Q4 2020 Gartner Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Gartner fourth quarter 2020 earnings Conference call.
At this time, all participant lines on a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
Please be advised on today's conference is being recorded.
If you require any further assistance. Please press star Zero I would now like turn the conference over to your Speaker today, David Cohen Gartner T V. P of Investor Relations. Thank you. Please go ahead Sir.
Good morning, everyone. We appreciate your joining us today for Gartner fourth quarter 2020 earnings call and I Hope you're well with me on the call today are Gene Hall, Chief Executive Officer, and Craig Safian, Chief Financial Officer. This call will include a discussion.
On a fourth quarter 2020 financial results and Gartner is outlook for 'twenty and 'twenty, one as disclosed in today's earnings release and earnings supplement.
It's our website Investor day, Gartner Dot com on comments by gene and Craig We will open up the call for your questions. We ask that you limit your questions to one and a follow up on the call unless stated otherwise all references to EBITDA are for adjusted EBITDA with the adjustments as described in our earnings release all growth rates in Gene's comments are FX neutral.
Errol unless stated otherwise reconciliations for all non-GAAP numbers, we use are available on the Investor Relations section of the Gartner Dotcom website finally, all contract values and associated growth rates. We discuss are based on 2020 foreign exchange rates unless stated otherwise it said force in more detail on 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 2019 annual report on form 10-K quarterly reports on form 10-Q, as well as in other filings with the SEC encourage all of you to review the risk factors listed on these documents.
Now I will turn the call over to Gartner as Chief Executive Officer Gene Hall.
And thanks for joining us 'twenty 'twenty was an extraordinary year. The COVID-19 pandemic global macroeconomic conditions, social unrest and geopolitical changes all pose significant challenges to enterprises around the world in this context Gartner delivered a strong performance across contract value revenue.
EBITDA and free cash flow as many of you know we entered 2020 with a financial plan to align costs with revenues by executing this plan and taking swift cost actions. When the pandemic first began we quickly stabilized our financial position, we maintained disciplined cost management throughout the year, while restoring investments too.
<unk> future growth, we successfully pivoted our global work force to operate effectively in a remote environment. We grew our capabilities key functions across our business. We drove strong operational execution and we were extremely agile in serving our clients pivoting our content to address critical contemporary issues such as the pandemic.
But work environments cost optimization and business continuity.
Well positioned to spring back quickly as the macroeconomic environment improves.
Our performance improved in Q4 compared to earlier in 2020, we delivered strong performances in GBS contract value research revenues, EBITDA and free cash flow.
Research is our largest and most profitable segment. It is a vast market opportunity across all sectors sizes and geographies are.
Our research segment serves executives and their teams across all major enterprise functions in every industry around the world.
We are uniquely positioned to support leaders enterprise wide on hundreds of critically important topics topics with the highest interest during Q4 included data and analytics cost optimization and talent management.
Global technology sales or GTS serves leaders and their teams within it for the full year 2020, GTS contract value grew 4% our key underlying metrics have improved each quarter since Q2.
Fourth quarter 2020 contract value from new logos was up from a year ago, well cancels were about the same.
Our existing claims continued to increase their spend whoever it was a slower pace than in 2019.
This was the biggest factor impacting our growth in the quarter.
Client engagement continues to be strong with both content and analyst interactions up 30% versus 2019, we.
We saw strong performances across several regions and industries, including Tech retail and services some of the topics with the highest interest included digital transformation application development cloud management and the digital workplace, we expect GTS contract value growth to accelerate in 'twenty 'twenty, one and returned to double digit growth in the future.
Global business sales or GBS serves leaders and their teams beyond Daiichi. This includes HR supply chain finance marketing sales legal and more GBS contract value continued to perform well throughout the year with contract value growth of 7%.
New business growth was a very strong 26% in the quarter driven by our G X L product line.
The sales finance and HR practices, all ended Q4 with double digit growth rates in all practices with the exception of marketing contributed to gbs's growth across our entire research business, we practice relentless execution, a proven practices and we're seeing the results of our efforts our research business is well positioned to return to.
Sustained double digit growth over the medium term.
Turning to conferences as many of you know our conferences segment had great momentum coming out on 2019. It was hard hit in 2020 per the global pandemic.
To replace our traditional in person destination conferences, which were no longer possible in 2020, we pivoted to virtual conferences.
The performance of these conferences exceeded our expectations in 2020 and now with several months experience under our belt. We've got a set of best practices that will continue to refine.
Our value proposition for virtual conferences remains the same as for in person conferences, we deliver extraordinarily valuable insights to an engaged and qualified audience.
Beyond personal conferences operationally, we're preparing to return to in person conferences in the second half of 'twenty 'twenty one Gartner.
Gartner consulting is an extension of Gartner research and helps clients execute their most strategic initiatives through deeper extended project based work.
Our consulting segment was also impacted by the pandemic with revenues down 12% in Q4 and five per cent for the full year 2020 over the past several years, we've made great progress in our consulting business and it will continue to serve as an important complement to our I T research business.
