Q3 2024 Gartner Inc Earnings Call
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Good morning everyone.
Speaker Change: Welcome to Gardner's third quarter 2020 for earnings call, and David Cohen, S.V.P. of Invest Relations. At this time, all participants are an listen-only mode. After comments by Jean Hall, Gardner's Chairman and Chief Executive Officer, and Craig Safian, Gardner's Chief Financial Officer, there will be a question and answer session.
Please be in vise to this conference as being recorded.
Speaker Change: This call will include a discussion of third quarter 2024 financial results and Gartner's outlook for 2024 that disclosed in today's earnings release and earnings supplement both posted to our website investor.gartner.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.
Speaker Change: All contract values and associated growth rates we discuss are based on 2024 foreign exchange rates. All growth rates and genes comments are FX neutral unless stated otherwise. All references to share counts are for fully diluted weighted average share counts unless stated otherwise.
Reconciliations for all non-GAAP members we use are available in the Investor Relations section of the Gartner.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.
Speaker Change: including those contained in the company's 2023 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, as well as other filings with the SEC.
I encourage all of you to review the risk factors listed in these documents.
Speaker Change: Now, I will turn the call over to Gartner's Chairman and Chief Executive Officer, Gene Hall.
Gene Hall: Good morning, and thanks for joining us today. Gartner continues to remain resilient in a complex environment. In Q3, contract value grew high single digits.
Gene Hall: Financial results for the third quarter were ahead of expectations. We raised our 2024 guidance for revenue, EBITDA, EPS, and pre-cash flow.
Gene Hall: Leaders in every enterprise continue to face more simultaneous disruptions than ever before.
Gene Hall: Gartner is the best source for actionable, objective insight to drive smarter decisions and stronger performance on an organization's mission critical priorities.
Gene Hall: A powerful way to experience our research insights is to attend a Gartner conference.
Gene Hall: At the start of every conference, our analysts deliver a thought-provoking keynote on a critically important topic.
Speaker Change: I recently attended Gartner's IT Symposium Expo in Orlando, Florida.
In the opening keynote, our analysts inspired thousands of CIOs and IT executives.
Speaker Change: Go to www.Flydreamers.com for more.
Speaker Change: They showed these leaders how to implement AI in the right places and at the right pace for their environments.
The Keynote received among the highest ratings ever.
Gartner delivers unparalleled value at the intersection of business and technology.
Speaker Change: We help our clients manage risk, save time, save money, and build confidence.
Speaker Change: We guide clients through a wide range of topics. For example, cybersecurity.
Speaker Change: Strategic Workforce Planning, Cost Optimization
Speaker Change: and leveraging generative AI across multiple disciplines, including procurement, brand management, and sales enablement.
Speaker Change: Research continues to be our largest and most profitable segment.
Speaker Change: Our research business serves leaders across all major enterprise functions, in every industry, in every geography.
Speaker Change: and our market opportunity is vast.
Speaker Change: Within our research business, contract value with enterprise function leaders grew 9%.
Speaker Change: and Contract Value with Tech Vendor clients continued the improvement we saw last quarter.
Speaker Change: Global Technology Sales, or GTS, serves leaders and their teams within IT.
Speaker Change: Contract value was 6%.
GTS new business growth was eight percent.
Speaker Change: Global Business Sales, or GBS, serves leaders and their teams beyond IT.
This includes HR, supply chain, finance, marketing, legal, sales, and more.
Speaker Change: GVS new business growth was 10% and contract value grew 12%.
Speaker Change: Gardner Conferences deliver extraordinarily valuable insights to an engaged and qualified audience.
Speaker Change: We're having a good 30% of third quarter and we're off to a great start in 2-4.
Speaker Change: Gartner Consulting is an extension of Gartner Research. Consulting helps clients execute their most strategic initiatives through deeper, project-based work.
Speaker Change: Consulting is an important complement to our IT research business.
Speaker Change: Labor-Based Consulting Revenue Grew 2%
Speaker Change: Contract Optimization Revenue met our expectations.
Speaker Change: Our launch of success has been driven by a relentless execution of Gartner best practices.
Speaker Change: We continuously improve and innovate across our business. I'll share a few examples.
Speaker Change: First, we've deployed a state-of-the-art CRM system across most of our business.
Speaker Change: Now our teams have greater visibility to better serve our clients.
Speaker Change: We also added innovations to our phased approach to sales training, which possibly impacts sales productivity for new hires.
One way we capture our large untapped market opportunity is by growing sales headcount.
Speaker Change: We accelerated hiring in the second half of 2024 and expect to continue growing our sales force into 2025 and beyond.
Speaker Change: Another example of improvement is with early career salespeople.
Speaker Change: We're growing and refining our Apprentice-type program that lets early career salespeople gain valuable experience before they take on direct volunteering roles.
Speaker Change: and we're leveraging AI internally. We've built prototypes that associates are using to match our vast library of powerful insights to each client situation. Those are just a few examples.
Speaker Change: Developing great best practices and executing them consistently is a core part of our strategy.
Speaker Change: In closing, Gartner delivers financial results ahead of expectations.
Speaker Change: We delivered 9% contract value growth with enterprise function leaders. TechVendor CV growth has turned the corner and continues to accelerate.
