Gartner, Inc. ($IT)

All right. Good morning, everyone. I'm Jeff Meuler, Baird's information solutions analyst. Thanks for joining us. Pleased to be with Gartner this morning. Gartner is the world's leading subscription-based insights and advisory firm across enterprise function with $5.3 billion of contract value with great long-term growth. With me on stage is the company's CFO, also a long-time CFO and company employee, Craig Safian, who's overseen much of that growth.

Craig, maybe to just start out, your Insights a research business. It's the key value driver of the company, nearly 90% of consolidated gross profit. Just help investors understand the value proposition for an Insight subscription, like things like what does it cost, what's included, how do clients engage, et cetera?

Yes, happy to. And thanks for having me. Good morning, everyone. Thanks for joining us. So as Jeff mentioned, our Insights business is largely a recurring revenue, annual subscription license to our insights. And I'll start with sort of what we do and who we do it for. So we are targeting the top of the organization chart. So the C-level and their teams across every major enterprise function. So you may know Gartner, we were built around serving technology professionals, technology leaders, Chief Information Officers and their teams. And over time, through a combination of acquisitions and some of our own organic development, we actually now serve all the major functions within the enterprise. So finance, HR, supply chain, sales, marketing, legal, customer service, et cetera, et cetera, et cetera. And essentially, the way we operate and the way we think about delivering value to our clients is every one of those operating executives and their teams have a core set of what we call mission-critical priorities or MCPs. What MCPs are essentially the big things that they need to accomplish for the enterprise. So for example, for a CFO, it might be a finance transformation. For a marketing organization, it might be how do we optimize ad spend and yield of marketing investment in an AI world, things like that. And those are not questions that have a definitive answer, they're actually multiyear journeys. And so our job and our goal is to make sure that we are providing the operating executives we serve across every major function with the insights, tools, assets, intelligence, et cetera, they need to meet those mission-critical priorities. Now we do that through a variety of different ways. And I'll talk about our product tiering and also talk about how we deliver some of those insights. So I think it's core to remember that the core of our business is we develop insights that help our operating executive clients make the right decisions around their mission-critical priorities. We've got about 2,400 experts on staff. These are deep domain experts in the specific functions and domains that they serve who are not just "researchers". These are experts. These are world-class. These are former practitioners. These are people from academia. These are people from major consulting organizations. These are people from the major technology companies, et cetera. And they come in because of their expertise, and they're actually able to augment that expertise because of a lot of the, I call it, a network effect that we have from all the operating executives that we serve, and I'll get back to that in a second. So think about essentially 3 tiers of service that we have for our clients. Our least expensive offering, which is our digital-only offering, basically gives clients the opportunity to interact with all of our insights through gartner.com and through our mobile application. The core thing to remember, though, is even with our digital clients, the primary way they get connected to our insights is not by going to gartner.com and typing in a question or a search or a question and ask Gartner. The primary way they actually get to the insights and the assets is we are proactively pushing them the things that we think are most important and most relevant to them. And we're able to do that because we know who they are. We know the corporographics of who they work for, industry, company size, all the dynamics around their company, and we also know what their mission-critical priorities are. And so before they even think about a problem or have a question, we're actually proactively pushing them information that draws them into gartner.com or a mobile application, and then they're actually able to explore all of our other assets and things like that. And again, the digital-only offering runs about $25,000 per licensed user per year. As you step up the tiering, we have what we call an adviser product next. That's probably $45,000 to $50,000 per licensed user per year. And you get all the stuff and things and assets that you get from a digital subscription with 2 primary differentiators. Differentiator one is you get a conference ticket to attend one of our destination conferences, which hopefully, we'll talk a little bit about later because that's enormous value to our licensed users. And then the second major thing they get is the ability to talk to an expert. We call it an inquiry. Essentially, it's a 30- or 45-minute call with one or multiple of our experts so that you can go deeper. You can provide the context of your specific situation. You can get insights and thoughts from our experts around what they're seeing with other clients who may be in similar spaces. And so that -- and you get to do it on an unlimited basis. The average client does it 5 or 6 times a year, but it's enormous value when they do, do it. And then the third tier of service is what we call guided service. On average, let's just say, around $100,000 per licensed user per year. And you get all the things that an adviser level entitlement gives you, but you also get 2 additional things beyond that. One is a premium experience at our destination conferences. And two is you have actually a named senior level service person, we call it an executive partner, who is a former C-level practitioner who acts as your guide, consultant, concierge, if you are a professional golfer or professional watch professional golfing, you on course professional Caddy. And they only have 25 to 30 clients that they serve. And so they're actually able to really get to know the individual, serve as a sounding board and act as an entry point into all the insights that we have. And again, that's about $100,000 per licensed user per year. But again, at all levels, the main thing is helping operating executives accomplish their mission-critical priorities by connecting them to the right assets and insights and tools and peers at the right time so they can actually move those mission-critical priority journeys along.

