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

Good morning, everybody. Thanks for joining us 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'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 43rd Annual William Blair Growth Stock Conference. Thanks for joining us today, Craig. And I'll give it to you to give the presentation.

Awesome. Thanks, Andrew, and good morning, everyone. Thanks for joining us. Got to share this and then we'll move on, but we will be making some forward-looking statements. So want to introduce you to Gartner. And so as Andrew said, my name is Craig Safian. I'm the CFO at Gartner. I've been with Gartner since 2002. I've been Gartner's CFO since June of 2014. We are a growth company, and I'll give you some insights into how we do it, why we do it and some of the results over the course of our time together today. So we are a growth company. And obviously, the thing that fuels our growth is really our people and our insights. Ultimately, our goal is to make sure that we're delivering actionable objective insight to executives and their teams. And historically, Gartner served the IT function. That's where we started. That is our heritage. We started doing that in 1979 when the technology world was really just IBM, and so we covered IBM. Obviously, the technology world has grown a little bit from then as well. And now we actually serve all the major functions within an enterprise. And so through a combination of acquisitions and some organic launches, we now serve not only functional leaders within technology but we do so in HR and supply chain and finance and legal and sales and marketing and customer service, and we'll get into that a little bit later. We are a global company, as you'll see later. About 1/3 of our revenue comes from outside of the U.S. and Canada. We've got almost 20,000 associates delivering our insights across the world. And as I mentioned, we've been doing this for over 40 years. When we think about our pitch around growth and value creation, we really put it into 3 categories. And so we can drive consistent and sustained double-digit top line growth. And as I'll show you a little bit later, we've been delivering on that. We have a huge market opportunity. It is wildly unpenetrated. And really, our belief is the only thing standing between us and the capture of that market opportunity is hiring more salespeople to make the pitch about how Gartner can help executives accomplish and achieve their mission-critical priorities. The bulk of our revenues are recurring revenues, so a subscription business, and again, we'll double-click on this a little bit later. So double-digit top line growth, sustained double-digit top line growth. We can do that while also modestly expanding our margins each and every year. And so we believe our fundamental margins are in the low 20s. And we believe that we can not only grow the top line at double-digit growth rates, that we can also modestly expand our margins from there moving forward. And then the third big thing is really our free cash flow generation, and so we generate free cash flow well in excess of net income. On average, it's about 140% to 160% of net income. And we're able to do that because for our recurring revenue business, we're actually invoicing a year ahead for the most part across all of our contracts. So think of it as we sign a deal or we renew a deal, we send an invoice, we collect it 30 or 45 days later. And we're actually delivering value and recognizing revenue over the following 12 months. So we're getting cash well in advance of actually the revenue recognition or the expenses that we're required to service that. On top of that, we're not a capital-intensive business. We have a strong balance sheet. And we've actually been using our free cash flow for shareholder value-enhancing initiatives for a number of years. And again, I'll show you that in more detail a little bit later. I promised you that you would see the top line performance. Here is the top line performance. This is contract value, which is our best forward-looking measure for future research revenues. You can see that since 2012, we've grown at a 15% compound annual growth rate. And equally as important, we've grown our free cash flow at roughly the same rate, mid-teens growth rate over that same period. So contract value, significant growth, which fuels research revenue growth, and then as I mentioned, that free cash flow machine kicking in and really driving significant amounts of free cash flow. We also -- and a lot of investors are focused on this as well, very helpful in our -- with our clients in their journey around ESG. And so we've got lots of insights and tools and templates that help clients improve their ESG. In addition to, we're very focused on it as a company as well. And I'd encourage you, we just published our 2022 corporate social responsibility report, which is out there, which really highlights and details all the things we're doing ourselves as a company but also highlights all the things we're doing to help our clients on this ESG journey as well. So you think about what we do, our core business is our subscription research business. And as I mentioned, we now cover