Gartner Q1 2024 Earnings Call Transcript

Hey, good morning, 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. And what we saw was GTS new business for enterprise function leaders was up low single digits year-over-year in the quarter and it was down a little bit year-over-year on the tech vendor side.

And so those two dynamics are really what hit us in the first quarter. I would say just on the tech vendor side, and I'm sure we'll talk about this quite a bit as we work through the questions, that we highlighted in February that we had a larger-than-normal amount of contracts coming up for renewal on the tech vendor side. Those were typically 2- or 3-year deals, and so they hadn't been touched in a few years. And obviously, the tech market is very different today than it was a few years ago. And generally, what we're seeing, particularly with our medium- to larger-sized tech clients is they are staying with us, but there is some -- still some recalibration.

And what that means is there's less new business than normal on those renewals. Out over the medium term and long term, we expect our tech vendor business to be a 12% to 16% grower, but we're still, and again, you guys can obviously read the headlines as well as we can, we're still in a pretty challenging tech vendor end market.

Gene, I don't know if you want to add?

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.

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 with Q1 being a seasonally very small new business quarter, historically, it's always been that way, coupled with the disproportionate amount of tech vendor contracts we had coming up for renewal, the reason we highlighted that in February is because that makes for a tough math, if you will, on NCVI in a given quarter. We are seeing retention rates stabilize. We do see a strong pipeline across the board in both GTS and GBS. And so again, we firmly believe that contract value growth is going to reaccelerate this year, as we indicated in our prepared remarks. And stable retention rates will certainly be an ingredient in that reacceleration.

Hey, 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 for renewal, many of those companies are a difficulty getting funding for two reasons. One is that the interest rates are higher. The second is there's been a big shift to where venture capitalist want to fund Al. Not surprisingly, Al start-ups compared to the software startups they were funding 2 years ago.

And so we're seeing kind of as those come up for renewal, the ones that aren't getting funding don't do as well, and that's -- plenty of logos doing wells are selling to the Al start-ups. And then you have the large end of the market, where we have different front going where they're laying off tens of thousand of people. And so they're -- it's a tougher selling environment than it has been in the past. As Craig mentioned, Q1 is our worst quarter in terms of just as we look at the SKU of renewals in terms of the most -- the largest number of those renewals coming up, and so we expect to get better through the year.

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.

So Toni, there's a broad level of interest in Al across each of our functional areas. So whether it's IT, marketing, sales, finance, legal, every single function has a very high interest in Al and we have a large research team that is focused on making sure we understand the applications in Al 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 Al research and using it.

When we sell a new client, they also -- that's a very hot topic, they want to talk to us about it, and it is a good reason to close a sale. If I contrast it though, like 2 years ago, about even cloud computing that was, Al wasn't the hot topic, cloud computing was. And so the topic has shifted. It's a very high level of interest, just as cloud computing was 2 or 3 years ago. And so it's not like that we didn't have demand, just all of a sudden increased demand. It kind has taken the place of things that were in the past. And again, as we -- and the other thing I'd say is, companies are now just kind of trying to figure out whether it's relevant, what the trade-offs are, what the cost is. And I think that this could gather momentum over time as they sort these kinds of things out.

It's good for us no matter how you look at it. But it's not like we had no business and that its going to like through a step change. It's more like it's substituted other things that we're helping with. Again, I think about the margin over time, it will be a net plus. And with regard to internal usage, we have a number of internal uses that we are using, mainly with data analytics, having very sophisticated like machine learning algorithms and neural networks in terms of understanding our business. That's one of the big applications we have for it.

Hye, Heather, let me start. So our Q1, our enterprise function leaders see we grew 10%. So it was a little tougher economic environment. Decisions got pushed. We still grew 10% in that kind of environment. The second thing is we talked about the tech sector, we had a -- particularly, we had a lot more renewals from 2 or 3 years ago tahat are coming up for renews later in the year. And the third thing is, if we look at our go-forward sales pipeline, our go-forward sales pipeline is very robust.

And so those are the kinds of things that give us confidence that the outlook that we gave is very accurate.

