought process around how aggressively you'd consider share repurchases?

So our leverage, as you mentioned, kind of right around 3x, we'll get over. But we will continue to be responsible stewards of all our sources of capital. Our long-term capital allocation strategy remains the same. We deploy our free cash flow by returning capital to our shareholders through our buyback programs and through strategic, value-enhancing M&A. We'll continue to be opportunistic and price-sensitive. And we want to be responsible. We want to be flexible. And over the medium to long term, that capital allocation strategy has been the same for several years, and we expect it to be the same going forward.

And as I think back over the financial performance of the company for 5 or 6 years, more actually, but really 5 or 6 prior to CEB, you consistently delivered low double-digit revenue growth, flattish margins as you invested in growing the top line and salespeople and the product. But you levered that 10%, 11%, 12% revenue growth into mid-teens or better EPS pretty consistently through aggressive share repurchases. I understand there also was some bolt-on M&A during those years. But is there any reason that in the next several years that we wouldn't go back after a couple of sort of nontypical or different looking years to that kind of a model as a baseline? Or is there any reason that, that might not be a reasonable way to think about the next few years?

Yes. So what you described, we love that. That was a great formula and especially a formula that delivered a lot of value over that time period. But when we kind of look at the last couple years, so, in 2017, we bought and integrated CEB. In 2018, we started rolling out the new GxL products. And we divested a significant number of noncore businesses. In 2019, we ramped up, and we saw the acceleration in GBS. Throughout that time, we also continued to make sure we were investing in GTS and Conferences and saw great growth in both. Entering 2020 before the -- this coronavirus situation hit, we developed a plan to get us back to our long-standing formula. Right now, there's obviously more certainty in the world. But we feel good, because we're in a great position to help our clients in a time when they need us more than ever. And we do believe, as we talked about upfront, when this does abate, we'll be in a position, specifically from the Conferences business, but across the board, to get back after that formula that you just described.

Great. And maybe I'll ask one more, and then we'll let you go. You commented earlier about the approach you took to developing your operational plans and guidance for 2020. And I also heard a comment that you factored in known risks and some room for unknown risks. Again, before whatever coronavirus does, is it right way to interpret those 2 statements that maybe you've built in a little more conservatism than the way you formulated the initial plans the last couple of years?

I guess, what I'd say is we wanted to make sure that our expectations and what we were set out to deliver were aligned with investor expectations. And we also wanted to make sure that we weren't going to be in a position where we had to adjust our guidance as we progressed through the year. And so we built what we believe to be a really strong operational plan for 2020. That was reflected in the initial guidance. Obviously, as we press released and as we discussed a little bit earlier, we are dealing with some anomalous things in the market right now. But we built what we believe to be a really strong plan, and we were well positioned to go deliver on that.

Excellent. Well, Craig and David, thank you very much for your time. We appreciate your participation despite the crazy times out there and the shift to a virtual model. And so thanks again and stay safe, be healthy.

Thank you, Gary. Thanks, everyone.

And that does conclude today's conference. We thank you for your participation. You may now disconnect.