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

Hi. Good morning. This is Heather Balsky, BofA's business and information services analyst. I want to welcome you all to our fireside chat with Gartner's CFO, Craig Safian. Craig, it's a pleasure to have you. Before we kick things off, I just want to mention that we are offering Q&A on this fireside chat. There's an Ask a Question feature on the Webex, so please take advantage of that.

And so with that, I want to kick off with just a broader macro question. As we exit the pandemic period, what do you think are the biggest demand drivers for Gartner and for your customers? And what are bringing new customers to Gartner today?

Yes. Sure. Absolutely. Thanks, Heather, and good morning, good afternoon, everyone. I think consistent with how we've always operated, we offer clients and prospects a very compelling and unique product and client value proposition. And so just double-clicking on that for a second, our value prop is relatively simple, which is we provide actionable objective insight to enterprise function leaders and their teams to help them make better, faster and smarter decisions and to address their mission-critical priorities. Enterprise leaders across basically every function within the enterprise, whether it's finance, IT, HR, et cetera, they benefit from our insights. And our price point is modest so they can get loads and loads of value. And we can help them address their most critical priorities. And if you think about that, that's sort of an evergreen opportunity because those priorities are ever present. They change. But every executive and every one on an executive team has a number of priorities that they have. So at any point in time, enterprise functional leaders have top priorities. They shift from month to month, year to year. We have the benefit of having breadth and depth of insights to help them no matter what their priorities are. And if anything, the last couple of years have taught us that the world continues to be and will continue to be a very dynamic place. It's always a dynamic place. Throw in a pandemic, inflation, war in Europe. And there is perhaps an increased openness on the part of enterprise functional leaders to acknowledge that they need third-party insights and perspectives, and our experts are uniquely positioned to provide those insights and perspectives. And so think about the way we deliver value in research and through a variety of methods from our highly visible best practices, Hype Cycles, Magic Quadrants, tools, templates, speaking with our analysts one-on-one. We're helping every individual subscriber address their specific priorities, whatever they are and even as they evolve. And I think one of the underappreciated aspects of our research business is our ability to pivot quickly to match our clients' needs. And so a perfect example, there wasn't a pandemic, then there was one, and everyone's priorities changed. And we were very -- we were able to very quickly pivot to make sure that we could provide insights and help to our clients, whether they were figuring out how to transition to a virtual-first workforce, how to deal with supply chain issues, how to deal with return to work, you name it, but we were able to pivot and really help them.

That's helpful. Thank you. So let's talk about -- Gartner's sales force is a material driver of sales growth. I think of all of our coverage companies, you guys talk about your sales force the most. Why is your sales force so important to your business? And do you think -- just curious -- you were very productive in the last 2 years with your sales force. Do you think coming out of COVID, there's an opportunity to do more with less?

Yes. No, it's actually -- it's a really interesting question. And if you think about what we offer to clients and the client value proposition, it is super-compelling, but it's an intangible and it's really not a replacement sale for something that our prospects are already buying. And so that means our product really does need to be sold. And so we need to have a strong and growing sales organization to make sure that we understand what our prospects' needs are to help them understand how the breadth and depth of our research can help. And so think about how we go to market, we actually go to market by role. So we have a sales force specifically focused on IT, and that's known as our GTS or Global Technology Sales sales force. But we also separate sales forces that go after the HR function, the supply chain function, the finance function, marketing function and so on. And those are the various roles that we go after within our GBS or Global Business Sales portfolio. Our goal from a selling perspective is to start with C level and then work our way down from there. And the sales process can take anywhere from a few weeks to a few months. And so we are -- in order to go capture that enormous market opportunity we have, we know we need more feet on the street to go get it. And we also know that our sales excellence playbooks work. When our sales teams run those plays, they are very successful at both renewing existing clients, growing accounts and closing new business. And so while your point is spot on in terms of the last couple of years, we've been able to have a lot of productivity in our sales force by operating in these modes, point still remains is we've got an almost $200 billion market opportunity that we want to go after. And the way we will go after that is by continuing to grow our sales force. And so if you think about over the long term, and we talked about this, we aim to grow our sales force a couple of points lower than our top line contract value growth. And we can continue to do that and drive really strong productivity and efficiency through that sales force. But if we want to go capture that $200 billion market opportunity, we're going to need to continue to grow our sales force to go after it.

