Q4 2022 Gartner Inc Earnings Call
Good morning.
Everyone welcome to Gardner <unk> fourth 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 at Gardner, 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 fourth quarter 2022 financial results and quarters outlook for 2023.
In today's earnings release and earnings supplement posted to our website investor Doc Gartner 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.
Growth rates in Gene's comments are FX neutral unless stated otherwise with contract value comments exclude Russia from 'twenty to 'twenty one all.
All references to share counts 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 Dotcom website finally, all contract values and associated growth rates. We discuss are based on 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 very mature.
We're really from actual results are subject to a number of risks and uncertainties, including those contained in the company's 2021 annual report on Form 10-K quarterly reports on Form 10-Q, as well as in other filings with the SEC I encourage all of you to review the risk factors listed in these documents now I will turn the call over to gardeners, Chief Executive Officer Gene Hall.
Good morning, and thanks for joining Us Tonight.
<unk> drove our strong performance in the fourth quarter with double digit growth in contract value revenue EBITDA and EPS, we generated nearly $1 billion in free cash flow.
Returns, even more than that to shareholders through our ongoing share repurchase program.
Leaders are dealing with high volatility and uncertainty.
Question accelerated to the highest level in 40 years.
Dollar is the strongest it's been in 20 years and it remains extremely volatile.
Our ongoing supply chain issues energy prices have been volatile the labor market has been volatile.
Enterprises are assessing the impact of remote versus hybrid versus in person work there.
There are widespread concerns of a recession.
All of these factors and more impact enterprises around the world.
Leaders need help navigating these turbulent times and they know Gartner is the best source for that help.
Our services often make the difference between success and failure for executives and the rental prices.
We help clients succeed with their mission critical priorities other than growth.
Cutting costs.
With all this volatility our most recent research shows the chief financial officers are more carefully scrutinizing expenses.
But at the same time, increasing investments in mission critical priorities, even in enterprises that are under extreme financial pressure.
Our research business continues to be our largest and most profitable segment.
We help leaders across all major enterprise functions in every industry around the world.
Our market opportunity as fast across all sectors sizes and geographies.
We are delivering more value than apple.
Research revenue grew 13% in the fourth quarter.
Total contract value growth was 12%.
Contract value growth was broad based across practices industry sectors company sizes and geographic regions.
We surveyed executives and their teams through two distinct sales channels.
Global technology sales or GTS is our largest sales force.
Contract value grew 11%.
The large majority of GTS serves leaders and their teams and we saw double digit growth with this client segment. Despite tough compares.
Can you just also serves leaders and technology vendors, including Ceos and product managers.
In this segment growth moderated, but still grew at high single digits. Despite even tougher compares.
Global business sales or GBS serves leaders and their teams beyond it.
This includes HR supply chain finance marketing sales legal and more G.
GBS contract value grew 19% in 2022.
And the five years since we launched our <unk> products within GBS, we've seen exceptional compound annual growth rates.
Gartner conferences deliver extraordinarily valuable insights and engaged and qualified audience.
In the first half of 2020, we delivered most of our conferences virtually.
In the second half, we pivoted back to in person nearly all our conferences.
Baxter has been excellent.
Most interest in conferences, we're sold out in 2022.
And we sold significantly more than half of our exhibitor space for 2023.
Gartner consulting is an extension of Gartner research.
<unk> helps clients execute their most strategic initiatives through deeper extended project based work.
Consulting is an important complement to our research business.
Consulting revenue grew 24% in the fourth quarter.
We exited the year with a strong backlog and pipeline.
Our business is fueled by our highly talented associates.
During 2022, we grew our team by about 2900 associates.
With this growth we ended 2022 with the lowest percentage.
Sessions ever.
When we're fully staffed we provide our clients better service, which results in better retention.
We are also somewhat in territories that are fully staffed.
We are carefully aligned our hiring with recent demand and a long term opportunity we have for growth.
Our 2023 Apple reflects our most recent experiences from Q4.
We've also been prudent and considering the potential impact of volatility on the global environment.
We expect to deliver at least 21, 5% margins across a wide range of economic scenarios.
And our guidance is opportunity for upside.
<unk> performed in line with historical trends.
Greg will take you through our guidance in more detail.
One of the unique things about Gartner is that we provide value to enterprises that are thriving correctly or anywhere in between.
<unk> been exceptionally agile and adapting to the changing world we have sustained record of success.
Well well prepared as we enter 2023.
We carefully align staffing levels with demand.
The lowest percentage of open positions ever.
Our content addresses today's mission critical priorities and you know the right things to do to be successful in any environment.
In closing, we again saw strong growth across the business.
Looking ahead, we are well positioned to drive growth far into the future.
Even as we invest for future growth, we expect margins to increase modestly over time.
And we generate significant free cash flow well in excess of net income.
Our return on capital to our shareholders through buybacks, which reduces shares outstanding and increases returns overtime.
With that I'll hand, the call over to our Chief Financial Officer, Craig Safian.
Thank you Jim and good morning fourth quarter results were strong with double digit growth in contract value revenue EBITDA and adjusted EPS.