Speaker Change: Our client value proposition and addressable market opportunity will allow us to drive long-term sustained double-digit revenue growth.
We'll continue to create value for our shareholders by providing actionable, objective insight to our clients.
Speaker Change: Brutally investing for future growth and returning capital to our shareholders through our share repurchase program.
Speaker Change: We expect to deliver modest margin expansion over time and will continue to generate significant free cash flow while in excess of net income.
Speaker Change: All of this and more positions us to continue our sustained track record of success far into the future. With that, I'll hand the call over to our Chief Financial Officer, Craig Safian.
Craig Safian: Thank you, Gene, and good morning. Third quarter contract value grew 7% year over year, another good performance in a still complex environment.
Craig Safian: Third quarter revenue, EBITDA, and EPS all came in ahead of our expectations.
Craig Safian: We are updating our guidance based on the Q3 results and an improved outlook for the fourth quarter.
Craig Safian: Also, during the third quarter, we received $300 million before taxes related to conference cancellation insurance for the conferences affected by the pandemic.
Craig Safian: We have repurchased more than $630 million of stock through September, and remain eager to repurchase shares opportunistically.
Craig Safian: Third quarter revenue was $1.5 billion, up 5% year-over-year as reported, and 6% FX-neutral. In addition, total contribution margin was 68%, consistent with last year.
Craig Safian: EBITDA was $340 million, up 2% as reported, and 3% FX neutral versus the third quarter of 2023.
Craig Safian: and free cash flow, including the insurance-related proceeds, was $565 million.
Craig Safian: Research revenue in the third quarter grew 5% year-over-years reported and FX neutral. Subscription revenue grew 7% FX neutral. Non-subscription research revenue was in line with our expectations.
Craig Safian: Third quarter research contribution margin was 74%, consistent with last year.
Craig Safian: Contract value was $5 billion at the end of the third quarter, up 7% versus the prior year, and up about $104 million from the second quarter.
Craig Safian: CV from enterprise function leaders across GTS and GBS through 9%.
Craig Safian: Contract value and CV growth are FX neutral.
Craig Safian: CV growth was broad-based across practices, industry sectors, company sizes, and geographic regions.
Craig Safian: Tech vendor contract value has turned a corner with strong new business and continued contract value acceleration in Q3.
Craig Safian: Across our combined practices, half of the industry sectors grew at double-digit or high single-digit rates, led by the energy, healthcare, and manufacturing sectors.
Craig Safian: CV grew at high single-digit rates across all enterprise sizes except small, which grew low single digits and has the largest tech vendor mix.
Craig Safian: We also drove double-digit or high single-digit growth in the majority of our top 10 countries.
Craig Safian: Global technology sales contract value is $3.9 billion at the end of the third quarter, up 6% versus the prior year.
Craig Safian: GTS Enterprise Leader CV increased high single digits.
Craig Safian: Tech vendor CV growth improved from Q2 as the positive shift which began last quarter continued.
Craig Safian: GTSCV increased $67 million from the second quarter.
Craig Safian: while retention for GTS was 101% for the quarter, similar to Q2.
Craig Safian: Enterprise leader wallet retention was consistent with historical levels.
Craig Safian: GTS New Business was up 8% compared to last year.
Craig Safian: GTS quarter bearing headcount was up 1% year-over-year. We added more than 90 sellers in the quarter, the largest sequential increase since Q4 of 2022.
Craig Safian: This sets us up to deliver on mid-single-digit QBH growth for GTS by the end of the year.
Craig Safian: Our regular full set of GTS metrics can be found in our earnings supplement.
Craig Safian: Global business sales contract value is 1.2 billion dollars at the end of third quarter up 12% year-over-year.
Craig Safian: All of our GBS practices grew at double-digit rates other than marketing and sales, which grew mid-single digits.
Craig Safian: Growth was led by the finance, legal, and supply chain practices.
Craig Safian: GBSCV increased $37 million from the second quarter.
Craig Safian: While retention for GBS was 106% for the quarter, which compares to 108% in the prior year.
Craig Safian: TBS new business was up 10% compared to last year.
Craig Safian: As with GTS, our regular full set of GBS metrics can be found in our earnings supplement.
Craig Safian: Contribution margin was 40%, consisting with typical Q3 seasonality. We held ten destination conferences in the third quarter.
Craig Safian: Third quarter consulting revenue was $128 million compared with $133 million in the year ago period.
Craig Safian: Consulting contribution margin was 33% in the third quarter.
Craig Safian: Labor-based revenue was $101 million, up 2% versus Q3 of last year, as reported, and FX-neutral. Backlog at September 30th was $218 million, increasing 21% year-over-year on an FX-neutral basis, with continued booking strength.
Craig Safian: In contract optimization, we delivered $26 million of revenue in a quarter with a very tough compare from Q3 of last year. Our contract optimization revenue is highly variable.
Craig Safian: Consolidated cost of services increased 5% year-over-year in the third quarter as reported and FX neutral.
Craig Safian: The biggest driver of the increase was higher compensation costs.
Craig Safian: SG&A increased 8% year-over-year in the third quarter as reported and on an FX neutral basis.
