Q3 2022 Gartner Inc Earnings Call
Good morning, everyone welcome to Gardner's third quarter 2022 earnings call I'm, David Cohen SVP of Investor Relations. At this time all participants are in a listen only mode. After comments by Gene Hall, Gartner as Chief Executive Officer.
And Craig Safian gardeners, Chief Financial Officer, there'll be a question and answer session. Please be advised that today's conference is being recorded.
This call will include a discussion of third quarter 2022 financial results and gardeners updated outlook for 2022 as disclosed in today's earnings release and earnings supplement posted to our website investor Doc Gawker Dot com on the call unless stated otherwise all references to EBITDA are for adjusted EBITDA with the adjustments as described in our earnings release and supplement.
All growth rates in Gene's comments are FX neutral unless stated otherwise all references to share counts are for fully diluted weighted average share counts unless stated otherwise reconciliations for all non-GAAP numbers. We use are available in the Investor Relations section of the Gartner Dot Com website finally, all contract values and associated growth rates, we discuss are based on <unk>.
2022, foreign exchange rates unless stated otherwise.
As set forth in more detail in today's earnings release certain statements made on this call may constitute forward looking statements forward looking statements can vary materially from actual results and are subject to a number of risks and uncertainties, including those contained in the company's 2021 annual report on Form 10-K, and quarterly reports on Form 10-Q, as well as in other filings with the SEC I encourage all of you to review the <unk>.
Factors listed in these documents now I will turn the call over to Gardner Chief Executive Officer Gene Hall.
Good morning. Thanks.
Thanks for joining us.
We continue to deliver incredible value to more than 15000 enterprises around the world.
Led to another strong performance in the third quarter.
We achieved double digit growth in contract value revenue EBITDA and EPS, we had strong growth in all practices all industry sectors across every size client and in every region.
In addition through Q3, we repurchased over $1 billion of stock.
Our clients continue to face a rapidly changing world things like digital transformation future of work high inflation shifting customer needs supply chain disruptions and Moore our.
Our clients know they need help on these issues and I know Gartner is the best source of help through our actual objected insights we help executives and their teams across all major enterprise functions achieve their mission critical priorities, we know how to help whether our clients are thriving.
Struggling or somewhere in between.
With all of this demand for our services remains strong.
Search continues to be our largest and most profitable segment.
Research revenue grew 15% contract value growth was 14%.
We serve executives and their teams through distinct sales channels global technology sales or GTS serves leaders and their teams within Nike we.
We helped chief information officers achieved mission critical priorities, such as leading digital transformations bouncing challenge in a challenging labor market and fueling innovation GTS contract value grew 13%.
Global business sales or GBS serves leaders and their teams beyond it just.
This includes HR supply chain finance marketing sales legal and more.
We help leaders across these functions achieve their mission critical priorities.
For example, we help HR leaders engage employees in a hybrid world.
All organizational design with the transition to digital business managed compensation in an inflationary environment.
<unk> employee expectations on device of social issues and re imagine the future of work.
GBS contract value grew 21% across GTS and GBS, we're driving relentless execution of proven practices, which in turn is driving our sustained results.
Conferences deliver valuable insights to an engaged and qualified audience.
We continued our returns in person conferences in October we hosted two of our flagship conferences.
Symposium and re imagine HR, both in Orlando, Florida.
2019 attendance at symposium was up 12% and re imagine HR attendance doubled.
The feedback from our in person conferences has been resoundingly positive Gartner.
Gartner consulting is an extension of Gartner research consulting helps clients execute their most strategic initiatives through deeper extended project based work.
Consulting revenue grew 21% in the third quarter.
Over the past few quarters, the rapid growth of our business outpaced hiring.
This quarter, our associate base grew 18% year over year.
This provides the capacity we need to serve a rapidly growing base of licensed users and positions us for sustained future growth.
In closing Gartner delivered another strong performance, we've caught up on hiring and are positioned to deliver sustained future growth.
Our underlying margins are in the low twenties comfortably above pre pandemic levels, we expect them to modestly increase over time, we will continue to generate significant free cash flow in excess of net income and will continue to return significant levels of capital to our shareholders with that I'll turn the call over to our chief financial.