all the executive functions. So again, not just IT but finance and HR and supply chain, et cetera. And we have this concept where we want to make sure that we understand what our clients' most important mission-critical priorities are and map our value and deliver to that value over the life of the contract. And again, by delivering actionable objective insights and tools and templates and peer connections and all of that over the life of the contract. Our firm belief is that if we are helping our clients with their mission-critical stuff, they will renew. If we are not helping them with their non-mission-critical stuff or helping them with stuff that's not important, we won't renew. Similarly, if they are engaged with our platform and us consistently over the life of the contract, they renew. If they are not engaged, they don't renew. And so we are obviously very focused on: number one, understanding what the mission-critical priorities are of our clients and delivering value to that; and two, making sure they are consistently engaged with us over the life of the contract. When we do that, they renew. And again, renewals are the lifeblood of our business and of any recurring revenue business. The way we deliver the insights is really, we have this great ecosystem in which we operate where we've got about 2,500 experts who are generating the insight. And they generate that insight through their own research, their former practitioners, their knowledge of the space but also through all the interactions they have with clients around the world. And so as you can see on the chart here, we have just under 0.5 million interactions each year where clients are scheduling a phone call with one of our experts trying to get additional insights into helping on their MCPs, but that's information that we can then apply to our insights. So it's a really nice flywheel there for us. And then obviously, we've got tools and templates and presentations and things like that, that actually help our clients do their jobs better as well. From a numbers perspective, as I mentioned, the core part of our business is research. In 2023, we're estimating about 83% of our revenues come from research. Research has generally been our fastest-growing segment. It is also our most profitable segment, as you can see, reflected in the middle chart, where it makes up 83% of revenue but 89% of our gross margin. Again, our Conferences and Consulting businesses, and we'll double-click on these a little bit later, too, those are great businesses, but those are there to serve our Research business, to complement our Research business, to accentuate our Research business. And again, they're great businesses in and of themselves, but we're not in those businesses because they're great individual standalone businesses. We're in those businesses because of the way they support and complement our Research business. And then on the last pie chart, you can see our geographic mix where about 2/3 of our revenue coming from U.S. and Canada and the balance coming from the other parts around the world. So Research. So the Research segment, as I talked about, a little over 90% of the Research revenue you see here are those annual subscriptions and recurring revenue. You can see revenue increasing rapidly on this chart and gross margins being relatively stable but in the low to mid-70s range. This is, again, the core of our business. It's the biggest piece of our business. It's the most profitable piece of our business. And it's also the piece of our business that really fuels all that cash flow generation capabilities I talked about a little bit earlier. Again, the bulk of this 90-plus percent are annual subscriptions that we sell. And basically, the contract -- the minimum contract length is around 12 months. The majority of our contracts are actually multiyear in nature, so think, average contract length is probably more in the 1.6- to 1.7-year range, which obviously gives us a lot of great forward visibility into revenue as well. As I mentioned, 90-plus percent is subscription. The balance of our non-subscription business are a series of different revenue streams. The major one is helping small companies find the right software applications. We did 3 acquisitions in the 2014-2015 time frame. We bought 3 properties, 1 called Software Advice, 1 called Capterra and 1 called GetApp. We actually did another small acquisition last year called UpCity in this space. And essentially, it's an extension of our -- one of our core value propositions of our Research business. Our Research business, subscription research business is really helping enterprise-size clients with their mission-critical priorities. These businesses actually help really small clients, small businesses make the right software decisions. You'll hear us talk about GTS and GBS, and so just wanted to spend a minute on how we go to market and how we segregate some of our operating results to provide just a little more visibility. So we have a Research business. We manage it as a singular research business. We have common research methodology. We have common management tools. We have common sales tools, but we go to market through 2 different sales forces. So what