Company wide, we continued to strengthen our stance against racism and discrimination.
We appointed a new leader of diversity equity and inclusion we established a center of excellence dedicated to improvement in this area and we strengthened our employee resource groups, which helps remove barriers for diverse populations and support associate engagement.
Sustainability is an important factor in how we manage our business. For example, we signed contracts for a Stanford headquarters and our U K hub to be powered by 100% renewable energy will be eliminating single use plastics across our offices and finally, we're benchmarking, our environmental footprint and development programs to minimize it overtime.
Summarizing we performed well in the context of a pandemic looking ahead, we are well positioned for sustained growth. We expect to return to revenue growth in 2021 and are on track to return to double digit C D and revenue growth thereafter.
We expect to deliver 2021, EBITA margins up 2019 and to further expand merchants over time with.
We generate significant free cash flow in excess of net income, which will deploy to return capital to our shareholders through share repurchases and make strategic tuck in acquisitions with that I'll hand, the call over to Craig Craig.
Thank you gene and good morning, I hope, everyone remains safe and well.
Fourth quarter results were ahead of our expectations headlined by a strong performance in GBS better than planned cost management and outstanding free cash flow generation.
As our 'twenty 'twenty one guidance highlights we expect total revenue to increase versus 2020, while also positioning Gartner for a return to strong growth looking out over the medium term. We continue to expect double digit C V in revenue growth modest margin expansion and strong free cash flow generation.
Because we can fund growth investments, we have ample capital to return to shareholders and to deploy to strategic tuck in acquisitions. When we find the right opportunities our board authorized an additional $300 million for repurchases, bringing the total available to around $860 million reviewing our year over year financial performance for the full year 2020 total.
Contract value increased 4% total FX neutral revenue was down 3% FX.
FX neutral adjusted EBITDA increased 20% diluted adjusted EPS was a strong $4.89.
And free cash flow was $819 million up almost 100% from 2019, we did see some timing benefits, which I will discuss a bit later on.
Quarter revenue was $1.1 billion down, 8% as reported and 9% FX neutral.
Excluding conferences, our revenues were up 2% year over year FX neutral. In addition, total contribution margin was 68% up more than 580 basis points versus the prior year.
EBITDA was $245 million up 13% year over year and up 10% FX neutral adjusted EPS was $1.59.
And free cash flow on the quarter was a robust $237 million.
Research revenue in the fourth quarter grew 5% year over year as reported and 4% on an FX neutral basis fourth quarter research contribution margin was 72% benefiting in part from the temporary cost avoidance initiatives, we put in place starting in the first quarter of 2020 total contract value grew 4% FX neutral to three.
$6 billion at December 31, this was the highest contract value and Gartner history, a notable achievement in a challenging year.
For the full year 2020 research revenues increased by 7% both on a reported and FX neutral basis.
The gross contribution margin was 72% of about 240 basis points from the prior year.
Global technology sales contract value at the end of the fourth quarter was $2.9 billion up almost 4% versus the prior year.
The selling environment continued to improve in the fourth quarter, but we are still seeing less upsell with existing clients on normal our.
Our clients are staying with us, but not adding as much incremental CV as we've historically seen given the challenging economic environment moving forward, we expect win backs and a return to more expansion with existing clients to contribute to growth in 2021, consistent with our experience coming out of the last downturn.
By industry CV growth was led by technology retail and services while.
Wallet retention for GTS was 98 per cent for the quarter down about 600 basis points year over year.
A majority of our industry groups, our retention improved from the third quarter.
GTS, new business declined 5% versus last year, an improvement from both the second and third quarters are regular full set of metrics can be found in our earnings supplement.
Global business sales contract value was $696 million at the end of the fourth quarter.
It's about 20% of our total contract value C.
<unk> increased 7% year over year CV growth was led by the health care and technology industries.
The sales finance and human resources practices, all recorded double digit CV growth for the year on.
All practices contributed to the 7% CV growth rate for G. B S. With the exception of marketing, which was impacted by discontinued products that said, our marketing business saw improving retention rates and a return to year over year, new business growth in the fourth quarter wallet retention for GBS was 101 per cent for the quarter down 43 basis points year over year.
GBS new business was up 26% over last year led by very strong growth in HR finance and legal as with G. T. S. A regular full set of GBS metrics can be found in our earnings supplement overall GBS continued to demonstrate its resilience and strength as we exited twenty-twenty the conferences segment was materially.
<unk> by the global pandemic as you know.
During the year, we pivoted to producing virtual conferences with a focus on maximizing the value we deliver for our clients. We held 13 virtual conferences in the fourth quarter. We also held a number of virtual event. The meetings shifting these one day local conferences on line due to the pandemic.
Conferences revenue for the quarter was $93 million contribution margin quarter with 78% are fast transition to virtual conferences has been positive for the overall business as we discussed last quarter virtual conferences offer significant value to our research clients and prospects and while we've shown that we can run virtual conferences profitably.
