Gartner Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 30, 2024

There are 15 speakers on the call.

Operator

Good morning, everyone. Welcome to Gartner's Second Quarter 2024 Earnings Call. I'm David Cohen, SVP of Investor Relations. At this time, all participants are in a listen only mode. After comments by Gene Hall, Gartner's Chairman and Chief Executive Officer and Craig Safian, Gartner's Chief Financial Officer, There will be a question and answer session.

Operator

Please be advised that today's conference is being recorded. This call will include a discussion of Q2 2024 financial results and Gartner's outlook for 2024 as disclosed in today's earnings release and earnings supplement, both posted to our website, investor. Gartner.com. On the call, unless stated otherwise, all references to EBITDA are for adjusted EBITDA, with the adjustments as described in our earnings release and supplement. All contract values and associated growth rates we discuss are based on 2024 foreign exchange rates.

Operator

All growth rates in Gene's comments are FX neutral unless stated otherwise. All references to share counts are for fully diluted weighted average share counts, unless stated otherwise. Reconciliations for our non GAAP numbers we use are available in the Investor Relations section of the gartner.com website. As set forth in more detail in today's earnings release, certain statements made on this call may constitute forward looking statements. Forward looking statements can vary materially from actual results and are subject to a number of risks and uncertainties, including those contained in the company's 2023 Annual Report on Form 10 ks and Quarterly Reports on Form 10 Q as well as in other filings with the SEC.

Operator

I encourage all of you to review the risk factors listed in these documents. Now, will turn the call over to Gartner's Chairman and Chief Executive Officer, Gene Hall.

Speaker 1

Good morning, and thanks for joining us today. Gartner remains resilient in a complex environment. In Q2, contract value grew high single digits. Manager results for the Q2 were ahead of expectations and we delivered strong profitability and free cash flow. The external environment remains volatile and certain, complex and ambiguous.

Speaker 1

Leaders across every enterprise face more simultaneous challenges than ever before. For example, small technology companies continue to face funding challenges. Supply chain shifts are impacting many industries. The banking industry continues to deal with higher interest rates. There are budget challenges in the public sector, persistent cybersecurity threats, the potential impacts of generative AI, the list goes on.

Speaker 1

Enterprise leaders and their teams know they need help. And they know Gartner is the best source for the actionable objective insight they need to drive smarter decisions and achieve stronger performance on their mission critical priorities. Our value proposition helps our clients save time, save money, gain confidence, manage risk, develop leadership skills, enhance their teams and achieve success. Research continues to be our largest and most profitable segment. Our research business serves leaders across all major enterprise functions in every industry and in every geography.

Speaker 1

Our market opportunity is fast. Within our research business, contract value with enterprise function leaders grew 10% and our tech vendor clients returned to growth. We continue to guide clients through a wide range of topics, including generative AI, supply chain optimization, leader and manager development, cost optimization, cybersecurity and the recent CrowdStrike outage. Through relentless execution of proven practices, we deliver unparalleled value, whether our clients are thriving, struggling or anywhere in between. Our research business serves executives and their teams through distinct sales channels.

Speaker 1

Global Technology Sales or GTS serves leaders and their teams within IT. GTS new business grew 8%. Contract value grew 6%. Contract value with GTS enterprise function leaders grew high single digits. Global Business Sales or GBS serves leaders in their teams beyond IT.

Speaker 1

This includes HR, supply chain, finance, marketing, legal, sales and more. GBS new business grew 16%. GBS contract value grew 12%. Gartner Conferences deliver extraordinarily valuable insights to an engaged and qualified audience. Revenue grew 11% in the Q2 and the outlook for conferences remains strong.

Speaker 1

Gartner Consulting is an extension of Gartner Research. Consulting helps clients execute their most strategic initiatives through deeper project based work. Consulting is an important complement to our IT research business. Consulting revenue grew 15%. People are at the heart of everything we do.

Speaker 1

We get better, faster, stronger every year because we work effectively as one team to deliver unparalleled value to our clients. And our teams are committed to driving relentless execution of the best practices that will fuel long term sustained double digit growth. In closing, Gartner delivered financial results ahead of expectations. We delivered 10% contract value growth with enterprise function leaders. Our client value proposition and addressable market opportunity will allow us to drive long term sustained double digit revenue growth.

Speaker 1

We'll continue to create value for our shareholders by providing actionable objective insight to our clients, prudently investing for future growth and returning capital to our shareholders through our share repurchase program. We expect to deliver modest margin expansion over time And we'll continue to generate significant free cash flow well in excess of net income. All of this and more positions us to continue our sustained track record of success far into the future. With that, I'll hand the call over to our Chief Financial Officer, Craig Sathian.

