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

Hello, and good afternoon. 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'm required to inform you that for 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 CFO, Craig Safian, to the 41st Annual William Blair Growth Stock Conference. Thank you very much for joining me, Craig.

My pleasure, Andrew. Good to see you as well.

I was hoping we could start off with just a minute or 2 on the business as a whole, maybe a quick snapshot just so that everyone on the webcast is on the same page. And then from there, we can move into some of the more kind of specific topics relevant to the current environment.

Yes, absolutely. And thanks, everyone, for joining today. So let me give you a quick 1- or 2-minute thumbnail of Gartner, who we are and what we do. So Gartner, we deliver actionable objective insight to executives and their teams. Our insight, expert guidance, tools all enable better decision-making across every major enterprise function, including IT, HR, supply chain, finance and all the others. We essentially predominantly deliver our insight through individual subscriptions, which we sell to leaders and executives across the enterprise that run at least 1 year and in fact, average greater than 1 year in length. We are a free cash flow growth compounder, and we believe we have a long runway from a total addressable market perspective to grow our business, top line at double-digit growth rates, bottom line at double-digit growth rates, free cash flow at double-digit growth rates. Our long-standing financial model is consistent with our medium-term guidance. We can go into the details of that a little bit later, if you like. But basically, high level, our medium-term guidance includes double-digit revenue growth, modest margin expansion from a normalized 2021 level of between 18% and 19% and free cash flow growth at least as fast as EBITDA. And our free cash flow -- the power we see in the free cash flow, whether you look at it in terms of a percent of net income where we're well in excess of net income or as a percent of EBITDA, that free cash flow number reflects the benefit in our business of upfront billing. And so for the vast majority of our research contracts, we actually bill upfront, collect the cash upfront and then recognize the revenue and deliver the value over the subsequent months. We have a very strong balance sheet. And we expect to use our free cash flow to return capital to shareholders through our repurchase programs and also do opportunistic strategic tuck-in acquisitions. So that's the high-level view of Gartner.

Perfect. That's helpful. And I'll probably touch on capital allocation a bit more as we get through here. But maybe with that as a starting point, we can kind of transition into how the business has navigated in the past 12, 15 months since the start of the pandemic, if you could kind of speak to that. And also maybe within that, talk about some of the major learnings or takeaways over that time frame, whether it's in terms of new product opportunities or customer demand dynamics, whatever you think is most important to the story.

Yes, sure. Obviously, the last 12 to 15 months have been very interesting, and we've learned a lot. And we've actually had to navigate and pivot a number of times over the last year or so and generally pretty successfully. So when the COVID-19 outbreak was declared a global pandemic, we essentially transitioned our global workforce to operate effectively in a remote environment. And we actually had large portions of our workforce who are already working remotely. We're sort of engineered that way. But we quickly moved everyone remote and made sure we continued with our efficiency and productivity. We also pivoted real quickly to implement a number of cost avoidance initiatives that ensured that we could remain financially strong whatever the environment threw at us. And now as the macro environment has been improving, we have been restoring spending and targeted investments to make sure that we're well positioned to continue to rebound as the economy continues to recover. If we look at it by business, a little bit different story for each business. So Gartner Research, which again represents today about 80% of our overall business, was extraordinarily agile in meeting and exceeding the rapidly evolving needs of our clients. We pivoted our content almost immediately to address critical timely issues on the pandemic, such as remote work environments, cost optimization, business continuity. We took a lot of our best cross-practice content and made it broadly available to our clients. And we also significantly increased the number of content-rich webinars, other virtual events and just other ways for our clients to engage because the world was changing rapidly, and they really, really, really needed our help. On the Conferences side, obviously, the pandemic put a significant hit on that business as we were not able to run in-person conferences from essentially end of February last year through where we sit today. But we also adapted pretty dramatically there to serve our clients. We pivoted as quickly as we could to make our destination conferences virtual, delivering the same great content that our attendees are always seeking and would have received at our in-person conferences. And I'd argue -- and again, we can talk about this a little bit later, too. I'd argue we did a really good job of replacing that lost value, both economically on the P&L, but as importantly, as value to our clients in pivoting to delivering really high-end, high-value virtual conferences. And I guess if we sort of step back and think about the major learnings and takeaways, and some of this we knew and some of this was new learning or just reinforced, one is, the world is a crazy dynamic place, and there are always going to be sources of disruption and drivers of change. This situation was obviously very unique, and we had never really seen anything like it. But we have been preparing for this based on our experiences over the last decade plus of various economic cycles in different regions or different industries or what have you. I think the 1 constant, though, is regardless of the environment or sometimes, especially because of the environment, enterprise leaders and their teams need help. They need insight. They need expert guidance. And they need tools to navigate whatever the world is throwing at them. And this is really the core of our client value proposition and really the foundation for our financial performance in the past and actually as we made our way through the pandemic. The other thing I'd say is digital transformation is affecting all enterprise functions. And if anything, it got accelerated as a result of the pandemic. And every enterprise leader, whether they're in tech, finance, HR, marketing, supply chain, is dealing with disruption from digital transformation, and they need to address it. And we're obviously in a great position to help them. And then I think the last thing I'd say is we were able to demonstrate a great ability to effectively manage our costs. We had started on this journey exiting 2019 as we had kind of come through a very heavy investing cycle. But we were really quick to harvest savings, really quick to stop spending. And you saw the results of that flow through both from our EBITDA we generated in 2020 as well as the free cash flow we generated in 2020.

