Craig Safian
Executive Vice President and Chief Financial Officer at Gartner
Thank you, Gene, and good morning. Second quarter results were strong with high single-digit growth in contract value and double-digit FX neutral revenue growth. EBITDA, EBITDA margins and adjusted EPS were better-than-expected as a result of modest revenue upside and disciplined cost management. Free cash flow in the quarter was excellent. With good visibility into the balance of the year, we are increasing our 2023 EBITDA and free cash flow guidance.
Second quarter revenue was $1.5 billion, up 9% year-over-year as reported and 10% FX neutral. In addition, total contribution margin was 68% compared to 69% in the prior year as we caught up on hiring during 2022. EBITDA was $384 million, ahead of our guidance and about in line with last year. Adjusted EPS was $2.85, consistent with Q2 of last year, and free cash flow was $410 million.
We finished the quarter with 20,104 associates, up 12% from the prior year and 1% from the end of the first quarter. We remain well-positioned from a talent perspective with low levels of open territories and our new associates coming up the tenure curve. We will continue to carefully calibrate headcount and operating expenses based on near-term revenue growth and opportunities to invest for the future.
Research revenue in the second quarter grew 6% year-over-year as reported and 7% on an FX neutral basis. Subscription revenue grew 9% on an organic FX neutral basis. Second quarter Research contribution margin was 73% compared to 74% in the prior year period as we have caught up on hiring and returned to the new expected levels of travel. Contract value or CV was $4.6 billion at the end of the second quarter, up 9% versus the prior year. The second quarter last year was one of our strongest research quarters ever, with outstanding performance on nearly every metric we provide.
CV growth is FX neutral and excludes the first quarter 2023 divestiture. CV from enterprise function leaders across GTS and GBS grew at double-digit rates. CV from tech vendors grew low-single digits compared to mid-teens growth in the second quarter of 2022. Quarterly Net Contract Value Increase, or NCVI, was $41 million. As we've discussed in the past, there is notable seasonality in this metric.
CV growth was broad-based across practices, industry sectors, company sizes and geographic regions. Across our combined practices, the majority of industry sectors grew at double-digit rates, again led by the transportation, retail and public sectors. We had high single-digit growth across all of our enterprise size categories other than the small category, which grew mid-single digits. This category has the largest tech vendor mix. We also drove double-digit, or high single-digit growth in the majority of our top ten countries.
Global Technology Sales contract value was $3.5 billion at the end of the second quarter, up 7% versus the prior year. GTS had quarterly NCVI of $14 million. Wallet retention for GTS was 102% for the quarter, which compares to 107% in the prior year when we saw a record high for this metric. IT enterprise function leaders wallet retention remained above historical GTS levels during the second quarter. GTS new business was down 4% versus last year. New business with IT enterprise function leaders increased high-single digits compared to the prior year against the tough compare. GTS quota-bearing headcount was up 13% year-over-year, reflecting the catch-up hiring we did in 2022. We will continue to manage hiring based on both short-term performance and the medium-term opportunity. Our regular full set of GTS metrics can be found in the appendix of our earnings supplement.
Global Business Sales contract value was $1 billion at the end of the second quarter, up 15% year-over-year, which remains towards the higher end of our medium-term outlook of 12% to 16%. All of our GBS practices grew at double-digit or high single-digit rates, again led by supply chain and HR. GBS CV increased $27 million from the first quarter. Wallet retention for GBS was 109% for the quarter, which compares to 115% in the prior year when we saw one of the highest-ever results for this metric. GBS new business was up 2% compared to last year against a strong compare. GBS quota-bearing headcount was up 15% year-over-year. This excludes headcount associated with the Q1 divestiture. As with GTS, our regular full set of GBS metrics can be found in the appendix of our earnings supplement.
Conferences revenue for the second quarter was $169 million, ahead of our expectations as we saw strong performance with both exhibitors and attendees. Contribution margin in the quarter was 58%, consistent with typical seasonality. We held 17 destination conferences in the quarter, all in-person.
Second quarter Consulting revenues increased by 5% year-over-year to $126 million. On an FX neutral basis, revenues were up 6%. Consulting contribution margin was 37% in the second quarter. Labor-based revenues were $104 million, up 9% versus Q2 of last year and up 11% on an FX neutral basis. Backlog at June 30th was $172 million, increasing 17% year-over-year on an FX neutral basis with continued booking strength.
Our contract optimization business is highly variable. We delivered $22 million of revenue in the quarter, and the pipeline for both contract optimization and labor-based revenues remained strong. Consolidated cost of services increased 15% year-over-year in the second quarter as reported and on an FX neutral basis. Biggest driver of the increase was higher headcount to support our continued strong growth. We also saw an increase in cost year-over-year with the return to in-person conferences.
SG&A increased 12% year-over-year in the second quarter as reported and 14% on an FX neutral basis. SG&A increased in the quarter as a result of headcount growth. EBITDA for the second quarter was $384 million, compared to $389 million in the year-ago period. Second quarter EBITDA upside to our guidance reflected revenue exceeding our expectations in conferences and prudent expense management.
Depreciation in the quarter of $24 million was up modestly compared to 2022. Net interest expense, excluding deferred financing costs in the quarter was $23 million. This was down $5 million versus the second quarter of 2022 due to higher interest income on our cash balances. The modest floating rate debt we have is fully hedged through maturity.
