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

Hello, and welcome to everyone joining the webcast today. My name is Andrew Nicholas, and I'm the research analyst covering the information services, consulting and HR technology sectors here at William Blair. Before getting started, I am required to inform you that for a list of -- a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com. With that out of the way, I'm very pleased to welcome Gartner's Chief Financial Officer, Craig Safian, to the 40th Annual William Blair Growth Stock Conference. Thank you very much for joining us.

Thanks for having us, Andrew. We appreciate it.

As I think we talked about ahead of time, I was just hoping you could start us off by taking a minute or 2 to just give a quick snapshot of the business, just that everyone on the webcast is on the same page. And then from there, we can move into some of the more specific topics relevant to the current environment.

Happy to and happy to spend as much time on this or on Q&A as you'd like. So just to start, thanks for having us, number one. Thanks, everyone, for joining us on the webcast. I'm required to let you know that we do have forward-looking comments. I'll leave it at that. You can read this at your leisure. And of course, the other thing I'd mention is all of our non-GAAP reconciliations, you can find on our Investor Relations site. So wanted to give a quick high-level view of Gartner. So Gartner at its highest level, we provide research, insight and advice to functional leaders across the enterprise. And in these unprecedented times, functional leaders around the world, across the enterprise, large and small, need help. They need insight and advice. Today, we have around 16,000 associates serving more than 15,000 client enterprises globally. We do business in around 100 countries around the world, and we're in just about every major country you can imagine. The business, we go to market and we operate in 3 business segments. In a normal environment, about 80% of our revenue comes from our Research business, 11% from Conferences and 9% from Consulting. The Conferences and Consulting segments are aligned with and are built to support the Research segment. As you likely know, Conferences has been significantly impacted by the pandemic, and we've adjusted our outlook in our business to reflect on that. And I'm sure we'll cover that a little bit later, Andrew. I just want to spend a minute on what Gartner Research actually does. Many people equate Gartner Research with a buying decision, and they'll say things like, "Well, I'm not buying any software this year, so I don't need Gartner." Buying decisions are an important part of value proposition. But that's really just scratching the surface of the overall value that we deliver to our clients through our subscriptions. We deliver value through a lot of different methods, best practices, hype cycles, Magic Quadrants, tools and templates, all the way to actually speaking to with one of our analysts or multiple of our analysts one-on-one, something we call inquiry. And we're helping every individual subscriber address their specific priorities, whatever they need and evolving that as they need it. One of the underappreciated aspects, I think, of our Research business is our ability to quickly pivot to clients' needs, depending on what they need. And so if you think about today and when most companies just a few months ago were working through their 2020 operating plans, their goals that they had back in December are very different than their goals today. And so just as an example, our Research team was able to pivot really quickly and create content to help our clients manage through this new environment. Organizations are both dealing with the pandemic. They're going to working remote and they're also looking to reduce costs. And so we very quickly spun up, based on some existing research and new research created by our team of analysts, a cost optimization resource center and a pandemic planning resource center. And I can assure you, both of these libraries of research and tools and templates are getting heavily, heavily used by our clients in this environment. That's one example -- two examples, as it would be, of things we do, but we do that sort of thing for our clients all the time. And the beauty of the subscription is the -- as your change -- as your needs evolve and/or change, we are there to support them regardless of what those changes are. Most of you -- last slide. Most of you probably know Gartner for what we do in technology. In 2009, through the acquisition of a company called AMR Research, we expanded into supply chain. In 2012, we started a marketing practice organically. In 2017, we acquired a company called CEB, which expanded our market opportunity to include leaders from HR, finance, sales, legal and a few other smaller areas so that we now deliver insight and advice for basically every enterprise function that would roll up into a CEO. If you think about our value prop, it's real compelling for clients. We publish research and we offer on-demand inquiries with our team of a few thousand analysts and advisers and experts. We do it at scale and we get significant network benefits and network effects from just our sheer massive users that we interact with globally. Over the last decade, if you look in the middle, we've developed a formula to drive long-term sustained double-digit growth. And on the right, you can see we've got a really strong business model that supports really great creation of free cash flow historically, and we're projecting continuing free cash flow well in excess of net income. And so the last thing I'd draw your attention to is the bottom of the slide, which represents our medium-term outlook for our business. We believe we can be a consistent double-digit top line grower, really led by our Research business, which again represents about 80% of our overall revenues. So 3 key messages before we dive into the Q&A. One, we're well positioned to help our clients in any environment, including this pandemic environment and economic downturn environment. This year, and I'm sure we'll cover this, we've taken a lot of steps to carefully manage cost and cash flows so that we can maintain financial strength and financial flexibility. And then lastly, we believe we're positioning ourselves to exit this tough macro situation now strong and be well positioned to get back on our double-digit growth trajectory moving forward. So with that, I'll turn it back over to you, Andrew.