Craig Safian: SG&A increased in the quarter as a result of headcount growth, which contributed to higher compensation costs.
Craig Safian: EBITDA for the third quarter was $340 million, up 2% from last year's reported and up 3% FX neutral.
Craig Safian: We outperformed in the third quarter through revenue upside, effective expense management, and a prudent approach to guidance.
Craig Safian: Depreciation in the quarter of $29 million was up 18% compared to 2023.
Craig Safian: Net interest expense, excluding deferred financing costs in the quarter, was $17 million.
Craig Safian: This is favorable by $4 million versus the third quarter of 2023 due to higher interest income on our cash balances.
Craig Safian: The Q3 adjusted tax rate, which we used for the calculation of adjusted net income, was 26% for the quarter.
Craig Safian: This compares to last year's rate of 22%.
Craig Safian: The tax rate for the items used to adjust that income was 17% for the quarter.
Adjusted EPS in Q3 was $2.50 compared with $2.56 last year.
Craig Safian: We had 78 million shares outstanding in the third quarter. This is an improvement of close to 1.6 million shares, or about 2% year-over-year.
Craig Safian: We exited the third quarter with about 78 million shares on an unweighted basis.
Craig Safian: Operating cash flow for the quarter was $591 million, compared with $331 million in Q3 of 2023.
Craig Safian: This includes $300 million of insurance-related proceeds we receive in the quarter. We expect to pay the associated taxes during Q4.
Craig Safian: CapEx for the quarter was $26 million, in line with our expectations.
Craig Safian: Free cash flow for the quarter was $565 million, including the insurance-related proceeds.
Craig Safian: Free cash flow on a rolling four-quarter basis was 119% of GATT net income.
Craig Safian: excluding the insurance related proceeds, free cash flow with 16% of revenue and 63% of EBITDA. Our free cash flow conversion is generally higher when CV growth is accelerating.
Craig Safian: At the end of the third quarter, we had about $1.8 billion of cash. Our September 30th debt balance was about $2.5 billion.
Craig Safian: Our reported gross debt to trailing 12-month EBITDA was under two times.
Craig Safian: Our expected free cash flow generation, available revolver, and excess cash remaining on the balance sheet provide ample liquidity to deliver on our capital allocation strategy of disciplined share purchases and strategic tuck-in M&A.
Craig Safian: Our balance sheet is very strong, with $2.5 billion of liquidity, low levels of leverage, and effectively fixed interest rates.
Craig Safian: We repurchased $69 million of stock during the third quarter. As of the end of Q3, our share repurchase authorization is more than $1 billion.
Craig Safian: As we continue to repurchase shares, our capital base will shrink.
Craig Safian: Over time, this is accretive to earnings-per-share, and combined with growing profits, also delivers increasing returns on invested capital.
Craig Safian: We are updating our full year guides to reflect recent performance and trends.
Craig Safian: We increase the outlet for all three segments, research, conferences, and consulting.
Craig Safian: and our EBITDA guidance reflects Q3 upside and an increased outlook for Q4.
Craig Safian: As a reminder, about one-third of our revenue and operating expenses are denominated in currencies other than the U.S. dollar.
Craig Safian: Based on recent FX rates, we expect currency to be a modest benefit in Q4.
Craig Safian: Our updated 2024 guidance is as follows.
Craig Safian: We expect research revenue of at least $5.11 billion, which is FX-neutral growth of about 5%.
Craig Safian: This reflects subscription research revenue growth of about 7%.
Craig Safian: We expect conferences revenue of at least 580 million dollars, which is FX neutral growth of about 15 percent.
Craig Safian: We expect consulting revenue of at least $535 million, which is growth of about 5% FX-neutral.
Craig Safian: The result is an outlook for consolidated revenue of at least $6.225 billion, which is FX-neutral growth of 6%.
Craig Safian: We now expect a full year EBITDA of at least $1.52 billion, up $60 million from our prior guidance.
Craig Safian: We expect 2024 adjusted EPS of at least $11.75.
Craig Safian: For 2024, we expect free cash flow of at least $1.35 billion.
Craig Safian: The increase from prior guidance reflects several items.
Craig Safian: First, improved operating performance. Second, the insurance-related proceeds we received in August net of estimated taxes.
Craig Safian: and third, a non-recurring payment related to our ongoing real estate planning.
Craig Safian: The guidance reflects a conversion from Gap Net Income of 126%.
Craig Safian: Our guidance is based on 78 million fully diluted weighted average shares outstanding, which reflects the repurchases made through the end of the third quarter.
Our financial results through September have been ahead of our plan despite continuing global macro uncertainty.
Craig Safian: CV grew high single digits in the quarter, and we believe the first quarter of 2024 was the bottom for CV growth in this cycle.
Craig Safian: We repurchased more than $630 million of stock year-to-date through September and remain eager to return excess capital to our shareholders. We will continue to be price sensitive, opportunistic, and disciplined.
Craig Safian: Looking out over the medium term, our financial model and expectations are unchanged.
Craig Safian: With 12-16% research CV growth, we will deliver double-digit revenue growth.
Craig Safian: With gross margin expansion, sales costs growing about in line with CV growth, and G&A leverage, we will deliver modest EBITDA margin expansion 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 paying us up front.