It makes a lot of sense. And that transitions us to, this year, your cost base is catching up with your top line. Can you just walk us through why cost lagged so much in the last few years -- over the last few years and the steps you're taking to get to where you need to be? And -- yes.

Yes. Absolutely. And it has been a little bit of a roller coaster ride over the last couple of years. As we've adapted to operating in this new environment, we've dealt with all the things that have been thrown in front of us from a macro perspective. So just zooming out for a second, yes, there's a pretty big step-up in costs from '21 to '22 baked into our guidance. But if you actually step back and look at it, based on that guidance, the expense CAGR, compound annual growth rate, from '19 through '22 is about 5% per year, right, which is lower than our revenue CAGR over that same period. And again, if you zoom out again, the guidance implies OpEx increasing by about $700 million year-over-year from '21 into '22. So if you break that apart, about half of the increase is expenses growing in line with revenue. This is making sure that we can continue to service our clients both from a client-facing perspective and support. And so about half that increase is just keeping up with our overall revenue growth. The other half is mostly catching up on spending that we either avoided or fell behind on in '20 and '21. If you look at -- and again, the total dollar increase compared to '21, the biggest piece -- or the biggest piece of the increase in OpEx are people costs. And most of that is related to hiring, normal merit increases but that running a little bit higher than normal to reflect wage inflation and the really super-competitive labor market. Additionally, because of the huge success we had in '21, we have much higher commission costs in '22 as we amortize our commissions to match revenue. And then the rest of the increase includes areas like T&E. We had virtually 0 travel expense in '20 and '21. And we are planning on not necessarily reverting all the way back to 2019 levels but having some level of travel spend in '22, which is, obviously, a lot more -- pretty significant increase compared to almost 0 that we had in '21. And if you think about the margins in '21, they also benefited from higher-than-expected levels of high-margin revenue. And we had, as we talked about on our earnings call as well, a sales productivity tenure mix, given that we didn't hire a lot of new people in '20, fell behind a little bit in '21 in hiring. So we definitely had some benefits flow through in '21 that we don't expect to continue into 2022.

Great. I wanted to clarify one thing you mentioned just towards the end about the higher mix of high-margin revenue. What exactly was that?

So we did really strong in some areas within consulting. Our Contract Optimization business had an exceptionally strong year and that flows through at a very high incremental margins. We -- our phasing of contract value growth, what we call NCVI, came in much earlier in the year than we have typically seen, and that drove significant revenue upside in year, which flowed through at very high margins. Our nonsubscription revenue within our research segment grew exceptionally well in '21 as well, and that flows through at high incremental margins as well.

Okay. That's helpful. And I'm curious, you talked about this that -- on the earnings call as well. Are there opportunities for some of these -- some of the things that you saw in 2021 to continue in 2022? Are they things that are really just -- absent the tenure piece, right, because you're hiring new people, just curious sort of how do you kind of think about that?

Yes. I mean I think there are a number of really great lessons that we learned over the course of '20 and '21 that will be forever benefits for us. And we're excited about really leveraging those. As I mentioned, we're not going to travel nearly as much as we did in 2019. That's a benefit. We're in the process of optimizing and consolidating our real estate -- and rationalizing our real estate portfolio because we don't need as much real estate as we had, historically, because we're operating in a virtual-first operating environment. And so -- and on top of that, we also have done a fantastic job of delivering value to our clients 100% virtually. And so from analyst interactions to service interactions, to sales interactions, et cetera, we've done a great job. And so those are great shifts that we've made in our business that will benefit us moving forward. That said, we still want our salespeople out in front of our clients and in person with them when we can make that happen. We still want our teams traveling so we can drive high levels of engagement within our sales teams and the rest of our teams so that we can deliver even greater results. And so there's things that are -- that will be everlasting benefits, but there are also things that we feel really -- are really important around how we run our business and drive great results that we need to restore over the course of '22 and '23 as well.