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 I think also, we are a learning company that are very agile. And even in a tougher environment, we are always working for ways to perform better in that tougher environment. And we learned a lot from prior dislocations, we've learned a lot even from the last couple of quarters, and we are applying those things, and we believe that actually will have a positive impact and help fuel that reacceleration as well.

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. So if you look at the way the renewals work and the way our new business ramps over the course of the year, that's what gives us confidence that either coming off of Q1 or Q2, you will see the reacceleration in the total contract value growth rate.

Hey, Andrew. Good morning. 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. And so we have dialed in the savings in the areas that we saw in Q1. Some of that's timing, some of that we're going to catch up on and some of that is real savings. And so the new guidance reflects what we learned from Q1 from an opex perspective.

But I don't overlook the foreign exchange. As we talked about, the dollar has strengthened quite a bit. And about 1/3 of our operating expenses are denominated in currencies outside of the U.S. dollar. And so those pretty large movements can actually impact the reported opex and revenue pretty significantly. But again, all reflected now in the new guide.

Yeah. 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. And so we've expanded our finance, our CFO conferences, to Australia in the first quarter. Again, sort of building out that portfolio and we brought back a Data & Analytics Summit in Brazil, again, because we've got a large business in Brazil, and there's demand for data and analytics.

This year, 2024, we're going from 47 conferences last year to 51 in 2024. I would expect us to have a similar sort of build over the next several years as we continue to build out the Conferences portfolio to support the Research business.

The other thing we're doing to Andrew too is for some of the existing conferences, we're moving to larger venues so that we actually can accommodate the incremental demand that we're seeing, which is substantial.

Thanks. Good morning, 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. As you think about moving through the year, the simple way that I think about whether CV growth accelerates or not, it's just comparing an expectation to your point on what the quarter NCVI is going to be in this year compared to what the NCVI was last year.

And so roughly speaking, last year, in the second quarter, we did around $40 million worth of NCVI across GTS and GBS. For the contract value growth to reaccelerate in Q2, we have to do modestly more than that on a dollar basis year-over-year. And again, if you look at the same number for Q3 where I think Q3 of last year, we did order of magnitude around $100 million of NCVI in the third quarter, we have to do modestly more than that in the third quarter of 2024 to continue the reacceleration.

And so again, as we've talked about, sort of when we think the reacceleration is going to happen, clearly, the renewal mix or the contracts coming up for renewal mix, coupled with our new business, normal expectations, coupled with looking at our pipeline, looking at the conversion rates, looking at pipeline velocity, et cetera, that's what gives us confidence that we will see a reacceleration coming off of either the Q1 or the Q2 number.

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 change 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. We also measure the inputs that go into sales.

And so how many opportunities are being added? How quickly are those things advancing through the pipeline? How often are salespeople and sort of people interacting with their clients, how many prospects are we getting to webinars or the conferences and things like that? So there are other measures beyond just the pure NCVI measure, which is sort of the ultimate measure, but there are other measures that we can look at that give us confidence that our sellers are getting more at that and more experience and are coming up a tenure curve. And then when the economy does stabilize or perhaps even improve, we should be able to see the benefits from that.

Hye, good morning, Manav. Just for clarity's sake, the pricing stabilization comment was really specifically about the non-subscription 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 so what we saw in the first quarter is some stabilization to pricing, which again, we view as positive. And as we continue to focus on that higher-quality traffic, if it does convert into better pricing there, that would reflect upside to the existing guidance.

And Manav, the pricing in our subscription business has been completely stable. So there's been no issue there.

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 and 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 again, as Gene laid out, the challenges that a lot of these clients had where they had funding 2 years ago, when they sign the contract and obviously may not today. And so that's really the prime story on the enterprise count. On headcount growth, we continue to target mid- to high single-digit QBH growth by the end of this year. And again, the combination of the size of the army we had entering the year, people coming up the 10-year curve and that mid- to high single-digit growth in QBH should set us up-or will set us up to continue to accelerate contract value growth rolling into 2025.