Craig Safian: and we'll continue to deploy our capital on share purchases which 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?
Speaker Change: Thank you. As a reminder to ask a question please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question please press star 1 1 again. Please stand by while we compile the Q&A roster.
Speaker Change: Our first question comes from the line of Jeff Mueller with Robert W. Baird, your line is now open.
Jeff Mueller: Yeah, thank you, good morning. Can you just comment on GTS enterprise leader, I guess, end market conditions or pipeline, just trying to triangulate from what you're giving us on TechVendor getting better as well as the 9% enterprise function with GBS growing 11.6. It looks like it might have decelerated a little bit. So just any help on pipeline and anything beyond macro sales capacity, etc. Thanks.
Gene Hall: Hey Jeff, it's Gene. So in terms of pipeline, we have a robust pipeline for GTS Enterprise Leaders.
Speaker Change: You know, we have a very strong value proposition. We're on the issues that people really care about, and so, you know, our pipeline link's very strong.
Speaker Change: From time to time there's some reconfiguration that goes on in terms of our sales force and any results in a particular quarter are influenced by a particular skew of renewals that quarter and other things, but we're kind of on track to where we expected, and again, we have a great pipeline for TTSA users.
Craig Safian: Thank you.
Speaker Change: Okay, and then on expenses, is 2024 expected to be a good baseline to expand modestly from over time for adjustability of job margins, or could there be, I guess, more of a headwind as growth investment gets fully reinstated with you re-accelerating sales headcount?
Speaker Change: Hey, good morning, Jeff. So I think, you know, a couple thoughts there. So one, 24 is a relatively good baseline from an operating expense perspective rolling forward. The only thing I would highlight is
Craig Safian: The growth in both GTS and GBS headcount that we're building into 2024 has been back-end loaded. And so obviously, we'll pay for that from a full-year perspective next year. And then, as Gene mentioned in his prepared remarks,
Craig Safian: we intend to continue to grow our sales force to go after that huge untapped market opportunity into the future.
So I think, you know, the way we sort of think about the op-ed space is.
Craig Safian: You know, we're 24 is a relatively good baseline and safe for that.
Craig Safian: back-end loading of our GTS and GBS headcount. As we roll into 2025, we want to make sure that we continue to make those investments in GTS and GBS headcount and other key areas of the business to make sure that we drive strong retention rates, we drive productivity, and we drive sustained growth to the top line over time.
Speaker Change: All right, thank you.
Speaker Change: Thank you. Our next question comes from the line of Tony Kaplan with Morgan Stanley. Your line is now open.
Tony Kaplan: Thanks so much.
Tony Kaplan: You know, I guess at this point in the year, you're probably talking to a lot of clients on renewals. And so just wanted to hear if there's anything interesting that you're hearing from them about their 25 budgets and what your expectations are for the selling environment for next year.
Speaker Change: Thank you for watching!
Craig Safian: Hey Tony. Hey Tony. We have renewals all year long, but if I look at what's going on right now and our clients have 25 budgets.
Speaker Change: They're expecting a better year in 2025 than in 2024 right now, which, you know, if that proceeds largely good for all of us, but right now, that's what we hear is that they're expecting 2025 much better than 2024.
Speaker Change: Great and I was hoping you could give us an update on your Salesforce tenure. I know you've been working on a number of initiatives to retain and attract the best salespeople. Just wanted to
Speaker Change: hear how those initiatives are going, and your retention relative to history, and are you where you want to be with regard to sales headcount? I know it's a continuous process, but just anything around the tenure and salesforce attraction. Thanks.
Speaker Change: Yeah, we have a fantastic value proposition for, you know, prospective salespeople as well as other associates for Gartner.
Speaker Change: So we have a very, you know, if you think about when we hire people, we have on the order of 200 people applying for every job. And so we kind of get to pick from the best of the best in terms of who we hire. Also because we have a very strong associate value proposition. Our associate turnover is very low.
Speaker Change: So our turnover has been lower, but the reason it's not any lower than it is is because we're managing the bottom group to make sure that, you know, we're always upgrading our talent.
Speaker Change: And so, again, we have a great associate value proposition that allows us to really attract great people. Our turnover is very low. It's in the range that we would like it to be in, exactly. Any lower would be too low because we wouldn't be doing enough performance management.
Speaker Change: And in terms of tenure, what that's left us with is our tenure has been slowly rising over time. Now again, as Craig mentioned in his remarks, we accelerated hiring, and I mentioned as well, we've accelerated hiring in Venice, so that puts some newer people in the sales force, but overall our tenure has been rising.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from the line of Alex Lakritz with Goldman Sachs. Your line is now open.
Speaker Change: Hi, this is George Tong with Goldman. I guess with respect to tech vendor contract value, you mentioned that it's turned the corner and continues to accelerate. Can you talk about where the growth is currently now and when you would expect the CV growth with tech vendors to more meaningfully improve in performance given prevailing trends?
Speaker Change: So, George, you know, with TechBender, what's going on is that
Speaker Change: with our new business, and in fact Craig and I mentioned this, new business to TechVendors actually has rebounded pretty nicely.
Speaker Change: But we still have some tech vendors that are particularly small tech vendors.
