Q3 2023 Gartner Inc Earnings Call
Good morning, everyone welcome to Gardner <unk> third quarter, 2023 earnings call and David Cohen SVP of Investor Relations. At this time, all participants are in a listen only mode.
After comments by Gene Hall, Gardeners, Chief Executive Officer, and Craig Safian, Carter's 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 2023 financial results and Gartner is the outlook for 2023 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 adjustments as described in our earnings release and supplement.
Our contract values and associated growth rates, we discuss are based on 2023 foreign exchange rates and exclude contributions related to the first quarter divestiture and the 2022, Russia exit.
All growth rates in Gene's comments are FX neutral unless stated otherwise all references to share counts or 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.
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 2022 annual report on Form 10-K, and quarterly reports on Form 10-Q, as well as in other filings with the SEC.
Encourage all of you to review the risk factors listed in these documents now I will turn the call over to Gardner Chief Executive Officer Gene Hall.
Good morning, and thanks for joining us today.
Gartner drove another strong performance in Q3.
We delivered high single digit growth in contract value.
Revenue EBITDA and adjusted EPS came in above expectations.
Free cash flow in the quarter was excellent.
External environment remains volatile and uncertain.
The tech sector is still adjusting to post pandemic demand.
The banking industry continues to grapple with rising interest rates.
Supply chain challenges are still impacting many industries.
Theres heightened geopolitical volatility and more.
Leaders know they need help.
They know Gartner is the best source for that help.
Gartner delivers actionable objective insight to drive smarter decisions and stronger performance on our clients' mission critical priorities.
Whether they are striving struggling or anywhere in between our insights tools and advice often make the difference between success and failure for leaders in the enterprises they sir.
We continue to be agile and adapt to the changing environment.
Research continues to be our largest and most profitable segment.
We've got leaders across all major enterprise functions in every industry around the world.
Our market opportunity is vast across all sectors sizes and geographies.
We estimate our opportunity at around $200 billion.
In the third quarter, we continue to help clients with a wide range of topics such as cyber security.
Good analytics.
Artificial intelligence remote work.
Cost optimization and more.
In the third quarter research revenue grew 5%.
Subscription revenue grew 8% on an organic basis.
Tony contract value growth was 8%.
Contract value for enterprise function leaders continue to grow at double digit rates.
We sort of executives and their teams through distinct sales channels.
Global technology sales or GTS.
Leaders and their teams within it.
Cts also surf leaders at technology vendors.
Including Ceos.
Chief marketing officers and senior product leaders.
GTS contract value grew 7%.
Sales to enterprise function leaders performed well in the quarter GTS sales two leaders at technology vendors were affected by technology sector dynamics and tough year over year comparisons.
We expect sales to technology vendors will return to normal growth rates over the next 12 to 18 months.
Global business sales or GBS serves leaders and their teams beyond it.
This includes HR supply chain finance marketing sales legal and more.
GBS contract value grew 14%.
Were relentless execution of proven practices, we're able to deliver unparalleled value to our clients.
Our business remains resilient, despite persistent complicated external environment and tough compares to the technology vendor market.
Turner conferences deliver extraordinarily valuable insights to an engaged and qualified audience.
This will be the first full year of in person conferences since 2019.
We're having a great year.
In person attendance and advanced bookings are at record levels.
The fourth quarter is off to a great start and our outlook for the year remains strong.
I T Symposium Expo is our flagship conference series.
I recently attended this conference in Orlando.
Attendance was strong.
Our sales teams were highly engaged with clients and prospects in.
And feedback from the conference continues to be actions.
Gartner consulting is an extension of Gartner research.
Consulting helps clients execute their most strategic initiatives through deeper extended project based work.
Consulting is an important complement to our IQ research business.
Consulting revenue grew 23% in the third quarter with record results and contract optimization.
Given the strong performances across our business, we've increased our 2023 guidance.
For revenue EBITDA and free cash flow.
Greg will take you through the details.
We're well positioned for a strong close to the year and get off to a fast start in 2024.
In closing <unk>.
<unk> achieved another strong quarter of growth.
We deliver unparalleled value to enterprise leaders and their teams across every major function.
Thriving struggling or anywhere in between.
We're essentially agile and continuously adapt to the changing world.
We know the right things to do to be successful any environment.
Looking ahead, we are well positioned to continue our strong record of success far into the future.
