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

All right. Good morning, everyone. Thanks for joining us today for the Gartner presentation. My name is Andrew Nicholas, and I'm the analyst covering the information services, consulting and HR technology sectors here at William Blair. Before getting started, I am 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 and Executive Vice President; Craig Safian, to the 44th Annual Growth Stock Conference. Thanks, Greg, and take it away.

Thank you. There we go. Great. Awesome. Thank you, Andrew, and good morning, everyone. We're going to spend the next 29 minutes talking about Gartner and the Gartner story, and then we do have a breakout scheduled after this for any questions you may have and of course our investor relations team led by David Cohen is here as well. If there are any follow-ups post conference, you can feel free to reach out to him. Obviously, we have our forward-looking statement disclosure. It's there, duly noted. So let's dive in. So as an introduction to Gartner, many of you may know us, but many of you may not know us. So Gartner, we've been around since 1979. And our mission and goal is to make sure that we are delivering actionable objective insights to the executives that we serve to help them on their most important mission-critical priorities. And we'll talk a lot about that as we go through the presentation. We're expecting over $6 billion in revenues this year. We were about 20,000 person strong organization. And again, we are a global organization with close to half of our 20,000 associates outside of the U.S. We operate in about 90 countries around the world. And today, we serve not only technology leaders, which is our bread and butter and where we started, but we were serving enterprise function leaders across every major function in the enterprise. And so today, not only are we serving chief information officers and their teams, we are serving CFOs and their teams, CHROs and their teams, Chief Supply Chain Officers and their teams, Chief Marketing Officers, Chief Sales Officers, general counsels, et cetera. And again, we'll talk all about that some more, but this is the brief introduction of the business. From a value proposition perspective, we offer a very compelling value proposition for our clients at a relatively low cost. And so think of an average license to Gartner costs about $45,000 to $55,000 per year, and we are delivering value, significant value well in excess of that, again, making sure that we support the operating executives that we serve, helping them on their most important mission-critical priorities. The Gartner business, about 82% of the business falls into our Research segment. More than 90% of that 82% is a recurring revenue subscription business where we are selling individual licenses to users within the enterprise. Minimum contract length is 12 months. Over 70% of our contracts are actually multiyear in nature. So the average contract term is about 1.7 years for us on that 76% of a recurring revenue business that has higher retention rates, and we continue to -- to grow. It has the highest gross margin of all our businesses, typically been the fastest grower and has a wonderful free cash flow characteristics, which we'll double-click on a little bit later as well. The nonsubscription portion of the business is -- it's small. It is largely what we are doing there is connecting buyers of technology, particularly on the small end of the market so small businesses with sellers of technology. And then we have a consulting business and conferences business. Those are great stand-alone businesses, but we're not in them because they are great stand-alone businesses. We are in them because they support, complement and catalyze our research business. So if you think about who we are and what we do, we are an insights company, a research business. And everything we do is in support of making sure that we deliver great value to our research clients. And if they attend the conference, it's awesome. If they use our consulting, fantastic. But everything is about making sure that we complement, catalyze and grow our research business. From an investor story perspective and how we sort of think about our business, there are really 3 major takeaways that I would like you to take away from this presentation. So one is that given all the characteristics of our business, great value proposition, huge addressable market that we can grow our top line at consistent, sustained double-digit growth rates. We can do that while investing in the business, but also delivering modest margin expansion each and every year going forward. And then given the fundamental characteristics of our business, we are a free cash flow generation machine. We can generate huge amounts of free cash flow well in excess of net income that we can then deploy on shareholder value-enhancing initiatives, particularly the return of capital to our shareholders through our buyback program and strategic value-enhancing tuck-in M&A. And again, we will double-click on each of these as we roll through. So let's start with double-digit growth. So it really does start with our value proposition. And we believe and I think our clients believe that we have a very compelling client value proposition for the price that we are charging. And we started in technology serving chief information officers and their teams, and we've obviously expanded that out now serving all of those other enterprise functions that we talked about. But if you think about what is a mission-critical priority to one of the executives that we serve, we've got some examples in the bubbles that are lightning bolting to this poor operating executives head, and they're meant to sort of cover the broad different functions that we serve. But imagine you are a leading supply chain or you're a direct report of the Chief Supply Chain Officer, at a company. Again, you're going to be really focused on supply chain and business resiliency. You're going to be focused on what are the right technologies to deploy to support driving that supply chain. You're going to be focused on what happens if there are disruptions in my supply chain if something happens in China or something happens, elsewhere, if there is a global pandemic or something like that. And again, if you put yourself in the seat of any