Craig Safian: that are financially challenged. You know, they aren't doing that well and they can't get funding. They may have a contract that's still in force. They may actually renew, but they're renewing at lower rates. And so what's dragging our growth down in our tech business right now
Craig Safian: is the fact that we have particularly very small vendors that can't get funding but have contracts with us. This could be one, two, or even a three-year contract that's coming up for renewal.
Craig Safian: and those are renewing at lower rates than we've seen historically. Eventually that will walk through, but again I think a very positive sign is that our new business, our sales both to existing clients and new logos for tech vendors has rebounded nicely and is more in the range of historical levels.
Speaker Change: Got it, that's helpful. And then with the consulting business, you mentioned the contract optimization piece at tough comps and growth can sometimes be variable. Can you talk a little bit more about the trends that drive this business and what you're seeing with the trends there or overall trends improving and what would you expect going forward to be the key driver of performance with this part of the consulting business?
Speaker Change: So in that business, we have a very strong value proposition.
Speaker Change: and others.
Speaker Change: We help clients get better deals in terms of both pricing and terms on very large contracts.
Speaker Change: So if we have a client that's going to a very large CRM system or something like that, and they're spending, the contracts there could be $50 million, $100 million, $500 million in terms of that we're helping clients get better deals on. So it's a very strong value proposition. And our track record of helping clients is very strong there.
Speaker Change: So that's kind of the fundamentals of the business. Having said that, the business, you can imagine if you're doing $100 million deals.
Craig Safian: But it's more what drives that business is first our very strong value proposition.
Craig Safian: But then, you know, when we realize that value is very variable depending on we get paid when the clients actually sign the deal And so depending on the skew of how big the deals are and when they get signed is why are
Craig Safian: We had a great Q3, but it wasn't quite as strong as it was last year in that business.
Craig Safian: It's just a matter of
Craig Safian: you know, the kind of variability that I just went through. And George's order of magnitude last year reported growth rate in Q3 was 98 percent.
Craig Safian: So, it was definitely meets the definition in my mind of
Craig Safian: very tough compare, and I think, you know, over the short term, medium term, and long term, you know, we expect this business to, you know, grow in line with our consulting, you know, medium term objective as well, but from a quarter to quarter basis, as Gene outlined, and for all the reasons Gene outlined,
Craig Safian: It can be very variable quarter to quarter to quarter, but it's a great business because it delivers a very strong value proposition for our clients.
Speaker Change: Very helpful, thank you.
Speaker Change: Thank you. Our next question comes from the line of Andrew Nicholas with William Blair. Your line is now open.
Craig Safian: Hi, good morning. This is Tom Rashon for Engine Nicholas. Thanks for taking my question. I wanted to focus on new business growth in the quarter across GTF and GBS and was wondering if you could unpack the underlying drivers there.
Speaker Change: Yeah, so Tom, as we stated, the GBS new business growth was 10% year-over-year, so really good, solid, double-digit growth, and as we mentioned in our prepared remarks,
Speaker Change: pretty broad-based performance across all the GBS practices.
Speaker Change: On the GTS side, year-over-year new business growth was 8%.
Speaker Change: Again, strong, you know, high single-digit year-over-year growth.
Speaker Change: and again, sort of broad-based across.
Speaker Change: the bulk of GTS. I think, you know, when we think about the drivers, it sort of goes back to
Speaker Change: you know, the strength of the value proposition of our research offerings.
Speaker Change: and making sure that our sellers are generating enough opportunity to put in the pipeline, and then are leveraging all of our best practices to work those things through the pipeline and convert to sales. And that's sort of the strategy, and we continue to do that.
Speaker Change: to turn the crank on that. I wouldn't say there's any big, you know, external driver or demand driver or anything like that, other than, you know, the value proposition continues to remain incredibly strong in the end markets that we serve.
Speaker Change: Great. And then for my follow-up, I wanted to drill down on client spending more broadly in the quarter and just see how it trended relative to your expectations and then any call you can add thus far into the fourth quarter. Thank you.
Speaker Change: Thank you for watching!
Speaker Change: You know, again, I wouldn't say we saw anything different, you know, from a client spending or an end market perspective, you know, both Jean and I mentioned earlier, you know, the world continues to be a pretty complex and dynamic place. And, you know, we are working our way through that, you know, Jean highlighted some of the.
Speaker Change: The big topics that a lot of our clients are very focused on, but it's not exclusively those, you know, are the clients we serve have lots and lots and lots of challenges. And obviously partner is a.
Speaker Change: a great way to address those challenges and improve operational performance for the executives that we support. So I think there's no big change from a client spending perspective or any external trend like that. More of the same, we're just focused on making sure that we're delivering value and continuing to execute.
Speaker Change: Thank you very much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Josh Chan with UBS. Your line is now open.
Josh Chan: Hi, good morning, Gene Craig. Thanks for taking my questions.
Josh Chan: So last quarter you suggested that the Q1 CV would be the bottom but that the path of recovery may be uneven. I guess maybe taking a step back what did you see that caused you to make that uneven comment and as we stand here in Q3
Speaker Change: What do you think about the pace going into Q4 in terms of CV? Thank you.
Speaker Change: So, Josh, the...