It is important to recognize the different economics associated with virtual versus in person conferences.
Similar to last quarter I'd highlight two primary differences first our mix of revenue from attendees and exhibitors has essentially flipped.
With the in person format approximately two thirds of revenue comes from exhibitors and one third from attendees.
On the virtual format, we've seen about two thirds of revenue come from attendees.
Second the vast majority of our attendee revenue has continued to come from research contract entitlements as opposed to incremental tickets.
I'd also highlight that our fourth quarter destination conferences have historically been our largest most profitable conferences in 2020, we held our biggest most highly anticipated conferences of the year in the fourth quarter in a virtual format.
For the full year 2020 revenue decreased by 75% both on a reported and FX neutral basis gross contribution margin was 48% down about 290 basis points from 2019, as we maintained some of our cost of service as well as SG&A. Despite the lower revenue.
We did this to ensure we were in a position to execute our new virtual conferences and to resume in person conferences when it is safe and permitted.
Lastly, the timing of receiving conference cancellation insurance claims remains uncertain. So we will not record any recoveries in excess of expenses incurred until the receipt of the insurance proceeds.
Fourth quarter consulting revenues decreased by 10% year over year to $94 million on an FX neutral basis revenues declined 12%.
<unk> contribution margin was 26% in the fourth quarter down about 160 basis points versus the prior year quarter due to lower contract optimization revenue, which usually flow through at high margins.
Labor based revenues were $73 million down 10% versus Q4 of last year or 12% on an FX neutral basis.
Based billable head count of 730 was down 10% utilization was 63% up about 300 basis points year over year.
Log at December 31st was $100 million down 14% year over year on an FX neutral basis our.
Our backlog provides us with about four months of forward revenue coverage.
Our contract optimization business was down 9% on a reported basis versus the prior year quarter as we have detailed in the past. This part of the consulting segment is highly variable.
Full year consulting revenue was down 4% on a reported basis and 5% on an FX neutral basis and its gross contribution margin of 31% was up 68 basis points from 2019.
SG&A decreased 6% year over year on the fourth quarter.
SG&A as a percentage of revenue was up year over year, as we restored certain compensation and benefit costs and had significantly less revenue from conferences for the full year SG&A decreased 3% on a reported and FX neutral basis.
EBITDA for the fourth quarter was $245 million up 13% year over year on a reported basis and up 10% FX neutral as we've seen improvements in the macro environment. We have resumed growth spending and started to restore some of the compensation and benefit programs, which we've put on hold when the pandemic first hit.
Fourth quarter EBITDA benefited from several factors.
First we've continued to maintain very strong cost discipline across the company.
Second we had better than planned revenue performance in research and conferences, which flow through with very strong incremental margins.
Third we had planned for an increase in certain costs, such as travel, which didn't materialize due to pandemic related shutdowns and.
And finally, we had been conservative in our implied fourth quarter guidance, given the geopolitical uncertainty due in part to the U S election, rising Covid counts and it's still recovering global economy.
Depreciation in the quarter was up approximately $4.5 million from last year, including expense acceleration from facilities related charges.
Amortization was down about $800000 sequentially.
Net interest expense, excluding deferred financing costs in the quarter was $26 million flat versus the fourth quarter of 2019.
The Q4 adjusted tax rate, which we use for the calculation of adjusted net income was 25 per cent for the quarter.
The tax rate for the items used to adjusted income was 28, 4% in the quarter.
The adjusted tax rate for the full year was 21%.
Adjusted EPS in Q4 was $1 59 for the full year adjusted EPS was $4 89.
P S growth for the year was 25%.
Note that about $7 million of equity compensation expense, which we normally would have incurred in the fourth quarter has shifted into the first quarter of 2021 that was a benefit to fourth quarter adjusted EPS of about seven cents.
Operating cash flow for the quarter was $260 million compared to $83 million last year.
The increase in operating cash flow was primarily driven by cost avoidance initiatives improved collections and timing of tax payments.
Capex for the quarter was $23 million down 57% year over year.
Lower Capex is largely a function of lower real estate expansion needs due to the pandemic.
We define free cash flow as cash provided by operating activities less capital expenditures free.
Free cash flow for the quarter was $237 million, which is up about 700% versus the prior year.
Free cash flow as a percent of revenue or free cash flow margin was 20% on a rolling four quarter basis, continuing the improvement we've been making over the past few years free.
Free cash flow was well in excess of GAAP and adjusted net income adjust.
Adjusted for timing and one time benefits 'twenty 'twenty normalized free cash flow margin is around 13%.
We had a fantastic year for free cash flow driven by the resiliency of the business continued strong collections disciplined cost and cash management and lower cash taxes and deferrals of certain tax payments.
We took a number of actions in 2020 to further strengthen our balance sheet. We had two successful bond offerings and amended and extended our credit facility.
We reduced our maturity risk and our annual interest expense will be lower starting in 'twenty 'twenty, one or December 31st debt balance was $2 billion at the end of the fourth quarter, we had about $1 billion of revolver capacity.