of the operating executives, you're going to have all these different challenges. And we are very well positioned with over 2,000 experts creating insights and tools and other assets to help these executives deal with these mission-critical priorities and actually win for their business moving forward. And so again, it all starts with a very compelling value proposition. And then on top of that, we have a massive market opportunity. And so as we think about our TAM, our total addressable market, I'd encourage you to check out our investor say, we actually just produced a new video that attempts to help investors triangulate on that addressable market. But we look at it for each of the segments that we serve, we essentially have, call it, roughly 140,000 enterprises globally that operate in the markets in which we are operating in that are large enough, complex enough and have enough budget to actually get value out of a Gartner license. And we look at that and then we estimate, based on the size of the company, the industry they're in, et cetera, how many licensed users we could find in each of those companies. And essentially, we just take that quantity and multiply it by the price of our varying products across our portfolio. So essentially, we've done a PxQ analysis in technology, in supply chain, and all the other functional areas, and this is the result. And again, I'd encourage you to check out the video. It has a very handsome and charming star of the video, I would say as well, it's me. That's not -- it wasn't a joke. Just kidding. But again, it's an attempt to help you sort of triangulate based on real data around how we came up with that PxQ analysis. And so on the technology side, if you look at it that $55 billion, about $10 billion of that addressable market is serving technology vendors and about $45 billion is serving enterprise end users of technology. So Chief Information Officers and their team. And then the same thing across supply chain, marketing, HR, et cetera. And the really important thing here is 2 things. One -- or 3 things, I should say. One is it's a huge addressable market. We estimate it at around $200 billion. Big point number 2 is that little teeny sliver of a bar on the far right is our current penetration of that market, just under $5 billion. And then the big point 3 is it is largely an unvended addressable market. So we don't have a ton or many competitors in this space. Generally speaking, when we make a proposal for new business, it is not a response to an RFP. That's a very small percentage of our deals. These are largely greenfield -- this is largely a greenfield opportunity for us. And the way we capture this opportunity is through our sales excellence and growing our sales force to capture this opportunity. And again, as we think about the opportunity, it really falls into 2 categories. One is further penetrating our existing client base. And if you look at our stats over the last decade, 15 years, et cetera, we've slowly but surely been increasing our penetration of those existing enterprises. And then capturing if there's 140,000 enterprises out there today and we do business with roughly 15,000 of them, it means that we've got another 125,000 enterprises to go get over time. And then the way we get them or get after them is by continuing to grow our sales force to go capture that. So again, great compelling value proposition, especially as compared to the cost of the product and a huge addressable market opportunity that is, again, largely unvended, I think we've been slowly but surely ticking away at continuing to capture a greater and greater percentage of that market. And again, those are the 2 primary ingredients towards driving sustained double-digit top line growth. This is an asset that we use. It's an illustrative growth algorithm just to give a sense of how we actually generate growth and how much of it comes from continuing to penetrate our existing clients and how much of it comes from new logos. And again, this is illustrative. So if you think about starting from the left side of the chart, if you start the year with 100 of CV, we want to get to, at a minimum, 12% growth, that's that 112 on the far right. And so what happens within our existing client base is there is some churn. We tend to see a little bit more churn with our smaller clients who spend less with us. And so in this example, illustrative, of course, we lose $18 through churn. But the clients that stay with us, we take consistent price on them. So 3% to 4% per year on average for the last several years. And we also find new buyers or licensed users within the existing enterprise in this illustrative example, it's 19. And so at the end, after we've churned through our smaller clients, the ones that remain with us are actually spending $104 with us. So without any new logo growth, we would be growing 4% per year. But we're actually chasing new logos as well. And here, you can see the new -- from new clients represented as $8. So that's a rough way to think about the algorithm of how we grow. It's how we've done it for 25, 30 years, and it's how we intend to do it into the future. And so even though there is a lot of new logo opportunity, we still have huge opportunity to continue to grow our business within our existing enterprises. And then every time we add that $8, they become an existing enterprise in the next year that we intend to continue to grow as well. And so again, as we think about growth, this is how -- this is a good way to think about it, where a significant portion of our net growth comes from existing enterprises and then the new logo growth accretes on top of that. And again, we've delivered strong results over the last whatever period you want to look at. I mean here, we're looking at 2013 to through 2023, if you want to go back to 2003 or 2004, and start the clock then, you'd see a similar trajectory 14% compound annual growth rate on contract value and a 14% coincidentally compound annual growth rate on the free cash flow as well. So that's consistent sustained double-digit top line growth or proxy for top line growth and, most importantly, continued sustained double-digit growth on free cash flow as well. And again, if you look at just about any metric that we have, revenue, EBITDA, you name it, the trends are going to look pretty consistent. Now we can now do this