Craig Safian. Thank you gene and good morning third quarter results were strong with double digit growth in contract value revenue and adjusted EPS FX neutral growth was even stronger than our reported results. We also delivered better than planned EBITDA margins, reflecting the strong third quarter enthusiastic.
Demand for our in person conferences and continued success in balancing cost discipline with investing for future growth. We are again, increasing our 2022 guidance third quarter revenue was $1 $3 billion up 15% year over year as reported and 20% FX neutral. In addition, total contribution margin was 69%.
<unk> down 20 basis points versus the prior year.
EBITDA was $332 million up 9% year over year and up 15% FX neutral adjusted EPS was $2 41 sets up 19% and free cash flow in the quarter was $283 million research revenue in the third quarter grew 11% year over year as reported and 15 per se.
On an FX neutral basis, driven by our strong contract value growth third quarter research contribution margin was 74% modestly below last year, but continued higher than normal contribution margin reflects improved operational effectiveness increased scale travel expenses still modestly below our twist pandemic expectations.
And research related head count with a bit more catch up still to go contract value or CV was $4 $5 billion at the end of the third quarter up 14, 5% versus the prior year CV growth is always FX neutral.
Excluding the impact of exiting Russia growth for Q3 would have been 14, 9%.
Quarterly net contract value increase or and CVI was $128 million quarterly in CVI is a helpful way to measure contracts how your performance in the quarter, even though there is notable seasonality in this metric the sequential increase in CV at $128 million was driven by the combination of continued strong retention rates.
And near record new business up almost $250 million similar to the second quarter of this year and the third quarter of 2021 to 14, 9% contract value growth was broad based across practices industry sectors company sizes and geographic regions, our technology practice grew 13%.
And all of our business practices led by HR and supply chain grew at double digit growth rates, all industry sectors, including technology grew at double digit rates with the fastest growth in transportation retail and manufacturing, we had double digit growth across all of our enterprise sized categories with our medium category growing the fastest.
In the small category the technology sector continued to grow at double digit rates. We also drove double digit growth across all of our top 10 countries other than China, where we saw continued single digit growth across our north.
America, and Europe , Middle East and Africa regions, all industry sectors had double digit growth rates.
Global technology sales contract value was $3 $5 billion at the end of the third quarter up 13% versus the prior year GTS had quarterly in CVI of $88 million driven by strong retention and near record levels of new business for a third quarter.
Wallet retention for GTS was again strong at 107% for the quarter of about 310 basis points year over year GTS, New business was down 5% versus last year up against another tough compare the two year compound annual growth rate was about 9% GTS quota bearing head count was up 16% compared to September of last.
Year, our continued investments in our sales teams will drive long term sustained double digit growth. Our regular full set of GTS metrics can be found in the appendix of our earnings supplement.
Global business sales contract value was $977 million at the end of the third quarter up 21% year over year, which is above the high end of our medium term outlook of 12% to 16% GBS CV increased $40 million from the second quarter wallet retention for GBS was 114% for the quarter up about 120.
Basis points year over year, GBS, new business was up 1% compared to last year against a strong compare the two year compound annual growth rate for new business was 18% GBS quota bearing head count increased 19% year over year head count we hire in 2022 will help to position us for sustained double digit growth in the future.
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 $77 million ahead of our expectations as attendees and exhibitors were excited to get back to the in person experience contribution margin in the quarter was 52% we held 10 in <unk>.
Person conferences and three virtual conferences in the quarter.
We held the Vantiv meetings in both virtual and in person formats, we plan to run nine in person destination conferences in the fourth quarter and have updated our guidance to reflect the strong demand we are seeing.
Third quarter consulting revenues increased by 13% year over year to $107 million on an FX neutral basis revenues were up 21% consulting contribution margin was 35% in the third quarter up 210 basis points versus the prior year with better than expected revenue and higher utilization rates.
Labor based revenues were $90 million up 16% versus Q3 of last year and up 26% on an FX neutral basis backlog at September 30th was $162 million, increasing 33% year over year on an FX neutral basis with another strong bookings quarter, the inclusion of multi year contracts.
And our backlog calculation of change we described earlier in the year contributed about 11 percentage points to the year over year growth rate our contract optimization business declined 3% as reported and 1% on an FX neutral basis versus the prior year as we have detailed in the past. This part of the consulting segment is highly valuable consolidated cost of.