Our client value proposition and addressable market opportunity will allow us to drive long term sustained double digit revenue growth.
We expect margins will expand modestly over time.
And we generate significant free cash flow well in excess of net income.
Even as we invest for future growth will return significant levels of excess capital to our shareholders.
This reduced the shares outstanding and increases returns over time.
With that I'll hand, the call over to our Chief Financial Officer, Craig Safian.
Thank you gene and good morning third quarter results were strong with high single digit growth in contract value.
Revenue EBITDA, adjusted EPS and free cash flow were better than expected with outstanding performance in consulting and disciplined cost management.
With strong results in the quarter and good visibility into Q4, we are increasing our 2023 guidance.
Third quarter revenue was $1 $4 billion up 6% year over year as reported and 5% FX neutral.
In addition, total contribution margin was 68% compared to 69% in the prior year as the 2022 hiring catch up continued to flow through the P&L as expected.
EBITDA was $333 million ahead of our guidance and about in line with last year.
Adjusted EPS was $2 56 sets up 6% from Q3 of last year.
And free cash flow was $302 million.
We finished the quarter with 20253 associates up 6% from the prior year and 1% from the end of the second quarter.
We remain well positioned from a talent perspective, as our associates continue to move up the 10 year curve.
Research revenue in the third quarter grew 6% year over year as reported and 5% on an FX neutral basis.
Subscription revenue grew 8% on an organic FX neutral basis.
Non subscription revenue performance was similar to Q2.
Third quarter research contribution was 73% compared to 74% in the prior year period, as we have caught up on hiring and return to the new expected levels of travel.
Contract value, our CVP was $4 $7 billion at the end of the third quarter up 8% versus the prior year.
The third quarter last year with some very strong research quarter with outstanding performance across most key metrics.
CV growth is FX neutral and excludes the first quarter 2023 divestiture.
C V from enterprise function leaders across GTS, and GBS grew at double digit rates.
New business with enterprise function leaders increased double digits as well.
C V from Tech vendors grew low single digits compared to mid teens growth in the third quarter of 2022.
Quarterly net contract value increase or N CVI was $101 million as we've discussed in the past there is notable seasonality in this metric.
CV growth was broad based across practices industry sectors company sizes and geographic regions.
Across our combined practices the majority of the industry sectors grew at double digit rates led by the transportation services and public sectors.
We had high single digit growth across all of our enterprise sized categories other than the small category, which has the largest tech vendor mix and grew low single digits.
We also drove double digit or high single digit growth in the majority of our top 10 countries.
Global technology sales contract value was $3 $6 billion at the end of the third quarter up 7% versus the prior year.
GTS CV increased $65 million from the second quarter.
Wallet retention for GTS was 102% for the quarter, which compares to 107% in the prior year when we saw near record high for this metric.
Enterprise function leaders wallet retention remained above historical G. T S levels during the third quarter.
GTS, new business was up 7% versus last year.
New business with enterprise function leaders increased mid teens compared to the prior year.
GTS quota bearing head count was up 5% year over year.
With a dynamic territory planning, we introduced a few years ago. The catch up hiring we did last year and our teams moving up the 10 year curve, we're well positioned for growth moving into 2024.
Our regular full set of G. T S metrics can be found in the appendix of our earnings supplement.
Global business sales contract value was $1 billion at the end of the third quarter up 10% year over year.
All of our GBS practices grew at double digit or high single digit rates other than sales, which grew mid single digits.
Growth was again led by supply chain and HR.
GBS CV increased $36 million from the second quarter.
Wallet retention for GBS was 108% for the quarter, which compares to 114% in the prior year. When we saw one of the highest ever results for this metric.
GBS, new business was up 10% compared to last year.
C. B S quota bearing head count was up 10% year over year. This excludes head count associated with the Q1 divestiture.
As with G. T S. Our regular full set of GBS metrics can be found in the appendix of earning supplement.
Conferences revenue for the third quarter was $57 million ahead of our expectations during a seasonally small period.
We delivered strong growth for the conferences, we held in Q3 compared to the same conferences in 2022.
The calendar shifted significantly from 2022 to 2023 with the return to in person.
Contribution margin in the quarter was 36% consistent with typical seasonality and reflecting investments for future growth.
We held nine destination conferences in the quarter all in person.
Third quarter consulting revenues increased by 24% year over year to $133 million.