Speaker Change: if you look at our contract value
Speaker Change: In any given quarter, there are certain set of renewals that come up. It varies from quarter to quarter, and if there's more renewals in one quarter than another, or one slips a quarter, that's kind of what's responsible for the quarter-to-quarter variation, which is why we've said the path to accelerated growth isn't going to be necessarily the exact straight line.
Speaker Change: And so you just see the normal variation in terms of what's due for new rules. A new business deal may get pushed in another quarter. Again, if you add these up with big deals, it actually is what is responsible for that. But overall, again, we have a very strong value proposition.
Speaker Change: And we see, you know, great demand from our clients on the issues you'd expect. So like cybersecurity, how do they use artificial intelligence, data and analytics.
Speaker Change: cost optimization is always popular and again it's a rocky macroeconomic situation right now and so cost optimization continues to be something
Speaker Change: very important to many of our clients.
Speaker Change: Yeah, the kind of strong value proposition is the same, it's just kind of the specifics of what happens each quarter causes a little variability. And Josh, just to put it in sort of quick quant terms, you know, with a roughly $5 billion base...
Speaker Change: Yeah, three and a half million dollar change in a quarter could be a 10 basis point or at least reported, you know, around the 10 basis point change. And so, again, recognizing that the world is a very complex and dynamic place.
Speaker Change: deals may push, may come in early, et cetera, et cetera. And all the things Gene just highlighted, that's why we guided that. It may not be a straight line from a trend perspective. It can be a little bit rocky.
Speaker Change: But again, we're talking about potentially as small a swing as three and a half million dollars could drive a 10 basis point bump one way or the other.
Speaker Change: That's right, that's definitely understandable. Thanks for that, Keller.
Speaker Change: And then maybe on GBSCV, I guess, you know, that's still a very healthy level, but it continues to step down a little bit sequentially. Could you talk about what you expect there or what's going on in terms of GBSCV? And I don't know if sales and marketing practices have anything to do with that, but some comment on the trajectory there would be helpful. Thank you.
Speaker Change: Let me just spin on GBS-CB. GBS-CB, you can think about at a very high level, there's two groups. There's kind of new products that we've introduced that we refer to as GXL, and then some of our legacy products that we inherited primarily from CEP.
Speaker Change: And we still have a lot of CV there. And if you look at the new products that we've introduced, the GXL products, they're actually growing above our 12% to 16%. They continue to grow above our 12% to 16% median growth range.
Speaker Change: And so the deceleration is really, in some of the legacy products, as the economy has gotten a little rougher, those that are renewing at somewhat lower rates than they've done historically. And that's kind of the biggest factor that's impacting.
Speaker Change: the GBS growth rate. So the GBS kind of new business is extremely healthy, doing extremely well. Of course, we're managing the legacy products, but they're less attractive than they were each year. They get a little less, less attractive. So that's kind of the biggest drag that we have on GBS.
Tony Kaplan: That's really helpful, Carla. Thank you, Gene, and thanks for your time.
Speaker Change: Thank you. Our next question comes from the line of Faisa Alway with Deutsche Bank. Your line is now open.
Faisa Alway: Yes. Hi. Thank you.
Faisa Alway: So, you mentioned a few times that you're helping clients implement, you know, AI in the right places. I know historically you've talked about
Faisa Alway: AI sort of not being a big driver of.
Faisa Alway: CV growth generally. I'm curious if, now that we're further along the AI journey, if you think that could be a more significant contributor to overall new business as we look ahead to 2025 and beyond.
Speaker Change: Great question. So we, you know, clients always expect us to be helping with the most important issues they have. And so at one point in time, a few years ago, it might have been cloud computing. And so if you look today, the issues that are really, that people are focused on are the ones I mentioned earlier, which is
Speaker Change: Our clients are wrestling with how do we use AI, they're wrestling with how do we maintain type cybersecurity, they're wrestling with how do we maintain and access all of our data, all the data and analytics that every business needs.
Speaker Change: Today, and as I said, cost optimization. And that's true across all the functions in the business. In addition there's kind of the geopolitical factors that are making organizational changes that we help people with.
Speaker Change: And so the way I think of our business is we're always on the issues that are most important to clients. Those issues change over time. So it doesn't mean, for example, there's a new issue that now AI is more important than cloud. It means that all of a sudden, we get this huge demand. We've been helping them all along with the most important issues. And so on the margin, it's important.
Speaker Change: It helps, of course, but it's a whole range of issues, and we always were on the most important issues at the time.
Speaker Change: Great, that's helpful. And then I was curious as we think about, you know, revenues into 2025. I know we're still waiting on, you know, 4QCD and that will be a big driver, but
Speaker Change: Curious if there's any, you know, any sort of early read on 2025. Maybe you can share some thoughts on, you know, research non-subscription revenue where we saw some declines. Do you expect that business to grow? And maybe just, you know, additional color on in response to Tony's question around acceleration in CB.
Speaker Change: next year.
Speaker Change: Hey, good morning Fiza. So I think, you know, we'll obviously provide a full view on 2025 guidance in February as is our normal practice.
Speaker Change: You're right in highlighting that, you know, the biggest driver of 2025 revenue is
Speaker Change: where CV and CV growth finishes.