Services increased 16% year over year in the third quarter as reported and 21% on an FX neutral basis. The biggest drivers of the increase were higher head count to support our continued strong growth and the return to in person destination conferences, SG&A increased 20% year over year in the third quarter as reported and 24 person.
<unk> on an FX neutral basis SG&A increased in the quarter as a result of added headcount for sales and G&A functions and higher commissions. Following a strong CV growth in 2021, we expect SG&A expenses to increase as a percentage of revenue over the near term as our catch up hiring continues.
EBITDA for the third quarter was $332 million up 9% year over year on a reported basis and up 15% FX neutral.
Third quarter EBITDA upside to our guidance reflected revenue exceeding our forecast and expenses at the low end of our expectations.
Depreciation in the third quarter of $23 million was down modestly versus 2021.
Net interest expense, excluding deferred financing costs in the quarter was $29 million down a little over $1 million versus the third quarter of 2021, mainly due to lower interest rates swaps costs are 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 20.
Four 7% for the quarter the tax rate for the items used to adjust net income was 22% for the quarter. Adjusted EPS in Q3 was $2.41 growth of 19% year over year. The average share count for the third quarter was 80 million shares. This is a reduction of about $4 seven.
Shares or about five 6% year over year, we exited the third quarter with about 80 million shares outstanding on an unweighted basis operating cash flow for the quarter was $315 million down 9% compared to last year Capex for the quarter was $32 million of about $18 million year over year led.
By increases in capitalized technology labor costs, and catch up laptop spend free cash flow for the quarter was $283 million.
Free cash flow growth continues to be an important part of our business model with modest capex needs and upfront client payments.
As many of you know, we generate free cash flow well in excess of net income our conversion from EBITDA is very strong with the differences being cash interest cash taxes and modest capex, partially offset by strong working capital cash inflows adjusting for the insurance proceeds we received last year free cash flow as a percent of revenue or free cash flow.
Margin was 19% on a rolling four quarter basis on.
On the same basis free cash flow was 76% of EBITDA and 137% of GAAP net income at.
At the end of the third quarter, we had $529 million of cash our September 30th debt balance was $2 $5 billion. Our reported gross debt to trailing 12 month EBITDA was under two times, our expected free cash flow generation unused revolver and excess cash remaining on the balance sheet provides 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 $1 $5 billion of liquidity low levels of leverage and effectively fixed interest rates, we repurchased more than $1 billion worth of stock through the end of the third quarter, we had about $600 million remaining on our author.
Amortization at the end of September , which we expect the board will continue to refresh as needed going forward.
Since the end of 2020 through the end of the September we've reduced our shares outstanding by 10 million shares. This is a reduction of 11%.
As we continue to repurchase shares we expect our capital base will shrink. This is accretive to earnings per share and combined with growing profits also delivers increasing returns on invested capital over time.
We are increasing our full year guidance to reflect strong Q3 performance and an improved outlook for the fourth quarter, despite incremental FX headwinds.
We now expect an FX impact to our full year revenue growth rates of about 420 basis points for the full year.
This is up from 370 basis points based on rates when we guided in August as we discussed the last three quarters 2021 research performance benefited from several factors, including GBH tenure mix and CVI phasing within the quarters in the year record retention rates and strong non subscription growth the growth compare.
Erez will continue to be challenging for a few more quarters. We continue to take a measured approach based on historical trends and patterns, which we reflected in the updated guidance for conferences, we assume we will be able to run all nine in person conferences as plans consistent.
Consistent with our commentary the past couple of quarters, our assumptions for consolidated expenses continue to reflect significant head count increases during the fourth quarter to support current and future growth. We continue to model higher labor costs, and teeny well above 2021 levels. As we've previously indicated we also have higher commission expense during 2020.
Two due to the exceptional performance we delivered in 2021 finally, we continue to invest in our tech both client facing and internal applications as part of our innovation and continuous improvement programs.
Our updated guidance for 2022 is as follows we expect research revenue of at least $4.58 billion, which is FX neutral growth of about 16%. The FX neutral growth is up about 60 basis points from our prior guidance due to strong and CVI performance in the third quarter, we expect conferences revenue of at least 300.
$75 million, which is growth of about 84% FX neutral.