Helpful. So contract value is the golden metric, I think, for a lot of investors with Gartner. The long-term growth has been great, 12% 10-year CAGR, I think around 10% organic. 2023 and 2024 were plus 8%. 2025 was plus 1% or plus 4% if you exclude U.S. federal government headwinds. So just what's your perspective on what's driving that? And then the elephant in the room, how do you measure if AI is having an impact or what gives you confidence if it's not?

Yes. So obviously, I'd rather spend more time talking about the 12% CAGR, but I will address the question directly. So I think there's been a handful of rolling macro and geopolitical challenges that have certainly impacted our growth rate over the last few years. In '22 and '23, it was really tech vendor-driven as a lot of the air got let out of that balloon, if you will, with VC funding sort of seizing up, Silicon Valley Bank going belly up and mass layoffs across the tech industry as they were recalibrating their OpEx bases coming out of the pandemic. When that sort of leveled out and normalized, we then ran into the headwinds of challenges with our U.S. federal business. And so put it in perspective, we entered 2025 with around $280 million of U.S. federal contract value. So that is CV licenses with civilian, defense and intelligence agencies across the entire U.S. federal government, which was about 5% of CV at the time. The Doge activity started in earnest, really, call it, back half of March and really picked up Q2, Q3, Q4. And we took a lot of hits there. And as you noted, it was almost a 300 basis point impact on our overall growth rate in 2025. We are now starting to lap those challenges, and we do expect to get the mechanical benefit of lapping those challenges as we move through 2026. And then the third sort of major thing that impacted our results, I would say, I mean, obviously, it was not the best macroeconomic or selling environment, but we pride ourselves on tuning and adjusting so that we can be successful in any environment. That said, I think the volatility in trade policy had a significant impact on our results as well. And because we're selling globally and because we're industry agnostic, size agnostic and market agnostic, about 40% of our contract value sat with clients who rely on supply chains and importation and exportation to make their money or make their products. And what we saw post Liberation Day last year was it wasn't the amount of the tariff that was the problem, it was sort of the whipsawing volatility around them that caused companies to really seize up on decision-making. So I put myself in the shoes of a CFO at a Daimler-Benz or John Deere or whatever it may be. And when you don't know if you're solving for a tariff that's 10% or 50%, you kind of just say, hey, until we know what this is, we're not taking on any incremental investment. And we saw that impact our tariff -- our clients who rely on importation or exportation. Again, I think the last several quarters -- last few quarters, I should say, we've seen much more stability in trade policy, and we should start lapping those again and sort of leads into our expectation for 2026, which is through a combination of lapping the U.S. Fed challenge, lapping the U.S., the trade policy challenge and continuing to transform and adapt our business to be successful in any environment, we fully expect contract value, both the Fed piece and the non-U.S. Fed piece to accelerate over the course of this year.

And AI, just how do you measure it? And what are the proof points that give you confidence or can give investors confidence it's not having an impact?