Our reported gross debt to trailing 12 month EBITDA is about 2.5 times.
At the end of the fourth quarter, we had $713 million of cash we.
We resumed our share repurchases after pausing earlier in the year buying back $100 million in stock at an average price of $156 per share. The board recently increased our share repurchase authorization by $300 million, because we have significant capacity for buybacks from cash on hand, and expected free cash flow as of February eight we have around.
$860 million available for open market repurchases.
We expect the board will refresh the repurchase authorization as needed going forward.
We will deploy excess cash for share repurchases and strategic tuck in acquisitions.
Before providing the 'twenty 'twenty, one guidance details I want to discuss our base level assumptions and planning philosophy for 'twenty 'twenty one.
Our research most of our 'twenty 'twenty one revenue is determined by our year end 2020 contract value as.
As we move through the year, we will revisit the research revenue outlook for.
For conferences, our guidance is based on being 100% virtual for the full year operationally, we are planning to relaunch in person one day events in the third quarter and in person destination conferences starting in September.
Our guidance includes fixed costs, primarily people and marketing related to both a full year of virtual and in person conferences, we've excluded the variable costs, primarily venue related associated with the in person conferences from our guidance.
We've been able to run profitable virtual conferences in 2020 and that is reflected in our 'twenty 'twenty. One guidance. If we are able to run in person conferences, we expect incremental upside to both our revenue and profitability for 'twenty 'twenty one the.
The economics in 'twenty 'twenty, one even in a partial in person year won't be fully back to normal as we get closer to the go no go decision point will provide additional insight to sizing the incremental revenue and profits.
For consulting revenues the compares get easier as we move through the year.
We have more visibility into the first half based on the composition of our backlog and pipeline as usual.
For expenses, we have planned for the full reinstatement of benefits that were either canceled or deferred in 2020.
This includes our annual merit increase and certain other benefits.
We are also returning to growing our sales forces with plans quota bearing head count growth in the high single digits for both GTS and GBS.
We've also planned for several additional programs, including technology investments the.
The impact of most of these expense restorations are investments impact our P&L starting in the second quarter.
As you know travel expense was close to zero from April through December our current plans assume a modest ramp up and travel related expenses over the course of 'twenty 'twenty one.
Most of this ramp is built into the second half of the year, if travel restrictions remain in place for longer than we've assumed we'd see expense savings.
Our guidance for 'twenty 'twenty. One is as follows we expect research revenue of at least $3.815 billion, which is growth of at least 5.9%.
We expect conferences revenue of at least $160 million, which is growth of at least 33%. We expect consulting revenue of at least $390 million, which is growth of at least three six per cent. The result is an outlook for consolidated revenue of at least $4.365 billion, which is growth of six 5%.
Based on current foreign exchange rates and business mix. The consolidated growth includes an FX benefit of about 200 basis points.
We expect full year adjusted EBITDA of at least $760 million, which is a decline of about 7% and reported margins of at least 17.4%.
This is based on conferences running virtual only we.
We expect our full year 'twenty 'twenty, one adjusted net interest expense to be $102 million, we expect an adjusted tax rate of around 22% for 'twenty and 'twenty one.
We expect 2021, adjusted EPS of at least $4.10.
For 'twenty and 'twenty, one we expect free cash flow of at least $630 million. This is before any insurance proceeds related to 'twenty 'twenty conference cancellations.
It is also important to note that we have revalued our contract value at current year, FX rates, which had a modest overall impacts.
Our 'twenty 'twenty ending contract value at 'twenty 'twenty, one FX rates is $2.9 billion for G. T S and $706 million for GBS details were included in the appendix of the earnings supplement.
All the details of our full year guidance are included on our Investor Relations site.
Finally, we expect to deliver at least $200 million of EBITDA in Q1 of 2021.
In summary, despite an unfavorable economic environment, we delivered better than planned financial results in 2020, we.
We had outstanding free cash flow and strong EBITDA.
We strengthened our balance sheet and move quickly to implement cost avoidance initiatives, while still investing for future growth.
While there is still uncertainty in the macro outlook our contract value held up better than in the last downturn, we were able to launch and monetize virtual conferences and virtual event. The meetings. We will continue with targeted investments in restoration of certain expenses to ensure we are well positioned to rebound when the economy recovers as I mentioned at the start of my remarks.
Looking out over the medium term, we continue to expect double digit C V in revenue growth modest margin expansion and strong free cash flow generation.
Because we can fund growth investments, we have ample capital to return to shareholders through our buyback programs and to deploy to strategic tuck in acquisitions. When we find the right opportunities with that I'll turn the call back over to the operator, and we'll be happy to take your questions operator.
Thank you as a reminder to ask a question you will need to press star one on your telephone towards Joe Your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from Jeff Mueller with Baird. Your line is open.
Yes. Thank you good morning.
GTS Upselling I guess, how does that compare to the last downturn anything youre doing operationally difference.