We expect consulting revenue of at least $450 million, which is growth of about 14% FX neutral. The result is an outlook for consolidated revenue of at least $5.40 billion, which is FX neutral growth of almost 19%. The FX neutral growth is up about 180 basis points from our prior guidance due to strong performer.
And third quarter, and an improved outlook for Q4 without the strengthening U S. Dollar since August our revenue outlook would have been about $85 million higher than previous guidance.
We now expect full year EBITDA of at least 1.3 dollars 6 billion up $125 million from our prior guidance and an increase in our margin outlook as well without the strengthening U S. Dollar since August our EBITDA guidance would have been about $136 million higher than previous guidance we.
We now expect 2022, adjusted EPS at least $10 and <unk> per share for 2022, we now expect free cash flow of at least $1.0 billion to $5 billion. Our EPS guidance is based on 81 million shares which reflects year to date repurchases. As a result, we expect to deliver at least $310 million of EBITDA in the fourth.
Quarter of 2022, all of the details of our full year guidance are included on our Investor Relations site.
Our strong performance in 2022 continued in the third quarter with momentum across the business contract value grew 14% adjusted EPS increased 19% fueled in part by the significant reduction of shares over the past year, we are adding associates across the business to keep up with our growth and to position us well heading into 2023.
Our continued investments in our teams will drive long term sustained double digit growth, we repurchased more than $1 billion in stock. This year through September and remain committed to returning excess capital to our shareholders over time.
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 in line with CV growth and G&A leverage we can modestly expand margins and 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.
Thank you.
A reminder to ask a question at this time. Please press star one one on your telephone please.
Please stand by while we compile the Q&A roster.
Our first question comes from Jeffrey Miller with Baird. Your line is now open.
Yes. Thank you just maybe.
If I could better understand the messaging on where you are in terms of.
Catch up hiring I thought from Gene's comments, you talked about 18% associate growth and having the capacity you need.
Needed being caught up on hiring but then it seemed like in Craig's comments.
Calling out some areas, where you're still in the process of doing catch up hiring in Europe .
Maintaining the low twenty's underlying margin target despite seemingly run rating above that although seasonally adjusted basis. So just if I could better understand where you are in that process.
Hey, Jeff ESG, so the 18% associate growth that we talked about on the call.
As.
Largely catch up hiring if you look over the last three years or so we had very robust growth in our business our hiring black behind that give you a flavor for the compound growth rate of contract value was about 11% in the.
The compound growth rate of head count was about five 5%.
Lagged a lot we've got behind the good news is that we're as of Q3 into Q3, we're almost fully caught up and so we expect to see not the same rate of hiring as we go into Q4 and next year, we expect to normalize more but what we've done traditionally.
Which is to have our head count growth.
FCB grow about five or six points higher than our actual headcount growth going forward.
Okay and then.
Obviously note about the big step up in GTS quota bearers.
I guess just to what extent are you seeing signs of unmet.
Demand that.
You're fulfilling and I don't know if thats showing up in.
The new business sold metric with Engie kiosks, which also has the tough comp just trying to understand to what extent.
Maybe the 12% or 12, 5% whatever it was CV growth in GTS has been governed down because of some sales capacity constraints that you're addressing versus to what extent. This is about getting out ahead of demand and building capacity in to what is still a good.
Demand momentum environment.
Yes. Good morning, it's Greg just a couple of points and then Jim will fill in any blanks, so as gene mentioned.
We can't fall behind in terms of our <unk>.
Count hiring across the business, but probably most notably in GTS over the course of 2021, especially as that.
At that segment.
CV really accelerating and so a lot of what we were doing.
Starting in the first quarter of 'twenty, one and through the first three quarters of this year is catching up and filling open territories and the open territory challenge and opportunity was a little exacerbated by the accelerated growth and we had to promote more people than we normally do as we've talked about.
In previous quarters at the beginning of the year, which put even more of an emphasis on making sure that we were recruiting and growing our very higher base and so if you think about it and again, we talked about this when we did our initial guide for the year as well.
Last year, we had the benefit of.
The most.
<unk>.
The highest proportion of tenured sellers that we've ever had obviously this year it reverse and as we roll into next year, we expect it to be more quote unquote normal.
We've seen historically so all of those dynamics are at play as well and again as you think about it gene's comment earlier on we're catching up.