We're not quite 20 minutes in, but I got a question, I think, that's relevant to what we're talking about. And the question was we talked about building your sales force. We talked about productivity that you've seen. Just what are you expecting in terms of sales force productivity in '22? And how does that compare to what you saw in '21 as well as pre-COVID in 2019?

Yes. The -- I mean our '21 productivity numbers were record highs for both GTS and GBS, significant record highs for us. And it was a combination of, obviously, great performance but also the tenure mix that we had talked about. And so as we think about '22, we do think that a lot of the benefits we saw in '21 and '20 stick, right? So we drove really strong retention. Now is all of that going to stick compared to what we did in '21? Maybe, maybe not. We've sort of taken a -- as we talked about on the earnings call, a thoughtful and historical approach to looking at how we built our initial guidance for 2022, not assuming that every benefit we saw in '21 actually stays with us. And so there are a lot of things that we do think will stay either completely or partially. But the one thing that we know will reverse itself to some extent is the tenure mix. And so if you think about what we've gone through over the course of '20 and '21, we didn't have a lot of net headcount growth in GTS. We did actually have decent headcount growth in GBS in '21. And what that meant is that the tenure mix shifted. We've talked about, typically, in a normal operating environment, having 35% to 40% of our people in their first year on the job. And obviously, we had a smaller cohort that fell into that category over the course of '21, which benefited us because first year productivity is lower than second year productivity, which is lower than third year productivity, and first year productivity is well below the average as well. We want to grow our sales force. We talked about, in our guidance, we're assuming, double-digit net headcount growth in both GTS and GBS, which means we'll have a lot more people, and they typically drive lower productivity. The reality is the investment in those people is for '23 and '24 and beyond. And so we do expect a little bit of a step-back in the average productivity numbers akin to the way we managed the business pre-pandemic, where we would invest, grow the sales force, drive low levels of productivity with those first year sellers in year 1, but it's really an investment in supporting our future growth.

And I'm curious, you're doing a lot of hiring this year, and you've had to -- some of the hiring is for sales force. You're also hiring for other roles within the organization. Can you just talk about where you are in your sort of efforts and your goals and also just what's it like recruiting in a very, very tight labor market today?

Yes. No, absolutely. So starting in Q2 of last year, we really began to rebuild all of our recruiting capacity. In 2020, we -- given what was going on from a macro perspective, we let our recruiting capacity wane down a little bit. And we quickly recognized in '21 that we needed more recruiting capacity to support all the growth that we were driving across the business. And so in earnest, we really started building that recruiting capacity in Q2 of last year. And we started to see the real benefits of that flow through in the second half of last year. If you look at total headcount for the company, we added around 750 people net from July 1 through the end of last year. And we've continued that momentum from a hiring perspective into 2022. And again, it's not just sales people that we're hiring. We're hiring research analysts. We're hiring service people. We're hiring people to collect, et cetera, et cetera. In terms of the dynamics around the labor market, it is a competitive labor market. And we talked about wage inflation being a little bit higher than we've normally seen. We want to make sure, A, that we are able to hold on to our top-performing people, and I think we're doing a really good job of that. And part of that is making sure that they are paid competitively internally so that they don't leave and don't go take jobs elsewhere. I think that from a hiring perspective, we have an exceptional brand as an employer in the market, particularly in sales and research, but also across the board. And so we are able to attract and continue to attract great candidates. We have really competitive compensation packages with really nice upside if you are a seller. And so we've done great and continue to do great in terms of attracting really great candidates and getting them on board because of that great value proposition. And again, you can look at all the awards we've won as an employer of choice. We've got a really great reputation in the market as well, and our recruiting team does a fantastic job of finding both active and passive candidates and talking to them about the value proposition of working at Gartner, and we do a great job of bringing them on. And again, we're very confident in our ability to continue to do that in '22 and beyond.

There you go. I said I would do it at least once. So there we go. There it was. So just holding it a little bit longer on the margin line, your normalized margin target throughout the COVID period, even before it hit, has moved up. You kind of started mid to high teens level and now you're talking about 20%. As we zoom out, what drove that higher outlook?