On an FX neutral basis revenues were up 23%.
<unk> contribution margin was 37% in the third quarter.
Labor based revenues were $100 million up 10% versus Q3 of last year as reported and on an FX neutral basis.
Backlog at June 30th was $180 million, increasing 15% year over year on an FX neutral basis with continued booking strength.
Our contract optimization business is highly valuable we delivered $33 million of revenue in the quarter with some of the revenue pulled forward from the fourth quarter relative to our prior outlook.
Solid daily cost of services increased 8% year over year in the third quarter as reported and 7% on an FX neutral basis. The biggest driver of the increase was higher head count to support our future growth.
SG&A increased 8% year over year in the third quarter's reported and 7% on an FX neutral basis SG.
SG&A increased in the quarter as a result of head count growth.
EBITDA for the third quarter was $333 million about in line with last year.
Third quarter EBITDA upside to our guidance, primarily reflected revenue exceeding our expectations and consulting and prudent expense management.
Depreciation in the quarter of $25 million was up modestly compared to 2022.
Net interest expense, excluding deferred financing costs in the quarter was $21 million. This was down $8 million versus the third quarter of 2022 due to higher interest income on our cash balances.
The modest floating rate debt, we have is fully hedged through maturity.
Q3, adjusted tax rate, which we use for the calculation of adjusted net income was 22% for the quarter.
The tax rate for the Ida is used to adjust net income was 35% for the quarter.
Adjusted EPS in Q3 was $2.56 up 6% compared with last year.
We had 80 million shares outstanding in the third quarter.
This is a reduction of cost of 1 million shares or about 1% year over year.
We exited the third quarter with about 79 million shares on an unweighted basis.
Operating cash flow for the quarter was $331 million up 5% compared to last year.
Capex for the quarter was $28 million down 11% year over year as a result of catch up spend on technology investments in 'twenty, 'twenty, two which normalized this year.
Free cash flow for the quarter was $302 million.
Free cash flow as a percent of revenue on a rolling four quarter basis was 18% of revenue and 67% of EBITDA adjusted.
Adjusted for the after tax impact of the Q1 divestiture free cash flow conversion from GAAP net income was 122% are.
Our free cash flow conversion is generally higher when CV growth is accelerating.
At the end of the third quarter, we had about $1.2 billion cash.
Our September 30th debt balance was about $2.5 billion.
Our reported gross debt to trailing 12 month EBITDA was under two times.
Our expected free cash flow generation available 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 $2.2 billion of liquidity low levels of leverage and effectively fixed interest rates.
We repurchased $209 million of stock during the third quarter and about $100 million in October.
The board increased the authorization by $500 million earlier this week and we expect they will continue to refresh the repurchase authorization as needed going forward.
At the end of October following the increased authorization, we had about $1 billion available for repurchases.
As we continue to repurchase shares our capital base will shrink.
Over time this is accretive to earnings per share and combined with growing profits also delivers increasing returns on invested capital.
We are raising our full year guidance to reflect the better than expected Q3 performance and good visibility into the fourth quarter.
For research, we continue to innovate and provide a very compelling value proposition for clients and prospects.
Subscription research growth will reflect recent trends in contract value.
We continue to expect stronger growth from the subscription business and the non subscription part of the segment consistent with the third quarter.
For conferences, we still expect Q4 to be the largest quarter of the year for consulting revenues labor business continues to perform well we have very tough contract optimization compares in Q4 and pulled some revenue into Q3 relative to our prior expectations.
We will continue both to manage expenses prudently to support future growth and deliver strong margins.
Our updated 2023 guidance is as follows.
We expect research revenue of at least $4.875 billion, which is FX neutral growth of about 6% or 7%, excluding the Q1 divestiture.
The update to the research revenue guidance reflects better than planned and CVI performance in Q3.
With continued stability in our non subscription part of the business. There is modest incremental upside relative to the expectations, we built into the guidance last quarter we.
We expect conferences revenue of at least $500 million, which is FX neutral growth of about 27%.
We have increased our outlook for conferences by $10 million to reflect the good starts in the fourth quarter.
We expect consulting revenue of at least $515 million, which is growth of about 8% FX neutral, reflecting the very strong performance Q3 and timing in our contract optimization business.
The result is an outlook for consolidated revenue of at least $5.89 billion, which is FX neutral growth of 8%.
