Gartner, Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good morning, everyone. Welcome to Gartner's First Quarter 2024 Earnings Call. I'm David Cohen, SVP of Investor Relations. [Operator Instructions] After comments by Gene Hall, Gartner's Chief Executive Officer; and Craig Safian, Gartner's Chief Financial Officer, there will be a question-and-answer session. Please be advised that today's conference is being recorded.
Good morning, and thanks for joining us today. Gartner remains resilient in a complex environment. In Q1, contract value grew high single digits. Natural results for the quarter were ahead of expectations. We delivered strong profitability and free cash flow, and we increased our guidance for 2024 on an FX neutral basis.
Thank you, Gene, and good morning. First quarter financial results were better than planned with particular strength in profitability and free cash flow. We remain well positioned for the global CV growth rate to accelerate from the first or second quarter of this year. We are increasing our revenue, profit and free cash flow guidance on an operating basis and updating for the stronger U.S. dollar. We have a lot of capacity for share repurchases and remain eager to buy back stock opportunistically.
our CFO and Finance Executive Conference in Australia; and our Data & Analytics Summit in Brazil. Contribution margin in the quarter was 33%, consistent with typical seasonality and reflecting investments for future growth. We held 12 destination conferences in the quarter.
[Operator Instructions] And our first question will come from Jeff Meuler from Baird.
Hello? Can you hear me?
Yes, sir, we can hear you now.
Yes. Sorry about that. Was hoping you could give more perspective on GTS new business sold trends, and I'm obviously keying in on the year-over-year being a bit weaker this quarter than last.
Jeff, it's Craig. Thank you for the question. On the new business side, again, you need to really differentiate between what we're seeing from a tech vendor perspective and what we're seeing on the enterprise function leader portion of the GTS business.
The only thing to add is that our sales to new logos in tech vendors has been strong. And so what Craig reflected is that it's not the new logos that's actually been strong. It's when we have a renewal, how much of -- how many digital seats they buy.
Okay. And then just on retention, obviously, we have your publicly reported metrics, and just want to recognize that you had previously called out the outsized renewals for tech vendor this quarter.
Yes. I think, Jeff, it's a great question. We have seen some stability in the retention rates. And generally, if you look at our NCVI in any given quarter, it's a combination of what did we renew and how much new business we sold.
And our next question will come from Toni Kaplan from Morgan Stanley.
I was hoping you could just comment on the first part of the last question, the recalibration and seats as contracts come up for renewal. Are you seeing the large enterprise clients reducing seats? Or was that more of a comment around the tech vendor?
Toni, it's Gene. There's a couple of things going on. One is in the small end of the market, the companies that got funding 2 or 3 years ago that are now coming up for renewal, many of those companies are having difficulty getting funding for two reasons.
And then, Toni, just for context, the tech vendor CV is a little less than 25% of total CV, which is pretty consistent with where we've been over the last several quarters.
Yes. Okay. Great. And then wanted to ask on AI. You've said in the past that it hasn't generated extra demand, and that it's just sort of another topic that clients are interested in. I guess, why shouldn't you see increased demand for additional seats across both GTS and GBS?
So Toni, there's a broad level of interest in AI across each of our functional areas. So whether it's IT, marketing, sales, finance, legal, every single function has a very high interest in AI, and we have a large research team that is focused on making sure we understand the applications in AI in each of those functional areas. And so we have a large installed base of existing clients. Most of those clients are -- the existing clients are looking at our AI research and using it.
Our next question comes from Heather Balsky from Bank of America.
I'd love to touch on your, I guess, I'll call it guidance that you still think CV should start to accelerate, either after this quarter or after next quarter. It sounds like the selling environment got tougher. We're still seeing layoffs in the tech industry. I'm just curious what you're seeing right now that still gives you confidence that this is the year we see the inflection?
Heather, let me start. So our -- Q1, our enterprise function leaders CV grew 10%, so it was a little tougher economic environment. Decisions got pushed. We still grew 10% in that kind of environment.