Speaker 2

Thank you, Gene, and good morning. 2nd quarter contract value grew 7% year over year, accelerating about 50 basis points from Q1. We believe the Q1 marked the bottom for CV growth this cycle barring a meaningful shift in the macro or geopolitical environment. Growth may vary from corporate to quarter, but we expect the overall trend will be higher from the 6.9% we delivered in the Q1. Over the medium term, we expect both GTS and GBS to grow 12% to 16%.

Speaker 2

2nd quarter revenue, EBITDA and EPS all came in ahead of our expectations. We are updating our guidance based on the Q2 results, FX and a change in non subscription research revenue. We have repurchased $565,000,000 of stock through June and remain eager to buy back stock opportunistically. 2nd quarter revenue was $1,600,000,000 up 6% year over year as reported and 7% FX neutral. In addition, total contribution margin was 68%, about in line with last year.

Speaker 2

EBITDA was $416,000,000 up 8% as reported and 10% FX neutral versus Q2 of 2023. Adjusted EPS was $3.22 up 13% from Q2 of last year and free cash flow was $341,000,000 Research revenue in the 2nd quarter grew 5% year over year as reported and 6% on an FX neutral basis. Subscription revenue grew 7% FX neutral. The year over year change in non subscription revenue was similar to Q1 2024. 2nd quarter research contribution margin was 74%, consistent with last year.

Speaker 2

Contract value was $4,900,000,000 at the end of the 2nd quarter, up 7% versus the prior year and up about $67,000,000 from the 1st quarter. CV from enterprise function leaders across GTS and GBS grew 10%. Contract value and CV growth are FX neutral. 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 or high single digit rates led by the energy, manufacturing and public sectors.

Speaker 2

CV grew double digit or high single digit rates across all enterprise sizes except small, which has the largest tech vendor mix. We also drove double digit or high single digit growth in the majority of our top 10 countries. Global technology sales contract value was $3,800,000,000 at the end of the second quarter, up 6% versus the prior year. GTS enterprise leader CV increased high single digits. Tech vendor CV returned to growth in the quarter.

Speaker 2

GTS CV increased $40,000,000 from the Q1. Wallet retention for GTS was 101% for the quarter, up from Q1. Enterprise leader wallet retention was consistent with historical levels. GTS new business was up 8% compared to last year. GTS quota bearing headcount was down 2% year over year as we manage tech vendor focused sales territories in response to near term industry dynamics.

Speaker 2

Across GTS, we continue to aggressively optimize our territories to align with where we have the best growth opportunities, and we are investing for future growth. We continue to expect mid single digit QBH growth by the end of the year. We have the headcount we need to meet our commitments for this year. Our regular full set of GTS metrics can be found in our earnings supplement. Global business sales contract value was 1 $100,000,000 at the end of the 2nd quarter, up 12% year over year.

Speaker 2

All of our GBS practices grew at double digit or high single digit rates other than marketing, which grew mid single digits. Growth was led by the finance, legal and supply chain practices. GBS CV increased $27,000,000 from the Q1. Wallet retention for GBS was 106% for the quarter, which compares to 109% in the prior year. GBS new business was up 16% compared to last year.

Speaker 2

GBS quota bearing headcount was up 6% year over year and we continue to target high single digit growth for 2024. As with GTS, our regular full set of GBS metrics can be found in our earnings supplement. Conferences revenue for the Q2 was $186,000,000 increasing 10% as reported and 11% FX neutral compared to Q2 of 2023. Adjusting for the movement of conferences across the year, revenue increased about 15% in the quarter. Contribution margin was 58%.

Speaker 2

Q2 is our seasonally strongest margin quarter of the year. We held 16 destination conferences. 2nd quarter consulting revenue increased by 13% year over year to $143,000,000 On an FX neutral basis, revenue was up 15%. Consulting contribution margin was 38% in the 2nd quarter. Labor based revenue was $107,000,000 up 3% versus Q2 of last year as reported and 5% on an FX neutral basis.

Speaker 2

Backlog at June 30 was $199,000,000 increasing 16% year over year on an FX neutral basis with continued booking strength. In contract optimization, we delivered $36,000,000 of revenue in the quarter, up 62% versus the prior year. Our contract optimization business is highly variable. Consolidated cost of services increased 5% year over year in the second quarter as reported and 6% on an FX neutral basis. The biggest driver of the increase was higher compensation costs.