But we're also making sure that we are seeding the ground with investments so that we can sustain our double digit growth into the future.
Okay. Thank you.
Thank you.
Our next question comes from the line of Toni Kaplan with Morgan Stanley . Your line is now open.
Thanks, so much.
Wanted to ask on the conferences side.
<unk> had better attendance and pre pandemic.
There are any gating factors that should lead 2023 did not fully back to 2019 levels are higher just assuming that current travel restrictions stay as they are now.
Good morning, Good morning, Toni Thanks for the question so.
It's been great to return to in person conferences and as we've said in the past few quarters in.
And gene referenced some large October conferences as well.
Exhibitors and attendees really enthusiastically return, which is awesome and.
Yes, the conferences are hugely valuable to everyone, who goes and it's super valuable to the entire Gardner franchise.
As we look towards 2000, and 2003 and again, we'll give guidance in February around the full calendar 'twenty three conferences et cetera.
Not going to be anywhere near the 70 conferences destination conferences that we delivered in 2019, we are carefully building back up our goal over the long term as you have a conference for every major function that we cover in every major geography in which we do business, but we can.
Kansas Snap, our fingers and be there it takes time to build those out and to relaunch them and so we're taking a measured approach in doing that.
We're going to be as aggressive as we can but we're going to be nowhere near that 70 conferences that we ran in 2019 pre pandemic.
Okay great.
I actually wanted to ask about that the new business growth as well So you mentioned GTS.
Five in GBS of one.
Complex very tough and the two year CAGR is a good I.
I guess.
With the sales hiring that those would be higher I know you said stuff catch up that you are doing but I guess like what are your thoughts on the level of like those new business levels, and I guess I'm only asking because everything else seemed like.
Really really strong and so that that's sort of the one that.
I think maybe it's a pet that so just wondering what are your thoughts on the new business. Thanks.
Hey, Tony it's Jim So our new business was at an all time high so just keeping clear wasn't like it was not a good club car.
It was at an all time lot was near an all time high secondly.
The impact of new business. The most talked about in terms of the proportion of our sales force.
Tenured versus not tenured.
Last year, we added as Greg mentioned, the highest proportion of tenured salespeople.
Have on record.
This year because of promotions and growth hiring we had among the lowest proportion of tenured salespeople on record and a tenured salesperson cells cells whole number multiples higher more in new business than a non tenured salesforce.
Productivity accelerate rapidly during the sales versus the first three years and that's the primary factor that.
It impacted our new business in Q3.
Super helpful. Thanks, again and congrats.
Thank you.
Our next question comes from the line of Andrew Nichols Nicolas with William Blair. Your line is now open.
Hi, Good morning, I wanted to start just with a question on kind of sales activity levels.
As the quarter progressed and maybe into October did you notice any I mean, it seems like double digit growth across.
Every practice every industry every region every client size, but was there any kind of distinguishing change over the course of the quarter or are those conversations and the length of contract cycles relatively consistent with what you've seen year to date.
Hey, Andrea so during the quarter I would say, it's typical with September being slightly stronger than accelerated a little bit more accelerated during the quarter that you might normally see but within a small range call. It overall, a pretty normal quarter.
Alright, Great and then you talked quite a bit about the.
The catch up hiring in the sales.
Sales force growth what about on the <unk> side, where do you sit relative to <unk>.
Pre pandemic levels, and where you would ultimately expect.
Those expenses to level off I think last quarter, you talked about the second half of the year being more more indicative of normal travels. So just wondering if thats in the third quarter number if there is still some more.
Increases to expect there as well thank you.
Morning, Andrew It's Craig Yes, so we're obviously orders of magnitude lower than 2019 by design and that's the way we're going to run it going forward I would say Q3.
Is almost back to where we think the new normal should be.
So Q3, and Q4 will be pretty close to the new normal.
But also recognizing that as we rollout more conferences as we travel to see our global teams et cetera, there might be a little bit more lift in the travel number but not order of magnitude that we feel pretty good about where we are again theres probably.
Yes, a little bit more uplift that will see travel rolling into next year, but Q3 and Q4 are roughly indicative of what we expect moving forward.
Great. Thank you.
Thank you.
Our next question comes from the line of Seth Weber with Wells Fargo. Your line is now open.