<unk> neutral growth was even stronger than our reported results. We also delivered better than planned EBITDA margins.
During 2022, we generated almost $1 billion of free cash flow and we returned more than that to shareholders through stock repurchases.
Our financial performance for the full year of 2022 included total contract value growth of 12% total revenue growth of 16% EBITDA growth of 14%.
Diluted adjusted EPS of $11, 27, and free cash flow of $993 million.
We are introducing 2023 guidance, which reflects higher than normal variability in the set of reasonably likely outcomes.
The guidance accounts for the tough compares at the start of the year and the opportunity for upside of near term demand is stronger than we built into the outlook.
The catch up hiring we did last year, we are very well positioned to add value to enterprise function leaders and their teams across all industries and around the world.
Fourth quarter revenue was $1 5 billion up 15% year over year as reported and 20% FX neutral. In addition, total contribution margin was 68% down 100 basis points versus the prior year.
EBITDA was $421 million up 37% year over year and up 44% FX neutral.
Adjusted EPS was $3 70 up 24% and free cash flow in the quarter was $166 million with.
We finished the year with 19505 associates up 18% from the end of 2021.
40% of the head count growth was catch up from prior years.
Our hiring has been carefully calibrated to revenue growth and future demand and we are well positioned from a talent perspective heading into 2023.
Research revenue in the fourth quarter grew 9% year over year as reported and 13% on an FX neutral basis, driven by our strong contract value growth.
Fourth quarter research contribution margin was 74% consistent with 2021, the contribution margin had a benefit during the quarter from somewhat lower head count levels and travel expenses still modestly below our post pandemic expectations.
For the full year 2022 research revenues increased by 12% on a reported basis and 16% FX neutral the gross contribution margin for the year was 74% in line with 2021.
Contract value or CV represents the annualized revenue under contract at a point in time.
And looking at our global contract value across both GTS and GBS more than 75% of our CV is from enterprise function leaders and their teams with the bulk of the balance coming from leaders at Tech vendors are enterprise function leaders business includes I T leaders, who are end users of technology and who we serve through our GTS sales force.
And leaders of other business functions. So we serve through our GBS sales force in both cases, we serve leaders around the world and across all industries. We're helping these enterprise function leaders address their most important mission critical priorities.
CV was $4 7 billion at the end of the fourth quarter up 11, 9% versus the prior year and up 12, 3% adjusted for the impact of exiting Russia CV.
From enterprise function leaders across GTS and GBS grew at strong double digit rates CV from tech vendors grew high single digits compared to a high teens growth rate in the fourth quarter of 'twenty one.
Clearly net contract value increase or N CVI was 189 million.
I guess of almost $400 million.
CV growth was broad based across practices industry sectors company sizes and geographic regions.
Across our combined practices all industry sectors grew at double digit rates other than technology and media, which grew at high single digit rates. The fastest growth was in the transportation retail and manufacturing sectors, we had double digit growth across all of our enterprise size categories.
We also drove double digit growth in nine of our top 10 countries with high single digit growth in the 10th.
Global Technology sales CV was $3 6 billion at the end of the fourth quarter up 10% versus the prior year and up 10, 5% adjusted for the exited Russia GTS at quarterly end CPI of $138 million.
Wallet retention for GTS was 105% for the quarter GTS, New business was down eight 5% versus last year, new business with it function leaders was up modestly year over year against the tough compare new business with tech vendors facing even tougher compare against Q4 of 2021, which was its strongest quarter ever.
GTS quota bearing head count was up 18% compared to December of last year about 40% of the growth was catch up hiring from 2021.
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 CV was over $1 billion at the end of the fourth quarter up 19% year over year, which is above the high end of our medium term outlook of 12% to 16%.
All of our GBS practices other than marketing grew at double digit growth rates led by supply chain and HR, which both continued to grow faster than 20% GBS.
GBS CV increased $52 million from the third quarter.
Wallet retention for GBS was 112%.
GBS, new business was up 3% versus last year against a very strong compare the two year compound annual growth rate for new business was 9%.
GBS quota bearing head count increased 22% year over year with a little more than 50% of the growth being catch up from 2021 head count we hired 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 fourth quarter was $188 million contribution margin in the quarter was 53% we held nine in person conferences in the quarter.
It has been very exciting for our business to return to in person conferences for the full year 2022 revenue increased 82% on a reported basis and 90% FX neutral.
Gross contribution margin was 54%.
Fourth quarter consulting revenues increased by 17% year over year to $138 million on an FX neutral basis revenues were up 24%.
Consulting contribution margin was 37% in the fourth quarter.
Labor based revenues were $96 million up 11% versus Q4 of last year and up 19% on an FX neutral basis.
Backlog at December 31 was $140 million, increasing 24% year over year on an FX neutral basis with another strong bookings quarter.
<unk> of multiyear contracts in our backlog calculation of change. We described earlier last year contributed about 13 percentage points to the year over year growth rate.
Our contract optimization business had a very strong quarter, increasing 36% as reported and 39% on an FX neutral basis versus the prior year as we have detailed in the past. This part of the consulting segment is highly variable.