Perfect. Thanks, Craig. That is great color and great kind of starting point for the rest of the Q&A here. I did want to move right into kind of current trends in the current environment. On your Q1 earnings call, you issued revised guidance, which assumed no improvement from March and April retention and new business trends for the remainder of the year. With May and the week of June now behind you, has there been any improvement in those metrics within your Research business? And if there's any way for us to think about those trends within the 3 different customer buckets you outlined on the call, which maybe we could summarize, that would be helpful as well.

Yes. So we haven't commented publicly on May yet. And so I'll still stick to the trends we saw in March and April. And the other thing I'd add is April and May tend to be small months for us. And so we always generate a significant amount of our transaction volume, sales volume, retention volume in the last month of each quarter, so March, June, September and so on. It's been interesting talking to investors all day today and talking to investors over the last several weeks in terms of what we're seeing from a macro perspective and how does that relate to our kind of selling motions and selling patterns. I guess what I'd say is that there's no one-size-fits-all answer to your question. We're obviously -- we operate globally. As we talked about earlier, we operate across just about every industry. And there are places where we're doing just fine. There are places that where the economies and markets have sort of reopened, whether that be China to some extent or Korea or Japan. And we've got -- again, it's a month worth of activity. So it's not enough to draw major conclusions from. But we feel like we're back on track in those markets. Here in the U.S. or across Western Europe, we're at varying degrees of sort of back to normal. I think the good news for us is, after a couple week period at the end of March, where everyone was sort of getting reacclimated to or newly acclimated to working from home or working from wherever, which caused a little bit of disruption in our ability to communicate with both clients and prospects, we kind of got back to normal in April. And that's continued when we look at engagement levels of clients. We're kind of back on our historical trend in terms of percentage of clients that are hitting website, percentages of clients that are doing upgrades with clients, all that stuff seems to be back to normal. And again, as I mentioned, the cost optimization research and the pandemic planning-related research continues to be super popular and super valuable for our clients. I think that every company is a little unique in terms of how they're dealing with spending in this market. And again, there are companies that have not been impacted at all or, in fact, have seen their businesses improved. And look, and they're spending and they'll remain really good clients of ours. For everyone else who's either moderately impacted or significantly impacted, we are doing our darndest to make sure that we can help them when they need us. And whether that relates to planning on how to run their business in a virtual environment, kicking off digital transformations or just saving costs, we're ready to help them do that. And we firmly believe that if we can help our clients when they need us the most that they will renew at the end of the day. Selling cycles are going to be challenging for a period of time. Budgets and forecasts have been slashed. CFOs are grabbing spending and really scrutinizing everything. If our sales and service teams do a good job of talking about and articulating and showing quantifiable value associated with the relationship, we get the renewal or we win the business. If we don't do a good job of that or if the client is in super challenging mode, then we run the risk of not winning that business. I think the one other thing I'd add is, in the last downturn back in 2008-2009, one of the things we -- I remember very distinctly is we did lose clients in the first half -- in the fourth quarter of 2008 and the first half of 2009. And then once things stabilized, we actually won a lot of them back, the clients that we had lost over the back half of 2009 and early 2010. And so we're focused mainly on making sure our clients get huge value out of their research relationships right now. We recognize that a lot of them are in super challenging times. But we really believe that our clients can get value in multiples of what it costs of their Gartner contract. And at the end of the day, that's what matters most for the long-term relationships.