Speaker 2

SG and A increased 5% year over year in the 2nd quarter as reported and on an FX neutral basis. SG and A increased in the quarter as a result of headcount growth, which contributed to higher compensation costs. EBITDA for the 2nd quarter was $416,000,000 up 8% from last year's reported and up 10% FX neutral. We outperformed in the 2nd quarter through effective expense management and a prudent approach to guidance. Depreciation in the quarter of $28,000,000 was up 16% compared to 2023.

Speaker 2

Net interest expense excluding deferred financing costs in the quarter was $19,000,000 This is favorable by $4,000,000 versus Q2 of 2023 due to higher interest income on our cash balances. The modest floating rate that we have is fully hedged through Q3 of 2025. The Q2 adjusted tax rate, which we use for the calculation of adjusted net income was 24% for the quarter. The tax rate for the items used to adjust net income was 25% for the quarter. Adjusted EPS in Q2 was $3.22 up 13% compared with last year.

Speaker 2

We had 78,000,000 shares outstanding in the 2nd quarter. This is a reduction of more than 1,500,000 shares or about 2% year over year. We exited the 2nd quarter with about 78,000,000 shares on an unweighted basis. Operating cash flow for the quarter was $370,000,000 compared with $436,000,000 in Q2 of 2023. The change reflects working capital timing, which we expect to reverse in

Speaker 1

the second half. CapEx for

Speaker 2

the quarter was $29,000,000 in line with our expectations. Free cash flow for the quarter was $341,000,000 Free cash flow on a rolling 4 quarter basis was 17% of revenue and 66% of EBITDA. Free cash flow conversion from GAAP net income was 121%. Our free cash flow conversion is generally higher when CV growth is accelerating. At the end of the second quarter, we had about $1,200,000,000 of cash.

Speaker 2

Our June 30 debt balance was about $2,500,000,000 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 and A. Our balance sheet is very strong with $1,900,000,000 of liquidity, low levels of leverage and effectively fixed interest rates. We repurchased $340,000,000 of our stock during the Q2. We have more than $1,000,000,000 of repurchase capacity after the Board recently increased our share buyback authorization by $600,000,000 As we continue to repurchase shares, our capital base will shrink.

Speaker 2

Over time, this is accretive to earnings per share and combined with growing profits also delivers increasing returns on invested capital. We are updating our full year guidance to reflect recent performance and trends. The outlook subscription research is higher based on the latest FX rates. We increased the outlook for conferences and consulting. And our EBITDA guidance primarily reflects Q2 upside, partially offset by our updated non subscription research outlook.

Speaker 2

For subscription research, which was about 76% of revenue in 2023, we continue to innovate and provide a very compelling value proposition for clients and prospects. Executives and their teams face uncertainty and challenges and they recognize how Gartner can help regardless of the economic environment. For subscription research revenue, based on Q2 results and our outlook for the balance of the year, our FX neutral guidance is unchanged. We have very high visibility into the subscription research revenue at this point in the year. For non subscription research, which was about 6% of 2023 revenue, we help small businesses find the right software.

Speaker 2

We've updated our outlook for this portion of the segment given the most recent trends. We now expect non subscription revenue of about $305,000,000 for 2024. As a reminder, about 1 third of our revenue and operating expenses are denominated in currencies other than the U. S. Dollar.

Speaker 2

Based on recent FX rates, we expect currency to be roughly neutral in the back half of the year with a modest benefit in Q4. Our updated 2024 guidance is as follows. We expect research revenue of at least $5,105,000,000 which is FX neutral growth of about 5%. This reflects subscription research revenue growth of about 7%. We expect conferences revenue of at least $565,000,000 which is FX neutral growth of about 12%.

Speaker 2

We expect consulting revenue of at least $530,000,000 which is growth of about 4% FX neutral. The result is an outlook for consolidated revenue of at least $6,200,000,000 which is FX neutral growth of 5%. We now expect full year EBITDA of at least $1,460,000,000 up $5,000,000 from our prior guidance. We expect 2024 adjusted EPS of at least $11.05 For 2024, we expect free cash flow of at least $1,080,000,000 consistent with our prior guidance. This reflects the conversion from GAAP net income of 138%.