Full year consulting revenue was up 15% on a reported basis and 22% on an FX neutral basis gross contribution margin of 39% was up 140 basis points from 2021.
Consolidated cost of services increased 19% year over year in the fourth quarter as reported and 24% 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 decreased 3% year over year in the fourth quarter as reported and increased 1% on an FX neutral basis.
We had lower noncash nonrecurring charges in 2022 compared to 2021 on.
On a comparable basis SG&A was up due to additional head count for sales at G&A functions.
For the full year cost of services increased 17% on a reported basis and 21% on an FX neutral basis, SG&A increased 15% on a reported basis and 19% on an FX neutral basis in 2022.
EBITDA for the fourth quarter was $421 million up 37% year over year on a reported basis and up 44% FX neutral.
Fourth quarter EBITDA upside to our guidance reflected revenue exceeding our forecast most notably in consulting and expenses at the low end of our expectations.
EBITDA for the full year was $1 47 billion, a 14% increase over 2021 on a reported basis and up 19% FX neutral.
Depreciation was $24 million in the fourth quarter down modestly versus 2021.
Net interest expense, excluding deferred financing costs in the quarter was $29 million about flat with the prior year.
Modest floating rate debt, we have is fully hedged through maturity.
Q4, adjusted tax rate, which we use for the calculation of adjusted net income was 16, 7% for the quarter the tax rate for the items used to adjust net income was 23, 2% for the quarter.
Our full year tax rate was 21, 6% on the same basis.
Adjusted EPS in Q4 was $3 79.
19% year over year.
The average share count for the fourth quarter was 80 million shares. This is a reduction of about $3 7 million shares or about 4% year over year.
We exited the fourth quarter with about 80 million shares outstanding on an unweighted basis.
For the full year adjusted EPS was $11 27.
EPS growth for the year was 22%.
Operating cash flow for the quarter was $203 million, excluding insurance proceeds in Q4 of 2021 operating cash flow was down about 7% Q.
Q4 cash flow was impacted by hurricane in which hit our center of excellence in Fort Myers extremely hard in late September while we were able to sell and service our clients from Fort Myers, We did have some delays in getting invoices out as quickly as we normally would.
Collections for some of these delayed invoices slip into January but we are now caught up.
Capex for the quarter was $38 million up about $16 million year over year led by increases in capitalized technology labor costs and catch up laptop spend.
Free cash flow for the quarter was $166 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 also very strong with the differences being cash interest cash taxes and modest capex, partially offset by strong working capital cash inflows.
Free cash flow as a percent of revenue or free cash flow margin was 18% on a rolling four quarter basis on a same basis free cash flow was 68% of EBITDA and 123% of GAAP net income.
At the end of the fourth quarter, we had almost $700 million of cash.
Our December 31 debt balance was $2 $5 billion.
Our reported gross debt to trailing 12 months 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 or.
Our balance sheet is very strong with $1 $7 billion of liquidity low levels of leverage and effectively fixed interest rates.
We repurchased more than $1 billion of stock throughout 2022.
We expect the board will refresh our share repurchase authorization as needed, which they did earlier. This month, we now have about $1 billion authorized for share repurchases.
Across the past two years, we have returned $2 $7 billion to shareholders by repurchasing more than 11 million shares over that timeframe, we've reduced our shares outstanding by 11%.
As we continue to repurchase shares 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.
Before providing the 2023 guidance details I want to discuss our base level assumptions and planning philosophy for 2023 for.
For research, we continue to innovate and provide a very compelling value proposition for clients and prospects executives and their teams face uncertainty and challenges and a recognized how gartner can help regardless of the economic environment.
Our plan allows for a higher than normal level of uncertainty in the world as gene discussed we've got tough compares across the business and particularly with tech vendors for another quarter or two.
We've taken a prudent approach based on historical trends as well as more normal patterns, which we have reflected in the guidance.
If near term demand is stronger than we built into the outlook and Nicky phasing retention rates and non subscription growth perform closer to the way. They have historically there would be upside to our guidance. In addition, our teams are focused on driving greater growth and what's embedded in the guidance.
Finally, as you think about GBS overall, CV and revenue growth for 2023. Please keep in mind that we closed on the divestiture of a small non core asset last week, we sold talent neuron, which we acquired as part of the CEB transaction for $164 million in the earning supplement appendix, we provided historical contract Valley.
<unk> updated for 2023, FX rates as well as the removal of talent neuron from prior years.
Conferences, we are basing our guidance on being 100% in person for the 47 destination conferences, we have planned for 2023.
We expect a return to more typical seasonality for the business with fourth quarter, the largest followed by the second quarter.
Our consulting revenues, we have more visibility into the first half based on the composition of our backlog and pipeline as usual.
Contract optimization is seasonally slower in the first quarter and remains highly variable we had a very strong year in 2022, especially in contract optimization in the fourth quarter.
Our base level assumptions for consolidated expenses reflect significant head count increases from 2022 Annualizing into 2023.
Our plan for head Count for 2023 is more in line with our normal model as we caught up on hiring last year, if demand is stronger than what's in the initial plan. We will have the opportunity to add even more great talent to our teams.
We also expect <unk> costs to more fully normalize this year.