while also modestly expanding margins each and every year going forward. And that might sound in some scenarios like, "Oh, you guys have to be really thoughtful and disciplined on cost." And yes, we do. But we also -- if we're growing our top line at 10% or 11% or 12%, what it means is expense growth can be just a tick below that. And so part of what we're doing is making sure that we are investing or reinvesting back into the business so that we can drive sustained growth, but we can do so at a level where margins modestly expand each and every year, and I'm going to show you how we do that. Really comes from 2 places. So if you think about how we're going to drive modest margin expansion going forward, there's a little bit of gross margin expansion just from shift in mix to research. So research is our largest, most profitable segment with gross margins or segment contribution margins in the low to mid-70s and think about incremental segment contribution margins roughly in that range as well. So it's the largest and most profitable segment and should be our fastest-growing segment as well. And so over time, as research becomes a bigger and bigger piece of the pie, there is just based on math modest gross margin expansion. And again, you can see our contribution margins are up nicely, it's a combination of continued shift in mix, but also operating leverage that we've gotten out of the business from learnings from the pandemic, from growing our GBS business after investing a lot behind it post our CB acquisition in 2017 and a number of other factors. And you can also see it has translated into structurally significantly higher EBITDA margins as well. Now I would say in '21, '22 and '23, there are some onetime benefits coming out of the pandemic that we've been telling investors since they happen, are not permanent. Right now, we're seeing the structural margins of our business on an ongoing basis are sort of low to mid-20s. Our 2024 guidance implies an EBITDA margin of about 23.5%. Think of that as roughly the baseline for where we modestly want to expand margins going forward. But again, if you think about how we're going to expand those margins going forward, it's continued gross margin expansion through a shift in mix to more research. It's modest G&A leverage. So G&A expense is growing a little bit slower than total revenue, and it's continuing to invest in growing our sales force, but at a level that allows us to essentially maintain sales cost as a percent of CV or sales cost as a percent of revenue. So it doesn't dilute the overall -- overall operating EBITDA margins. And then the point -- it's funny, a lot of investors will say to us like what is most misunderstood about the Gartner story. And I do think there are a handful of things. I do think people do not appreciate the breadth and depth of the value proposition. And again, we're trying to help investors really understand that because that is core to sort of how we retain the business and how we grow the business. And then I think the piece where people don't spend enough time on is the free cash flow generation capabilities of the business. And so if you think about what we're able to do pretty consistently is generate a huge amount of free cash flow. And here are the -- on the top of the slide, sort of the characteristics that drive that. And so the recurring revenue model and the upfront invoicing, make working capital a source of cash as opposed to a use of cash for us. And so we've got recurring revenue with high renewal rates, and we're invoicing in advance. Again, a lot of our contracts, as I mentioned, are multiyear in nature. And the way we handle those from an invoicing perspective so let's say we sell a 2-year deal. On signature, we send out an invoice for the first year, which we collect 30 to 45 days later and again, are still recognizing the revenue and delivering the cost over the subsequent 11 months. And then on the first anniversary, we send out the second annual invoice, again, well in advance of recognizing the revenue and delivering the value and actually the expenses that go with it. So again, our working capital is a source of cash for us, and it's structurally that way, and we do everything in our power to make sure that we enhance and magnify that impact. Obviously, we have high contribution margins now leading to really strong EBITDA margins. It's a low capital intensity business. Our biggest expense on our P&L is our people. So we're not building manufacturing facilities or anything like that. CapEx for us is order of magnitude about 2% of revenue, and that's roughly where it should be moving forward. So low capital intensity. And then as I mentioned and really importantly is we're making sure within the model that we are reinvesting so that growth isn't a 1-year thing or a 2-year thing. It is a sustained thing like I showed you on the chart where we can consistently keep growing at double-digit growth rates. And the most notable investment that you all see is our investment in frontline sellers, but I assure you that is not the only place we are investing to make sure that we can continue to sustain the growth. We are investing in the right level of experts. We are investing in the right level of service people so that we can consistently delight our clients and drive higher retention rates. We are investing in technology and new process so that our teams have the most contemporary tools to make sure that they are delivering the greatest value to our clients and converting prospects. We are launching new conferences to support our research business so that we build out our portfolio of conferences so that we actually do have a must attend Destination Conference for every major role that we support in every major geography in which we operate. And so we're able to do that while still delivering modest margin expansion every year going forward and still with all that we generate lots and lots of free cash flow. And if you think about how -- a couple of different ways to think about it. So if you think about EBITDA yield, we're dropping about 70% to 80% of our EBITDA dollars into free cash flow each and every year. So it's one way to look at it. Second way to look at it is, we're generating about 140% to 160% of GAAP net income into free cash flow. So free cash flow consistently greater than our net income. And the 