Speaker 2

After the Q2 ended, we reached the settlement related to pandemic era event cancellation insurance. We expect pretax proceeds of $300,000,000 during the Q3. This is not yet included in the cash flow or GAAP EPS guidance. Our guidance is based on 78 1,000,000 fully diluted weighted average shares outstanding, which reflects the repurchases made through the end of June. And finally, for the Q3, we expect adjusted EBITDA of at least $295,000,000 Our financial results through the first half have been ahead of our plan despite continuing global macro uncertainty.

Speaker 2

CV grew high single digits in the quarter and we believe Q1 was the bottom for CV growth in this cycle. We repurchased $565,000,000 in stock year to date through June and remain eager to return excess capital to our shareholders. We will continue to be price sensitive, opportunistic and disciplined. Looking out over the medium term, our financial model and expectations are unchanged. With 12% to 16% research CV growth, we've delivered double digit revenue growth.

Speaker 2

With gross margin expansion, sales cost growing about in line with CV growth and G and A leverage, we will deliver modest EBITDA margin expansion over time. 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 and A. With that, I'll turn the call back over to the operator and we'll be happy to take your questions. Operator?

Speaker 3

And it's from the line of Jeff Meuler with Baird. Please proceed.

Speaker 4

Yes. Thank you. Good morning. When you kind of reiterated that you think Q1 marked the bottom for CV growth with the macro and geopolitical caveats. You said growth may vary quarter to quarter.

Speaker 4

I just want to, I guess, zoom in on what you're trying to signal there. Is that just an acknowledgment of, I guess, the volatile end market environment? Or are you expecting that you expect deceleration at some point in the near future because of a like a known year over year comp issue or anything else that you're seeing?

Speaker 5

Hey, good morning, Jeff. So I'd say it's definitely more about the fact that we're operating in a very volatile operating environment. And a 10 basis points up or down is a relatively small amount of CV in any given quarter. I think the core message is 6.9 Marks the bottom and we should be above that in every quarter moving forward. It could bounce around a little bit and then ultimately our medium term objective is to get both GTS and GBS back to 12% to 16% annual growth rates.

Speaker 4

Got it. And then on the building sales headcount from here, I guess the tech vendor territory, I don't know exactly the phrase you use, but I don't know if it's just dynamic territory planning. But was that something that you recently kind of like kicked into gear or was that a ongoing dynamic? Just not sure what you're trying to signal there. And is it reassigning salespeople or just managing those territories through attrition?

Speaker 6

Hey, Jeff, it's Gene. So we do what we call dynamic territory planning, which is we look at every territory, literally every territory each week to see what the productivity is then and what the kind of trend is. And then what we do is as we have turnover as one salesperson leaves and of course we have even though we have no turnover, we do have people leave every quarter. We look at where is the most productive place with those territories. So I'll give you just an extreme example.

Speaker 6

And we used to have salespeople in Russia. We decided obviously we're going to sell in Russia back when the invasion happened. So we don't fill those territories anymore, but we have other territories that are we look most productive. In a more recent example, if you look at the small tech vendor market, there are sets of small tech vendors that used to be able to get funding that in today's environment can't get funding, whereas there's others like for especially those in AI that can. And so what we do is literally on a weekly basis say, okay, but these people believe that we're selling to tech companies that are not going to get funding.

Speaker 6

Let's take those territories and move them over to places where in fact like AI based where they are going to get funding. So we're doing this on a constant basis to make sure our salespeople are always deployed in the most productive territories. We do it with turnover. And again, if we have cases where it's clear that that's not going to recover the short term, we'll do it more proactive than that too. We'll say we'll actually close those territories down and move either those people or that headcount to more productive areas.

Speaker 5

And then just sort of pulling a thread all the way through, we are targeting even with all that dynamic territory planning mid single digit QBH growth for GTS by the end of the year and high single digit QBH growth for GBS by the end of the year. And again, implicit in all that are all the things Gene talked about. That's been our normal operating procedure for the last 4 or 5 years now. It's an innovation we put in place in 2019. And again, it doesn't allow us to perfectly match, but it gives us a better chance of making sure that the resources that we're investing in are actually going against the best short term, medium term and long term opportunities.

Speaker 4

Got it. Thank you.

Speaker 3

Thank you. Our next question comes from the line of Toni Kaplan with Morgan Stanley. Please proceed.

Speaker 7

Thank you. I wanted to focus on the research revenue guide. It seems like you lowered it because of the non subs business. I know Tech Vendor actually returned to growth on the subscription side, but the non subs piece, I think, still is it seems to be declining. I guess, was it because your guide down, was it because non subs was worse than you originally thought?

