Craig W. Safian
Executive VP & CFO at Gartner
Thank you, Gene, and good morning. Third quarter results were strong with high single digit growth in contract value. Revenue, EBITDA, adjusted EPS and free cash flow were better than expected with outstanding performance in consulting and disciplined cost management. With strong results in the quarter and good visibility into Q4, we are increasing our 2023 guidance.
Third quarter revenue was $1.4 billion, up 6% year-over-year as reported and 5% FX neutral. In addition, total contribution margin was 68% compared to 69% in the prior year as the 2022 hiring catchup continued to flow through the P&L as expected.
EBITDA was $333 million, ahead of our guidance and about in line with last year. Adjusted EPS was $2.56, up 6% from Q3 of last year, and free cash flow was $302 million. We finished the quarter with 20,253 associates, up 6% from the prior year and 1% from the end of the second quarter. We remain well positioned from a talent perspective as our associates continue to move up the tenure curve.
Research revenue in the third quarter grew 6% year-over-year as reported and 5% on an FX neutral basis. Subscription revenue grew 8% on an organic FX neutral basis. Non-subscription revenue performance was similar to Q2. Third quarter research contribution was 73% compared to 74% in a prior year period, as we have caught up on hiring and returned to the new expected levels of travel.
Contract value or CV was $4.7 billion at the end of the third quarter, up 8% versus the prior year. The third quarter last year was a very strong research quarter with outstanding performance across most key metrics.
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. New business with enterprise function leaders increased double digits as well. CV from tech vendors grew low single digits compared to mid-teens growth in the third quarter of 2022. Quarterly net contract value increase or NCVI was $101 million. As we've discussed in the past, there is notable seasonality in this metric.
TV growth was broad based across practices, industry sectors, company sizes and geographic regions. Across our combined practices, the majority of the industry sectors grew at double digit rates, led by the transportation, services and public sectors. We had high single digit growth across all of our enterprise size categories other than the small category which has the largest tech vendor mix and grew low single digits. We also drove double digit or high single digit growth in the majority of our top 10 countries.
Global technology sales contract value was $3.6 billion at the end of the third quarter, up 7% versus the prior year. GTS CV increased $65 million from the second quarter. Wallet retention for GTS was 102% for the quarter, which compares to 107% in the prior year when we saw a near record high for this metric. IT Enterprise Function Leaders Wallet Retention remained above historical GTS levels during the third quarter.
GTS new business was up 7% versus last year. New business with IT Enterprise Function Leaders increased mid-teens compared to the prior year. GTS Quota Bearing Headcount was up 5% year over year. With the dynamic territory planning we introduced a few years ago, the catch up hiring we did last year and our teams moving up the tenure curve were well positioned for growth moving into 2024. 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 third quarter, up 14% year over year. All of our GBS practices grew at double digit or high single digit rates other than sales, which grew mid-single digits. Growth was again led by supply chain and HR.
GBSCV increased $36 million from the second quarter. Wallet retention for GBS was 108% for the quarter, which compares to 114% in the prior year when we saw one of the highest ever results for this metric. GBS new business was up 10% compared to last year. GBS Quota Bearing Headcount was up 10% 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 third quarter was $57 million, ahead of our expectations during a seasonally small period. We delivered strong growth for the conferences we held in Q3 compared to the same conferences in 2022. The calendar shifted significantly from 2022 to 2023, with the return to in-person. Contribution margin in the quarter was 36%, consistent with typical seasonality and reflecting investments for future growth. We held nine destination conferences in the quarter, all in-person.
Third quarter consulting revenues increased by 24% year-over-year to $133 million. On an FX neutral basis, revenues were up 23%. Consulting contribution margin was 37% in the third quarter.
Labor based revenues were $100 million, up 10% versus Q3 of last year as reported and on an FX neutral basis. Backlog at June 30 was $180 million, increasing 15% year-over-year on an FX neutral basis with continued booking strength.
Our contract optimization business is highly variable. We delivered $33 million of revenue in the quarter, with some of the revenue pulled forward from the fourth quarter relative to our prior outlook. Consolidated cost of services increased 8% year-over-year in the third quarter as reported, and 7% on an FX neutral basis. The biggest driver of the increase was higher headcount to support our future growth.