Yes. I mean the interesting thing is from the outside, you say there's a 1.0 correlation between AI disruption and CV performance, but correlation is not causation, as many like to say. And so when we look at the business, I'd say 3 things. So one is we track this religiously. And we track any sort of disruption or competitive activity. And we're just not hearing it from our sellers, and we're asking and analyzing and looking at every deal, and we're just not seeing it as the reason why people are deferring growth or not renewing or what have you. The second thing I'd say is a lot of our indicators that we look at below sort of the headline and below even that on our operational dashboards, you would expect would be going sideways or down if AI was really disrupting and or not. I'll give you 2 examples. One is engagement. And so we measure engagement both from a digital engagement perspective. So how often and how frequent are people interacting behind our firewall, gartner.com or our mobile app. And then we look at human interactions because that's a big piece of our value proposition as we talked about a little bit earlier as well. And if AI was really disrupting the way our clients operate and the way our clients used us, we would see declines in engagement. As we talked about coming out of our Q1 earnings call, we've seen quite the opposite. We've driven significant improvements in engagement, both from a digital perspective and from a human interaction perspective. Second thing I'd say is conferences have continued to perform exceptionally well. The reason conferences continue to perform exceptionally well is people really value our insights. The reason they come to conferences is to interact with our experts. It's to really live what they can learn from Gartner to network with our peers, all the other elements of the value proposition, but the primary reason they're there is because of the insights. And then the third thing I'd say is our new business and new business pipelines, while the velocity of which -- the way things are moving through the pipeline is a little slower than normal, largely because of the macro overhang and some of the challenges there, we are still generating a huge amount of opportunities adding to the pipeline every month, every quarter. We've talked about for the last several quarters, pipelines are up -- factory pipelines are up at double-digit growth rate. And so there's still a lot of demand in the market as well. And so as we look at everything, we feel really good that AI is not disrupting us and that we will accelerate our contract value over the course of this year. And I think fundamentally, a client may come to us and say, can I do that with Copilot or Claude or whatever? And I think it's just -- it's a fundamental misunderstanding of the way we help people. And I alluded to this a little bit earlier, but we are not a question-and-answer engine. We have never been a question-and-answer engine, and we do not aspire to be a question-and-answer engine. We are an insights company that proactively pushes things to our operating executive clients before they even think about it. So think about like addressing blind spots, knowing the unknowns to some extent, mitigating risk, all those things we're able to do where it's great. We say, look, you should use the LLMs for X, Y and Z, but that is not a replacement for Gartner. It's a very different thing. And Gartner has got a very differentiated value proposition to help you accomplish your mission-critical priorities.

We always love to hear about a healthy and resilient conferences and insights business here. On that the way you interact with customers, you do have an LLM overlay on your digital platform called Ask Gartner. I guess what impact is it having? Or how important is it even if a lot of the interaction is like pushing content to them and people coming to conferences and other forms of interaction?

Yes. I mean, look, I think it's table stakes in terms of the way we deliver our product digitally, right? So we need to follow what our users experience is outside of the Gartner ecosystem so they have a similar experience when they come in. And clearly, having a language model on top of the corpus of Gartner information is incredibly important. The one thing I will say is the proactive pushing is what brings them in. But then once they're in, using Ask Gartner versus traditional search is significantly better for our clients. And what we've been seeing as we've sort of brought everybody on board and watched usage is when people do get drawn in from the proactive pushing of insights, when they do then go to ask Gartner, we are seeing that they actually ask more questions than searches, so more engagement there. They read more documents than when using traditional search, so more engagement there. And they're actually interacting with a larger diversity of our assets, more engagement there. And so my view or our view on this when we launched it was worst case, it's a better search experience. Best case, it actually does the things I'm talking about. And I think we're seeing nearer to the best case. But again, fundamentally, the primary way that people come in is because of the proactive pushing.

If a client wants to incorporate Gartner's data content and insights with their own first-party data, maybe with some other third-party data sources, is there a mechanism to do that? Is there a future road map where you'll be able to do that and ask Gartner? Like just I would think that would be a value.