Got it. And you mentioned that it's only been a month or a little bit over a month, and there's not a whole lot that you can glean from May by itself, particularly given June is a bigger selling month as will September and December be. But just kind of given how dynamic situation this is and with that in mind, can you maybe spend some time talking about the different metrics that you are looking at, kind of help guide how you're moving and changing the business, spending plans for the back half of the year, at what point would you feel more comfortable kind of ramping back up? And then -- and I know this is a long question here, but also which investment areas would you expect to kind of be the first that you turn back on?

Yes. So I'd say there are 2 primary metrics internally that we're looking at: one, related to engagement of existing clients, which correlates to future retention; and then one related to sort of opportunities added in pipeline velocity, which would relate to the new business side of things. And so as you probably know, we analyze the heck out of everything and we measure that out of everything. And so engagement has been something that we've always religiously measured, managed and analyzed. And again, in every environment we've ever operated in, strong engagement levels correlate to strong retention levels. And so as I mentioned, we are just hell-bent on making sure that our clients stay engaged and they stay engaged on really important stuff that's driving value for them. And we feel good about the levels of engagement that we've been driving since everyone went into lockdown around the world. And so again, will it result in great retention in May and June? Remains to be seen. But the more we're doing that and the more we're focused on driving engagement, we've got another 6 or 7 months in 2020 that we want to make sure retains at good rates as well. And so we're kind of all over that. And things are definitely positively trending from an engagement perspective. The second piece is related to new business and opportunities added. And we're sort of looking at the top end of the funnel, the middle of the funnel and the end of the funnel from a new business perspective. And we've been able to, after a little bit of a disruption, again at the end of March, when again everybody was sort of relocating themselves and relocating into a new work environment, we've gotten back on track in terms of finding opportunities and adding them to the pipeline and then starting to work them through the pipeline. We're also looking at, at the other end of number of proposals we're generating and number of options we're offering on each of those proposals and also other touch points along the pipeline cycle. And again, things are moving. And so we're putting a lot of stuff into the pipe and we're working it through. I do think given the environment, there will be a lot of things that do, for lack of a better term, stall at the 5-yard line, if I can use the American football analogy. But it doesn't mean it goes away. It means it -- maybe it's a holding penalty and we go back 15 yards and then keep working it. But the teams are super engaged. Our sales teams are really working hard both to make sure that current clients stay engaged and that they're working all these new opportunities as well, recognizing that's a little bit tougher. But they're fighting and they continue to generate the sort of high-level metrics or front-level metrics that should lead to good results for us in the future. But again, this is sort of an unprecedented environment. And so we're doing all the right things. We fundamentally believe if we do the right things, we'll get great results. So we're just going to keep doing the right things.

Absolutely. Appreciate that color. And I'm guessing my next question is, because I do want to kind of touch on each of the businesses, current trends, first and foremost, before getting into some of the bigger-picture items, I'm guessing this next question might be difficult to answer. But just given kind of the relatively successful -- and I'm crossing my fingers as I say this, but relatively successful reopenings across the U.S. and EMEA so far, I mean, is there any anecdotes that you can share or conversations that you've had with clients that give you some sort of optimism around the possibility of scheduling conferences later this year? I think on the first quarter call, you estimated if you scheduled September through the end of the year, it was as much as $200 million worth of revenue. So I'm just kind of curious, without committing to anything towards the back end of the year, what, if anything, are you hearing from clients that's different over the past several weeks that could indicate at least some increased possibility even if you're not willing to put a number on it?