Finally, we continue to invest in our systems and process automation, both client facing and internal applications as part of our innovation and continuous improvement programs. We will continue both to manage expenses prudently to support future growth and deliver strong margins.
At current rates FX will be a modest tailwind to growth for the full year with the benefit in the second half.
Our guidance for 2023 is as follows we.
We expect research revenue of at least $4 $92 billion, which is growth of about 7%.
Excluding the effect of the divestiture adds one percentage point to the year over year growth rate.
We expect conferences revenue of at least $445 million, which is growth of about 14%.
We expect consulting revenue of at least $500 million, which is growth of about 4%.
The result is an outlook for consolidated revenue of at least 586 5 billion, which is growth of about 7%.
Excluding the divested business from 2022 would add about 80 basis points to the growth rate.
As I've mentioned, we've taken a prudent approach to planning for 2023, the supplies to revenue operating expenses and free cash flow.
We expect full year EBITDA of at least 1.2 dollars 6 billion.
We expect to be able to deliver at least 21, 5% margins in most economic scenarios.
If revenue is stronger than our guidance, we expect upside to EBITDA and margins.
Included in the guidance is equity comp of $132 million up from 2022.
We expect 2023, adjusted EPS of at least $8 80 per share.
For 2023, we expect free cash flow of at least $920 million. Our EPS guidance is based on 80 million shares, which only assumes repurchases to offset dilution.
Finally for the first quarter of 2023, we expect to deliver at least $310 million of EBITDA.
All the details of our full year guidance are included on our Investor Relations site.
Our strong performance in 2022 continued in the fourth quarter.
Contract value grew 12% adjusted EPS increased 19% fueled in part by the significant reduction of shares in 2021 and 2022 over.
Over the past few years, our hiring has been carefully calibrated to demand and we are well positioned from a talent perspective 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 last year and remain committed to returning excess capital to our shareholders over time.
As I mentioned, we expect to generate at least $920 million in free cash flow in 2023.
We have ample liquidity and the net proceeds from last week's divestiture for our capital deployment initiatives.
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 at G&A leverage we can modestly expand margins.
We can grow free cash flow at least as fast as EBITDA because of our modest capex needs and the benefits of our clients paying us upfront.
And we'll continue to deploy our capital on share repurchases, which will lower the share count over time and on strategic value enhancing tuck in M&A with that I'll turn the call back over to the operator, and we'll be happy to take your questions operator.
Thank you at this time, we will conduct a question and answer session.
As a reminder to ask a question you will need to press star one on your telephone.
You will then hear an automated message advising you that your hand is raised.
To withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
And our first question comes from Jeff Mueller from Baird. Your line is open.
Yes. Thank you.
Maybe if you could talk through what you think for the outlook for the tech vendor channel.
Just given the more recent risks and I need to cycle through kind of renewals on annual and multiyear contracts and related to that is there an opportunity or a plan to reallocate some of those sales resources into kind of the functional leader channels.
Yeah.
Hey, Jeff It's gene I'll just started so as we think about the inner protect vendor channel.
Start with tech and in Tech industry itself, the technology companies and we think about those as being in two different segments. One is for enterprise.
And the other consumer devices things like that.
On the enterprise side we're.
Were expecting the technology competence technology vendors to grow about seven 8% globally during 'twenty three.
And the reason they are growing pretty robustly as that enterprise it spending.
The ones that are not certainly consumers.
Selling to large complex <unk> sales and they tend to be multiyear contracts with annual increases et cetera.
So thats a technology vendors that are selling to enterprise.
They are also seeing continued demand for cloud security digital moderate.
<unk> monetization.
And so all of those things are growing at a much higher rate the general tech industry.
And when we survey Ceos.
This is the end user there customers that are buying this VW equivalent events is saying things bleed digital modernization is still really important to meet the economic situation as well as staffing situations they base as well as consumer requirements or more technology and the services they offer.
So on the enterprise side.
Summarizing the enterprise I keep check vendors, we have to see that growing about 7% globally.
On the consumer device side.
That's going to be a lot worse in a sense that we expect demand to be lower there and that's because a lot of demand was pulled forward during the recession and during the pandemic.
And so there's sort of a tale of two cities in the tech industry.
So thats the tech vendors themselves.
Our.
Our business is predominantly on the enterprise side. So we just proportionately served us.
So looking forward, we expect actually the check vendors we serve.
Doing okay as opposed to the consumer and device manufacturers, which we expect to actually just shrink during 2023.
So that translates into our own business.
We expect Joe we had a.
Craig dishes results.
Our vendor or sales force itself for technology vendors actually one for very high.
Chinas growth that's right.
At a high teens growth to low single digit growth.
Actually I'm, sorry high single shipment ICU dosage products, so they actually performed pretty well in the fourth quarter going forward again, because our major business is selling to the enterprise are key.
Technology vendors, we expect that business to do pretty well on a go forward basis and Jeff.
Last part of your question on the.
Territory assignment and where we're putting our growth we've got a pretty robust territory optimization.
Analytics team that is always looking at this and we have the ability to.
Very quickly and with a lot of agility flex up or down on where we're paying a territory and so obviously as we're looking at are selling environment and.