Yes. I mean -- so yes, it would be a value, and we're staying very close to our clients around what they want and what they need. I think there's 2 thoughts or cautions there. So one is it's not data. Predominantly, it's not data, it's insights, right? So I think with data integrations, it's much more logical and makes a lot more sense because you're sort of building it into a workflow, a spreadsheet, whatever it may be. It is harder to do that with insights. The second thing I'd say is everything we have is proprietary to us. And we have to be very, very, very careful and diligent about ensuring we protect all of that IP. And as we've talked about on the last several earnings calls, it's terabytes and terabytes and terabytes of proprietary information that actually feeds into the thousands of proprietary insight documents that we have. And we just need to make sure that whatever solution we come up with absolutely walls those things off and protects them going forward.

What about in your environment, like where you could do a connector where you're going to get access to a client's Workday or something to help inform the CHRO that has a Gartner seat. Is that an opportunity?

So are you looking for a product management job at Gartner, you're making a good pitch there. Yes, those are all things that we are looking at and considering. And again, we do a significant amount of market research. And also because of the level of engagement of our clients, we're getting live feedback literally on a day-to-day basis from our clients, and they're very happy to share those kind of product development ideas with us as well. And so those may be on the future road map. For now, the way we're operating is we want you to come into our ecosystem and do all of that. Maybe at some point, you'll be able to drop in assets from your own company, your IT architecture, your IT road map, your finance road map, whatever it may be, and actually then query as Gartner for all that stuff. But for now, it is essentially uniquely the Gartner experience when you come behind our firewall.

So Q1 contract value accelerated a very little bit. You had some comments about in-quarter trends because obviously, there was a flare-up in March and a geopolitical situation. So just talk us through kind of the shorter-term trends. And given that it at least feels like we're not as hot in Iran right now as we were in March, are you -- is it your experience that things like slipped out of March and then subsequently closed?

Yes. So we talked about this in early May around Q1. And so the commentary was really around January and February new business were actually trending really positively. In full disclosure, January and February are a lot smaller months than March, right? So the third month of each quarter tends to be significantly larger for us than the first 2 months. But nevertheless, we were trending really positively through the first 2 months of the year. We did see with the onset of the war in Iran, a lot of decision-making, particularly with companies and industries that can be impacted by oil prices and with markets directly in the line of fire that decision-making did get slowed down. And so we did see a lot of new business opportunities push not close in March. Commentary on the call is a lot of them did close in April, which I think is very positive. And I do think your commentary on the challenges related to the war being a little less hot right now is true. could change tomorrow, but it feels a little bit less risky and less exposure right now compared to what we saw in the back half of March.

Okay. This is a short-term question, but rev rec flows off of contract value. Q1 is seasonally weaker typically for contract value, and it's a more tough -- or more challenging environment right now. So contract value took a sequential step down. Consensus has revenue modeled flattish for Insights -- that seems kind of illogical based upon where contract value ended. Just any comment on how -- if there's any unusual dynamics that could inflate it or how we should think about modeling off of CV?

It's a great question. So generally speaking, the simplest way to run the model is you look at what the NCVI was in the quarter and you either step up or step down 1/4 of that in the following quarter from a rev rec perspective. FX rates constant in that scenario. I think last year, the revenue didn't do that, and I think that was largely because of foreign exchange. And so I think I haven't gone. Foreign exchange benefited us. you didn't see the step down sequentially in revenue that you would expect with a negative NCVI quarter last year because foreign exchange offset it. So I don't know everyone's model specifically, but generally speaking, the way to do it is if you generate, I'll make it up, $20 million of positive NCVI in the quarter, you would expect the next quarter's revenue to be $5 million higher and the inverse as well.

Got it. Fed government, as you alluded to, it's down like 2% of total. Mathematically, your total contract value is going to start to benefit from anniversarying the headwinds. But you are now coming up on some of that business that was signed or renewed in the Doge era. So as you come up on that -- the second opportunity on that, just what are you seeing? Is it now stable? Are you seeing win backs? What's going on with government?