Speaker 7

Or is just the trajectory not going to be as quick as you were thinking? Just maybe help us through the trajectory on the non subs piece? Thanks.

Speaker 5

Yes, sure, Tony. I mean, the first thing I'd say is that the entire operational change relates to the non sub piece. The subscription revenue piece of the overall research revenue, I mean, it's up a little bit from foreign exchange. But from an operational perspective, the guidance is essentially unchanged from last quarter. And again, as we talked about last quarter, we believe that the bottom was going to be either Q1 or Q2.

Speaker 5

And so we had a strong solid Q2 of NCBI and CV growth dialed into our outlook. And so everything all the change relates to non subscription business.

Speaker 7

Great. And then the cash balance is pretty high. You're below leverage. You added capacity to the buyback program. Maybe just give us an update on like what conditions could we look for the sort of for you to be buying back more stock?

Speaker 7

I know you already do, but just sort of elevate that level. Thanks.

Speaker 5

Yes, sure. So our basic philosophy on buybacks is to be price sensitive, opportunistic and disciplined. And I'd underscore each of those they're all sort of important in influencing our philosophy on buybacks. What I'd also say, obviously, and you know this and most people on the call know this, we've returned a lot of capital since 2021 back to our shareholders. We're close to what we did full year 2020 through the first half of twenty twenty four.

Speaker 5

And in fact, our free cash flow, our operating cash flow and buybacks are pretty close on top of each other through the 1st 6 months of the year. And so we're going to continue to be price sensitive, opportunistic and disciplined, But we want to make sure that we are driving incremental shareholder value by leveraging our free cash flow and our balance sheet. And so we look at strategic value enhancing tuck in M and A and in absence of that buybacks, the bias over the last several years has been buybacks. And I would presume that moving forward, we would be more focused on buybacks going forward. So you're right, we have cash, we have capacity.

Speaker 5

We did a pretty good job through the 1st 6 months of the year and we'll continue to make sure that we're driving incremental shareholder value by leveraging our balance sheet and free cash flow.

Speaker 7

Thank you.

Speaker 3

Thank you. Our next question comes from the line of Andrew Nicholas with William Blair. Please proceed.

Speaker 8

Hi, good morning. Thank you for taking my questions. I wanted to first focus on new business growth, seemingly stepped up pretty nicely relative to the Q1. Can you unpack that a little bit? I know at least in GTS some of that might be some easier comps, but are you seeing better productivity from your sales force?

Speaker 8

Is there any change to the selling environment? Any color there would be great.

Speaker 6

Hi, Drew. It's Gene. So what I'd say is that the selling environment is pretty much the same. But I do think we've focused on improving the productivity of our teams. And as you know, we're always taking actions to be agile respond to changes in the world.

Speaker 6

I think that's really the impact received. It's not that the environment got better in any way really.

Speaker 8

Understood. And then I'm looking at the contract value per client or per client enterprise and it continues to tick up nicely. Just wanted to confirm my hunch that that's the result of maybe losing some smaller tech vendor clients more so than selling a bunch more seats into the larger enterprises. But any confirmation there or color on that metric and how you'd expect it to evolve as you have now seen the trough of CV growth? Thank you.

Speaker 6

So Andrew, I'll get started and Craig to finish. Basically, our basic strategy with clients is when we sell a client, that's not the end. There's plenty of opportunity to sell more seats to those clients over time. And so one core part of our selling strategy is to keep selling additional business, additional licensed users to clients and sell them. The other part of our strategy is of course to sell new logos as well.

Speaker 6

And so because that's one factor that you see there is that we've always had this as a core part of our strategy, which is always keep growing existing clients as well as new clients.

Speaker 5

And Andrew, I would just add, if you look at wallet retention being over 100%, that is baked in what Gene just talked about in terms of once we have a client, we then expand our relationship with them each and every year. And we've been doing that for years and we intend to continue to do that going forward. And there is a little bit of increased churn on the small end that you highlighted, which is also helping modestly, but helping that overall CV for enterprise figure as well.

Speaker 8

Thank you.

Speaker 3

And thank you. Our next question comes from the line of Heather Balsky with Bank of America Securities. Please proceed.

Speaker 9

Hi. Thank you very much. I was hoping to talk about your medium term outlook and you're getting back to that low teens growth number. In the context of the environment right now, the selling environment, how are you thinking about the time it could take you to get back there? And also going back to your comments on the Q3 call of 2023, where you expected tech vendors to return to normal growth in 12 to 18 months.

Speaker 9

Is that still on the table right now? Or do you think things have changed?