And I guess any signs that having a higher penetration rate in terms of number of seats per average client.
Coming out of this downturn could be a constraint.
Hey, Jeff It's gene so compared to last downturn a G. T. S. In fact, the whole company. We took a lot of lessons from the last downturn in terms of operational execution and we've been better all the way around in terms of operational execution and so I think that the in terms of of every aspect of the busy.
Like you've looked with new logo group growth in Q4.
It was very good even though obviously, it's still a tough economic environment out there etcetera. So I think basically our operational execution as lumpy as it was during the last downturn.
And Jeff Hey, Good morning, it's Craig the only thing I'd add is you know.
While we have increased the penetration.
The last downturn, we still look at our penetration is sort of woefully underpenetrated, even in our existing enterprises, we're talking about on average four to six seats generally and so we continue to believe there is an enormous opportunity to continue to penetrate existing enterprises.
Got it and in fact, there's a <unk>.
Lot of growth in existing.
Gotcha.
And in fact, there was a lot of growth in existing enterprises as well wasn't quite as much as in 2019, but still significant on a growth in existing enterprises.
Got it and then I.
Get that youre going to give us more financial outlook commentary on conferences as we get to the second half and know if they're happening in person or not but.
Just any framework for thinking about incremental margins.
As that return, but I know that your guidance is assuming that you don't have the variable facilities based costs to execute in person conferences, but I think he's still preserved quite a bit of SG&A. So not sure how much that of that asked to return just if you can give us any framework on incremental margins as conferences come back to in person.
At some point.
Yes, sure, Jeff happy to and again I mean, I think part of the challenge we have is.
We hope we're in a situation, where we're able we're able to run full.
Full in person scenario in the second half of the year. It may vary depending on regions that opened up earlier than others or certain restrictions that are in place and so theres no easy, yes, or no answer here on the way, we sort of think about it is yes, you're right. We did maintain a T.
Tim and conferences to be able to return to producing you know are fantastic in person events or conferences, rather as soon as we can and that is baked into our base level guidance, obviously, if we pivot to in person.
We generate a lot more revenue on the way we thought about it in our modeling. It is it will flow through at historical incremental margin rates roughly offer conferences and so if you look back.
Our incremental margins flow through historically, that's what we're expecting as we make this pivot now the other thing I would mention is.
As we do return to in person and I mentioned this in my prepared remarks, as well, we don't expect to fully return to the the size and scale that we exited 2019 at its going to take a little bit of time to grow back and that obviously impacts the flow through economics as well.
And I hope to see all of you at one of your in person conferences later this year. Thanks Paul.
Thank you. Our next question comes from Toni Kaplan with Morgan Stanley. Your line is open.
Thanks very much.
Sure on conferences I wanted to ask you've had about 40 per cent monetization versus in person for a virtual conferences.
Similar to what we should expect.
This year or is there.
A progression that you can get higher than that and basically in terms of the exhibitors is there any progress that you've made on getting exhibitors involved in a virtual format and just basically shall we expect sort of a similar model for for monetization of conference here.
The impression obviously.
Hey, good morning, Toni Thanks, Thanks for the question.
In terms of the monetization I would say, we're still progressing on that and I wouldn't.
Acre on on that 40% I think you know one thing to keep in mind is we did a really great job on very quickly pivoting and a great job of monetizing in the back half of this year in the last three months of the year. We ran our global Symposium series, which as you know are are typically and historically.
Our largest.
Most profitable conferences.
And we were actually we had significant pent up demand if you will from not being able to run conferences for the first several months of the year.
Yeah I think.
And so again, we'll continue to refine our monetization and our ability to market to and sell incremental tickets.
Two of those virtual conferences and so again, we expect we will get better and better at this as we move on in terms of exhibitors, we did a decent job I would argue in the fourth quarter.
While the revenue mix has shifted as I mentioned to being more attendee driven yes, it's still a full third of our revenue was generated from exhibitors in the fourth quarter and so I think similar to the attendee commentary I. Just gave you we continue to get better and better at that as well by providing.
Exhibitors the opportunity to meet with or get exposed to our highly qualified audience and then on top of that our attendees generally one of the things that they really put a lot of value on when they come to a conference is that exposure to the exhibitors as well. So I think both are works in process, we've gotten as gene mentioned.
And smarter at how we deliver it.
After each and every conference and we will continue to refine that as we move forward.
Great and then.
In terms of G. T. S. How are you thinking about head count growth strategy in 'twenty. One please start to ramp up ahead of demand or concurrent with demand.
What are your thoughts on on ramping that up and are you still expecting one queued at the inflection point.
Hey, Tony its gene so.
We are.
<unk> focused on long term double digit growth and head count growth are an important part of that and so as we go through 'twenty. One we expect to increase our head count Bocce T. S. N G. P S.
Not so much to impact 'twenty, one, but really till we have the capacity in 'twenty two to make sure. We can hit a very attractive growth rates in 'twenty two.