SG&A increased 8% year-over-year in the third quarter as reported, and 7% on an FX neutral basis. SG&A increased in the quarter as a result of headcount growth. EBITDA for the third quarter was $333 million, about in line with last year. Third quarter EBITDA upside to our guidance primarily reflected revenue exceeding our expectations in consulting and prudent expense management.
Depreciation in the quarter of $25 million was up modestly compared to 2022. Net interest expense excluding deferred financing costs in the quarter was $21 million. This was down $8 million versus the third 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 Q3 adjusted tax rate, which we use for the calculation of adjusted net income, was 22% for the quarter. The tax rate for the items used to adjust net income was 35% for the quarter. Adjusted EPS in Q3 was $2.56, up 6% compared with last year. We had 80 million shares outstanding in the third quarter. This is a reduction of close to 1 million shares, or about 1% year over year. We exited the third quarter with about 79 million shares on an unweighted basis.
Operating cash flow for the quarter was $331 million, up 5% compared to last year. Capex for the quarter was $28 million, down 11% year-over-year as a result of catchup spend on technology investments in 2022, which normalized this year.
Free cash flow for the quarter was $302 million. Free cash flow as a percent of revenue on a rolling four quarter basis was 18% of revenue and 67% of EBITDA. Adjusted for the after-tax impact of the Q1 divestiture, free cash flow conversion from GAAP net income was 122%. Our free cash flow conversion is generally higher when CV growth is accelerating.
At the end of the third quarter, we had about $1.2 billion of cash. Our September 30th debt balance was about $2.5 billion. Our reported gross debt to trailing 12-month EBITDA was under two 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 $209 million of stock during the third quarter and about $100 million in October. The board increased the authorization by $500 million earlier this week, and we expect they will continue to refresh the repurchase authorization as needed going forward.
At the end of October, following the increased authorization, we had about $1 billion available for repurchases. 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.
We are raising our full year guidance to reflect the better-than-expected Q3 performance and good visibility into the fourth quarter. For research, we continue to innovate and provide a very compelling value proposition for clients and prospects. Subscription research growth will reflect recent trends in contract value. We continue to expect stronger growth from the subscription business than the non-subscription part of the segment, consistent with the third quarter.
For conferences, we still expect Q4 to be the largest quarter of the year. For consulting revenues, the labor business continues to perform well. We have very tough contract optimization compares in Q4 and pulled some revenue into Q3 relative to our prior expectations. 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 $4.875 billion, which is FX neutral growth of about 6% or 7%, excluding the Q1 divestiture.
The update to the research revenue guidance reflects better than planned NCVI performance in Q3 with continued stability in the non-subscription part of the business, there is modest incremental upside relative to the expectations we built into the guidance last quarter.
We expect conferences revenue of at least $500 million, which is FX neutral growth of about 27%. We have increased our outlook for conferences by $10 million to reflect a good start to the fourth quarter.
We expect consulting revenue of at least $515 million, which is growth of about 8% FX neutral, reflecting the very strong performance in Q3 and timing in the contract optimization business. The result is an outlook for consolidated revenue of at least $5.89 billion, which is FX neutral growth of 8%. We now expect full year EBITDA of at least $1.44 billion, up $80 million from our prior guidance.
With the strong performance in Q3, we have increased confidence in the margin forecast for the fourth quarter. We expect typical operating expense seasonality from Q3 to Q4. We now expect 2023 adjusted EPS of at least $10.90 per share.
For 2023, we now expect free cash flow of at least $1.025 billion, up $50 million from our prior guidance. The higher free cash flow reflects a conversion from GAAP net income of 136%, 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 October.
We are performing well this year despite continuing global macro uncertainty and a dynamic tech vendor market. CV grew high single digits in the quarter. Revenue and EBITDA performance exceeded our expectations and we increased our guidance. Free cash flow was strong in the quarter, and we increased the guidance for the full year.
We repurchased about $550 million of stock year to date through October, and remain eager to return excess capital to our shareholders. We will continue to be disciplined, opportunistic and price sensitive.
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 about in line with CV growth and G&A leverage, we will expand EBITDA margins modestly 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&A.
With that, I'll turn the call back over to the operator and we'll be happy to take your questions. Operator?