Yes. No, that's a great question. So let me just kind of zoom out and provide some historical context. So in 2017 through, call it, the first half of 2019, we were in a heavy investment cycle, and this is coming out of the CEB acquisition as well. So we were introducing new GxL products, Gartner for HR Leaders, Gartner for Finance Leaders, so that we could align all of our new GBS offerings with our heritage Gartner products. We were growing the sales force. We continued to invest in growing GTS pretty aggressively as well and our Conferences business as well. So at the end of that investment cycle, the pre-COVID margins for 2019 were around 16%. As I mentioned, in mid-2019, we pivoted to -- we've made great investments to make sure we focus on harvesting those returns. And during 2020, we committed to at least flat margins from that roughly 16% level. And then obviously, through '20 and '21, we had virtually no spending in travel and facilities, and our headcount growth was below our normal operating levels. And so as we move back towards a more normal operating environment, we believe we're going to deliver margins this year of at least around 20%. And our medium-term commitment from there is to deliver modest margin expansion from a normalized level, and a normalized level for 2022 is between 19% and 20%. And again, if you think about the algorithm for where does that modest margin expansion come from, we get a little bit of gross margin expansion through operating leverage and mix. We're going to grow sales costs roughly in line with top line growth, and then we can get some modest margin leverage out of G&A. But I think the important takeaway, and we've done this whole sort of recalibration, but the important takeaway is that we can drive top line double-digit growth and modestly expand our margins over time.

That's helpful. I'm going to ask a question, and then I'll throw in a question that we got from the audience. So my question is Global Business Sales, you just sort of started to talk about that turnaround. It looks like based on contract value numbers you've been putting out that it's really starting to gain traction. So curious sort of what you've gleaned turning that business, where you've seen the biggest successes and where things go from here.

Yes. No, I mean, obviously, with the GBS business accelerating, getting to double-digit growth and getting to mid-teen growth and for 2021, we were at 24% growth, clearly, performing exceptionally well. So I think, first, the value proposition for our GBS products is the same as our GTS side of the world. And I think, partially, there was some misunderstanding around can a product for HR professionals or finance professionals or legal professionals, can it be as strong and as sticky and as important as a product for technology professionals. And sort of the short answer is, yes, it can be, for sure. And again, if you cycle back to the beginning of our conversation, the value proposition, we're delivering that same sort of actionable objective insight for finance leaders, tech leaders, HR leaders, all around helping them achieve their mission-critical priorities. And HR leaders, finance leaders, supply chain leaders have mission-critical priorities just like tech leaders do. And so we've made a lot of investments in making sure -- and we just talked about that in the '17 to '19 time frame, to make sure that our -- the value proposition in finance and HR was as strong as it is in GTS. And I think we're proving that. And the business has performed really, really, really well. It's a huge market opportunity, just like we have on the tech side. We're going to grow the sales force to go after that market opportunity just like we do on the tech side. It's the same selling best practices. It's the same hiring and recruiting and training best practices, just applied to different enterprise functions. And so we're going to keep going after it. Our medium-term guidance for GBS is the 12% to 16% growth. So again, we believe that we can grow both GTS and GBS at really strong double-digit growth rates over the medium term.

So a question from our audience, which is, can you talk about the pricing actions or any pricing actions you're taking this year?

Yes. So our typical price increase is to do, call it, 3% to 4% price increase in the November time frame. And it varies a little bit around the world depending on when people's fiscal years are or government budgeting years or things like that. This year, with more inflation -- and for us, inflation is really predominantly on the personnel side, the bulk of our costs are personnel. We've been a little bit more aggressive on the pricing, so think more in the 5-ish percent range, overall, to make sure that we don't dilute margins as we pay our people a little bit more. And so I think -- and on top of that, we are always improving the value proposition in our products. And so generally speaking, our clients -- the discussion around a price increase on renewal is not a tough discussion. Generally, on average, our clients are not spending tens of millions of dollars with us. The average spend in GTS is around $250,000. The average spend in GBS is around $180,000. And so a 5% increase on that is not generally a deal breaker. So we're making sure that we adjust pricing to keep up with our major cost inflation, which is personnel.

I want to make sure as we have about 8 minutes left that we talk about some of the other parts of your business and, specifically, your Conferences business. Given the success you've had with virtual, do you anticipate hybrid models or some events remaining virtual once we're through this? Theoretically, we should be through this pandemic period. But as we come off this pandemic period, and -- can you just talk about the economics in virtual versus in-person? And what happens as you transition back to in-person events?