we call GTS or Global Technology Sales is our sales force that calls on the technology world. It's a combination of end users of technology, so think Chief Information Officers and their teams, and also technology vendors and then, to a lesser degree, technology investors and technology service companies. That is our biggest piece of contract value or our biggest piece of our Research business, representing about 80% of total CV, about $3.5 billion of contract value. You can see we've got almost 4,000 frontline sellers in that space, and that's all about that IT circle that you see there. We then have a separate second sales force, which we call GBS or Global Business Sales. And back in 2017, we did an acquisition of a company called CEB. And with that acquisition, we were able to have businesses and coverage and products in all these other functional areas outside of IT, like finance and HR and legal and sales, et cetera. That's about $1 billion of contract value. We talk about it like it's 1 big business, but in effect, it's actually several smaller businesses. So within GBS, we have a sales force that calls on finance leaders. We have a sales force that calls on HR leaders. The 2 fastest-growing circles within the GBS portfolio are HR and supply chain, which as of last quarter, were both growing north of 20% per year and have been consistently growing in that range. GTS growth rate at the end of last quarter was 9%. GBS growth rate at the end of last quarter was 16%, so again, 2 very fast-growing businesses. And you can see GBS represents about 20% of our total contract value. This is an area where if you are new-ish to Gartner, I think it's really important to spend a little time on it, just sort of a way to think about how we drive growth and how it translates into our -- some of our operating results. And so in this example, and again, just illustrative, these aren't real numbers, just illustrative, we start the year with 100 of CV. And we do have some client churn and that's reflected in that first attrition category. And in this illustrative example, it's 18. We then take price on those that stayed with the business. Obviously, you can't take price on clients that cancel. And then we generally, on average, drive a nice hunk of growth from existing clients. And that's a combination of finding additional license users within that client base, upgrades, additional buying centers, et cetera, et cetera. And so when you net those first 3 categories over, you get to 104, okay? And essentially, what that is, is wallet retention of -- on a net basis of existing clients, net of those that went away. On top of that, our sales teams are focused on bringing in new logos as well. And here, you can see they brought in 8 new logos. And that gets you to what would end up being an overall contract value growth rate of about 12%. And so this is illustrative but indicative of how we generally operate where about 2/3 of our gross growth comes from existing clients, the balance coming from that -- those new logos that you can see reflected in the new -- from new clients. So again, this is kind of the way we think about how we drive growth in the business and has been relatively consistent in terms of proportionality for the 20 years I've been at Gartner. We also talk a lot about our vast market opportunity. And as we've done the math on this, and we've triangulated on it and calculated it all sorts of different ways, the short story is huge market opportunity. We're this little blue sliver here on the far right. And so a $200 billion market opportunity and we've only got $4.5 billion of it. And so a lot of runway for growth. Part of the way we think about this also is even if we were 50% wrong on the calculation, and it was only a $100 billion market opportunity, it's still amazing and still a lot of runway for us. And so we think about this market opportunity, and again, we've been slowly but surely moving that contract value number up at a pretty consistent double-digit growth rate. And so the market is there and the thing standing between us and capture of that market opportunity is us having more feet on the street to go get it, so more salespeople. So you've seen us grow our sales force pretty consistently at double-digit growth rates over the last 10 to 15 years. And that's how we've been slowly but surely capturing this market opportunity. A lot of people do ask about what are the competitive dynamics you see in this market. And there is competition, but oddly not a lot of competition with a similar business model to what we have. And so I think we compete for mind share and we compete for wallet share. But a lot of -- there really are very few companies who come in with a subscription-based product at a relatively low cost that is very flexible and moves with the needs of the operating executives that we serve. And so if you think about the difference between Gartner and a consulting project, as an example, if you hire consultants, they will come in, you will scope out a project. They will spend a few months delivering on it, send you a large -- generally, very large bill for that work and then move on. With a subscription to Gartner, and again as I talked about, we're