We now expect full year EBITDA of at least $1.44 billion up $80 million from our prior guidance with.
With the strong performance in Q3, we have increased confidence in the margin forecast for the fourth quarter.
We expect typical operating expense seasonality from Q3 to Q4.
We now expect 2023, adjusted EPS of at least $10 90 per share.
For 2023 we now expect free cash flow of at least $1.0 billion to $5 billion up $50 million from our prior guidance.
The higher free cash flow reflects a conversion from GAAP net income of 136% excluding the after tax divestiture proceeds.
Our guidance is based on 80 million fully diluted weighted average shares outstanding which reflects the repurchases made through the end of October.
We are performing well this year, despite continuing global macro uncertainty and the dynamic tech vendor market.
CV grew high single digits in the quarter.
Revenue and EBITDA performance exceeded our expectations and we increased our guidance.
Free cash flow was strong in the quarter and we increased the guidance for the full year.
We repurchased about $550 million of stock year to date through October and remain eager to return excess capital to our shareholders. We will continue to be disciplined opportunistic and price sensitive.
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 about in line with CV growth and G&A leverage we will expand EBITDA margins modestly over time.
We can grow free cash flow at least as fast as EBITDA because of our modest capex needs and the benefits of our clients pay us upfront and.
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'd be happy to take your questions. Operator, Thank you and as a reminder to ask a question simply press star one one and.
And wait for your name to be announced please standby. Our first question is from Jeff Mueller with Baird. Please proceed.
Jeff Your line is open.
Alright, Silicon we continue with the next question.
For a moment.
Next question is from Heather <unk> with Bank of America. Please proceed.
Hi, Thank you.
For taking my question.
I was hoping to ask your question.
Expense management as you look into next year.
Yeah.
Assuming that tech vendors spending potentially you start to lap easier comparison, there is an opportunity to invest in sales.
Thank you.
Got that.
Or do you think you have an opportunity with your sales force and then also just your thoughts around expense management as we head into 2024.
Hey, Heather Jim So as we look at our market opportunity as you know Mark doctors very fast over time that we intend to grow our sales force in line with capturing that market opportunity.
Over the last couple of years ago ourselves for dramatically and we feel like we're in really good position.
Through the end of 'twenty three 'twenty four requests we have we can over time will continue to grow that capacity.
And so.
Sure.
And Jim just to clarify that when you think about the Tech Center opportunity do you think you can win back the sales of the sales force you have.
Alright, thank you.
Yeah over overtime, whether we think that the check under market will return to kind of broke receive historically he has we our perspective on it is a lot of the business. They had was pulled forward.
Their own sales as a result, they kind of over higher than have been having some retrenchment, which will impact our business, we think again that the.
Tech business is going to grow over time that revenues will grow our business will get back to normal growth overtime.
The other thing I would add is you know.
As our tech business as the contract value growth accelerated.
Over the last two years, we also increase the number of territories, we add serving that market and so we did a lot of hiring across all both GTS and GBS as gene mentioned over the last couple of years Tech vendor market included and so a lot of new people joined the company in 2022 and selling positions.
And they are coming up for tenure.
Yes, we think about our territory coverage, if you will heading into 2024 and beyond as well as the maturation of our sales force.
We feel like we're in a really good position to.
To return to the kind of target growth that we want to be over the medium term.
Great. Thank you.
Thank you for a moment please for our next question.
Okay.
Comes from the line of Toni Kaplan.
Thank you.
I was hoping you could give us some metrics around the current average tenure of your sales people.
Sort of any reference point, maybe it's year over year, our pre pandemic or versus a historical average just wanted to get a sense of where we are now versus.
Some historical point thanks.
Good morning, Tony Thanks for the question so.
The way to think about it is if you look at all of the <unk>.
Net.
And gross adds we did in 2022 effectively when we entered this year, we had the least tenured or at least experienced sales force that we've ever had.
Yeah sort of order of magnitude, where we're typically gene and I both talked about this in the past in normal times call. It 35% to 40% of our sales forces is on a newish side.
Yeah, we were in the 50 50 plus percent range being brand new to Gardner as we've made our way through this year, obviously all those people we hired in 2022 had gained experience and tenure.
We did we were very backend loaded last year in terms of hiring and so those people we hired in the third and fourth quarter of last year are now approaching or disrupt over their one year anniversary and again, that's sort of getting back to heather's question.
