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

Thank you for joining us. I'm George Tong, and I cover business and information services at Goldman Sachs. I'm really pleased to be joined by Craig Safian, CFO of Gartner. Craig, thank you for being with us.

My pleasure. Thank you, George.

All right. So I'll start off with high-level questions about Gartner's long-term strategy and targets, and then we'll dive deeper into business trends. Those in the audience interested in asking questions, feel free to submit them through the portal, and we can get to those near the end of the session. So starting off at a high level, Craig, Gartner's medium-term guidance calls for GTS and GBS contract value growth of 12% to 16%. When do you expect that to happen? And what factors could drive growth to the upper or lower end of that range?

Yes, sure. Happy to. And obviously, just for clarification's sake, GTS is our selling force that sells to technology end users or end users of technology, and GBS is our sales force that sells to all the other enterprise functions like legal, sales, HR, finance, supply chain, marketing. Our firm view is that as we rebound from the pandemic, and obviously 2020 was significantly impacted by macro conditions in the pandemic, once we get back to "normal", we expect to return or be able to return to 12% to 16% contract value growth. We have a lot of confidence that our research insight, advice, tools, the products that we offer, they really do offer enterprise functional leaders a super compelling value proposition. For a relatively reasonable annual cost, we help them achieve their mission-critical priorities. And putting it in a quick nutshell, we really believe our products help enterprise leaders save time, save money, gain knowledge and gain resources. Since we're selling an intangible, it really isn't a replacement for an existing product. And so the way we sell is by getting our salespeople in front of prospects. And as we think about driving growth towards the higher end of the range, it's really a function of how well we retain our existing clients, getting our annual price increases, upselling in terms of finding either new people or new buying centers within our existing clients and then bringing in lots of new logos into the franchise as well. Historically, we've been able to drive really nice growth in that range by driving about 2/3 of our growth from existing clients, meaning we're actually expanding within those that stay with us each and every year. And we typically increase prices between 3% and 4%. We're growing our existing accounts and then new logos typically add between 5 to 10 points of annual CV growth. And so we have the products, we have the sales teams in place. We know how to execute on all of that. We know how to deliver value to our clients. So we remain very confident that we can get back to that 12% to 16% growth for both the GTS and GBS businesses.

That makes a lot of sense. Now Gartner's medium-term targets also specify that EBITDA growth will come in in line or faster than revenue growth. Of course, that implies stable or expanding margins off of 2021 levels. Do you see full year 2021 EBITDA margins as essentially the floor for margins going forward? Or is there any chance that 2021 margins, you might see some margins in the future dip below that?

Well, our view as we see it today and look forward that our margin guidance for 2020 is to be at least 17.4%, which is up nicely from what we delivered in the last "normal" year, which was 2019. We believe this is a new reference point. And as we look forward, we expect to modestly expand margins from here. As we think about what's happening from a model perspective, we think we get gross margin leverage through a continued shift to research, which is our largest, most profitable business. We get G&A leverage by growing G&A at a slightly lower rate than the top line, and we focus on sales productivity improvements. And so we're comfortable with that 2021 view of at least 17.4% and the medium-term guidance of modestly expanding margins from there.

I'm glad you brought up the topic of structural improvements to the business. As you know, historically, EBITDA margins at Gartner have stepped down a bit between 2012 and 2019. So maybe could you elaborate a bit on what's fundamentally changed in the business model that should allow Gartner to inflect and start generating flat to improving margins beyond 2021?

Yes, absolutely. The time period -- or time period you're referencing, we were in a relatively narrow range in the high teens. And we ran at that level for a number of years. In 2017, we obviously did a very large transformational acquisition, which may be, meshing everything together, a little messy. And then in 2018, 2019, we actually -- those periods included some of the operating results of divestitures of nonstrategic assets. And there were -- some of them were nice margin businesses. And so it also messed around a little bit with what a normal operating margin would be. And then the other thing on top of that is, through 2019, we were in a pretty heavy investment cycle. And so I think about halfway through 2019, we said, "You know what, we're getting through this investment cycle now, and we want to focus on driving returns on those investments moving forward." And in fact, pre-pandemic, our guidance for 2020 was basically stabilized margins, which is the first step towards then modestly expanding them. And so as we think about 2021, as we just talked about, we've guided 2021 margins of at least 17.4%. We've guided modest margin expansion after that. And essentially, we're back to the model that yielded that high-teens margin that we saw several years ago. And again, we're very comfortable that we can get that gross margin leverage, we can get G&A leverage. And we'll manage our sales investment in a way that it's not dilutive to the overall EBITDA margins.