Yes. I mean, definitely more stable. The renewal rates we achieved in the first quarter were obviously significantly better than last year, not quite all the way back to our all-time highs in that space, but significantly better. the way we've thought about that business is in 2 ways. So one is we've modeled this year to be essentially flat, right? So we have not assumed growth in the U.S. federal business for us in 2026 in all of our contract value growth assumptions for this year. That all said, we fully expect to get back to growth. Our U.S. federal team across sales and services and insights are amongst our strongest teams. even though it was very chaotic from a contract signing, retention and growth perspective last year, the team still stayed really close to the operating executives that we serve. The reason we renewed 40% to 45% of the business last year is because people were willing to stick their necks out and go to bat for how valuable Gartner is, and we fully expect even the ones that we lost last year to come back over time. It may be this year, may not be this year, but we feel really good about the business and being able to grow that business from a new base going forward.

Most of the businesses, the Insights business, you mentioned how well conferences is doing and why. You also have a consulting business. You meaningfully reduced the business outlook for consulting when you reported Q1, just maybe not surprising, but what in your view is driving the weakness? Is there anything that's like AI-related that's structural? And anything that's unusual from a timing factor that we should consider for consulting this year?

Yes. I think a couple of things there. So one is similar to what we saw with our Insights business and some decision-making getting deferred, we did see that from a bookings perspective in consulting in the first quarter as well. And we -- I'd say we derisked that business so that even if we don't see a pickup in bookings, we're protected and covered. from an annual guidance perspective within that particular revenue line. I think pipelines are strong. Q2, we believe, will be a good bookings quarter. That will put us back in position to get back on track in Q3 and Q4 because obviously, we book it in Q2 and then we can't -- we don't start working until Q3 or Q4. But I'd say we derisked the line. And then on top of that, our contract optimization business is coming off of 2 record years. And as you know, you've been following us for a very long time, that tends to be an extremely volatile business and 100% reliant on clients making a decision to purchase something. And when there's uncertainty in the market, it can flow through onto the contract optimization side as well.

So you've long had this 12% to 16% Insights growth and a variety of other intermediate-term financial targets. Your Q1 supplement, I think, removed the medium-term guidance section. So does that still hold over the longer term? Or what type of environment do you need? And then the follow-on is you kind of inserted a 12% 3-year EPS CAGR. If you can talk through how you came to that target or what the goalpost is now?

Yes, sure. So the -- you can still find the medium-term objectives in our Gartner 101 materials on our investor website. I think, by and large, I think we've got to get through mid-single digit, high single digit, et cetera, before we start having the conversation again about the 12% to 16% growth, and we're obviously very focused on making sure that we accelerate our CV growth rate this year so that we can hopefully start having those conversations again soon. We still believe in a normal operating environment. There's no reason why we can't grow at strong double-digit rates consistently. And so that's sort of that medium-term objective. In terms of the EPS CAGR, we just thought it was important for people to know that, I guess, 2 or 3 things. So One is revenue does lag CV growth. And while we expect CV growth to accelerate, the revenue is going to lag that a little bit. And while that is happening, we are very actively, and I'd argue effectively managing our operating expense base, so that we deliver consistent profitability and perhaps most importantly, consistent free cash flow. And then we're doing something with all that free cash flow and returning significant amounts of capital to our shareholders through our buyback programs. And so if you were to say to me, Craig, EPS CAGR of 12%. You took out 4% of your share count in Q1. Your math is terrible. It's terrible. I would be willing to concede that. That all said, we feel very confident that laying out 12% compound or at least on the EPS is a good positive signal that not only are we confident in our ability to accelerate the growth, but we're also confident in our ability to make sure that we're managing profitability, managing margins and most importantly, managing free cash flow.

And then just in the final wrap, 30 seconds, you have 4 kind of dimensional initiatives in the business to drive improvement. Which ones are you most excited for? Where are you seeing an impact? Where do you expect the impact to build?

So I'm excited for all of them. I think our new leader of Insights, who's long-term Gartner insights leader is doing all the right things to drive the business. And all the elements of the transformation are important. They're overlapping. They're not unique and discrete amongst themselves, but everything we're doing there, I am super excited about because we're an insights company, and that's what drives the business.

Excellent. And with that, we will wrap. Please join me in thanking Craig for insights on Gartner.