Jean around do we have enough capacity et cetera, we have enough capacity and the tenure and we'll look more quote unquote normal as we roll into 2024, but significantly better than what we experienced our more tenured than we experienced over the course of slightly.
Yes that makes sense.
I wanted to ask about client retention.
Sort of a step down in both GTS and GBS.
So I think are still pretty well within historical range, but like I guess is there anything you're doing to put in place initiatives to address your attention or do you feel like you're at sort of more normal levels and.
That's what's what's driving that.
Any concern.
To call out.
So.
The GTS side.
While we are still at or above historical levels, it's really sad vendor drag, it's really small vendor drag there. If you actually broke apart our enterprise function leader in Dts those client retention rates are at or above.
Our historical levels for Dts and so it's really just the tech vendor market impacting that client retention rate.
Si, yes, it's down a little but it's still for a 500 basis points higher than GTS and so we feel really good about that that said, we're never got our attention.
I'll, let dean talk a little bit about that.
Joining me is as Craig said, even even with the rates. We have now we are never satisfied with a whole set of programs designed to improve those retention rates over time.
Includes things like our user conferences.
As a tool to support tools.
Our service delivery associates.
As well as training.
Training, we have when people first come on board have been our trend throughout their careers.
So we are never satisfied.
No matter how good it is we always want to be better.
Terrific. Thanks, a lot.
Thank you one moment please for our next question.
Comes from the line of Seth Weber with Wells Fargo. Please proceed.
Hey, guys good morning.
I wanted to go back to the.
Expense question just for a second I mean your margin guidance for this year is pretty well ahead of the.
The initial framework that you guys were talking about.
Earlier in the year last year and I'm, just trying to think through are there any.
Big cost buckets.
Could come back next year I think Craig you mentioned travel is kind of back G&A. So I'm just trying to think through the margin leverage going forward.
In a higher revenue in our revenue growth rate environment.
I think we should be considering.
Yeah, Yeah. Good morning, Seth Great question. So I think there's a couple of things.
Going on within within your question so.
From an operating expense perspective.
We are I guess relatively back to normalized level of expenses. There are obviously always going to be puts and takes but.
Relatively normalized level of expenses I would note and this is obviously embedded in the guidance that there is a pretty significant step up in opex sequentially from Q3 to Q4, just given our conference schedule.
Our travel related to conferences in the fourth quarter and another client activity marketing related.
Conferences in Q4 activity et cetera. So.
<unk> sort of normal Q3 to Q4 step up but just make sure you kind of baked that into into the Opex I think the only thing just to keep in mind is that obviously our largest.
Revenue line is our research.
And there is a lag between when contract value does start accelerating and then the revenue flows through and so.
We're just very mindful of watching that.
And that can have a pretty significant impact.
On margins on both a sequential and year over year basis.
Okay. That's helpful. Thanks, and then just following on that is there any reason to think that pricing would be.
Softer next year than it was in 2023.
<unk>, what I'd say is what we're seeing in the marketplace as clients value our products greatly and we expect pricing and your pricing power will be the same next year as this year.
Perfect. Okay. Thank you guys.
Thank you for a moment for our next question. Please.
Comes from the line of Jeff <unk> with Wells Fargo. Please proceed.
Jeff.
One moment please.
Hello.
Line is open. Please proceed.
Can you hear me now yes, okay. Thank you sorry to drag you back to it I know you said you have sufficient sales capacity I just want to make sure I'm understanding the management of sales head count appropriately.
So is this that you have.
You've already seen a slowing environment and you've already rebuilt your sales capacity, so with those dynamics, you're well calibrated.
Should we be reading into it that there is any sort of like incremental weakening you're seeing because we're not seeing that in any of your externally reported metrics.
Yes, Jeff So you should not read into it any way that we're seeing any kind of weakening.
It's what we talked about earlier, which is that we expanded our sales force a lot over the last two years for example, GTS. It's up about 18% of 2021, that's a lot of capacity. So we've added a lot of capacity on top of that as Greg mentioned a lot of those people are now coming into tenure and so as we look especially for 'twenty.
We feel like we're really well situated in terms of actual capacity between the larger number of additions we made in the last years and the fact that those people are kind of a 10 year curve and kind of being at a really really good spot engineered project 24, and by the way in 'twenty five as well.
Okay, and then Craig you just alluded to this but.