Oh, Hey, guys good morning.
Wanted to touch on the if you could give us any thoughts on the pricing environment I think last quarter, you've talked about pricing is kind of running a little bit above sort of normal levels can you just talk about what youre seeing there in customer appetite for multi year contracts.
Kind of just given the uncertain environment. Thank you.
Hey, good morning, Seth it's Craig so.
Agree with your assertion on the pricing so we.
Rolling into into this year, we were a little bit more aggressive than we nor.
Normally have been so we've typically been in the 3% to 4% range this year and the five ish to 6% range in.
In terms of overall price increase a similar.
Similar rolling into next year.
Brent price increase actually went effective today for most of our clients and sellers around the world.
And we haven't seen much friction or pushback from clients on that obviously.
As a more inflationary environment, our costs are going up roughly in that range, and where we're roughly pricing to offset that.
In terms of the multiyear Ahmed.
I think our sales teams do a fantastic job of articulating the value that we can deliver over the short term over the medium term and over the long term and they've done a fantastic job of continuing to.
Get our clients to sign up for multiyear contracts. So we haven't really seen a snapback in that from clients either.
Super Thanks, and then.
Maybe just on the share repurchase in the quarter it stepped down from where its been trending for the last.
The last year, and a quarter year and a half or so.
Just you kind of front front end loaded some of the spending in the first half of the year or.
Hey, just saying are you just trying to save some powder for M&A or anything that we should read into the tick.
Ticked down here in the third quarter on share repurchase.
I wouldn't read anything into it I'd say on a year to date basis, we're over $1 billion in share repurchases over the last seven quarters is two six ish billion of share repurchases. It remains.
Our primary use of capital going forward and will bump up our bumped down from time to time from quarter to quarter, but over the long over the last seven quarters. We've obviously returned a lot of capital to shareholders through our repurchase program and moving forward, we expect to return a lot of capital to our shareholders through our repurchase programs.
Fair enough I appreciate it guys. Thank you.
Thank you.
Our next question comes from.
George Tong with Goldman Sachs. Your line is now open.
Hi, Thanks. Good morning, you had a big step up in sales head count and <unk>, notably in GTS was there any pull forward in hiring from <unk> or do you expect there.
Continue to be healthy increases in head count in <unk> on a quarter over quarter basis.
Yes, George good morning.
No.
We're focused on ending the year up double digit.
In a quota bearing head count again, really making sure that we're set up.
Roll into 2023 with <unk>.
Full territories and a more tenured sales force et cetera.
There can obviously be a lot of puts and takes but what I'd say is we expect to end the year for both GTS and GBS with strong double digit quarter very high for higher growth on a year over year basis.
Okay got it and then with respect to EBITDA margins.
The outlook continues to move higher can you just at a high level frame.
For us you're evolving views around normalized EBITDA margins and how your investment activity. So far this year are on pace to get you back to what normalized spending should be.
Yes, absolutely and Jan feel free to fill in any blanks here as well.
So as Jim mentioned in his prepared remarks, and as we have.
I've been saying for the last couple of quarters, we now believe that the underlying metrics.
<unk> margin of the business isn't a loved one eight which is obviously comfortably well above pre pandemic levels of EBITDA margins. I think there are a number of factors that have allowed us to increase that outlook as we've gotten comfortable with the way the business is running in the way we're running the business.
Most notably I would say is one as gene mentioned.
We're good.
Grow our CV base about four to five or five to six points faster than we grow our quota bearing <unk>.
<unk> hires that allows us to essentially fix our cost of sale, if you will or not.
Our margins through cost of sale, we can get gross margin leverage just by virtue of research being our biggest and most profitable segment and we can get a little G&A leverage as well going forward on top of that with GBS.
We're start we're starting to see our we're seeing returns on the investments that we made in 2017 and 2018 and we now have much more scale in that business. There's still a lot of scale to be gained in GBS, but obviously, we're orders of magnitude higher.
And our contract value than we were pre pandemic and so again and then there are other things like real estate and travel where we've just gotten smarter around the way we run our business, which have also helped us to raise our expectation on what the underlying margins of the business are.
Clearly we've done a lot of hiring through the course of 2022 as Jean mentioned and we've said multiple times most of that was catch up hiring from all the growth. We delivered in 2021 and 2022, obviously those costs roll into 'twenty, three which is why we're stating.