Yes. So there's multiple factors that we're considering as we think about operational planning for running conferences in the balance of the year. And so number one is, from a regulatory perspective or regulations perspective, are we allowed to, right? And so again, every state sort of has different reopening philosophies and regulations relating towards gatherings, what have you. And so we're watching that very closely. And obviously, if the state of Florida, where we do a lot of conferences, or the state of Arizona or what have you are not allowing large groups, then obviously everything is off the table. So that's kind of -- that's step number one. Step number two is we're staying in close contact with attendees and potential attendees and also the exhibitors, who would go through -- to a conference. And we're doing a ton of market research with them to understand sentiment around, are you okay traveling? Are you allowed to travel? And would you travel, right? And to be frank, it's kind of all over the board in terms of the responses. The one new challenge we have that it is not health-related, which is a lot of companies, and we did the same thing in a -- to save costs, have significantly stepped on travel budgets. And so while health-wise, you might be able to travel, there might not be any budget for it, right? And so we've got to make sure that if we're going to run these things: a, we're allowed to; and b, people feel safe going; and c, they actually have the travel dollars to be able to get there. And so we're continuing to survey potential attendees and the potential exhibitors. And we'll watch the situations, and we'll make the right calls. The one other thing I'd add is within the planning around September or October through December conferences is we obviously have the larger destination conferences, but we also have the opportunity to run local 1-day events, which is a business we also have embedded within our Conferences segment. And those are potentially easier to run because: a, you don't have to travel to get there, it's local city, so think like CIOs in Dallas or something like that; and b, they're smaller, right, so think in the 50- to 100-person range. And so the requirements or restrictions, I should say, on gatherings, 50- to 100-person gatherings are now allowed in a lot of places. And so we do think that the opportunity to run those is a little probabilistically higher than the opportunity to run destination. But our whole mindset right now is keep the optionality open. And if we can run them, if we're allowed to run them and we can run them in an economically favorable way and people will come, we'll run them. If not, we won't. But the outlook essentially reflects us not being able to run any of them.

Yes. Yes, makes sense. Obviously, a lot of investor interest, both pre COVID and now post or mid-COVID, about margins in the business and the different cost actions that you've implemented here to start 2020 are enabling you to leave your guidance as is in terms of margins being flat year-over-year. I was just hoping you could speak to, one, what the actions are just as a little bit of a summary for the people on the call, how you're thinking about margins over the course of 2020? And then as we kind of get out of this pandemic, what should we kind of keep in mind for 2021 and beyond?

Yes. So we started to feel the impacts of the pandemic across our Asia business, particularly China in February. And we already had an operating plan for 2020 that had us really tightly managing costs and investments. We're still growing, we're still investing but not at the same sort of levels that we had dialed into our 2019 operating plan or our 2018 operating plan. So we're already benefiting a little bit from, I guess, what I would call tight reins on expenses. And as we saw our ability to hold conferences, particularly in the first few months of the year, kind of go away and then when we saw kind of everybody's shift into quarantine mode, we took a bunch of steps to very quickly harvest cost savings and cost avoidance. And when we talked about on the earnings call, the roughly $400 million worth of cost avoidance and cost savings initiatives, remember we were marking off of our original 2020 operating plan, which actually had a decent amount of expense growth built into it. And so a lot of what we're doing is just not hiring to the levels that we had originally planned to hire because either: a, we don't have conferences to support; or we're seeing a little bit of pressure on the business and we don't need as many people as we had originally thought. So that's kind of category 1 of cost avoidance. Category 2 is we're not allowed to travel. And so I'd love to say, "Hey, we did a great job on reducing our travel expenses." But the market, the pandemic did a great job of reducing our travel expenses. And so we just made sure that we harvest all that. And for us, it's a pretty large P&L line item. And so we've kind of banked that savings into our 2020 outlook as well. And the third topic, we did make some tough calls around -- we did not do merit increases. We did reduce or eliminate some benefits. These are all tough calls. But we felt like we need to do it to sort of maintain our financial strength and financial flexibility. That's the third bucket. And the fourth bucket, like any other company, things that weren't nailed down that we could avoid in the short term, we did and so things like outside consulting fees or market research fees or things like that. So we avoided what we needed to avoid. We weren't actually solving for a margin level for this year. We were more solving for let's protect EBITDA and let's maintain as much financial flexibility as possible. And so we sort of accomplished that and feel good about where we are. The key thing to note, which you alluded to is some of these things are going to have to be turned back on, right? So we're going to travel again at some point, right? And so that we're going to have to turn on. We're going to want to give a merit increase to our associates. We're going to have to turn that back on. We're going to want to grow our sales force again. We're have to turn that back on. And so I think in the short term, in 2021, in particular, there is the potential for some margin pressure. Just as we kind of come out of our recovery and start ramping up contract value growth again, the revenue lags and we may want to turn those expenses back on a little earlier. Over the long term, I think 2019 operating margins are sort of a good benchmark for us on sort of the floor-ish of where we want to be. And when we get back to "normal," which is probably more like 2022, that's what we want to measure against in terms of our operating leverage and our operating margins moving forward.