Speaker Change: in 2024 and we've got, you know, we're one month through the fourth quarter and there's still, you know, a lot of deals that we are working. It's a very, very, very large quarter for us and so, you know, where the dust settles on that will be the biggest driver around 2025. And then
Speaker Change: around 2025 revenue I should say more specifically and then as we think about the business, you know, we continue to believe I have great conviction behind the fact that
Speaker Change: we will get both GTS and GBS back to 12 to 16% growth over the medium term, and we expect to, you know, accelerate to those points over time.
Speaker Change: 2025 is a part of that time for sure, but we'll provide full guidance around 2025 as we normally do in February.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from the line of Manav Padnaik with Barclays. Your line is now open.
Manav Padnaik: Thank you. Good morning. Craig, maybe just to follow up on that, can you just remind us, you know, how big the fourth quarter is in terms of, you know, the percentage of renewals and maybe sales that are typically weighted towards that quarter?
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Craig Safian: The way to think about it, you can kind of look back at historical numbers. We generate order of magnitude around half.
Speaker Change: of our NCBI, which is the numerator for overall TV growth, in the fourth quarter. And we generate order of magnitude about 40% of our annual new business in the fourth quarter.
Speaker Change: But one thing I would say is that we're not generally overloaded with renewals in the fourth quarter. Our teams do a really good job of when there's an opportunity to pull forward, we do that. And again, remember, we're also writing lots of multi-year deals when we sell them as well. But roughly 50% of NCVI happens in the fourth quarter, again, roughly, and about 40% of new business.
Speaker Change: Thank you, that's helpful. And Eugene, just on the hiring, the quota-bearing headcount strategy, you know, you talked about better budget expectations in talking to your customers, the pipeline is robust, I think you said, 200 applicants for job posting. You know, historically, I think you've always, you know, been in the camp of, you know, hiring aggressively even when things are tough, so you're ready for the rebound. So just curious why, you know, mid-single digits by year end is, you know, is the strategy today was a bigger number to be ready for the rebound.
Speaker Change: about the reason that our hiring plans are based on what we think is where the market is, which we think is in a good place, that's why we're starting accelerating our hiring.
Speaker Change: But also it's based on our operational capability to make sure we bring on really good people and we train and develop those people.
Speaker Change: and so it makes more sense for us to kind of accelerate that hiring as opposed to make a step change where I'm concerned about our operational ability to be as effective as we would be as compared to a kind of more streamlined acceleration.
Speaker Change: Okay, thank you.
Speaker Change: Thank you. Our next question comes from the line of Sarinda Zinn with Jeffries LLC. Your line is now open.
Sarinda Zinn: Thank you. Gene, just following up on the last question there, as you structurally think about the sales force and the size of the sales force,
Sarinda Zinn: Just any color on the potential impact on longer term metrics, maybe around how you're viewing productivity.
Sarinda Zinn: you know, the number of clients that maybe each salesperson can handle. Does AI change any of that or do you have any data points as you think about structurally, not this year or next year, but as we maybe think a little bit longer term about the Salesforce?
Speaker Change: Yeah, I mentioned in my comments that we have some prototypes that we're using that are very promising. I think it's too early to say what the long-term productivity impact will be.
Sarinda Zinn: I think it'll be positive but whether it's you know 2% or 5% or whatever I couldn't really say right now. I knew our associates like it and it's working really well. We'll see over time as we realize what the real benefits are.
Sarinda Zinn: It's not going to be like a 50%, I don't expect it's going to be like a 50% improvement in productivity or something like that. It will be modest improvements over a period of time.
Speaker Change: Thank you.
Speaker Change: Got it. And then in terms of the...
Speaker Change: on the GBS side.
Speaker Change: I think you mentioned there's some areas where you're seeing some strengths, such as finance, legal, HR, those kinds of areas, but then you also talked about maybe some...
Sarinda Zinn: a more tepid demand on the sales and marketing side. Just any additional color there, is that just kind of the malaise that we're seeing in terms of in-client demand and the hiring in that area at the clients themselves, or how should we think about?
Sarinda Zinn: the headwinds that we're seeing there.
Peter Trump: and Peter Trump.
Peter Trump: So in marketing sales, there's a couple things you want. First, there's an overweight for tech and so
Sarinda Zinn: Well, most of GBS split kind of with GDP. It turns out that in marketing sales, we're a little overweighted on the tech side and so they're being impacted by the tech piece in a way that the overall GBS isn't.
Sarinda Zinn: The second piece is, there's actually, relative to the amount of CD, there's a relatively high amount of legacy.
Sarinda Zinn: CV that I talked about earlier, where the new products are doing quite well, but the legacy CV isn't doing as well. There's a higher proportion of legacy CV in the marketing and sales piece.
Sarinda Zinn: And the last piece is that with marketing in particular, but to a certain extent, when economic times are tough, there's a lot more scrutiny on hiring in marketing and marketing spending than there is in some other areas of business.
Sarinda Zinn: So all those things are coming together and make it, you know, more challenging that circuit. It's still doing very well So I wouldn't take away that it's, you know, shrinking or not doing well We're actually happy with where it's going, but it does have those challenges that some of the other practices don't have as much of
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from the line of Jeff Silber with BMO Capital Markets. Your line is now open.