And sticking to the fact that our underlying margins are in the low twenties and that we can grow our business at double digit growth rates moving forward and we can modestly improve those margins over time as well.
Very helpful. Thank you.
Thank you our.
Our next question comes from the line of Jeffrey Silber with BMO capital markets. Your line is now open.
Thanks, So much I wanted to go back to the earlier pricing question.
I know this segment or this industry that youre in a very broad, but some of the other info services companies that we talk to has started to be a little bit more aggressive in terms of giving price concessions in exchange for multiyear contracts or are you doing any of that are you seeing that in the market as well.
Yeah.
Jeff Good morning, no not really I think we.
Yes.
We lead with multi year contracts as sort of the facto standard.
<unk>.
Generally what our clients want because their mission critical priorities are not bounded by a 12 month contract or something like that.
So we've seen really no change.
And the selling environment or the selling motion around.
The price increase we've talked about earlier as well as our contracted vehicles, we haven't changed our pricing on multi year.
Are most of your contracts the pricing approach has remained the same.
Okay. That's helpful.
And I know in your prepared comments you talked about the strength in your research business being broad based I. Just was wondering if you can parse down a little bit. If there are specific end markets that are doing better or worse than others and I'm, specifically interested in Europe versus the U S. Thanks.
So as Craig mentioned, both North North America, and Europe had double digit growth in the third quarter.
And we saw it was broad based across Europe , and North America from an industry and size perspective. So.
Yes, theres really nothing to point to.
In terms of softness.
The average growth for GTS it over for <unk>.
Around 13, and overall around 14% and when you Peel back the onion.
Pretty close to that at lower levels, whether you look regionally industry.
By size et cetera.
All right very helpful. Thanks, so much.
Thank you. Our next question comes from the line of Manav Patnaik with Barclays. Your line is now open.
Thank you good morning.
Can you and Craig and I guess historically.
You guys just talk about how quickly.
Typically two to three points above.
The quarter's growth demand caught up with it.
Five and six so in that context I guess.
We still expect to keep growing that sales force growing to 15%.
These methods in the call.
Hey, good morning, I think the way to think about it is that we want to make sure that our cost of sale. If you will so sales costs as a percent of CV or percent of revenue remained roughly effects.
We believe we can do that by.
Having CV growth at whatever that is or whatever we deliver and toggling the amount of head count growth. So that we keep our cost of sale roughly say.
If <unk> is growing 20% then yes, we would grow head count close to 15%.
His CV, we're growing 10%, we would probably we would toggle down the growth investment again locked in roughly lock in that overall cost of sale.
This is a.
Our pivot we made in the second half of 2019.
As we shifted to really wanted to make sure that we got returns on the investments, we're making and manage.
Yes.
The sales portion of our overall margin I think the one difference that you point to which is the gap between CV grow the head count growth is really just driven by what we're seeing from a wage inflation perspective, and so when it was three to four point gap, that's because that's what we were seeing from wave.
Inflation perspective, now, we're obviously seeing a little bit greater as it were just dialing that into our growth algorithm to make sure that we account for it.
Got it.
Then.
Core credit you made comments around SG&A.
This is Brian .
Was that.
Fourth quarter specific comment.
More longer term.
So just to clarify you talked about the Q2 and Q4 run rate kind of being where you want it to be but that was specific to <unk>. I believe can you just talk about.
From an overall margin perspective, how we should think about the numbers of the low twenty's applicable yes, absolutely. So.
The SG&A comment is more of a near term comment so as we are catching up on the hiring and you again, if you just think about.
High teens growth, we're seeing in both GTS and GBS, obviously that rolls into next year, because we the hiring was really concentrated in the back half of the year and so that will put pressure on the cost of sales and margin.
As designed.
Into 2023.
So it's more of a near term comment.
The other things, we're seeing again, when we talk about growing the sales force.
A little bit our growing CV, a little bit faster than we're growing our sales force <unk> trends et cetera that is more in a steady state obviously 2022.
Indicated at the beginning of the year and have indicated each quarter as we move through the year. There was a lot of catch up happening in 2022 and that obviously impacts 2023.
We believe again that the underlying margins for the business are in the low twenties and that through the combination of the investments, we're making the size of the market opportunity opportunities.