Got it. That's helpful. And I think just kind of following up on margins and just thinking about the key drivers of margin stabilization and/or improvement. One of those major impacts is the productivity of your sales force. So I was hoping you could speak to the key drivers of productivity gains going forward and the extent to which, absent the obvious headwinds from the pandemic, you've seen any benefits from the recruiting and training initiatives that you put in place late last year and was part of kind of the story going into this year, just be interested if you've seen any signs.

Yes. I mean it's interesting in that a lot of the new programs that we put in place were set to go in early 2020. And we sort of stopped hiring for a period of time. And so we're not getting the -- we're not running those plays yet. It has given us the opportunity to more finely tune and tweak those programs so that when we are hiring again, we're ready to run more people through those new programs and those new processes. So when you think about productivity, I'd say there are 3 primary drivers that yield the productivity. One is the mix of tenure in the sales force. And so if -- when we grow faster, we have more first year reps, that's always going to be a dilution on overall productivity. And so as we moderate our growth rate, the benefit we get from that is we have a little bit more mix of people in year 2 and in year 2-plus, who are generally on average significantly more productive than year 1 people. And so us realigning how we think about headcount growth, one of the smaller benefits, but it's a calculable benefit, is just that shift in mix. The 2 other big pieces are how well do we do from a retention perspective and how well do we do from a new business per person perspective. And we are constantly working on programs and solutions and tools to help our salespeople get better at those sorts of things. Obviously, in this sort of situation with the pandemic and recessionary activity happening, that stuff gets harder. But we'll be ready in a normal operating environment to kind of pick those things up and really focus on driving productivity. And again, as we think about our long-term growth of our Research business, the way we drive growth in our Research business is a combination of adding capacity to the sales force over time, like we've done over the last decade, and also driving even modest improvements to productivity. That combination can yield the sort of medium-term guidance that we have for our Research business to grow in the 12% to 16% range.

Certainly. And I would imagine one of the silver linings of having to pause some of the hiring now is that, on the other side of this pandemic as things start to normalize, you do inevitably, just on that one metric, have a higher average tenure just based on fewer new associates, at least over the past couple of months. So...

Right. We do. And we also have the opportunity, because we will be hiring in the market, to potentially attract great salespeople, who may have lost roles because of the environment or have lower earning opportunities or what have you. And so in the last recession, we used it as an opportunity to attract great talent and it worked really well. And I don't see why we wouldn't do the same sort of thing this time around.

Great. That's a good point. Well, thank you, Craig, very much for your time today, and thank you to everyone on the webcast who has joined us. Have a good rest of the day.

Thank you.