The growth of the business, we're continuing to.
Yes allocate those.
As resources Accordingly, and then.
The last thing I'd mentioned, it sort of had this.
And your question, but I'll pull it out.
Our business selling to.
The enterprise functions both in.
<unk>.
Outside of Iot through GBS performed very very well in Q4 and for the full year and it was really the tech vendors that had as gene said, a very tough compare going from.
High teens growth to high single digit growth.
In the quarter.
I appreciate that and maybe just a follow up given that comment on the strength selling to the.
Functional leader channel.
Productivity metrics I understand kind of the way the metric works in the year over year acceleration in sales head count growth, but.
Productivity was down and quarterly productivity was also quite a bit down year over year can you just kind of like tease out tenure mix impacts I don't know if theres anything on.
Further to say on the tech vendor channel, but just kind of like help us bridge that because it does look pretty soft. Thank you.
Yes, so Jeff I mean again, the way to kind of think about the <unk>.
<unk> in quarter, and if you look at it on a rolling four quarter basis.
Again that.
At.
The end user side of the GTS business held up really really well and performed really well.
Throughout the year and in the fourth quarter, including the productivity.
And again, just we saw that.
Deceleration from <unk>.
In fact, the high single digits, obviously impacting the.
The productivity as well as we have brought in more and more new associates and the sales force.
Last year, we talked about in 2021.
Had the best tenure mix, we've ever had in 2022, we have really the highest proportion of new people. We've ever had that's obviously going to impact productivity, we'll start to see the benefits.
Of the 10 year ring over the course of 2023 as all of those people we hired over the course of 2020, you start getting up the productivity curves.
Got it thank you.
Yeah.
Thank you.
Our next question comes from Heather <unk> from Bank of America. Your line is open.
Hi, Thank you for taking my question.
First off you've communicated a fair amount during the call that you are taking a prudent approach to guidance.
And I know you just addressed the tech vendor piece of the business, but I'm curious if you can elaborate a little bit in terms of how youre thinking about the overall macro environment and your guide, especially on the research side, and then as well for conferences and consulting because it seems like the guide for those parts of the business.
Imply the economy holds up pretty well so just wanted to kind of get your deeper into your train of thought.
Sure Good morning, Heather and thanks for the questions.
So I think.
A couple of thoughts there so I'll start with conferences and consulting firms and so as we look at those two businesses again coming off a very strong 2020 twos.
If you look at the backlog position in consulting we actually entered the year in really good shape, we had a very strong delivery quarter in the fourth quarter, but also a very strong bookings quarter.
And again based on the visibility that we have.
Roughly through the first half of the year, we feel really good about the consulting business.
Trending looks good there and again I think our client base.
Jean's earlier comments about the tech sector are still embarking on a lot are embarking were continuing on a lot of digital transformation and major projects.
Projects and programs, where our consulting team really can help them get the most value out of that on the conferences side.
Again, we had a great year returning to in person conferences in 2022, and the team has done a fantastic job of driving forward, what we call forward bookings, but basically locking up the revenue from the exhibitor side into 2023, and so as Jim mentioned, we've got significantly more than 50.
Oh.
Our pre bookings already under contract.
As we head into 2023, and so feel very very good about the conferences business as well on the research side again.
Our enterprise function meter business is performing very well and we expect that to continue to perform well. We do have continued to have tough compares there, but we do we're driving great value for our clients and.
And we expect that to continue.
We have been thoughtful and prudent about our experience in the fourth quarter with our tech vendor clients and making sure that we don't assume just some magical return.
Yes.
High teens growth.
Right out of the gate and so we're trying to be prudent by making sure. We use our most recent experience and rolling that through.
The four quarters from a research perspective.
Ken and user enterprise function liter business again, performing very strong.
Double digit growth rates in tech vendor business still at high single digits.
Down from where we were a year ago.
Thank you and as a follow up question.
It.
Sort of a follow up on the last the earlier question.
With regards to the new associates, the hiring you've done.
And two a potentially tougher environment in 2023.
And you have a kind of a relatively young sales force.
How are you preparing your team has for this environment and thoughts around ability to attract new customers in this environment with the threat of associates, who are they one year in.
Hi, Heather it's Jim So the we always train our associates on what are the most important mission critical priorities with our clients and prospects today, one of the issues that is going to be on People's minds, and some industries is going to be cost reduction and so we train our salespeople on among other things.
How to help clients with cost reduction we are a very small proportion of cost for a client they can save a lot of money by cutting our our services on the other hand, we can help them save.
Hold on were multiples of what they are.
They pay for us and their actual ongoing business. In addition to that as I mentioned earlier most companies.
Even in a tough environment cylinders, they want of investing in technology.
On things like automation that helps with their own labor situation around labor costs on most routes other pension costs again, the continuing transition to more and more digital services that are often in just about every single industry.
So we train our new salespeople on both how to sell to clients that value proposition, which is the trend continuing transition to digital but also how to save money on their purchases so that they actually get.
Can be more efficient over time.
So the combination of those things and of course, our traditional selling skills, where we.