140% to 160% range in an accelerating contract value growth environment will be towards the higher end of that range. And in a stable CV growth environment, we'll be sort of middle of that range and in a lower CV growth environment sort of at the lower end of the range, but still it's a pretty nice range to be in between 140% to 160% of GAAP net income on a consistent basis. And so with all that free cash flow, then we want to put it to use on behalf of our shareholders. And I think as you'll see in a few slides, we've been consistently making sure that we are driving shareholder value-enhancing initiatives with our free cash flow. And the 2 primary uses that we've been using are returning capital to our shareholders through our share repurchase program and strategic value-enhancing tuck-in M&A. And so sort of look at that free cash flow conversion, again, we've driven strong significant growth in EBITDA dollars. And as you can see, it has driven corresponding significant growth in those free cash flow dollars as well. And again, over the last few years, through the pandemic, we've unlocked a significant amount of incremental profitability, as you can see on the EBITDA numbers. and a significant amount of free cash flow conversion, as you can see with 26% compound annual growth rate in free cash flow since 2019. And again, what we've been able to do then is actually deploy that capital on behalf of our shareholders. And so the primary thing we've done over the last 4 years is buybacks. And you can see since 2021 through 2023, we're well over $3 billion of share buybacks in that time period. And if you look at that same time period, it's about $3 billion -- a little over $3 billion of free cash flow. So essentially, whatever we've generated in free cash flow, we've been able to pour back and reduce our share count pretty significantly, I think, 12% or 13% over that time frame as well. And that's what our model is going forward. And so, at a minimum, we want to offset our equity dilution with our repurchases, but we also want to make sure that we are using our excess capital and free cash flow to drive shareholder value. And so we'll continue to be price sensitive, opportunistic and disciplined on our repurchases. We continue to look for M&A opportunities, but being perfectly frank, we are an organic growth story. So we do not need to chase M&A deals to support our growth rate. We will do deals where they check the box strategically, where they catalyze a piece of the business, where they fill in gaps from a research coverage perspective or a technology capability perspective or a geographic perspective or things like that. But we can be super, super disciplined about M&A because we don't need to do it. And so if it doesn't check all the strategy boxes or it doesn't check all the valuation boxes or it doesn't check all the value creation boxes, we don't need to do it, and we will walk away and happy to deploy that excess capital on buying back shares and reducing our share count. And the other thing I'd mention is our balance sheet is an exceptional condition. We're currently actually slightly below our leverage target. So we're about 1.7x debt-to-EBITDA right now on a gross basis. We target 2 to 2.5x is sort of our notional target there. We did a lot of work in -- from 2020 through 2022 to remake our balance sheet. So we've got very attractive deals. We've got nothing coming due before 2028 and essentially our entire cap structure is fixed interest rates. And so obviously, in this environment, that's pretty positive, and we're happy we took advantage of the markets when we did. And then last thing I'd leave you with is sort of reiterating our medium-term objectives. And again, what you've seen is we've been able to deliver these kind of results pretty consistently over whatever time period you want to look at. But when we look at research business, we believe we can grow the CV and our research business between 12% and 16% consistently. Conferences, we've typically outperformed this 5% to 10%, but the medium-term objective is to grow that business 5% to 10%. And consulting, while doing a little bit better than this right now from a medium-term objective, 3% to 8%. If you sort of just pop that into Excel, pick your midpoints or do the ranges, whatever you want to do, what it spits out is double-digit revenue growth. So 10%, 11%, 12% revenue growth depending on where you dial in the ranges for the other revenue lines. The reality is with research being 80-plus percent of the business, that is the thing that swings the model the most. We are committed to modest margin expansion, which means EBITDA grows a little bit faster than revenue. And because we'll be deploying all that free cash flow on reducing the share count, our expectation is that EPS will grow a little bit faster than EBITDA. And so when you kind of boil it all together, what we're talking about is double-digit top line growth, modest margin expansion, huge amounts of free cash flow generation that we put to use on behalf of our shareholders so that our EPS or free cash flow per share or however you want to look at it, is growing at an even faster rate. So double-digit revenue growth little bit faster on the EBITDA side because of that modest margin expansion and then a little bit faster on the EPS side given how we deploy our capital and reduce our share count. And so I'll leave you with we are a growth company, we've got a great value proposition, as you can see listed down the bottom, helping the operating executives we support with our most important mission-critical priorities, 20,000 people strong around the world, delivering value to our clients across every major enterprise function, obviously, CIO or technology being the largest function that we serve, but we are building really strong, great businesses across supply chain leaders, finance leaders, legal leaders, HR leaders, marketing leaders, customer service leaders, sales leaders and whatever new functions may pop up from time. So with that, that is the Gartner story with 1 minute and 27 seconds to spare. So thank you for your time today. Thank you for leaning in and listening, and we look forward to taking questions during the breakout session.

Thanks to everyone for joining. The breakout will be in Adler for those interested in attending. Thank you very much.

Thanks, everyone.