Yes, I guess I was surprised to see subscription revenue performed as well as it did in research and I'm not sure. If there is some FX impact or divestiture them back or something but.
To see it on slide seven actually accelerate while Cvs still been decelerating. If you can just address why research subscription revenue would be accelerating.
With those dynamics.
Yes, Jeff.
So, yes, I think theres, a little bit of FX in there, obviously I do thing.
Over the course of Q3 and this is part of the reason why we're able to.
Increase.
Research guide a little bit too is.
<unk>.
CVI growth came in earlier in the quarter than we had originally anticipated.
And so again the combination of.
We booked in July we get two months of it if it books at the end of September it's all in Q4.
So we got a little bit of that benefit flowing through into <unk>.
Into Q3, and then obviously.
We were able to raise the full year guide for the research segment as well because of that yes.
Beating our expectations for the third quarter.
Yes.
Okay. Thank you.
Thank you one moment for our next question. Please.
It comes from the line of Andrew Nicholas with William Blair. Please proceed.
Hi, good morning, Thanks for taking my questions I wanted to.
Again ask on the head count.
Question, and maybe asking it a different way, which is given where you feel you are with with head count and territory coverage and the ramp for what was previously a lower tenured sales force is it fair for us to expect next year for a bit.
<unk> gap between CV growth and head count growth than maybe the 4% to 5%.
You've talked about historically is as all of those dynamics kind of come together.
Hey, good morning, Good morning, Andrew It's Craig I think the way we're thinking about it again, we'll we will we'll provide full guidance in February bye.
We're as we've mentioned throughout the course of this year, we are constantly recalibrating based on the external situation and how our business is performing.
Looking at the head count sort of quarter to quarter. There can obviously be a little bit of noise in those numbers and so as gene and I both credit too.
There is really nothing to see there and as we roll into next year and beyond.
Algorithm that we continue to think about is we're going to grow our territories and our head count.
In that kind of within four points or five points of our contract value growth in the four to five points is really dependent on what we're seeing from wage inflation perspective, and so wage inflation is abating, a little bit will be closer to <unk>. If wage inflation is higher it'll be CV minus.
Five or whatever but that's the algorithm over the long term or medium term.
Quarter, It may shift a little bit just given what's going on but over the long term given the use.
Our addressable market opportunity that's the algorithm we're going to go after.
Makes sense. Thank you and then for my follow up I just wanted to ask.
I'm curious, how the last year or so given all the macro uncertainty geopolitical dynamics.
Tech vendor weakness all these different kind of noisy items.
That performance and that growth has remained.
Very strong in within your your medium term targets I'm just wondering if.
Having been through that the past couple of years, if you have any kind of updated views on kind.
Kind of the cyclicality of that business specifically.
Because it does seem to have been.
More resilient than I would've expected, particularly at difficult comps last year. Thank you.
Andrew Sorry, you cut out at very beginning are you talking about consulting.
Sorry, no I was asking about GBS CV growth just kind of the.
The resilience of the CV growth there.
Yes, I mean, I think its hedges.
Consistent with.
The story.
<unk>, we've been telling for a while which is.
Business leaders outside of it and HR and finance and legal and sales.
Need help on their mission critical priorities and we have great products that offer tremendous value in that space.
That's really the headline there.
<unk> gotten better at the insights we create we've gotten better with our selling motions, we've gotten better at everything we do but the net of it is is that business leaders have problems and we have great products to help them.
While those problems and again, we believe that that that wont change moving forward.
So does that answer your question Andrew.
Yes, Thank you kila.
One moment for our next question please.
And he is from the line of Josh Chan with UBS. Please proceed.
Hi, Good morning, Jean correct, David Thanks for taking my questions.
Mentioned that and CVI was was better this quarter than you expected is there any themes in terms of types of clients that to call out and do you think that the.
This strength is more a function of the market turning alright.
Your salesforce gaining traction there.
Yes, I guess, Josh I'd say that we saw pretty consistent market environment between Q2 and Q3.
It's we get some of the pricing and then you've got which is that.
Our experts look at what are the most important.
Issues facing executives in each of the functional areas.
Have we give them advice on how to address those things that's driving all kinds of environments, whether it's a really robust firms are not as robust for that individual enterprise and so I think we see is just that.
Clients. It gives a lot of value out of our research.
Overtime.
Right Okay. Thank.