Think are quite good at training new salespeople in terms of how to sell effectively you put those things together and it lets new salespeople they are not as productive as experienced salespeople, but they're actually quite good.
Broad context.
Great. Thank you for the help.
Thank you.
Our next question comes from Toni Kaplan from Morgan Stanley . Your line is open.
Thanks, So much I wanted to start out on the margins.
Margins in the quarter really exceptionally strong again.
And obviously the guide being 21, 5% next year.
<unk> had about two and a half quarters, let's say of this sort of higher sales head count level.
Yes.
Are you fully back on TNT.
What what's really going to drive the margins.
To that sort of low twenty's level.
Good morning, Tony Yes, I mean, the way to think about the bridge from <unk>.
2022 to 2020 three is consistent with the way we've been talking about it for the last several quarters and so the biggest piece of it is the annualized <unk> of all the hiring we did in in.
In 2022, and obviously paying the full load.
For all those new associates over the course of 2023. So that's the that's by far the biggest piece of it a lot of our hiring was backend loaded or second half loaded I should say and so obviously, there's a pretty significant uplift in the annual cost as we annualize.
All of those individuals.
There is an element.
<unk> to your point.
And so were fourth quarter was kind of in line with where we expect it to be but obviously the first part of 2022, we were still mostly in locked down and not traveling and so there are incremental <unk> expense that we expect in 2023 as we get some kind of a new normal.
Of travel post pandemic and.
And there's a few other nits here and there, but the two primary ones are really the <unk> of the head count in all of it more on the G&A side.
Okay, great and.
I wanted to ask about free cash flow I know you mentioned a couple of things in the prepared remarks, but maybe.
Maybe just talk about why the free cash flow came in below the guidance.
And then the 'twenty three guidance also looked a little bit lighter than I was thinking so any any puts and takes on free cash flow would be helpful. Thanks.
So in 2022, the bulk of the story is what.
As discussed in my prepared remarks, which is just some invoicing delays coming out.
As a result of the hurricane and we thought we would be able to get all caught up on that in 2022 and yes.
A bunch of it slip into into 2023 and actually through the end of January we actually are all caught up on that so feel good about both the 'twenty two finished.
Getting that all behind us in terms of 2023, obviously, there can be a lot of variability to it.
Free cash flow numbers, if you look at it on a surface from the guidance the free cash flow margin is in line with what we'd expect free cash flow as a percent of EBITDA is roughly where we would expect and the free cash flow conversion as a percent of GAAP net income.
The range as well and so I think.
Free cash flow guidance and the free cash flow expectation sort of in line with the business performance I do think there are a couple of things impacting 'twenty three that potentially put it a little bit below your expectations, probably most notably cash taxes, so because of all that extra earning in 2022, we have.
More to pay in taxes, and that's obviously reflected in the 2000 and it's Wifi three great free cash flow guidance as well.
Perfect. Thank you.
Thank you. Our next question will come from Andrew Nicholas from William Blair. Your line is open.
Hi, good morning, Thanks for taking my questions.
First one I wanted to ask was just on conferences I think you said in your prepared remarks that there would be 47 conferences in 'twenty three or at least that's what's planned at this point and on person, obviously, a decent bit lower than where you were running pre.
Pre pandemic. So just looking for an update in terms of strategy. There I know you've talked about adding conferences to different functional lines over the course of the next couple of years, where does kind of 'twenty three sit relative to your ultimate goal on conferences and or is there the potential for additional destination conferences to be added as we.
Move through the year.
Yeah, Hey, Andrew So the our strategy is to have conferences for all the major functional areas in our business ink.
Our finance et cetera, as well as with the <unk>.
<unk> cyber security.
Applications and so forth.
And we're far from that now and sorry, and also each of those conferences each of our major geographies and so there's a it'll take us a long time to get to the point, where we have the aspiration I just said, which is to have a conference for every major of shipyard in every major geographic region and we're at because these conferences at so much value through our.
The attendees our seat holders that actually go and attend these conferences.
We really want to expand those as quickly as we can we're limited by what you do operationally like how fast we can actually higher.
Hire people and lbs conferences, so we're going to continue on that path.
We did that because we think we can handle operationally in.
2023.
If we find during the year, we can add more we will do that.
And certainly in 'twenty four 'twenty five 'twenty six we expect to have a continuing expansion of these conferences again because of the very high value they provide to our attendees.
Our seat holders and also our process.
Great. Thank you and then for my follow up switching gears little bit I, just wanted to ask more specifically about growth in GBS you talked about some of the things that have kind of evolved.
Side of the functional leader channel in GTS, but can you speak to the different businesses within GBS, how conversations with clients have evolved over the past couple of months there and if there is any.
Individual businesses, there to call out either positively or negatively relative to last quarter. Thank you.
We had great performance in GBS during 2022, including the fourth quarter.
There is tremendous opportunity in GBS.
As with the rest of our business, bringing pro GBS as quickly as we can to capture that enormous opportunity we had growth.
Across all functional areas.
Very robust growth actually in the areas that were slower it was more internal operational things that we add so for example, <unk> had one area, where we were a little forward hiring in another area.