Speaker 5

Good morning, Heather. Thank you. In terms of the medium term outlook, it is our goal. And again, we do need a stable, I won't say a great operating environment, but a stable operating environment. I'd argue we're doing really well in a very volatile operating environment globally, probably more volatile than that.

Speaker 5

We'd all like to see quite honestly, but we're continuing to do well. GBS is growing in that medium term guidance range today. The end user portion or the enterprise leader portion of GTS is growing at high single digit growth rates. And obviously, we want to get that back up into the 12% to 16% range. And then on the tech vendor side, what I would say is small tech continues to be a super challenging operating environment.

Speaker 5

We were pleased to see the overall tech vendor business return to growth in this quarter from last quarter. But it is still super challenging, particularly on the lower end of the tech vendor market.

Speaker 9

Okay. That's helpful. And as a follow-up, the business tends to see consistent sequential trends in terms of CV, just if you look back historically. When you think about the back half of the year, is there any reason that you would deviate in any way from the sort of sequential cadence that you typically see generally not like the exact number, but the trend?

Speaker 5

Generally, no. So our selling motion, our conference calendar, things like that, which are a big piece of what drives the typical phasing are pretty stable. So no, I would expect us to follow the similar trends that we've seen. Obviously, we called out Q1 of this year earlier because it was a little off trend, but I think back half of the year should look like a normal back half of

Speaker 2

the year for us from that perspective.

Speaker 9

Thank you.

Speaker 3

Thank you. Our next question comes from the line of Josh Chan with UBS. Please proceed.

Speaker 10

Hi, good morning, Jean and Craig. Thanks for taking my questions. If I look at the CV growth, so GTS obviously reaccelerated nicely as you had predicted. How do you think about the shape of GBS as that's been kind of moderating slowly perhaps because of the macro? How do you envision GBS trending from here?

Speaker 6

So GBS, first we grew 12% in the quarter, which we think is really good. The second thing is GBS has a tremendous market opportunity. We are aligned to go capture that opportunity over time. The CPO is going to bounce around a little bit quarter to quarter, but the huge market opportunity is there and we're prepared to go get it.

Speaker 5

And again, the medium term objective for that business is 12% to 16% growth. And we continue to believe that GBS business and the GTS business can both deliver 12% to 16% CV growth.

Speaker 10

Okay, great. Thank you. And then if I can ask a question on margin. I guess the ingredients that led to the slight year over year EBITDA margin expansion in Q2, is there any reason that those ingredients wouldn't also hold into the second half? And thanks for your time.

Speaker 5

Thank you, Josh. Great question. So the way to think about the second half, again, is sort of back to Heather's question a little bit too. Normal phasing from both a revenue perspective and from an operating expense perspective, coupled with continuing to make sure that we are investing for future growth. And again, we talked about mid single digit QBH growth for GTS and high single digit QBH growth for GBS.

Speaker 5

So making sure that those investments are dialed into the second half operating expense forecast and plans. The other thing I would note is that Q2 is our highest margin quarter for conferences. So despite Q4 being the largest revenue quarter, Q2 is actually the highest margin quarter, which drives some of that benefit that you saw in the Q2. But if you kind of run the math on revenue, normal OpEx phasing given our conference calendar and also dialing in that incremental investment for the QBH growth, which again, as you know, doesn't really benefit the results or top line results this year. Those are really investments for the future.

Speaker 5

That's how you can sort of reconcile from the Q2 EBITDA margins down to the second half EBITDA margins, which then give you that full year outlook of around 23.5%.

Speaker 10

Great. Thank you for the color and the time.

Speaker 3

Thank you. Our next question comes from the line of Manav Patnaik with Barclays. Please proceed.

Speaker 11

Hey, this is Brendan on for Manav. Just wanted to ask, there's been some, I guess, just reports on companies facing kind of like a Gen AI tax on their IT budgets just with the expense of some of the new technology. I was just curious if what you guys have seen related to that and kind of what your customers are saying and any if there's any impacts from that? Obviously, it's also an opportunity as well, but just what you're seeing near term.

Speaker 6

Yes. It's a great question, Brendon. So Gen AI continues to be a topic of very, very high interest of all of our clients. If you look at kind of our enterprise function leaders as opposed to tech companies, they're easing into the investments. The tech companies are investing heavily.

Speaker 6

The enterprise function leader businesses are basically starting to invest and looking for the best use cases where they can get

Speaker 1

the highest return on JAI.