Thank you for that.
I guess on the consulting side I. Appreciate that you mentioned there was some timing pull forward there, but do you think the contract optimization strength is its more a function of where we are in the cycle and clients looking at I.
I guess optimize their spend or is that more of a kind of a one time type of event for you.
Do you expect.
Things strengthen the contract optimization business for the next couple of quarters I guess.
The contract optimization business, we've talked about in the past is a very lumpy business and so you can't really take one quarter and sort of say and extrapolate something different in the market whatever it's really just a matter of when deals happen to come in and what clients have been looking for that point in time, and so they'll right. We looked at business as kind of like over a year long period or something.
Quarter to quarter, you can't really draw any conclusions I do think thats. The one other thing I'd add is that.
Client life saving money in any operating environment. So again, yes.
Obviously, a really strong value proposition.
Even in a choppy.
Yeah.
Okay. That's great color. Thank you and congrats on a good quarter.
Thank you one moment for our next question. Please.
And it's from the line of Manav Patnaik with Barclays. Please proceed.
Thank you good morning.
Great just to ask the expense question, a little differently I mean.
Obviously, the seasonal pick up going into <unk>, but if you look at the <unk>.
Full year, thus far like has that expense base being more normal or are there any other puts and takes we need to consider as we go into next year.
Yes, good morning, Manav I think is.
I'd characterize it is roughly normal.
I do think that as we pivot into next year.
We are likely to get back to.
All of it faster accounted territory and so.
Need to model that.
But that's probably the biggest.
Lever on that operating expense base other than timing of conferences and things like that it's just.
As Jim mentioned earlier, we we grew a lot, particularly in 2022 and so this year we have been.
Sort of operationalized maturing and digesting a lot of that growth.
And so there wasn't there has not been an issue.
Huge amount of net head count growth baked into the 2023 numbers there is some but not as much as we've had historically I think we get back to a more normal level of that next year. So that would have to be model than our normal wage inflation and merit increase and things like that but.
The other stuff is generally normal course.
Got it Okay and then my second question was just around the new sales environment, obviously fourth quarter is the.
The quarter any any color on that plus.
Just I think the new sales numbers, you gave for GTS and GBS.
Positive mid to high single digits, how much of that is was calm solicit and just talk about the momentum there I guess.
So in terms of the selling environment again, I think is unchanged, we see the things hillenbrand sort of tier two tier three and we are expecting the same environments or in terms of cappella.
I think youre, referring to the head count numbers.
And so yes, I mean GBS.
<unk> was up 10% year over year GTS.
Four 5%.
Again, we are constantly as we've talked about you're probably tired of hearing me say recalibrating those numbers.
Around a variety of different scenarios for the end of the year, obviously, there's only another two months left in the year, but.
Yes, we expect to end the year.
Sort of aligned from a head count perspective.
And CV perspective.
So that we roll into next year with the right sized sales force.
And then we will continue to.
To grow that sales force moving forward to go after that huge market opportunity.
Apologies, Craig I was referring to the new business number by about I appreciate the head count color as well, yes, okay, great sorry about that so yes on the new business side.
I think it's a combination.
A little bit easier comps.
And the maturation of the sales force coming up for tenure.
Okay. Thank you so much.
Thank you.
For our next question please.
And he comes from the line of George Tong with Goldman Sachs. Please proceed.
Alright, Thanks, good morning going.
Going back to Tech vendor trends, you mentioned that research non subscription revenues were.
Similar in terms of performance of <unk> and tech vendors CV growth was in the low single digits can you elaborate a little bit more on what youre seeing with tech vendors and if your updated 2020 feet guide assumes stabilization or improvement.
In performance.
So I'd say for Q3, we didn't see any change in the tech vendor environment is just the same as we've seen in Q2 in terms of the guidance I'll, let Craig Yes, I mean, I think it's stabilization George so.
We haven't yet seen signs that that market has shifted yet.
We do believe again over the medium term or the next year year and a half that.
We will get back to more normal growth trends, there, but I'd say, what we saw in Q3 and what's embedded in the guidance.
And again I mean, the reality just also remember that.
Contract value or growth. We saw in Q4 really has almost a de minimis impact on a full year research revenue numbers from a subscription revenue perspective.
And so stabilization baked in there and similarly on the non sub why we have not assumed any.
Crazy rebound sort of what we're seeing is stabilization and that's what we've modeled into the guidance.