So the places that GBS was a little slower we believe are more due to more internal operational things that we're working on but again. The overall performance was very strong and we're very happy with that Jeff and Andrew just to underscore that 18, 9% growth for the full year coming off of a 24% full year growth in 2020.
One is really really strong continued consistent growth and as I mentioned in my prepared remarks.
On the supply chain and HR, we're well above 20% year over year growth again coming off of really strong years in 2021 as well so.
Really strong demand there.
<unk> about the fact that across all GBS, we are providing enormous value to the functional leaders that we serve in finance HR supply chain marketing sales legal and so on.
Thank you I'll get back in queue.
Thank you. Our next question comes from Seth Weber from Wells Fargo. Your line is open.
Hey, good morning, guys.
And in answer to one of the prior questions you mentioned customers looking to manage costs better I'm wondering if you're getting any pushback on pricing.
Less appetite for multi year contracts.
Can you just talk about the pricing environment and how receptive customers are and what you think that might look like in a <unk>.
In an environment, where inflation starts to come down thanks.
Yes.
<unk> had a larger than usual price increases over the recent past because of the accelerating inflation and we've had I'd say essentially zero pushback from your clients on it and if you look at the cost of Gartner for an individual user or for even a contract for the company. It's a small ticket item.
And whether it increase was 3% or 7% isn't a swing factor the swing factors of the value we provide.
We provide a tremendous amount of value to these clients.
They have to pay spend at any alternative provides.
What's incredible value. So we have had I would say kind of no measurable pushback on price increases, even though there are higher rates.
Yes.
Okay and is there still appetite for multi year contracts.
Or is that.
Absolutely absolutely in fact again.
Many of our clients prefer multiyear contracts. So it's a small ticket item and they have administrative costs and dealing with it and so.
Many if not most of our clients actually prefer multi years, because the procurement people don't want to waste their time doing this over and over again, so you actually see demand from our clients for multi years as opposed to the other way around.
On top of that obviously their mission critical priorities are not bounded by contractual term.
So they wanted to make sure that they have support.
And inside to support their mission critical priorities and so.
We are seeing no pushback.
At all on our ability to sell multi year contracts.
Okay, and then Craig you mentioned, the 50% sign up pre booking for the conference business can you just how does that compare to pre COVID-19 levels for this time of year.
Yes, it's great question so actually.
Significantly greater than 50%.
Actually.
Both gene and I said, we're actually.
Comparable or perhaps even a little bit stronger than we were a prepaid debit on that metric.
Perfect. Okay. Thank you very much guys.
Thank you. Our next question comes from George Tong from Goldman Sachs. Your line is open.
Alright, thanks, good morning.
You mentioned head count growth in 2023 for research will be more in line with the normal model can you discuss how hiring is progressing in GTS and GBS given the tight labor market and what level of head count growth do you think will be achievable this year.
Hi, George So the are.
We are a very attractive employer.
In the marketplace. When we go for talent, where place that people want to work.
<unk>.
We were.
Actually top placement to drive income, we're very selective as well as we've had no trouble hiring at August why are.
Our growth rate in our associate body has accelerated so much if I talked about in my remarks. So.
Again were an attractive place to work people, who work here and so we have a great associate value proposition. So we don't have any trouble hiring people.
And I think George the way to think about just building on.
Gene's comments.
<unk>.
In 'twenty, one and 'twenty two we invested to rebuild our recruiting function of recruiting capacity and we have done all of that we have that now available rolling forward as Jim mentioned, we have a great.
Selling brand in associate brand more broadly for those recruiters to go out and attract people as we think about.
The head count growth for this year. It is more in line with our kind of quote unquote normal algorithm, where you expect to grow head count.
Four to five points slower than CV growth that being said given the recruitment capacity, we haven't given our standing in the market. If we see our CV growth accelerating it gives us the opportunity to potentially go a bit faster there and if we see challenges with the business, we can easily tap the brakes and slow down and so we built the plan that we feel real.
Comfortable with that is in line with our normal or our go forward model, but also allows us the flexibility to flex up reflects down given on what we're seeing from a demand perspective.
Got it that's helpful.
And then as a follow up you're guiding to at least 21, 5% EBITDA margins in 2023.
Under what conditions could you outperformed the 21, 5% target.
Yes, I mean.
I think that the major way would be from revenue upside and as we mentioned in the prepared remarks.
We've taken a prudent approach on the revenue on the expenses and on the free cash flow.
And if revenue does come in stronger we would anticipate potential upside to that.
Our margins, that's probably the primary way that we can see it.
We are again, making sure that we are calibrating all of our expenses, most notably head count, but all of our expenses with what we're seeing from a revenue perspective, and we're making sure that we're also seeing the right investments. So that we can sustained growth into the future and also deliver a really really strong.
And so we feel like we've got the balance right now where obviously our structural margins are significantly higher than they were pre pandemic.
And as we talk about we believe we can modestly expand margins on a year over year over year basis moving forward.
Great. Thanks very much.
Thank you.
Our next question comes from Jeff Silber from BMO capital markets. Your line is open.
Thanks, so much.
You mentioned the divestiture of the tantalum neutron business can we get a little bit more color on that it looks like you own that business for about five or six years. What did you do why sell it now and should we expect any other kind of divestitures.
