David Cohen, SVP of Investor Relations, welcomes everyone to Gartner's Third Quarter 2023 Earnings Call. The call will include a discussion of financial results and outlook for 2023. All references to EBITDA, contract values, and share counts are clarified. Forward-looking statements may be made, and the risks and uncertainties listed in previous filings with the SEC should be reviewed. The call is then turned over to Gartner's CEO, Gene Hall, who notes a strong performance in Q3.

In the third quarter, Gartner experienced strong growth in contract value, revenue, EBITDA, and adjusted EPS. The external environment remains volatile and uncertain, but Gartner continues to be a trusted source of objective insight for leaders. Research is their largest and most profitable segment, with a vast market opportunity estimated at $200 billion. In the third quarter, they helped clients with a variety of topics and saw growth in research revenue, subscription revenue, and contract value for enterprise function leaders. Gartner serves executives and their teams through different sales channels and saw strong growth in GTS contract value in the quarter.

The GTS sales to technology vendors were affected by market dynamics and tough comparisons, but are expected to return to normal growth rates in the next 12-18 months. GBS contract value grew 14% and Gartner conferences have seen record levels of attendance and bookings. The company's consulting business also saw strong growth. As a result, the 2023 guidance for revenue, EBITDA, and free cash flow has been increased. Overall, Gartner had a strong quarter of growth and is well positioned for the rest of the year and the start of 2024.

The company delivers value to enterprise leaders and their teams in any environment and is continuously adapting to the changing world. They expect to see long-term, sustained growth and generate significant free cash flow. The Chief Financial Officer reported strong results in the third quarter and increased their 2023 guidance. Revenue, EBITDA, adjusted EPS, and free cash flow were all better-than-expected, with outstanding performance in consulting and disciplined cost management. The company finished the quarter with 20,253 associates and remains well-positioned from a talent perspective.

In the third quarter, research revenue grew by 6% year-over-year, with subscription revenue showing 8% growth on an organic FX neutral basis. The third quarter also saw an 8% increase in contract value, with double-digit growth from enterprise function leaders in GTS and GBS. CV growth was broad-based across practices, industry sectors, company sizes, and geographic regions. Global Technology sales contract value was $3.6 billion, up 7% from the previous year, with wallet retention at 102%. These numbers were slightly lower compared to the previous year's third quarter, which had exceptional performance.

During the third quarter, IT enterprise function leaders showed strong retention rates and GTS new business was up 7% compared to last year. GTS quota bearing headcount also increased by 5% due to dynamic territory planning and catch up hiring. GBS sales contract value was $1 billion, with all practices except sales showing double-digit or high single-digit growth. Conferences revenue was higher than expected due to the return to in-person events. Contribution margin for the quarter was consistent with typical seasonality. Nine destination conferences were held in person. Consulting revenues increased by 24% year-over-year.

In the third quarter, the consulting contribution margin was 37%, and labor-based revenues increased by 10% to $100 million. The backlog at the end of June was $180 million, a 15% increase from the previous year. The contract optimization business brought in $33 million in revenue, and consolidated cost of services and SG&A both increased by 8%. EBITDA was $333 million, similar to last year, and adjusted EPS was $2.56, a 6% increase. The company had 80 million shares outstanding, a decrease of 1 million from the previous year. Operating cash flow for the quarter was $331 million, a 5% increase from last year.

In the third quarter, the company's CapEx was down 11% due to catch up spending in technology investments. Free cash flow was $302 million, and the company had $1.2 billion in cash and $2.5 billion in debt. The company's balance sheet is strong with low levels of leverage and fixed interest rates. They have repurchased $209 million in stock and have $1 billion available for future repurchases. The company is raising its full-year guidance and continues to innovate and provide value for clients. Subscription research growth will reflect recent trends in contract value.

The company expects stronger growth from their subscription business compared to their non-subscription business in the fourth quarter. They also anticipate their conference and consulting revenues to perform well. The company has updated their 2023 guidance, with an expected research revenue of at least $4.875 billion, conference revenue of at least $500 million, and consulting revenue of at least $550 million. They also expect consolidated revenue of $5.89 billion, EBITDA of at least $1.440 billion, adjusted EPS of at least $10.90 per share, and free cash flow of at least $1.025 billion in 2023.

The company has seen an increase in free cash flow due to a conversion from GAAP net income. Despite global uncertainty, they are performing well and have exceeded expectations for revenue and EBITDA. They have also increased their guidance and have repurchased $550 million in stock this year. Their financial model and expectations for the medium-term remain unchanged, with double-digit revenue growth and modest EBITDA margin expansion. They plan to use excess capital for share repurchases and strategic tuck-in M&A. The call is then opened for questions.