Got it that's helpful and then perhaps to ask the margin question a little bit differently raised your full year guidance for EBITDA margins.
Once again this quarter can you provide your latest views on what structural EBITDA margins are and the factors that led to your improved full year outlook for EBITDA margins can also lead to an improved view on structural margins.
Sure happy to so I think.
The view is really not changed.
From prior quarters and prior discussion so what I'd say is.
Our view on our margin profile today is that.
The base or foundational margins are in the low twenties obviously.
That is significantly higher than they were before the pandemic and before the CEB acquisition.
In addition to that as always we believe there is operating leverage in the business and that our margins will go higher overtime.
We will give guidance in February as we always do.
As we talked about on some of the other opex questions. This years operating expense is a reasonable starting point to think about.
The margins and the overall P&L for next year, but just obviously keep in mind that there are other things beyond just the opex level on the level of investment we put into the business next year that will impact the margins, most notably where we end this year from a contract value perspective.
Because as we've talked about there is a lag in terms of the.
The revenue and the CV relationship both when Cvs decelerating, but also when CV begins to accelerate as well. So it does take a quarter or two for a lag for the sub revenue to kind of catch up with the CV and so again, yes.
Be mindful of that as you think about 2024 as well we will provide all those details in February.
When when we when we come out with our initial guidance for FY 'twenty one.
Got it thank you.
Thank you for a moment for our next question. Please.
And he comes from the line of Jeffrey Silber with BMO capital markets.
Thank you so much I'm not going to ask a margin question.
Actually wanted to talk about pricing if I remember correctly. This is the time of year, where you start instituting price increases and I'm. Just wondering how has that been if you've seen any pushback in terms of client maybe pushing back on what they are buying.
Hi, Jeff I'll get started which is as I mentioned earlier, we haven't seen it at the time, we increase prices rose through obviously as clients renewed.
And I would say, it's a normal environment, we haven't seen any pushback.
I mean, Jeff so the major price increase for us.
Went into place.
Two days ago.
On November one so we're obviously very very very early.
In that cycle.
But again, if you think about it the average client is spending order of magnitude 250 to $260000 a year with us so the difference between four and 5%.
Not a lot of money in the Grand scheme of things and again, we're very focused on making sure that we're delivering value well in excess of that 250 or $260000. So.
<unk>.
We are generally able to.
Yes, so the price increase.
Again sort of as normal course of business for us.
Okay. That's helpful. I appreciate it let me shift over to conferences I know the numbers have been strong.
But typically when we're in an environment of economic uncertainty that area of the business might tend to be a little bit weaker do you think we're just seeing kind of a bounce back from the pandemic and the fact that nobody was traveling and nobody was mingling in may.
As we go into next year, you might see some softness in that business.
So Jeff I think the key thing driving the business is that our clients are enterprise functional leaders I have a lot of challenges and we've done a good job at laying out what those challenges are how they should address them as we market our conferences to potential attendees.
We focus on here the issues you face here's how we're going to help you with that of the Congress and so.
The biggest single thing Thats driving our contract performance is that where all the issues people characterize our our attendees have a lot of issues and we are on the our experts have lot solutions to those issues and they've got a lot of value prop I think thats kind of the biggest thing in <unk>.
To that and obviously, we've been adding conferences back in so we're getting I think some people that couldnt get accomplished in the past now can balancing sort of see that in terms of comparison points, but it's really hard to be more about the value.
Most of all.
Okay. Thanks, so much.
Thank you and this concludes the Q&A session I would like to turn the call over to Jean <unk> for his closing comments.
Well, here's what I would like to takeaway from today's call Gartner growth another strong performance in Q3.
We deliver unparalleled value to enterprise leaders and their teams across every major function with a thriving struggling or anywhere in between.
Agile and continuously adapt to the changing world and we know the right things to do to be successful in any environment.
Looking ahead, we're well positioned to continue our sustained record success far into the future.
Our client value proposition and addressable market opportunity will allow us to drive long term sustained double digit growth.
We expect margins will expand modestly over time, we generate significant free cash flow well in excess of net income.
Even as we invest for future growth will return significant levels of excess capital to our shareholders.
Shares outstanding increases returns over time.
Thanks for joining us today, and we look forward to updating you again next quarter.
And thank you all for participating and you may now disconnect.
Okay.
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