Right. Makes sense. Now the sustainability of Gartner's long-term growth is dependent on further penetrating the unvended markets for both GTS and GBS. Can you perhaps talk about how much room you have to penetrate the markets for both IT and non-IT research?

Yes. Absolutely. So the short answer is there's lots of room, but you probably want a little bit more than that. So we've estimated our total addressable market to be almost $200 billion; $198 billion, to be precise. So that's very large. And we have about $3.6 billion of that overall addressable market. And so we always used to talk about the fact that we believe we are really under-penetrated in our historical tech business, or GTS, where we've got about $2.9 billion of a $55 billion opportunity. And then we're even more underpenetrated in GBS, which is not 1 market, it's actually several markets that are all large in and of themselves in each of those enterprise functions that we currently serve. And so we believe we can sustain double-digit growth in all regions, across all sectors and in all the company sizes that we serve for a very long time. And the other thing I'd mention, just in terms of that market opportunity, is we've consistently found ways both organically and through M&A to further expand our addressable market. And so as we look at the market, there's really 2 pieces to that huge addressable market. One is all the businesses that don't do business with Gartner today or don't have any contract value, we would call them prospects or 0 CV accounts. And there are tens of thousands of clients like that around the world that are large enough, complex enough and have large enough IT budgets or HR budgets or supply chain budgets where they can get real value out of Gartner. On top of that, though, we have what I would argue is pretty minimal penetration even in the accounts we currently do business in. So in GTS, the average client is spending about $220,000 a year. That's the equivalent of about 4 to 6 seats, and we sell our products generally on a seat-based basis. And so we believe there are tremendous expansion opportunities within our existing accounts. And there's that whole new logo 0 CV opportunity that we have as well. And so just to put it in somewhat quantitative perspective, if you take our current total CV of $3.6 billion, and we grew it at a 15% compound annual growth rate for 20 years, we'd have captured about 30% of today's addressable market. So we think there's tons of runway there, is the short way to say that.

Right. No, that makes a lot of sense. Let's dive in a little bit deeper into some of the revenue trends within the business. Starting with the Research segment, you did indicate on the call that Research CV growth should trough in 1Q 2021 before reaccelerating over the remainder of the year, and that's going to be driven by improving client spend as well as rising sales force productivity. So as you look between GTS and GBS, which of the 2 has the most upside potential for growth compared to your internal forecasts? And what would be those drivers?

So we don't give specific CV growth guidance. I would say pretty consistently across both, we believe we are well positioned for success in both GTS and GBS. We always work to perform better than our planning targets. We have a little more momentum with GBS right now, just given the real strength we had in the fourth quarter, both relatively, in terms of the environment, but even on an absolute basis, it was a really fantastic quarter. GTS has shown really nice improvement. We improved from Q3 over Q2. We improved again from Q4 over Q3. So we feel good about that. Obviously, the compares get easier as we get further into 2021. So Q1 is our last really pre-pandemic compare, and then we get into Q2 and the compares do get easier for us. But we feel really good about the opportunity to accelerate the growth in both GTS and GBS.

I guess if you look at the selling environment for both GTS and GBS, which appears to be most constructive and conducive to growth?

I think they're both equally conducive to growth. If you think about what functional leaders are dealing with in tech or HR or finance, these are really, really challenging times for enterprise leaders. And we believe we are a very low-cost way for enterprise leaders and their teams to do their jobs better and add more value to their enterprises. And so we think the environment remains good. Obviously, there's a lot of industries that are under significant pressure right now. It is harder to sell and retain in those industries than it is in industries that are accelerating. But broadly speaking, we really do feel like, while the environment is a little tougher, as things have stabilized, as operating leaders have better visibility into how their businesses are performing and what their operating budgets are going to look like, that has certainly helped from a selling environment perspective. And I think also, we're very focused on our own operational best practices of closing business and retaining business in any operating environment. And quite honestly, we've gotten better as we've worked our way through the pandemic as well.

Right. No, that makes sense. Now within GTS, contract value per new logo, or from new logos, increased in 4Q, but to a lesser degree than in 2019. What would you say is contributing to the slower near-term recovery in GTS relative to GBS?