Yes, hi, Geoff so talent neuron is a business that provides.
Later labor market data.
Principally to people that in companies that are doing long term planning for where companies should have their workforce.
And we got the.
Business, when we bought CEB.
Acquisitions <unk> done when we bought CEB, therefore, we acquired that business.
As we looked at it.
We've been looking at the business to see does it really fit with our business on a go forward basis is a strategic to US we've looked at it in a lot of job we look for innovative ways, we could use it and the other thing we decided that it was not a strategic bet is never a better owners for that business to us which is why we divested it.
Let's just focus on.
Our core business in HR, which that was not really related.
In terms of other divestitures again, if we see things that don't fit our core business, we would divest them.
We will discuss those when it's appropriate.
Alright, great sorry, I got the main mixed up with Jimmy neutron.
In terms of my follow up.
Nothing to nitpick here, you provide a tremendous amount of data, but in looking at wallet retention. It did decline slightly year over year is there anything to read into it are you getting pricing concessions are people pushing back on reordering et cetera.
Jeff I won't comment on your Jimmy neutron comment we will save that for later.
In terms of wallet retention again, I think it's consistent with the way we talked about.
All of the GTS business earlier in the overall research business as well our enterprise function leader business.
Performed very very well across GBS and GTS.
And essentially what youre seeing in the while it is just that deceleration of the tech vendor business from high teens growth high single digits growth.
Even with that it is still really strong at 105%.
Obviously, well above 100 and significantly in excess of client retention and so the core value is still there but.
Slight deceleration or variance on a year over year basis can be completely attributed to.
The effect on your business and again I underscore the enterprise function business in both GTS and GBS performed very well in the fourth quarter.
Okay I appreciate the color. Thanks.
Thank you.
Our next question comes from Manav Patnaik from Barclays. Your line is open.
Thank you good morning.
Just wanted to clarify on the tech lending side again, I think you said it was a quarter of your business. It grew high single digits and did I hear you say that it into 'twenty two we assume it's going to be growing high single digits I was just curious.
Is that the sale was due to churn of new business and how that's been a trend basically.
Hey, good morning, Manav so.
We didn't talk about.
Our expectation.
The expectation from CV growth perspective for any part of the business we don't provide.
CV guidance or anything like that.
Yes, I think again it's.
As we built the plan and our guidance for 2023 utilize what we saw in the fourth quarter in terms of retention metrics, and new business metrics and productivity metrics and things of that nature.
Some of the inputs to extrapolate out our expectations for 2023, yes, I think on a tech vendor side in particular, obviously.
There is a lot going on in that in that industry right now.
We're still selling through at high single digit growth is still pretty nice growth.
Just not.
Teens growth and so we believe that given the value proposition that we have or even leaders.
That space that we've got a great value proposition and a great set of products and we will continue to serve those clients and help them with their mission critical priorities in the same way that we all the enterprise function leaders across GTS and GBS.
Okay got it.
And then just on the on the field the question around the sales force growth.
Four to five points below CV, I guess and I think you said lowest level of open positions. So does that mean this year's growth is going to be less than that.
Maybe even much less than the kind of 10% to 15% we used to historically.
Yes, so we recalibrated the way that we were going to grow the sales force back in 2019, and essentially the model obviously 2022 is different because we have to do a lot of catch up but our model moving forward is we want to essentially.
Not dilute our overall cost of sale and the way we do that is grow the sales head count call it 4% to five points, depending on wage inflation slower than CV growth.
Our stated model moving forward and so that's what we've got in place for 2023, and so yes, it will not be 10% to 15% head count growth unless we see 15% to 20% CV growth and again as I mentioned.
During George.
Georgia question, we believe we are set up to speed up or slow down accordingly.
And so if we see CV growth start to accelerate we had the recruitment capacity to be able to.
Increased and if we see D C CV growth.
We obviously can tap the brakes as well so we feel like we're in a really really good placements out perspective.
We are as we both mentioned gene and I carefully calibrating headcount growth in expenses and we.
We feel like we've struck the right balance between making sure we're investing for future growth and delivering strong strong margin performance.
Got it thank you.
Thank you.
I am showing no further questions from our phone lines I would now like to turn the conference back over to Gene Hall for any closing remarks.
Here's what I'd like to take away from today's call in the fourth quarter of 2022, we again saw strong growth across the business.
Gartner delivers incredible value to enterprises that are thriving struggling or anywhere in between.
By being exceptionally agile and adaptive to changing world, we've delivered a sustained record of success.
We are well prepared as we enter 2023.
We carefully align staffing levels with demand over the lowest percentage of open positions ever.
Our content addresses today's mission critical priorities.
And we know the right things to do to be successful in any environment.
Looking ahead, we're well positioned to fund growth or into the future.
And even as we invest for future growth, we expect margins to increase modestly over time.
We generate significant free cash flow well in excess of net income.
We'll return capital to our shareholders through buybacks, which reduced the shares outstanding increases returns over time.
Thanks for joining us today, and we look forward to updating you again next quarter.
Thank you. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.
Yeah.
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