focused on helping our clients with their most important mission-critical priorities. And so let's say you're a Chief Information Officer. And your big priorities are securing the organization from a cybersecurity perspective, building out a world-class data analytics function and making sure that you continue your journey from a digital transformation perspective. Great. Awesome. We will make sure that our assets and tools and insights help support you on those 3 major initiatives. But then the world changes. And let's say a pandemic happens as an example. And suddenly, your priorities change. You need to support a remote workforce. You need to figure out how to find software developers in a really challenging market environment. You don't have to buy anything incremental from Gartner. You literally, or I shouldn't say literally, you figuratively change the channel. So as a client, you get access to all the relevant insights for your role. And we know that priorities can change. And so you essentially just change your priorities, change the lens at which you look through gartner.com and you get access to what you need for those changing priorities. And the same thing applies across all the major functions that we serve. And so we have a high degree of conviction around this market opportunity, and that's why we've got a high degree of conviction around how we can grow our business. Quickly on Conferences and Consulting. Conferences is a great business that complements our research business. Our mission, as you can see, is to have the must-attend conference for basically every major role we serve. I think we do a fantastic job of this. I'd encourage all of you, if you've never been to a Gartner conference, to attend a Gartner conference. They are very affirming in terms of our reach and value. And I know even today, when I go 20 years later, I'm still blown away at the scope and importance of our conferences to our clients. Obviously, the pandemic put a little bit of a hurt on this business as we weren't able to run in-person conferences for about 1.5 years or so. But starting in third quarter of last year, we got back to our in-person destination conferences. We had a great second half of the year last year. We had a great first quarter this year. And people -- the attendance at our conferences has been off-the-charts great and so really excited about this. And again, it really helps our research business as well in addition to delivering strong revenue and strong gross margins. Consulting, similarly, really great business. Think about Consulting as helping our largest, most complex GTS clients who need arms and legs and brains on the ground to help them with their more strategic project work. And so we don't do implementation, we don't do integrations. I should have mentioned earlier, one of the hallmarks of our research business is maintaining independence and objectivity and that flows through to Conferences and Consulting as well. But for our largest clients, they really want Gartner Consulting to help them. Think about IT strategy, think about large project managing -- project management office, think about large transitions from data centers to cloud or assessing cybersecurity frameworks or helping with digital transformation strategy, those are the types of things that we do, and this business has actually been performing very well of late as well. And again, when you sort of boil it all together, this is a business model that is structured to deliver strong free cash flow, and you can see the reasons for that. So recurring revenue business with high renewal rates, high incremental overall and incremental contribution margins. The upfront invoicing, we talked about earlier, where we're collecting cash well in advance of recognizing the revenue and delivering the service and obviously that low capital intensity as well. And so we do generate lots and lots of free cash flow, again, as I mentioned, well in excess of net income. And so we put that free cash flow to use, and our 2 capital allocation priorities are share repurchases and M&A. And we did -- our M&A history has largely been small- and medium-sized tuck-in M&A. We did 1 very large transformational M&A deal in 2017, which was CEB, which I alluded to earlier. As we look out to the landscape today, we believe the landscape is really filled with more small- and medium-sized tuck-in opportunities as opposed to any large transformational M&A. On top of that, we believe, given the market opportunity and given our ability to go get that market, we are an organic growth story. We don't need to do M&A to support our growth rate. And so M&A will be very strategic but we can also be super disciplined about it because we don't need to do it to support the growth rate. And so saying all that, there's been a bias towards share repurchases over the last few years, which you can see here on the bottom left chart. And so this is a reflection of both our balance sheet and how we've deployed capital for the most part over the last several years. You can see in the last 3 years, in '21 and '22 in particular, we returned about $2.7 billion of cash to our shareholders. That was largely cash flow. And then on the right side