Yes. I think -- so one, our key underlying metrics, as I mentioned earlier, and as you just alluded to, have been improving each quarter since Q2. And in fourth quarter 2020, contract value from new logos was actually up from a year ago, while cancels were about the same. And so that actually improved really nicely. I think what we're seeing is our existing clients, they continue to increase their spend. It was just at a slightly slower pace than 2019. And again, I think it's all those things we just talked about in terms of the environment. So in that mix or cohort of clients that either increased or reduced spend, we are dealing with clients in really challenged industries. And so if an airline historically has increased their spend by 15% or 20% per year, and that's sort of in our baseline, obviously in this environment that's not going to happen. And so that was really the biggest factor impacting our growth this quarter. What I would say is -- and having been at Gartner for a very long time, when we went through this, and the most recent analog, it was obviously 2008, 2009 recession, we saw similar dynamics happen within the client base. And what we saw once things stabilized is we were able to win back a lot of business that was lost in the earlier stages of the recession, and our clients that stopped growing or spending more with us relatively quickly returned to that. And so again, we continue to believe we will see a similar trend. We think we're actually much better poised to take advantage of that now compared to a little over a decade ago. And so that will be the fuel for GTS growth going forward.

Got it. No, that makes sense. Now you mentioned that overall research CV growth should trough in 1Q and then improve thereafter. Of course, GTS makes up the biggest component of overall research CV. Without getting into specifics around guidance for GTS and GBS, qualitatively how would you expect the GTS CV recovery curve to look like? Is it going to be more back-end weighted in 2021, or is it going to be linear as you move through the year?

It's a great question. I think without providing specific guidance, obviously, as I mentioned earlier, the trough is really a matter of the compares. And the compares do get easier as we roll out of Q1 and into Q2 and beyond. I think we have historically had much of our -- an overweighted portion of our new business and net contract value growth activity has almost always happened historically in the second half of the year, with a real bias towards the fourth quarter. And so as we look at, again, notwithstanding that the compares may be a little easier from quarter to quarter, depending on the quarter, we generally gear our business around doing well in the first few quarters and then really picking up in the third and fourth quarter. And yes, I wouldn't expect that trend to change, with the exception of, we will have the opportunity, obviously, in the first half of the year, to get after some of that win-back activity that we just talked about a little bit earlier.

Yes. Got it. Sales force productivity in GTS has been stepping down a bit sequentially since the beginning of 2019, even before COVID hit. So if you look at GTS specifically, what initiatives do you have in place to improve sales force productivity there? And what could long-term productivity look like for GTS in terms of NCVI per year-ago sales headcount?

Sure. So the way we talk about productivity, it's really a function of the contract value growth and the amount of headcount that we have. And so the math would just say as CV reaccelerates, our productivity measures will improve and increase as well. And obviously in 2020 we moderated the headcount growth. We're actually down a little bit over the course of the year. And as we roll into this year, into 2021, we're targeting high single-digit headcount growth. But as you mentioned, that won't impact the NCVI per account executive calc for 2021. We are still really focused on all the sales optimization programs that our CEO, Gene Hall, highlighted the last few quarters: just-in-time recruiting, just-in-time training, territory optimization. So we are focused on those and also on driving greater efficiencies in how we sell. And so making sure that we're adding the right amount of opportunities to the pipeline, making sure that we are appropriately working those opportunities through the pipeline, that things don't get stalled. And if they do get stalled, we have best practices on how to get those things un-stalled, if you will, and continuing to flow through the pipeline. So it's all the classic plays and best practices that we've utilized for a while that we have refined over time as we continue to tweak and make improvements. Those are the things that we really do believe will lead to a reacceleration in the CV growth and the corresponding improvement in the -- in that NCVI per account executive. What I would say as well, just in terms of sort of setting up and balancing the growth and the productivity and the investment, in a normal operating environment, we would plan to resume headcount growth modestly below what the CV growth was. And so if we're at 13% GTS CV growth, we would expect to grow GTS headcount in the roughly 10% range. If we were a little bit higher, we'd grow headcount a little bit more. If we were a little bit lower, we'd grow headcount a little bit less. But in a normal operating environment, that's where we want to be, so that we make sure that we're focused both on adding capacity to our sales force to go after that enormous market opportunity we talked about a little bit earlier and continuing to focus on driving the efficiency and productivity of our sales force as measured dozens of ways, but ultimately in that NCVI per AE measure as well.

Right. And then what do you foresee as the long-term potential steady-state or multiyear target for NCVI per year-ago head? Is it $100,000? Is it $110,000 for the GTS?

Yes. The -- sorry, George. We -- so GTS is the benchmark, obviously, because GTS has achieved much higher NCVI per AE than GBS. There's no reason why we can't get back to 2018 or 2019 levels of productivity. So 2019, I think we ended the year at $99,000 of NCVI per AE, we were about 15% higher than that in 2018. And that's not a cap either, but there's no reason why we can't approach those levels of productivity for both GTS and GBS.