Speaker 6

I think people are still wrestling with what the right formula is there. And it's great for us because we're very high interest. They're spending money on it and it's important to them. And so it's a place we can really add a lot of value.

Speaker 11

Okay. And then just following up with the cash and leverage, you mentioned you always mentioned tuck in M and A as a possibility. Just kind of give us an idea of what I guess what kinds of tuck in M and A you would consider?

Speaker 5

Hi, Brendan. It's Craig. So generally, we think about M and A from kind of 3 angles. One would be enhancing our research coverage in some area. So it could be we're we need more in marketing or we need more in finance or something like that.

Speaker 5

So that would be one flavor of acquisition looking for assets that could enhance the insights to which we provide the operating executives that are our target audience. 2nd would be sort of a geographic fill in, so sort of the same tone and tenor there, but going after geographies where we're not as strong or don't have as much critical mass. And then 3rd and perhaps 4th would be sort of assets or technology type acquisitions that would help us catalyze getting to market faster or buying some capability that is really valuable to us that we can then leverage across the enterprise. And again, if you look at the there's a handful of small acquisitions we've done over the last 5, 6 years. We kind of have at least 1 in each of those categories.

Speaker 5

And that's sort of what the M and A radar screen looks like today.

Speaker 4

Okay. Thank you.

Speaker 3

Thank you. Our next question comes from the line of Surinder Thind with Jefferies. Please proceed.

Speaker 12

Thank you. Can you maybe talk about just the thought behind the cadence for your hiring plans at this point? It sounds like it's going to be quite back half loaded. Is that just looking for additional data points? Any color there would be helpful.

Speaker 3

Please stand by.

Speaker 6

Surinder, sorry. So if you look at our case for hiring, if you look at the market overall, it's been very, I'd say uneven over the last few years. There was a pandemic where we slowed down our hiring dramatically. There was the tech bubble afterwards where it was hard to even hire people because the tech companies were so aggressively hiring. In the year after that the tech companies were laying people off and so it was very easy to hire people.

Speaker 6

And so we've stepped up a couple of years ago very well and we had a lot of junior people. And so we want to make sure that those people mature and we got full productivity out of them. And also to see kind of what the macroeconomic and geopolitical world looks like. That seems to be more stable now and we feel like that tenure of that group we hired 2 years ago now is at a stable point. And so it makes sense to ramp our hiring up and the people we hire getting them second half of the year are going to position us 25, 26 and 27 because they're the productivity will improve over the 1st 3 years we hire them.

Speaker 6

And so this additional hiring we're planning to do in the second half is really getting back to what we've done traditionally before the rockiness of the last few years. And we would expect that kind of hiring trend to continue, which is more even going forward. And this is kind of just getting back to strategy after the last few years of a lot of tumultuous economic

Speaker 5

ties. And Surinder, the other thing I'd just add there is from where we are today, it's another few 100 net people on staff by the end of the year. So it may sound like a big sort of move. It's actually not given the trending. And so again, if we target that mid single digit QVH growth for GTS and high single digit for GBS.

Speaker 5

It's a few 100 more people between net between now and

Speaker 10

the end of

Speaker 2

the year.

Speaker 12

That's helpful. And then you mentioned CrowdStrike in the prepared remarks. How does something like that impact the business? Is it just more engagement with existing clients just wanting to access more resources? Or does this drive incremental demand at the top of the funnel that maybe you can convert in the back half of this year?

Speaker 6

So our whole strategy is to help our clients with their most important priorities. CrowdStrike on that Friday was certainly one of a big priority. And so we did see a big uptick in demand for our clients. It helps with engagement. We did a bunch of things immediately to help them.

Speaker 6

We had a panel webinar that day. We had a document that we published that day. We had a webinar live stream and we did a whole series of things like that to help our clients. And so it really, we're helping them with a mobile need, which is great for our demand. It's great for our existing clients, but for new clients, it gives us a reason why they should buy.

Speaker 6

So CrowdStrike, the kinds of CrowdStrike or why it exists is to help our clients in these difficult times.

Speaker 1

Thank you.

Speaker 3

Thank you. Our next question comes from the line of George Tong with Goldman Sachs. Please go ahead.

Speaker 13

Hi, thanks. Good morning. Enterprise functional leader CV growth was 10% in the quarter, which is pretty similar compared to 1Q. Can you elaborate on some of the trends you're seeing here and if the momentum exiting the quarter was stable or improved?