Gene Hall, CEO of GTS, discusses the company's plans for expenses management and their market opportunities for the next year. He mentions that they plan to grow their salesforce in line with the market opportunity, which they have already done over the last couple of years. They believe they can win back sales from tech vendors with their existing salesforce, as they expect the tech vendor market to return to normal growth. Additionally, Craig Safian, CFO of GTS, mentions that they have increased the number of territories serving the tech vendor market over the last two years.

In 2022, many new salespeople joined the company and are now gaining experience. As a result, the company expects to have a more experienced salesforce in 2024, which will help them achieve their growth targets. Currently, the average tenure of the salesforce is lower than normal due to the high number of new hires in 2022, but it is expected to improve as the new hires gain more experience.

The speaker asks about client retention rates and if the company is implementing any initiatives to address the issue. The company responds that retention rates are still within historical levels, but there is some drag from small tech vendors. They also mention that they are always working to improve retention rates through various programs and training. The next question is about expenses and the company's margin guidance for the year, which is ahead of their initial framework. The speaker asks if there are any potential cost increases for next year.

The speaker, Craig Safian, responds to a question about the margin leverage in a higher revenue growth rate environment. He mentions that operating expenses are back to a normalized level and that there will be a significant increase in expenses in the fourth quarter due to conferences and client activity. He also notes that there is a lag between when contract value starts accelerating and when revenue flows through, which can impact margins. Another speaker, Gene Hall, adds that clients value their products greatly and they expect pricing to remain the same next year as it is this year.

The operator confirms that the company has sufficient sales capacity and there is no indication of weakening in the market. The company has expanded their salesforce by 18% in the past two years and many of these employees are now reaching their tenure, making them well-equipped for the future. The analyst is surprised by the strong performance of research subscription revenue, which has accelerated despite deceleration in other areas. The company attributes this to some FX impact.

The company's research guide was increased in Q3 due to earlier-than-expected growth from NCBI. This also led to an increase in the full-year guide for the research segment. The company is constantly recalibrating their headcount and territories based on external factors and business performance. They plan to maintain a growth rate of four to five points in headcount compared to contract value growth.

The paragraph discusses the factors that determine the growth and performance of GBS CV, including wage inflation and the overall market opportunity. The speaker also notes that despite macro uncertainty and other challenges, the business has remained resilient due to their strong products and improved selling strategies.

During a conference call, an operator asks a question about NCVI and the strength of the market. The CEO responds by saying that the market environment has been consistent and that clients value their research regardless of the market's state. They also discuss the consulting side and the lumpy nature of the contract optimization business. They cannot predict sustained strength in this area for the next few quarters.

The speaker discusses the difficulty of drawing conclusions about a business from quarter to quarter and emphasizes the importance of looking at it over a longer period of time. They also mention the value of saving money for clients in any economic environment. Another speaker asks about expenses and the first speaker notes that they have been normal, but may increase in the next year due to growth and headcount. The second speaker then asks about the sales environment in the fourth quarter.

The company's CEO and CFO discussed the sales environment, headcount numbers, and new business numbers. They mentioned that the selling environment has not changed and they expect the same outlook for the rest of the year. The headcount for GBS and GTS has increased, and they are constantly recalibrating it to align with their goals. They also mentioned that the new business numbers were a combination of easier comps and the maturation of the sales force. In terms of tech vendor trends, they reported that research non-subscription revenues were similar to the previous quarter, and tech vendor CV growth was in the low single-digits. They did not update their 2023 guide and did not mention any assumptions about the performance of tech vendors in the future.

Gene Hall and Craig Safian discuss the tech vendor environment in Q3 and the company's guidance. They believe that there has been no change in the market and that stabilization is baked into their predictions. They also mention that the contract value in Q4 will have minimal impact on the full-year research revenue. Craig Safian reiterates their view on the company's margin profile, stating that the base or foundational margins are in the low 20s and that there is operating leverage in the business. They will provide further guidance in February.

The company has not seen any pushback from clients regarding price increases, which went into effect on November 1st. They will provide more details on the impact of these increases in February when they release their initial guidance for 2024. They also mention that there may be a lag in revenue catching up with contract value, so this should be taken into consideration when thinking about margins and the overall P&L for next year.

The difference between a 4% and 5% increase in price is not significant for the company, as they are focused on providing value to their clients. The conference business has been strong due to the company's ability to address the challenges faced by their clients. They have also been able to add more conferences, allowing more people to attend. The focus remains on delivering value to clients.

Gene Hall, CEO of Gartner, highlights the company's strong performance in Q3 and its ability to provide value to enterprise leaders in any environment. He also mentions the company's agility and its potential for sustained double-digit growth in the future. Gartner plans to return excess capital to shareholders and looks forward to updating them again next quarter.

This summary was generated with AI and may contain some inaccuracies.