Yes. Absolutely. I think first and foremost, we are hopeful that the environment improves in a way or stabilizes in a way where we are able to run in-person destination conferences. I think that our clients really value them. Virtual is great, and we can talk about the economics of that and how it fits into the portfolio. But ultimately, we really want to make sure that we are able to rebuild our in-person destination conferences business. Now the one thing I will say is we are definitely taking the opportunity to leverage the learnings we've had over the last couple of years to adapt our Conferences business. And so we don't expect it to look exactly like it did pre-pandemic. And so if you think about our business, historically, there have been 2 kinds of conferences. We had destination conferences, multi-day conferences, Gartner Symposium, Gartner for security, et cetera, et cetera. And we had what we call Evanta meetings, which are essentially 1-day local meetings, think CIOs in Dallas or CFOs in Chicago or something like that. And obviously, with the pandemic, we introduced virtual conferences. So think about essentially now like 3 legs of a stool for our overall Conferences business. Virtual has been great for us as filling in gaps that we were not able to address when we were not able to run in-person destination conferences. And I think virtual conferences will play a really important role for us in the future. And so even if you look at this year from an operational perspective, we are running some virtual conferences in the first part of the year. And then we've got operational plans to start delivering some in-person destination conferences from the May time frame onward. And we're running virtual where it makes sense to run virtual. Maybe the audience isn't as big as it is in other places, and we're taking the opportunity to run in-person where we can. And so we're going to learn a lot as we get back to in-person. As I mentioned, the in-person conferences, we are starting in earnest in May. And then the schedule really does ramp up in the back half of the year. I should mention our guide -- our initial guide does not include our ability to pivot to in-person destination conferences. It essentially assumes virtual destination conferences for the full year, but we're excited about the opportunity to return to in-person where it makes sense economically. We'll continue to have virtual where it makes sense economically, and we also will continue to run our in-person Evanta meetings, which are, again, just inherently easier to deliver because there's no travel required, they're local and they're 1-day events.

I want to take you up on the economics question then. And then we only have 3 minutes left. I had a capital allocation question. Maybe can we -- if we can squeeze it both, that would be awesome.

Sure. So economics -- yes. So again, I mean, the economics for virtual look really good from a margin percentage perspective. But the margin dollars, we can, obviously, deliver significantly more margin dollars when we are in person. And the reason for that is the pricing and value proposition for our exhibitors at an in-person event are just much greater economically for us and actually much more value for the exhibitors as well. And so if we're playing a margin percentage game, then virtual would be great. But we're also -- we want the dollars as well and the value. And so that's the primary difference between the economics on the virtual side versus the in-person side.

I appreciate that, and especially, for squeezing in 2 or 3 minutes. So the last question is capital allocation. I'm getting questions, should we assume all free cash flow goes to buybacks? Sort of what are you thinking of in terms of leverage? And I'll throw in, I guess, where does M&A or bolt-on M&A come into that?

Yes. So from a cap structure perspective, our leverage target -- so we believe our business can handle leverage and, obviously, we've proven we can handle leverage. We're targeting 2 to 2.5x gross debt to EBITDA on an ongoing basis. In terms of priorities from a capital allocation perspective, to return capital to our shareholders or buyback programs and strategic value-enhancing tuck-in M&A, we're an organic growth story. We don't need to do acquisitions to hit our growth targets. We can be really, really super disciplined about M&A. But when we find stuff that fits strategically, that makes a lot of sense that we think we can derive great value from, we're inclined to do that. So again, if you think about the capital allocation, our free cash flow generation, our balance sheet, those 2 priorities, given we don't need to do M&A, there's clearly a bias towards buybacks. But if we do have to shift the mix a little bit, we are talking about small to medium-sized M&A, though. So we would still -- I think our capital allocation consistently will be dominated with buybacks. You're on mute, Heather.

It looks like we've lost Heather. So with that, I think we'll just say thank you very much to Heather and BofA. And if there are follow-up questions, just reach out to me. This is David Cohen from the Investor Relations team.

Thanks, everyone. Thanks, David.