Speaker 6

So I would say the selling environment was pretty consistent between Q1 and Q2. There's not a lot of change there. I do think our execution was better, which is why we had a little bit of pickup in parts of our business. The overall macroeconomic and geopolitical environment didn't change much between Q1 and Q2.

Speaker 13

Okay, got it. That's helpful. And then research subscription revenue growth outperformed in the quarter, but you're holding your outlook for research subscription revenue unchanged for the full year. What factors are holding you back from raising your Research subscription outlook for the full year?

Speaker 5

Yes. Hey, George. Good morning. The way I would characterize it is we came in roughly where we thought we were going to land from a research subscription revenue perspective in the Q2. CV growth did accelerate 50 basis points from Q1 to Q2.

Speaker 5

That was pretty much baked into our full year outlook. And so from where we stand today, we feel really good about the research subscription revenue line as we mentioned in the prepared remarks. That's obviously the revenue line that we have the greatest visibility on. But it's also modest changes in CV don't have a huge impact from now until the end of the year. It's really the CV growth we deliver for this year will really determine 2025 revenue.

Speaker 5

So I think our perspective is sort of on target or on expectation for Q2. No change to the research subscription revenue line for the balance of the year other than the modest uptick that we dialed in for foreign exchange.

Speaker 13

Got it. Very helpful. Thank you.

Speaker 3

Thank you. And our next question is from Jeff Silber with BMO Capital Markets. Please proceed.

Speaker 14

Thanks so much. Wanted to focus on retention. The retention metrics still going down. I know the decline seem to be getting worse, which is good to see. But what do you think it'll take to get the retention metrics starting to move in a positive direction again?

Speaker 14

Is there anything you can do from your end?

Speaker 5

Hi, Jeff. Good morning. So I'd say focusing on GTS first. So while retention, as I think I mentioned in the prepared remarks for the enterprise function leader part of business is at historical levels and continues to be pretty strong there. And so I think what all you're seeing is the continued tech vendor challenging market.

Speaker 5

And again, in particular, the small tech vendor part of the market, diluting the retention metrics a little bit. We will eventually watch through this. It will take some time, because it's not as simple as thinking about, well, business you sold 24 months ago, you're already through that now and so there are no more issues. It's really client specific in terms of when they got funding, when their funding runs out, when they have cash flow problems, etcetera. And so I think what you're still seeing is just a drag down from, in particular, small technology companies that is driving the retention stuff.

Speaker 5

On the GBS side, I think we had really, really strong wallet retention there, particularly coming out of the pandemic. The wallet retention numbers are still significantly higher than what we report on the GTS side. So I'd argue the GBS, while retention metrics and client retention metrics are relatively strong as well.

Speaker 14

Okay, great. And if I could shift over to the contract length for research. If I remember correctly, at one point in time, you were selling more 3 year contracts. I might be wrong, but I think more recently probably shifting a little bit more towards 2 years. If you could just remind me if that's correct?

Speaker 14

And are a lot of those 2 year terms coming up for renewal over the next few months or so? Yes. Our

Speaker 5

hey, Jeff, our standard contract length, I would say, is 24 months. We do write some that are 12 months and we do write some that are 36 months, but the vast majority are 24 months. And so we always have a significant amount of contracts coming up for renewal in basically every quarter, because our sellers and our clients consume predominantly 24 month contracts. I think our average contract length is somewhere in the 1.7 to 1.8 year range. More than 70% of our contract value is multi year in nature.

Speaker 5

And so again, we're always going to have 2 year deals and 3 year deals coming up for renewal pretty consistently quarter to quarter to quarter to quarter.

Speaker 14

I appreciate the color. Thanks.

Speaker 3

Thank you. And as I see no further questions in the queue, I will pass the call back to the Chairman and CEO, Gene Ho for his final comments.

Speaker 6

Here's what I'd like you to take away from today's call. Gartner delivered financial results ahead of expectations. We delivered 10% contract value growth with the enterprise function leaders. We have a vast addressable market opportunity with a strong and compelling client value proposition. Looking ahead, we are well positioned to drive sustained double digit revenue growth over the long term.

Speaker 6

We will continue to create value for

Speaker 1

our shareholders by providing actual objective insights to our clients,

Speaker 6

prudently investing for future growth, generating free cash flow well in excess of net income

Speaker 1

and returning capital to our shareholders

Speaker 6

through our share repurchase program. Thanks for joining us today and we look forward to updating you again next quarter.

Speaker 3

And thank you all for participating in today's conference and you may now disconnect.

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Earnings Conference Call
Gartner Q2 2024
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