Yes. I mean, you touched on a bunch of different topics there that I'd like to expand on. Maybe I'll start with kind of the improving macro backdrop and what it potentially meant for all the positive signs that we saw in your Q1 results. Pretty, pretty impressive business momentum across most of the businesses, particularly on the CV side. So maybe with that in mind, I mean, can you walk us through the major drivers of improvement in the first quarter relative to the fourth quarter, maybe how much was from new logos versus existing clients versus win backs, and maybe how that would compare to kind of a prepandemic breakup of those growth drivers?

Yes, sure. No, of course. I think in the first quarter, on a stand-alone quarter basis, we actually have really strong performance. And it was really a continuation of the improvements that we had seen in the fourth quarter of 2020. Now the 1 thing just to keep in mind is all of our year-over-year and rolling 12-month metrics are burdened, for lack of a better word, by the really challenging second quarter of last year. And once we roll into reporting our 2Q results this year, we'll be past that headwind. But on a stand-alone basis, really strong operating results across all of our businesses. The contributions to the improvements were also really across the board, and this applies to both GTS and GBS. We saw underlying retention improve. We're starting to see some win-back activity. We're seeing growth in new logo contract value. And while it's not all the way back to normal, we're also seeing a lot of progress in selling more or expanding with existing clients. On top of that, in GBS, all of our practices, with the exception of marketing, grew their CV year-over-year at double-digit rates. All the practices positively contributed to positive quarterly [ NIC ] fee, and GBS new business was actually up 87% year-over-year. So it was across the board, but again, I think continued momentum, a better selling environment, for sure, but continued momentum from the fourth quarter.

Great. Great. And you touched on it here, but -- or just now, but GBS specifically, I mean, why do you think GBS has rebounded so quickly from what now looks like a trough in the third quarter to double-digit CV growth in the first quarter? And if there's any thoughts about its growth relative to GTS even, maybe that would be helpful in us comparing it to.

Yes, sure. I mean, if you just look at GBS as a stand-alone business, I think the first thing I'd note is the value proposition of our products and services within GBS are really strong and just as valuable as the long-standing value proposition that you've seen from our technology research business, and you're seeing that now. I think the growth rate that we reported in the first quarter being up 12% is a great indication that our compelling client value proposition is resonating with prospects and clients. And we're seeing it from a retention rate perspective, and we're seeing it, as I mentioned, on the new business side with growth up over first quarter of last year of up 87%. I think all the practices, as I just mentioned, grew double digit with the exception of marketing, but all of them positively impacted the positive NCVI or net contract value increase performance in the quarter. I think comparing to GTS is okay. Within GTS, obviously, it's a much larger business selling into 1 single function. So to put it in perspective, GTS is a roughly $3 billion business selling to the IT function. GBS is a $730 million business, and that's carved into several unique enterprise functions like HR, finance, sales, marketing, supply chain, et cetera. And so we have -- we believe we have a huge market opportunity on the GTS side, and we believe that we are wildly underpenetrated on the GTS side, but even more so on the GBS side. And I think we're definitely seeing the benefits of that. And then the 1 other thing I'd say is we were on a path prior to the pandemic of getting this GBS business up to double-digit growth rates. If you recall, we exited 2019 on an upswing with, I think, it was 7% organic CV growth, 8% reported CV growth, and we felt good about the momentum. Obviously, the pandemic jumped in front of that a little bit. As you mentioned, the trough was really in the third quarter for this business and then really started accelerating from there. And we're happy that we've gotten the double-digit growth rates, but we always believe that this, just like GTS, could be a really strong, consistent double-digit grower for us.

Given all that, do you feel like with the market size being multiples of the GTS market size, I think you've outlined that in prior investor days and in calls, and the accelerating momentum around kind of the new products and the build-out there, I mean, is this a business that can grow in excess of GTS for the foreseeable future? Or is that within the range of outcomes? It certainly seems like given the smaller size, that would be a possibility, particularly given the fact that marketing has been a headwind due to some of the product transitioning over the past several quarters. So if you could maybe talk about the range of outcomes and also when we would be lapping the marketing headwind and what that could mean to the overall growth rate.

Yes, of course. So I think if you look at our medium-term outlook or guidance for both GTS and GBS, we believe both can grow between 12% and 16% per year. And obviously, we're very excited about the GBS opportunity as we have been all along despite some skepticism out there. The value proposition for GBS is exactly the same as it is for GTS. We're providing actionable objective insight to help leaders and their teams just make better decisions. GBS, as we just talked about, has been accelerating. And I think really 2 things just to kind of double-click on what we just talked about. One is we are seeing the benefits of the building blocks and investments we put in, in 2018 and 2019. We added experts. We added service. We grew and trained the sales force. We introduced new seat-based or role-based products for individual leaders and their teams. And again, as you talked about, that market opportunity is enormous. And again, each of those enterprise functions that we sell to are massive double-digit billion-dollar opportunities in and of themselves. And then your last question on marketing. Most of that nonrenewal business is behind us. There's a little bit that hung over into 2021, but it's a tiny fraction of what we encountered in -- over the course of 2020. So we've essentially lapped that headwind now and moving forward.

Okay. All right. That's helpful. One other kind of component that you've mentioned a few times was kind of the investment cycle in '18 and '19 and hoping prepandemic to harvest a lot of those investments in 2020. I think one of the things that you talked about quite a bit over that time frame was some of the recruiting and training initiatives that you put in place. I realize the pandemic makes it a little bit murkier and more difficult to kind of figure out what that product -- progress looks like. But is there anything you can say in terms of that particular aspect of the productivity kind of equation and maybe how that informs your hiring plans on a go-forward basis?