And Tony just on the phasing.
Because of what gene just mentioned, which is this is really about.
Seeding the investments for 'twenty, two and beyond you won't necessarily see an inflection point in Q1 like most of our cost restoration and cost investments were really turning these things on from Q2 and beyond so it would really impact the P&L Q2 and beyond.
Thanks, a lot.
Thank you on our next question comes from Gary Bisbee with Bank of America. Your line is open.
Hey, guys. Good morning, great job on the results and outlook.
Craig I wanted to ask about free cash flow in the last two quarters I feel like <unk> been discussing that.
On the differently historically, it was sort of a conversion rate as a percent of adjusted earnings that we've talked about now you are talking about a free cash flow margin and frankly, it's a lot higher price. If we go back to that old metric.
Then he used to be I'm trying to understand.
Whats really driving that.
The significant improvement in your free cash flow generation.
Is that 13% of revenue.
Good bogey going forward, because the guidance implies a higher level than that in 2021. Thank you.
Yeah, Good morning, Gary and thanks for the comments on the question.
So I think that obviously our business model is one that should generate significant amounts of free cash flow and when we were in.
2017 to 2019 timeframe.
Yeah, we were investing significantly both from our operating P&L perspective, and also from a capex perspective, as we were dealing with all the growth.
We.
And we had some challenges with our collection pacing.
And dsos and things of that nature as well I think and in 2020, we start we got everything back on track and so we.
We did a fantastic job on collections in 2020, especially in a really tough environment.
Which was great and obviously that flow through in 2020, and we expect to maintain that level of collection pacing moving forward.
You know the other big factor I would say is is capex and so we had a significant amount of investment as I mentioned in capital expenditures, primarily behind our facilities to support our very significant investment in growth and head count obviously, we muted that in too.
'twenty and 'twenty 'twenty, one guidance assumes that we're going to run at roughly the same level of Capex spending as we had in 2020 and I think.
Moving forward, we can expect that to remain at roughly the levels that we are today sort of in that percentage of revenue range. So it will increase but we don't see it going back to the roughly $150 million that we spent on it in 2019. So I think the combination of those two things and really get.
The benefit of our upfront you know negative working capital model is what we're seeing flow through and so we focused on it.
Straight from it for for a year or two we've got real focus on it again and we saw the benefits of that in 2020, obviously 2020 was sort of an extraordinary year with a lot of unique things in it but you're right. Our 2021 on guidance for free cash flow margin. If you will is even a little bit higher than that normalized rate that we saw in 2020. So we.
Feel really good about the free cash flow generation capability and forecast and outlook moving forward.
Just the other question. The other thing that really stood out to me was the 2021 margin a lot higher than what you indicated.
Likely a quarter ago, obviously revenue is trending better than that.
Paul.
Is there anything else you'd call out other than how the top line is going and I guess, maybe as part of that.
As Youre thinking progress at all from last quarter around the potential for permanent cost reductions.
On the business through the pandemic.
Yeah, I think that's a it's a smart observation.
As we've progressed through 'twenty, let me back up per se. So when we entered 'twenty 'twenty. Our operating plan was essentially let's make sure 100% that we have revenue growth and cost growth in line and set ourselves up to then be able to modestly expand margins moving forward I think as we progress through 'twenty.
'twenty with.
An eye towards cost discipline in cost management, we were able to flex on things that we didn't necessarily think where possible previously and so I think as we look at our cost savings that we generated in cost avoidance of generated in 2020 are portions of that were permanent.
And we'll be able to yield the benefits of that moving forward portions of them were what I would characterize as a semi permanent we'll get smarter around the way we spend in the future based on what we learned in 2020 and some of them will come right back right. So like the benefit stuff that we save.
In our compensation and benefit savings in 2020, we're obviously, bringing that back in 2021, and we think it's really important from an associate perspective to keep everyone motivated and running towards our goals, but there certainly are things that we definitely see permanent or semi permanent savings from that we learned in 2020 that we'll be able to to help us.
Managed to that better margin outlook moving forward.
Thank you.
Thank you on our next question comes from George Tong with Goldman Sachs. Your line is open.
Hi, Thanks, Good morning on GTS, you mentioned, we won't see an inflection in CV and <unk>, but rather in <unk> and beyond that spending comes back since 2021, CV largely depends on the 2020 sales force head count what are the assumptions underlying sales force productivity as you move through 2021.
Good morning, George So the way to think about it is we have invested in growing.
Our GTS and GBS sales forces over the past several years, obviously in 2020, we didn't do that we actually.
Per down a little bit we were able to work through a pretty large bench that we had built.
At the end of 2019, and so we feel really good about our.
Capacity sales capacity selling capacity entering 2021.
And so we've got a significant amount of salaries in both GTS and GBS ready to go and tackle 2021, and so the way to think about the inflection and what we expect from a CV perspective.
Is that obviously Q1 is the last if you will tough compare from a semi normal environment and the compares do get easier in <unk>.