The Q2 adjusted tax rate which we used for the calculation of adjusted net income was 25% for the quarter. The tax rate for the items used to adjust net income was 27% for the quarter. Adjusted EPS in Q2 was $2.85, in line with last year. We had 80 million shares outstanding in the second quarter. This is a reduction of close to 1 million shares or about 1% year-over-year. We exited the second quarter with about 80 million shares on an unweighted basis.
Operating cash flow for the quarter was $436 million, up 5% compared to last year. Capex for the quarter was $26 million, up 21% year-over-year as a result of an increase in technology investments. Free cash flow for the quarter was $410 million. Free cash flow as a percent of revenue on a rolling four-quarter basis was 17% of revenue and 66% of EBITDA. Adjusted for the after-tax impact of the Q1 divestiture, free cash flow conversion from GAAP net income was 119%. Our free cash flow conversion is generally higher when CV growth is accelerating.
At the end of the second quarter, we had about $1.2 billion of cash. Our June 30th debt balance was about $2.5 billion. Our reported gross debt to trailing 12-month EBITDA was under 2 times. Our expected free cash flow generation, available revolver and excess cash remaining on the balance sheet provide ample liquidity to deliver on our capital allocation strategy of share repurchases and strategic tuck-in M&A. Our balance sheet is very strong with $2.2 billion of liquidity, low levels of leverage and effectively fixed interest rates. We repurchased $132 million of stock during the second quarter. We had about $830 million remaining on our share of purchase authorization at June 30th. We expect the Board to continue to refresh the repurchase authorization as needed going forward. As we continue to repurchase shares, our capital base will shrink. Over time, this is accretive to earnings per share and combined with growing profits also delivers increasing returns on invested capital over time.
We are increasing our full year Conferences EBITDA and free cash flow guidance to reflect the strong Q2 performance. We are updating our Research revenue guidance to reflect tech vendor market dynamics on the non-subscription part of the business. For Research, we continue to innovate and provide a very compelling value proposition for clients and prospects. We've got tough compares across most of the segment for another quarter. We expect stronger growth from subscription business than the non-subscription part of the segment as we indicated last quarter. The non-subscription part of the business has direct exposure to tech vendor spending.
The outlook continues to be based on all of our 47 destination conferences for 2023 running in-person. There is seasonality to the business based on the conference's calendar, which is different than the historical pattern. We still expect Q4 to be the largest quarter of the year. We expect Q3 will be the smallest revenue quarter of the year as I noted in May. For Consulting revenues, contract optimization remains highly valuable. We had a very strong year in 2022, especially in contract optimization in the fourth quarter. We will continue both to manage expenses prudently to support future growth and deliver strong margins.
Our updated 2023 guidance is as follows. We expect Research revenue of at least $4.855 billion, which is FX neutral growth of about 6% or 7% excluding the Q1 divestiture. The update to Research revenue guidance reflects the effect of tech vendor market dynamics on the non-subscription part of the business. We expect Conferences revenue of at least $490 million, which is growth of about 26%. We have increased our outlook for Conferences by $20 million. We expect Consulting revenue of at least $505 million, which is growth of about 5% FX neutral, consistent with the outlook we gave in May.
The result is an outlook for consolidated revenue of at least $5.85 billion, which is FX neutral growth of 7%. The guidance reflects an update to non-subscription research revenue, partially offset by an increase to Conferences. We now expect full year EBITDA of at least $1.36 billion, up $30 million from our prior guidance and an increase in our margin outlook as well. We will deliver on our margin guidance in most economic scenarios. If revenue is stronger than our outlook, EBITDA would be better than our guidance.
We now expect 2023 adjusted EPS of at least $10. For 2023, we now expect free cash flow of at least $975 million, up $55 million from our prior guidance. This higher free cash flow reflects a conversion from GAAP net income of about 140%, excluding the after-tax divestiture proceeds. Our guidance is based on 80 million fully diluted weighted average shares outstanding, which reflects the repurchases made through the end of June. Finally, for the third quarter of 2023, we expect EBITDA of at least $275 million.
We had a strong first half despite continuing global macro uncertainty and a dynamic tech vendor market. CV and revenue grew high-single digits in the quarter. Conferences and EBITDA performance exceeded our expectations and we increased our guidance as well. Margins are strong, consistent with our prior commentary. Free cash flow was strong in the quarter and we increased the guidance for the full year. We repurchased over $230 million in stock during the first half and remain committed to returning excess capital to our shareholders. And we have ample liquidity that we are ready to deploy on behalf of shareholders over the coming quarters.
Looking out over the medium term, our financial model and expectations are unchanged. With 12% to 16% Research CV growth, we will deliver double-digit revenue growth. With gross margin expansion, sales costs growing in line with CV growth over time and G&A leverage, we can modestly expand margins. We can grow free cash flow at least as fast as EBITDA because of our modest capex needs and the benefits of our clients paying us upfront. And we'll continue to deploy our capital on share repurchases, which will lower the share count over time and on strategic, value-enhancing tuck-in M&A.
With that, I'll turn the call back over to the operator, and we'll be happy to take your questions. Operator?