Jeff Silber: Thank you so much. I wonder if we can get some comments on the renewal process in terms of pricing, what types of price increases you've been able to get through, and what we should be expecting for next year as well.
Speaker Change: Good morning, Jeff. Thanks for that question. You know, from a renewal perspective and from a pricing perspective
Sarinda Zinn: You know, as you know, our number one strategy there is to make sure
Sarinda Zinn: that at a minimum we are offsetting our projected wage inflation with our price increases. And the majority of our price action actually happens in November 1. And again, we took up our pricing a little less than 4% this year to sort of match how we were thinking about wage inflation rolling into 2025. Generally speaking, we've ranged between 3% and 4% price increases for 15 plus years.
Sarinda Zinn: for a few exceptional years where there was higher wage inflation or lower, but most recently higher wage inflation when we had to be a little bit more aggressive on pricing, but things have settled down a bit now, and so rolling into 2025, we're a shade under 4% in terms of the structural pricing.
Speaker Change: and David Cohen. Thank you for joining us. Thank you.
Speaker Change: Okay, that's really helpful. If I could shift gears to consulting, you saw a decrease in gross margins on a year-over-year basis.
Speaker Change: Does that have anything to do with the mix shift away from the big contract optimization quarter you had last year or is there something else going on that we should be aware of? Yeah, the biggest thing there is what you highlighted, Jeff. Those deals are profitable for us.
Speaker Change: and we had a huge quarter in the year ago quarter as we talked about. We had a very strong quarter this quarter, but down and that's the biggest driver on the consulting contribution margin.
Speaker Change: Okay, appreciate the call. Thanks so much.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Thank you. Our next question comes from the line of Jason Hoff with Wells Fargo. Your line is now open.
Jason Hoff: Hey, good morning and thanks for taking my questions. I'm curious if you could talk about what you're expecting for non-subscription revenue this year. I think on the last call you talked about $305 million, and I think there were some comments.
Jason Hoff: on this call that it would be similar. So I was curious if that's still the expectation. And the reason I ask is because it does seem to imply, you know, pretty substantial decline in 4Q, but the compares do get a lot easier. So I'm just curious if I have that right, and then maybe how you're thinking about that non-subscription revenue going forward, thanks.
Speaker Change: Good morning, Jason. Thank you for that question. On the non-sub side, we are still expecting
Speaker Change: about $305 million for that revenue for 2024. So unchanged from our perspective last quarter. You're right, the math does imply a pretty significant year-over-year decrease, a little bit more than what we've been seeing. But again, we delivered on roughly our expectation in the third quarter, and so the full year was basically unchanged.
Speaker Change: Thank you for joining us. Thank you. Thank you. Thank you. Thank you.
Speaker Change: Got it. That's helpful. And then I'm not sure if you could talk about expectations, if that, if we'll continue to see declines into next year. And I have, I also want to have a follow-up question on
Speaker Change: Just the time it takes for your sales force to ramp up, so recognize you'll be growing quarter bearing head count by year end, make the high single digits.
Speaker Change: How long did it take those folks to get ramped up to a more normal level of productivity?
Speaker Change: Yeah, sure. I'll cover the 2025 expectations, which will be very short, and Gene can talk about the Salesforce wrap-up. So, again, as is our practice, we'll provide full guidance on everything in February. And so we're not in a position where we're talking about 2025 yet. There's still a lot to go in 2024, which obviously influences how we're going to set our plans and targets for 2025. And then Gene, on.
Gene Hall: In terms of the Salesforce Productivity Ramp, it takes three years for a salesperson to get from
Gene Hall: to full productivity. So the people we're hiring now will get to full productivity three years from now. So you know this is an investment not just for 2025.
Gene Hall: but for 2026 and 2027 as well. And we've seen that pretty consistently over time. We're very focused on moving that productivity earlier so that it doesn't take three years, or at least we get.
Gene Hall: more of that productivity early on. And so a bunch of things I talked about, like the apprenticeship program, the training, etc., the tools that we're equipping our sales force with are designed to get our new sales people up that ramp faster.
Gene Hall: It currently takes about three years to get to full productivity.
Speaker Change: Got it. Very helpful. Thank you.
Speaker Change: Thank you. And I'm currently showing no further questions at this time. I'd like to turn the call back over to Gene Hall for closing remarks.
Gene Hall: So here's what I'd like you to take away from today's call. Gartner delivers financial results ahead of expectations.
Speaker Change: We deliver 9% contract value and growth for enterprise function leaders.
Speaker Change: Tech Vendor Stevie Griffiths turned the corner and continues to accelerate.
Speaker Change: We have a vast addressable market opportunity with a strong and compelling client value proposition.
Speaker Change: Looking ahead, we're well-positioned to drive sustained, diligent revenue growth over the long term.
Speaker Change: We'll continue to create value for our shareholders by providing actual objective insights for our clients, prudently invested for future growth, journeying free cash flow, welling of excess of net income, and returning capital to our shareholders through our share of the purchase program.
Speaker Change: Thanks for joining us today and we look forward to updating you again next quarter.
Speaker Change: This concludes today's conference call. Thank you for your participation. You may now disconnect.