Q2, and beyond and so that's why we expect that inflection point from a CV growth perspective on just sort of pivot upwards after Q1.
I think there's a variety of different productivity scenarios you can run.
If we're able to get back to 2019 levels of productivity, obviously that would drive a really nice rebound in very significant contract value growth in 2021.
But you can also get there getting somewhere in between where we finished 2020 and where we finished 2019 and so as we think about it we believe that Theres no reason why in the future not necessarily in 2021 in the future we can't get back to the productivity levels. We were at pre pandemic, it's going to take potentially a little bit of time to get there.
But even if we glide up to that level, we can see a pretty nice rebound in the contract value growth for GTS over the course of both 'twenty 'twenty, one and into 2022.
Yeah.
Very helpful and then on GBS in the quarter you saw a significant upside there can you talk a little bit elaborate on what the sources of upside were in line and how you expect those sources of upside to persist into 'twenty and 'twenty one.
Yes, it's gene.
I think the answer is that of the clients and prospects. The a lot of value in our offerings. You know we help we identify what their most important initiatives are and how they can execute them better people have those challenges to address in good times bad and what we've seen is that the uptake from prospects and clients with the GBS.
Alex are really good.
And that's because the value they see on them.
Okay.
Got it thank you.
Thank you on our next question comes from Andrew Nicholas with William Blair. Your line is open.
Hi, Good morning, you've actually got Trevor Romeo here in for Andrew. Thank you for taking my questions first of all just curious on GTS you could maybe give us an update on buying.
Buying activity for clients that are kind of in some of the highly affected industries from the pandemic like.
Travel hospitality et cetera, and.
What to what degree have you seen client win backs at this point and how much opportunity D. C for further win backs in those areas in the future.
Yeah. Great question. So first are we even through the pandemic, we saw pretty good rates of buying from renewal rates and bind from existing clients, even troubled industries novel clients, where the same some clients actually you know would go from five seats to force seats or something like that.
Net and so we did see some of that but overall, we saw a pretty good performance. There in terms of win backs for the ones that did downgrade and so they're and they're obviously with some of those actually we are going to see win backs and packaging Q floors, particularly in December we saw some win backs from some of the business. We lost earlier in the year and as we go through 'twenty, one we'd expect that to continue.
Okay, great. Thank you and then for my follow up.
Within GBS and the marketing practice specifically.
Now lapped the shift away from those lower margin products that you were going through and how would you expect that vertical to grow relative to the other practices within GBS in the future.
Yes on marketing as this thing great value proposition that the other G. B S practices have and as you pointed out we had some products that we discontinued which has dragged their overall growth rate down, but if you look at the products that if you separate that out which we do we can do internally obviously the products with the new products are quite attractive and are selling well in terms of weather.
We've not quite lapped it but we've got we've just continued most of those products. Some of the clients were on multi years in those some of those multi years extended into 'twenty 'twenty, one and so it will take a 20 point on to get through all of it but again the majority we've already gotten through of those discontinued products.
Alright, great. Thank you very much for the color.
Thank you. Our next question comes from Manav Patnaik with Barclays. Your line is open.
Thank you good morning, guys just on the events business.
Talked about the mix in attendees I was just wondering if you could talk.
Talk about Atlanta.
Mahler events versus the.
The bigger events and perhaps David.
Difference.
Profitability as well that you guys have the gene from virtual to inflation.
Yeah. Good morning, Manav happy too so I think as we mentioned we've pivoted to virtual in both our.
Our destination conference portfolio and in our one day event the portfolio and.
If you look at Q4 as an example, historically event contributed about 20%.
Two our overall conferences revenue it was a little bit higher than that in Q4, but but but not significantly higher than that so it's been a it's been a pretty consistent contributor they actually were able to pivot a little sooner to virtual just given the size of the communities and the size of.
The events are the meetings that they run.
So again, we're very very pleased with.
What we've been able to do from a monetization perspective on both.
The event, the one day meetings and the destination meetings, we do believe as we.
Look at our 2021 calendar that.
We will be able to return to in person event, the meetings, perhaps a little bit sooner.
It's really dependent on the geography and what is allowed.
Or permitted in those geographies, but we do think given the size of them that we'll be able to return to them a little bit earlier.
But in any event we.
We focused on or we've pivoted to really driving virtual value in absence of in person value co.
Clearly I think our our our members and exhibitors in that business are itching to get back to in person.
<unk>, but we expect event that to continue to be a really nice contributor to the overall conferences portfolio.
Okay got it and then if I could just ask on your comments around M&A.
Just firstly just a quick clarification on how much did co pool add to the GBS contract value this quarter, but.
Broadly.
Do you see more opportunities like dislocation because they're smaller.
I guess targets, maybe not being able to handle it like you did like you guys did.
Yes Manav it's.
I'll take that the non turbo question.
The number of small companies, where there are a lot of small innovative companies out there. We track. Many many hundreds of companies who are looking for innovative ideas that we can add into our portfolio and so when we see that as a core part of our strategy, where we see small innovative companies and it makes sense to buy rather than build obviously.