of the page, during the pandemic, we took the opportunity to really remake our debt stack, push out our terms and also lock in at really great fixed interest rates. And so you can see reflected here the bulk of our debt is now termed out to '28, '29 and '30. And you can see with fixed interest rates, last 2 deals we did were sub-4% high-yield bond deals. And so in very good shape from that perspective. Our leverage ratios are right now below our targets. Our goal is to make sure that we use our free cash flow for shareholder value-enhancing initiatives, and again, with a bias towards buybacks, at least over the short term. And when you put that all together, this is our medium-term expectation or our medium-term outlook or our medium-term guidance. And this has been the same for the last several years. So it is boring and consistent, but I'm all for boring and consistent with numbers like this. So if you think about it from a segment perspective, Research, again, which is the biggest, most profitable piece of our business, we believe, and again, this is across both the GTS and GBS go-to-market channels, we believe we can grow this business between 12% and 16%. And in fact, we've been growing this business between 12% and 16%. And there's no reason, given the market opportunity I showed you earlier, that we can't continue to grow at 12% to 16% rates. Conferences and Consulting. Conferences, we are on the way back from the pandemic. Our current guide for this year for Conferences is almost to 2019 revenue levels with about 23 fewer conferences. So we are coming back strong. We're not quite back to 2019 levels but we're pretty darn close, but over the medium term, our expectation is 5% to 10% growth and Consulting in the 3% to 8% growth. And so when you put all that together, what that outputs is double-digit top line growth, EBITDA growing a little bit faster than revenue. That's, that modest margin expansion I talked about earlier. With us putting our capital to work, EPS growing a little bit faster than EBITDA, so earnings growing roughly in line with EBITDA but with fewer shares because we're buying back, EPS growing a little bit faster. And then, obviously, free cash flow growing even a little bit faster than EBITDA as well, given the free cash flow dynamics that we talked about earlier. So that's the Gartner story. I did it with 2 minutes and 40 seconds remaining on the clock. So Andrew, I could filibuster for 2 minutes or we could...

Yes. We'll try to squeeze in maybe 1 question. And I think it's one that I get quite a bit of from investors and maybe 2.5 minutes isn't enough to cover it, so maybe that's the teaser to go to Adler for the breakout. But if you could just kind of talk about kind of what's changed over the past 5 years in terms of the margin structure. I think there's a ton of different things that have evolved since you bought CEB that have really improved that growth profile and margin profile. So if you could just take 2 minutes to walk through the key points and then we'll go from there in the...

Yes, absolutely. So just a little historical context as well. So pre-CEB acquisition, our EBITDA margins had run in the roughly 18% to 19% range with a slight drift downward. Post acquisition, we had to do a lot of work to divest a number of nonstrategic businesses post acquisition, and we invested a lot of money not only behind the CEB businesses, which became the GBS go-to-market structure but also behind our Conferences and GTS, et cetera, et cetera. And so we ended 2019 with EBITDA margins of around 16%. In the pandemic, we actually learned a lot and we actually had pumped the brakes in 2019 to slow investment and get returns on investment. But I'd say there are 3 or 4 big things that allowed us to go from 16% in '19 to our foundational margins now in the low 20s. Thing 1 is the old CEB business, GBS actually grew a lot from '19 to '22. And we've invested a lot and we're just now getting returns on those investments. And so put in perspective, GBS was around $650 million of CV in '19 and is now $1 billion. And obviously, a lot of that flowed through and really enhanced our overarching margin structure. Thing 2 was travel. We were traveling a lot and spending a lot on travel and we're now able to travel much more effectively and efficiently. And that's had a really nice impact on the margin structure. Thing 3 is real estate. We've actually been trimming our real estate portfolio as we adapt to the new normal of in-office versus virtual. And then thing 4 is we moderated our sales force headcount growth. So historically, we had grown headcount in line with contract value growth. So if contract value was growing 14%, headcount was growing 14%. But with wage inflation and everything, that meant cost of sale was actually growing 17% or 18%, which puts a ton of pressure on cost of sale and margin. We now are targeting to grow our headcount about 4 to 5 points lower than CV growth. We think it doesn't impact our ability to go get that growth rate and it's just growing more effectively and efficiently.

Thank you very much. Right on time. Thanks again to everyone for joining us. And again, the breakout is in Adler, which is on the second floor. Thank you.