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

Okay. And you talked about adding people to the sales force as part of that algorithm. How are you planning for head count kind of looking into the next couple of quarters into next year?

Yes. So we -- as the pandemic hit and we started to see the real economic impacts of the pandemic, we slowed down hiring across the board within Gartner, in sales included. We had, as I mentioned, significantly invested in incremental selling capacity in 2017, 2018 and the first half of 2019. And so we took the opportunity with the slowdown we imposed on ourselves to make sure that we were optimized from a territory perspective so that we had all the right people in all the right places to really go after the opportunity at hand. That resulted in a slight glide down in the number of salespeople we have from where we ended 2019. Now we expect to drive some modest net growth on a sequential basis in heads so that when we enter 2021, we expect our GBS head count to be roughly flat to where it was ending 2019, so about 870 frontline sellers. And on the GTS side, we expect to end the year with over 3,100 front line sellers. And so that's where we're targeting to end the fourth quarter and enter 2021 with. In terms of how we think about it for the future, the way we architected our pre-pandemic 2020 guidance was we expected head count growth to be a couple of points or a few points lower than contract value growth. So for example, our ending GTS contract value growth in 2019 was about 12%. Our 2020 initial guide assumed that we would grow GTS head count in the high single digits. And so we think, going forward, we'll keep the relationship between contract value growth and head count growth being a couple to a few points lower than that contract value growth. And again, the combination of that and the modest productivity improvements is what can help us drive that sustained double-digit contract value growth.

Okay. Great. That all makes sense. Just switching gears a little and talking about Conferences. So you've pivoted to virtual conferences, a lot of people have as well. What do you think the long-term model for Conferences will look like? As of now we have maybe a vaccine on the horizon, but do you think there's going to be a hybrid model or we're going to go back to the way it was before?

Well, I think we made a pretty quick pivot, and we've made really great progress on delivering a high-value virtual experience for our clients and potential clients. And we started in Q2 with some pilots. We ran them commercially really in September, and we've got a bunch of them happening that will happen in October and will happen over the next few weeks. And so we've had some really strong success from that, and we continue to learn. And every conference gets a little bit better than the previous one. It's certainly a challenge. And I think we initially set out to just make sure we could deliver a strong attendee experience, so does the tech -- first, can we get people there? Does the tech work? Can we get people to stay and engage? And then do they get value out of it? And the early reads on the conferences we ran in September and October is, yes, we can do all of those things. And we've been very happy with the ratings we've gotten, the level of engagement we've seen, the number of sessions people attended. And so it's been a really, really good learning experience for us, and we've gotten better and better and better at it. We've also now started to monetize some of it. And the monetization model is interesting. It's not quite the same monetization model that we would have in an in-person environment, but we're working with what we can do. I do think regardless of how we exit this pandemic, and if there is a return to normal, having this capability will be an important part of our Conference portfolio going forward. So prior to the pandemic, we had 2 types of conferences. We had in-person multi-day, what we call, destination conferences, and we had local one day dinners and conferences. And so didn't have to travel, centered around CIOs in Dallas, as an example. We think this will be an important third leg of that stool, if you will, going forward, because as much as we know people and again, we talk to our clients and we talk to the exhibitors, people want to get back to an in-person experience. I think we're all -- we all welcome the opportunity to get back to offices or get back to industry events or whatever it may be, but we also recognize that for large segments of our client, our prospect base, they may not want to travel. They may not be comfortable traveling. They may not have the T&E budgets to travel, et cetera. And so having this virtual opportunity, again, we think is very complementary to our overall Conference portfolio moving forward.

Okay. Yes, that makes sense. And you kind of touched on it a little bit, but just thinking about the profitability of virtual conferences. So I think for your in-person conferences, it's historically commanded margins of about 50%. I guess it's early days in terms of thinking about how to monetize the virtual conferences. So can you just kind of walk us through what you're thinking about, what the plans are to get it closer to what you've done historically?

Yes. No. So again, as I mentioned earlier, the first order of business for us was really deliver an awesome attendee experience. And without -- because without that, you can't monetize anything. And so the primary focus has really been around delivering that awesome attendee experience. And I think we've done a really good job of that. The team is very focused then on, okay, so how can we monetize this? And the interesting thing is when you look at our in-person conferences, we get -- we historically got revenue from 2 sources. People who either used a contract entitlement or paid for an incremental ticket, attendee revenue or exhibits who -- exhibitors who wanted to have access to and meet with those attendees, which we call exhibitor revenue. Historically, about 65% of the revenue came from exhibitors and about 35% came from attendees. And it was a great mix. And again, we had the exhibitors because attendees wanted the opportunity to meet with exhibitors, and exhibitors loved it because we tend to attract a very senior, very highly qualified audience that they really value. So that's how it worked historically. In the virtual environment, we have determined, yes, we can charge people to come to the event from an attendee perspective. The part of the monetization that is in the earliest stages, I would say, of development is the exhibitor value proposition and the exhibitor monetization model. Now what I will tell you is we've got great relationships with our exhibitors, and they really can't wait until we're back in the in-person mode, and they're willing to test things with us in the virtual world. So we are generating some exhibitor revenue, but it's a fraction of the contribution that we historically see. And so from a margin perspective, exhibitors have historically driven a large portion of the contribution margin from a conference perspective. Right now, they're not. What I'd say, though, is the interesting thing as we look at it is a virtual conference, the contribution margin percentage is good because there's no venue cost, there's no food and beverage cost. And so the flow-through is really nice. It's just that the dollars are not quite where we were from an in-person perspective because we haven't cracked the code yet on the exhibitor value proposition or the exhibitor product.