Hey, good morning, 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. But we also see opportunity for acceleration across the enterprise function leader portion of our business as well. As Gene highlighted, that continues to grow at around 10% combined, so pretty strong growth in a challenging environment. But essentially, I think we believe the -- well, I shouldn't say the tide will lift all three businesses, but all three portions of the CV base should see improvement that lead to the reacceleration of growth.

Surinder, we generally don't guide around contract value. And so 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.

Yes, Surinder, great question. So the pricing is based on 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, then 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. And so we certainly -- we believe the pricing will go up as we increase quality of leads. Exactly when that happens is hard to predict because of the dynamic I just talked about. The companies actually have to get the leads, close them, realize that they got that business and then reflect that in their pricing.

Hye, George. Good morning. 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, etc. I guess all I'd say is we expect that total CV will reaccelerate coming off of either Q1 or Q2. And again, as we just discussed with Surinder, tech vendor will be a piece of that reacceleration.

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. As it stands right now with coming out of Q1, sort of putting aside foreign exchange for a little bit, we modestly outperformed our expectations or our operating plan on revenue and then had modest upside from an opex perspective as well. We have flowed that through the balance of the year. And what you see is the guidance that implies a 23.5% EBITDA margin for the year for 2024.

In terms of how to think about future years, we're only 1 quarter into 2024. We'll give 2025 guidance in February of 2025. But again, a framework or a way to sort of think about it is with the QBH growth that were -- we've got baked into the 2024 plan, we're growing our expenses in high single digits. And that's obviously consistent with our medium-term framework on how we want to run this over the long term to drive long-term sustained double-digit top line growth.

Obviously, today, with decelerating CV, that puts a little bit of pressure on the margins as the revenue growth is not as great as the expense growth. That said, we're really disciplined around where we're spending and how we manage our expenses. And we're finding that balance between delivering on our margin expectations and making sure that we are investing appropriately to drive future growth.

And then the last thing I'd say is over the medium to long term, there is operating leverage in the business, and we expect to modestly expand our margins each and every year over the medium to long term.

Hey. Good morning, 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. To your point, we do build price escalators into those multiyear contracts and sort of aligns with what our pricing expectation is when we sign the contract. So we think an escalator of between 3% and 5% on the anniversary of those contracts. And I'd say in this environment, we're selling roughly same amount of multiyear contracts that we sold 12 months ago or 18 months ago.

The team is very focused on continuing to improve that number. It's just -- it's great for our economics, and it's actually great for our clients as well because their challenges are not bounded by a 12-month time frame. They're bigger than that. So signing 24-month contracts or 36-month contracts makes sense both from our business model perspective, but almost as importantly or more importantly, from a client perspective, and that hasn't really changed.

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 so we get a lot of demand, just give the prior report. We get approximately 200 applicants for every single job. And if you benchmark that, that is way off the charts. And so we're a very, very attractive employer.

And that look -- this combination of being a very attractive employer, lets us hire great people, and then once we're here, we retain them, which is why we have such low turnover. And we worked this issue on both the recruiting side and the retention side of our associates. And so that's getting better and better

Over time, which is one of the things that's driving associate tenure up which, in turn, over time, drives productivity up.

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 so when we talk about the mid- to high single-digit year-over-year growth in quota-bearing hires across GTS and GBS, that's really a December to December measure.

But that's really the most important measure because the people we hire over the course of 2024 don't have a huge impact on 2024. But if we have them -- and see and train, with a little bit of experience rolling into 2025, they can actually have a meaningful impact on 2025 and 2026 and beyond. So as you think about the QBH growth of mid- to high single digits, that's really where we want to end the year 2024, so that we're very well positioned as we start 2025.

Well, here's what I'd like you to take away for 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.

Looking ahead, we're well positioned to continue our sustained record of success far into the future. We'll continue to create value for our shareholders by providing actual objective insights to our clients, prudently investing for future growth, generating free cash flow well in excess of net income and returning capital to our shareholders through our repurchase program.

Thanks for joining us today, and we look forward to updating you again next quarter.