In the absence of that we can do just fine with organically, but we can see you know.
Any opportunities that are accretive.
And helped strategically we'll certainly do that.
Great.
Yes sure of course, I mean actually Towboat C. V was included in Q4 2019, so over the course of Q4 and the first three quarters of this year. It added about 60 basis points to the GT GBS.
Growth rate, it's actually apples to apples in the Q4 number so it didn't that's why you don't see any any sort of dislocation really between the reported GBS rate and the organic rate given towboat T V.
<unk> balances.
Alright, Thanks, a lot guys.
Thank you. Our next question comes from Henry Chien.
With BMO capital markets. Your line is open.
Hey, good afternoon, thanks for taking the question.
So I guess.
And looking forward.
Relative to other cycles.
Any any suggestion that there might be some change in terms of the.
That incremental.
On the new demand coming forward in terms of CD growth, whether that's by industry, either or just any change in the cash this recovery.
Yeah.
Henry every every recession is different we've tracked carefully what our performance was last recession to see if there's things that are indicative. One thing is for sure which as you know we are operationally much better as we went through the last recession, we sat down and figured out kind of the things that worked the best and we made sure. We ran those plays very early in this recession.
Obviously, one big difference was that we.
We literally couldn't hold conferences in the last recession, you had old conferences.
People might have been not restrained the travel expenses, you had less people going but not but we can actually hold them that's very different than this year and so I think one big difference in terms of how it recovers as Craig mentioned earlier, we're looking forward to being able to will continue the virtual conference that we had but we also think that there's value in an in person conferences and look forward to go into those.
As we as the economy recovers.
Got it okay I appreciate it and I get it.
And in terms of.
Perhaps.
On a contract value growth of our research growth has there been any change or anything that you.
Youre expecting going forward in terms of Jeff.
Yeah, I guess the character characterizing that the recovery.
But I would say two things one is dead on our again because of we are operationally better I think the.
CV growth will hold up better than did the last recession. It has been already.
And I do think that for the ones that we pour clients that did decide to buy four seats instead of five or maybe even discontinued altogether. Just like there was less per section, we will see some uptake from that and so there'll be some clients that come back to give us a boost as well over the next several months.
And Henry though the one thing the one thing I'd add is obviously from a medium term.
Outlook, our medium term objective perspective, no change in how we're thinking about the market opportunity or our ability to grow.
The GTS and GBS businesses at a strong double digit growth rates.
Yes got it alright, thanks, a lot guys.
Thank you. Our next question comes from Hamzah <unk> Macquarie with Jefferies. Your line is open.
Hi, This is Mario <unk> filling in for Hamzah.
Question on on consulting and just wanted to see if you can give us a sense for what the sales cycle looks like for consulting today versus what it looked like a few months ago.
Do you think a vaccine rollout changes that as we enter 2021.
So I'd say to your point the consulting selling cycle is longer now what many companies did is just on in response to the downturn pandemic has just stopped all outside spending put a pause on it which obviously increases your selling cycle and we certainly saw that.
I do think as.
You know both with a vaccine, but also as companies understand how stable their financial situation is we will see that selling cycle start to come down a bit both from both of those factors.
Great and then.
Could you just also talk about how sustainable that.
I'm sorry, the sequential improvement in GBS day.
And are you doing anything differently there.
A factor of your sales force being more tenured are you is there anything new in terms of products.
Or is it just simply that that things are getting better from a free.
From an economy standpoint.
So G. P. S. Like G. T. S has an enormous untapped market opportunity and we have products that provide great value to capture that market opportunity. That's what's driving the GBS improvement and I think we're on and continue to see that acceleration on overtime for the same reason the.
Clients want a lot of value in the products I just think that you know we introduced EXL products. It took time to for the sales force to figure out the value proposition expand our clients and that's part of the reason we've seen sort of the acceleration more recently, but I think at the heart of it is giant market opportunity with products that provide tremendous value to our clients.
Okay.
Great. Thank you so much.
Thank you and I'm currently showing no further questions at this time I would like to turn the call back over to Gene Hall for closing remarks.
So as you heard today Gartner delivered a strong performance in the context of what was a truly extraordinary year, we continue head a vast and largely on penetrated does addressable market.
The Gartner Formula for sustained long term growth continues to drive success in our research business and looking ahead, we are well positioned for sustained success.
We returned to revenue growth in 2021, and beyond 'twenty 'twenty, one or the medium and long term, we expect to return to sustained double digit contract value and revenue growth.
We expect to deliver EBITDA margins up from 2019 and to further expand merchants overtime.
We generate significant free cash flow in excess of net income, which will deploy to return capital to our shareholders through share repurchases and to make strategic tuck in acquisitions.
And finally, we expect to come out of this recession strong and well positioned to drive long term sustained double digit growth for years to come.
Thanks, again for joining us and I look forward to updating you again next quarter.
Okay.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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