Okay. And just thinking about the overall margins. So I think you guys initially had expected 2021 margins to kind of be down from 2019 because of this year, but now you expect it to be actually similar or up versus 2019. What are some of the things that changed that caused that shift in view?

Yes. So it's a good question and a really important point. So I think the first thing I'd say is that over -- the message that we wanted our investors to understand is that over the medium term, we believe we can drive double-digit top line growth and modestly expand our margins. And so we just want to make sure that, that was a core message, and we're very, very focused on making sure that we can deliver that over the medium term. If you think about 2021, in particular, I'd say a few things. So one is, we had a major investment cycle from 2016 through the first half of 2019. And in -- around the Q2 earnings call of last year, we started talking about pivoting to slow down on the investment and make sure we get returns on that investment. And then even when we gave our initial 2020 outlook pre-pandemic, we were very focused on setting ourselves up to improve our margins over time. Obviously, 2020 is an odd year for any number of reasons, and the economics and the margin flow-through reflect that. And so we have avoided a lot of costs. Some of it natural, some of it a little unnatural. And that means that next year, we're going to want to restore some of those costs in a more normal operating environment. In terms of the actual 2021 view, consistent with our long-standing practice, we'll give 2021 guidance -- full guidance in February, when we do our Q4 earnings announcement. We're still in the planning process. There's obviously this year a lot more variability than normal with both the pandemic, the recession and numerous other things. Whether or not we're able to deliver in-person conferences versus virtual conferences is obviously a pretty large swing factor for us as well in terms of 2021. But the core message, I would say, is over the medium term, we believe we can deliver sustained double-digit top line growth and modestly expand margins as well.

Okay. And just on free cash flow, so I think in the past, Gartner had been a strong free cash flow grower. Not as much in the last few years, it probably relates to the investments that you alluded to. But just what's your expectation for free cash flow going forward? Can you grow kind of the EBITDA free cash flow conversion ratio similar to what you had done in the past?

Yes. I think so. We -- as you alluded to, we had a couple of challenges with free cash flow in 2018, 2019 time frame. We got back on track, I'd say, in 2019. And our free cash flow performance year-to-date has been very strong, particularly given the environment we're operating on. If you look at our free cash flow margin or free cash flow as a percent of revenue, on a rolling 4-quarter basis, we're at about 15%. We've seen that number ticking up nicely as we've recovered the fundamentals of our free cash flow. There are some onetime benefits within that 15%. On our last earnings call, we talked about 1 or 2 points coming from that. But even the 13%, if you assumed, it was a full 200 basis point onetime benefit we're getting, is better than what we've delivered historically. So very strong free cash flow performance this year. And free cash flow, if you look at it as a percent of GAAP net income, it was about 285%. So we've generated and have consistently generated free cash flow well in excess of net income. I think when we look at this year, in particular, we're benefiting from continued strong collections, which, again, we had some concerns about early on in the pandemic, would the collections continue to come in? And the team has done a really fantastic job of making sure that, that has continued to come in. Obviously, we set out to avoid a lot of operating expenses to protect and preserve profitability and protect and preserve our financial flexibility. That has flowed through from a cash perspective. We stepped on CapEx pretty significantly, also as a cash preservation lever and also because we don't need to fit-out offices right now because no one's in an office. And then we were able to take advantage of certain onetime deferrals on taxes and overall lower cash taxes as well. But going forward, there's no reason to believe that we can't generate free cash flow and pick your measure, whether it's margin yield on EBITDA or free cash flow as a percent of net income, that there's no reason we can't approach what we had done historically around free cash flow. Ultimately, because of the fundamentals of the business model, this is a very, very, very strong free cash flow engine. And there's no reason why it shouldn't continue to be a really strong free cash flow engine.

Okay. Great. So we're actually coming up on our time. So I think we should probably just end on that note. Craig, thank you for being with us today. We really appreciate the conversation and the discussion. And investors, we hope you will stick around for the rest of our Ultimate Services Investor Conference.

Thanks, Stephanie.