Well, I think -- and just to add to that, Heather, our sales force continues to come up the 10-year curve. And so every day, they're a little bit more experienced and a little bit more tenured. And that gives us confidence around the reacceleration.
And another question we got. You talked about the heavy renewals in the quarter, and you've warned us about that. As you think about the renewals coming from the, I guess, sort of peak period for the tech vendor space, how does the rest of the year look in terms of the renewals coming up?
Yes. I mean, it's -- so obviously, it's got to add up to 100% over the course of the year. And so we were a little overweighted in the first quarter on those tech vendor renewals, and it's much more even over the balance of the year. And again, it's another reason that gives us confidence.
And our next question will come from Andrew Nicholas from William Blair.
I wanted to first ask on operating expenses. Pretty significant upside to your adjusted EBITDA outlook on Q1. Just wondering where the major drivers were relative to your expectations in terms of spend. Any areas in particular where you're getting a bit more efficiency than you had expected and maybe what that means for operating expenses going through the rest of this year?
Andrew, I'd say the OpEx favorability was pretty broad based. It wasn't any one particular area where we harvested significant savings. I would say the FX rate actually helped a little bit there, too. It obviously hurts on revenue, but helps on expenses.
Got it. That's helpful. And then I wanted to ask about Conferences. I think you said you added two new Conferences in the first quarter. Can you just kind of talk about where you sit in terms of your plans on the Conference build out front?
Yes. And so that is still the plan, right? Strategy is for us to have destination conference for every major constituency that we serve, role that we serve on every major region or geography in which we operate. And I think the two launches in the first quarter, while small, are indicative of that.
The other thing we're doing to Andrew, too, is for some of these existing conferences, we're moving to larger venues, so that we actually can accommodate the incremental demand that we're seeing, which is substantial.
And our next question will come from Josh Chan from UBS.
Is there a way to estimate how much the elevated renewals in Q1 impacted your CV growth? And I guess, relatedly, absent this elevated renewal impact in Q2, how should we think about the NCVI in Q2 as compared to last year, which should theoretically be a pretty easy comparison, I think?
Thanks. Josh, so again, I think the combination, as we talked about, of more than normal contracts coming up for renewal against our smallest new business quarter is really -- and the continued tech vendor challenges is really the story around the Q1 NCVI and the Q1 CV growth.
Great. I guess, on my follow-up on your sales force tenure, how do you think about the idea of the tenure improving into a time when the environment is not yet fully robust? Do you have to work harder on retaining, so that you can fully take advantage of the sales force when the environment does cooperate? How do you think about that?
Yes, it's a great question. So obviously, when we talk about average productivity and what we've seen historically, those are generally measured in more "normal" operating environment. And so clearly, when it's more challenging from an operating environment perspective, we can see some of the productivity measures or at least the final output productivity measures a little more muted.
Our next question comes from Manav Patnaik from Barclays.
Craig, in your prepared remarks, you made a comment around pricing stabilized, that it could be upside to guidance if it improves. So I was just hoping you could just give a little bit more detail on what the pricing, I guess, year-over-year growth is today versus historical. And were you implying that you guys might be raising prices here again?
Manav, just for clarity's sake, the pricing stabilization comment was really specifically about the nonsubscription part of our Research business. And so as you recall, coming out of last year, on our February call, we talked a lot about focusing on higher-quality traffic. And by doing that over the medium to long term, we would expect to see improvements in pricing.
And Manav, the pricing in our subscription business has been completely stable, so there's been no issue there.
Okay. Got it. And then just one quick one. I think the enterprise count is down about 4% year-over-year. I'm guessing a lot of that was the tech vendor challenges you talked about. But just in context of your CV acceleration you're expecting, can you just remind us again of your hiring plans for the quota-bearing sales force?
Yes. Sure, Manav. Happy to provide that color. So on the enterprise count, your hypothesis is spot on. It's more -- and Gene alluded to this earlier in our prepared remarks. It's just more churn in the small tech space. And again, to Gene's point, we are adding new logos in the small tech space, and we're actually doing pretty well there and holding up pretty well, but it's not offsetting the losses.
And our next question comes from Surinder Thind from Jefferies.