And productivity et cetera that we can grow the business the top line at double digit growth rates and modestly expand margins from that underlying margin in the low twenties.
Got it thank you.
Thank you.
Our next question comes from the line of Stephanie more with Jefferies. Your line is now open.
Yeah.
Hey, good morning.
Thank you Patrick.
<unk>.
Okay.
Yes.
Where wage inflation.
Okay.
Yes.
Hey, good morning, Stephanie we had a little trouble hearing you I think what you asked was just provide a little bit more color around our hiring trends and where we may be seeing a more pronounced wage inflation is that what the question was.
Yes, I apologize, but that is correct.
Okay.
So I think and Jim will happen here too I think.
We have a great.
Associate brand out in the market, especially for salaries, but broadly as well.
Sellers know the Gartner brand sellers know that Gartner has a very sales focused organization and so we're able to really recruit.
Pretty well or very well I should say in the market and we have no problems meeting our needs and the supply is there for us to be able to keep hiring I think.
The wage inflation is just what we're seeing when we look at our.
Our competitors for talent.
And we do lots of surveys and we have a lot of market data and we're basically just keeping track with the market are keeping pace with the market to make sure that in addition to the great associate.
The proposition that we have that we're actually paying our people at market as well.
Again, if you look at where the highest wage inflation countries.
Countries, where wage inflation is very high like Turkey for example, where a small sales force of Turkey and wage inflation is higher there than it is.
Like the U S. For example, and there are other countries around the world with the places where it has the highest or in the countries where it overall inflation rates are higher.
Understood and I guess, we could take that further given kind of the step up in hiring that.
Certainly this year does that mean that we should expect potentially a step up in kind of pricing as you look at your contracts over the next coming years.
They are multiyear and just to make up for kind of the investments made this year or am I thinking about it incorrectly.
Stephanie I wouldn't I wouldn't think about it that way.
I would think about the catch up hiring we are doing is basically really to fulfill all the growth that we sold in 2021 and 2022 and make sure that we can.
Serve and grow that going forward.
The pricing is really there.
There as an offset or partial as an offset to the wage inflation. So we as Jim mentioned earlier, we fell behind in hiring you talked about.
The fact that our CV over the last three years has grown at a compound annual growth rate of 11% and our head counseling and growing at a compound annual growth rate of 5% and.
We had some catching up to do again to make sure that we can really provide amazing service to our clients and then grow them over time as well and so that's the way we're thinking about the catch up hiring.
The price increase is really just to.
To offset wage inflation.
Understood and then maybe taking more of a medium term and long term longer term question here and I. Appreciate the color that you gave on the underlying EBITDA margin.
Other times.
Efficiency of our Leverages the hiring.
Can you maybe talk about other investments you might see from just the overall sales force productivity standpoint, as we kind of look over the next couple of years.
Hey, Stephanie.
We could we invest across our business and the economics, we have.
Bars and stuff, we've talked about including those investments we do a lot of investment in business. We have invested in internal systems things like billing. So that we can build up faster and collect faster. Our cash flows higher is also easier for our sales force to generate orders and build things like that.
We constantly invest in new product features.
We have a wide variety of products that are tailored for specific roles and we constantly improve those.
<unk> offerings to provide continuously more value to our clients, which could help strengthen retention rates and growth in the business over time.
And so.
We're continuing to invest in those kinds of areas of our business to make sure we support future growth all of those investments are embedded in the.
Normalized margins that Cryolife referred to.
Got it it makes sense appreciate it.
Thank you I'm showing no further questions at this time I'd like to hand, the call back over to Gene Hall for closing remarks.
So summarizing today's call for the third quarter, we drove another strong performance across the business achieved double digit growth in contract value revenue, EBITDA, and EPS, which drove growth in all practices all industry sectors across every size client and in every region.
We've caught up on hiring and are positioned to deliver sustained future growth.
Our underlying margins are in the low twenties comfortably above pre pandemic levels, and we expect them to modestly increase over time.
We will continue to generate significant free cash flow in excess of net income will.
We'll continue to return significant levels of capital to our shareholders we will.
Once again increased our 2022 guidance.
Thanks for joining today and I look forward to updating you again midyear.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Okay.
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Yes.
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