Just following up on some of the tech vendor questions here. On an absolute dollar basis for CV for tech vendor, is the idea that we're close to stabilizing at this point? Or how should we think about the trajectory over the course of the year as you think about CV growth reaccelerate? So is the primary determinant of that where CV for tech vendor ends up? Or how should we think about that?
Surinder, I think it's a combination across the portfolio that will fuel the reacceleration for CV. I mean, clearly, tech vendor needs to be a piece of that. It's about 25% of total CV.
Got it. But as a clarification, is CV for tech vendor assume to inflect positive at any point in your guidance at this point?
Surinder, we generally don't guide around contract value. And so, yes, I can't answer that specifically. All I would say is from either the Q1 or Q2 point, we expect total CV to begin to reaccelerate. And certainly, tech vendor CV will contribute there.
Got it. And then just a quick follow-up on the nonsubscription pricing stabilization. It sounds like it stabilized fairly quickly or in the last few months. Is that a fair characterization? And then could the opposite also happen is how quickly could you potentially see improvement? Is that something that we could start to see in the back half of the year? Or how should we think about the potential for when pricing may reaccelerate or normalize?
Yes. Surinder, great question. So the pricing is based on the -- what we're calling the quality of the leads, which is basically the proportion of leads that we send that turn into actual clients. And so -- and analyzing it, we've determined that increasing that proportion actually increases prices. But what happens is you send the vendor the lead, they have to actually close the deals. And so there's a lag time between when you send a better lead and when the pricing goes up.
Our next question will come from George Tong from Goldman Sachs.
Can you discuss how tech vendor trends performed moving through the quarter in the month of April? Are trends still trying to find the bottom? Have you seen any stabilization? Or are you seeing early signs of a positive inflection?
George, I don't think there's anything really to call out month-to-month. I mean, our business, as you know, tends to be very heavily weighted towards the last month of the quarter. And so it's hard to draw inferences or conclusions from Jan to Feb to March, et cetera.
Okay. Got it. And then with respect to margins, you raised your EBITDA margin outlook for the year from 23% to 23.5%. Typically, revenue upside is what drives the margin upside, and expenses are stable at this point. So what's driving your improved margin outlook? And what are your latest thoughts on what normalized EBITDA margin should be?
Yes. George, great question. So spot on, on your assessment. I guess, I would say a couple of things. So one is that, clearly, our margins are structurally higher today than they were in 2016 or 2019. As you know, there are a lot of factors that can influence margins on a quarter-to-quarter basis or over the course of the year.
And we will take our last question from Jeff Silber from BMO Capital Markets.
This is Ryan on for Jeff. On the renewal activity over the past couple of quarters, can you compare the terms of those renewals to all the new business you signed 2, 3 years ago? In particular, are you seeing greater preference for longer contracts? And then what sort of price escalators are typically embedded in there, if anything worth calling out?
Ryan, I'd say it's been pretty stable and normal. So our standard contract is essentially a 2-year contract. I think somewhere around 70% of our contract value are multiyear contracts, 2 or 3 years, but the bulk of them are actually 2-year.
Got it. And then just on the quarterly cadence, what are the meaningful hiring quarters this year? And then just more broadly, how is the hiring market currently for tech talent?
So let me start with the tech talent market. So our turnover is very, very low. It's near record lows. And so that's really good for us because it helped increase tenure. On the hiring side, we have a great associate value proposition and a great recruiting team that does an incredible job communicating that value proposition.
And then, Ryan, on the timing of the phasing, hiring dates can be -- they can happen on June 29, and they're in the second quarter number or they could happen on July 1 and then they're in the third quarter number. We're very focused on making sure that we hire the right amount of people over the course of this year, so that we enter 2025 with the right number of sellers ready to go.
And that does conclude our question-and-answer session for today's conference. I'll now turn the call back over to Gene Hall for any closing remarks.
Well, here's what I'd like you to take away from today's call. Gartner delivered financial results ahead of expectations and 10% contract value growth with enterprise function leaders. We have a vast addressable market opportunity. We have a strong value proposition.
This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.