Gartner, Inc. (NYSE:IT) Q3 2023 Earnings Call Transcript

Gartner, Inc. (NYSE:IT) Q3 2023 Earnings Call Transcript November 3, 2023

David Cohen : Good morning, everyone. Welcome to Gartner’s Third Quarter 2023 Earnings Call. I’m David Cohen, SVP of Investor Relations. [Operator Instructions]. After comments by Gene Hall, Gartner’s Chief Executive Officer, and Craig Safian, Gartner’s Chief Financial Officer, there will 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’s outlook for 2023 as 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.

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 are for fully diluted weighted average share counts unless stated otherwise. Reconciliations for all non-GAAP numbers we use are available in the Investor Relations section of the gartner.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 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.

I encourage all of you to review the risk factors listed in these documents. Now I will turn the call over to Gartner’s Chief Executive Officer, Gene Hall.

Gene Hall: Good morning, and thanks for joining us today. Gartner drove another strong performance in Q3. We delivered high signal digit growth in contract value, revenue, EBITDA, and adjusted EPS came in above expectations. Free cash flow in the quarter was excellent. The 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. There’s heightened geopolitical volatility and more. Leaders know they need help and they know Gartner is the best source for that help. Gartner delivers actionable objective insight that smarter decisions and stronger performance on our client’s mission critical priorities.

Whether they’re thriving, struggling, or anywhere in between. Our insights, tools and advice often mean the difference between success and failure for leaders and the enterprises they serve. We continue to be agile and adapt to the changing environment. Research continues to be our largest and most profitable segment. We guide 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 cybersecurity, data 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, 20 contract value growth was 8%. Contract value for enterprise function leaders continue to grow at double digit rates. We serve executives and their teams through distinct sales channels, global technology sales, or GTS source leaders and their teams within IT. GTS also source leaders at technology vendors, including CEOs, Chief Marketing Officers, and Senior Product Leaders. GTS contract valued grew 7%. GTS sales to enterprise function leaders performed well in the quarter. GTS sales to 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 months to 18 months.

Global business sales or GBS serve leaders in their teams beyond IT. This includes HR, supply chain, finance, marketing, sales, legal and more. GBS contract value grew 14%. Through a relentless execution of proven practices, we’re able to deliver unparalleled value to our clients. Our business remains resilient despite a persistent, complicated external environment and tough compares for the technology vendor market. Gartner 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.

IT 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, and feedback from the conference continues to be excellent. 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 IT 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 to have strong close to the year and get off to a fast start in 2024.

In closing, Gartner achieved another strong quarter of growth. We deliver unparalleled value to enterprise leaders and their teams across every major function, whether they’re 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 in 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 would fit 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, we will return significant levels of excess capital to our shareholders.

This reduces shares outstanding and increases returns overtime. With that, I will hand the call over to our Chief Financial Officer, Craig Safian.

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 continue to flow through the P&L as expected. EBITDA was $333 million ahead of our guidance and about inline with last year. Adjusted EPS was $2.56, up 6% from Q3 of last year.

And free cash flow was $302 million. We have finished the quarter with 20,253 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 tenure 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 returned to the new expected levels of travel. Contract value or CV was $4.7 billion at the end of the third quarter, up 8% versus the prior year.

The third quarter last year was a very strong research quarter with outstanding performance across most key metrics. CV growth is FX neutral and excludes the first quarter 2023 divestiture. CV from enterprise function leaders across GTS and GBS, grew at double-digit rates. New business with enterprise function leaders increased double-digits as well. CV from tech vendors grew low single-digits, compared to mid-teens growth in the third quarter of 2022. Quarterly net contract value increase or NCVI was $101 million. As we have 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 size 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 a near record high for this metric. IT Enterprise function leaders while retention remained above historical GTS levels during the third quarter. GTS new business was up 7% versus last year. New business with IT enterprise function leaders increased mid-teens compared to the prior year.

GTS quota bearing headcount was up 5% year-over-year. With the 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 GTS metrics can be found in the appendix of our earning supplement. Global business sales contract value was $1 billion at the end of the third quarter up 14% year-over-year. All of our GBS practices grew a 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, while 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. GBS quota bearing headcount was up 10% year-over-year. This excludes headcount associated with the Q1 divestiture. As with GTS, our regular full set of GBS metrics can be found in the appendix of our 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%. Consulting 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 straight. 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. Consolidated 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 counts to support our future growth.

SG&A increased 8% year-over-year in the third quarters reported and 7% on an FX neutral basis. SG&A increased in the quarter as a result of headcount 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 in 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. The Q3 adjusted tax rate, which we used for the calculation of adjusted debt income was 22% for the quarter.

The tax rate for the item was used to adjust that 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 close to 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 to 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 2022, which normalized this year. Free cash flow for the quarter was $302 million. Free cash flow is a percent of revenue on a rolling four quarter basis was 18% of revenue and 67% of EBITDA.

Adjusted for the after-tax impact of the Q1 divestiture free cash flow conversion from gap net income was 122%. 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 of 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 provide ample liquidity to deliver on our capital allocation strategy, 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 repurchase $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 than 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, the labor business continues to perform well. We have very tough contract optimization comparisons 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 guides reflects better than planned NCVI performance in Q3 with continued stability in the non-subscription part of the business.

There is modest incremental upside relative to the expectations we built into the guidance last quarter. We expect conference 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 a good start to the fourth quarter. We expect consulting revenue of at least $550 million, which is growth of about 8% FX neutral, reflecting the very strong performance of Q3 and timing in the contract optimization business. The result is an outlook for consolidated revenue of $5.89 billion, which is FX neutral growth of 8%. We now expect full-year EBITDA of at least $1.440 billion, up $80 million from our prior guidance. 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 $1.025 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 vender 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 have repurchased about $550 million in 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 inline with CV growth and G&A leverage, we will expand to 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 up front.

And we will 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 will turn the call back over to the operator, and we will be happy to take your questions. Operator?

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Q&A Session

Operator: [Operator Instructions]. Our first question is from Jeff Mueller with Baird. Please proceed. Jeff, your line is open. We will certainly continue with the next question. Next question is from Heather Balsky with Bank of America. Please proceed.

Heather Balsky: Hi. Thank you for taking my question. I was hoping to ask a question about expenses management, as you look into next year, assuming that tech vendor spending to potentially start to lap with either comparison, there is an opportunity to win back those sales. Do you think you need to invest behind that, or do you think you have an opportunity with your existing salesforce? And then also just your thoughts around expense management as you head into 2024, more broadly?

Gene Hall: It is Gene. So, as we look at our market opportunities, our market opportunity is very fast. Overtime, we intend to grow our salesforce inline with capturing that market opportunity. Over the last couple of years, we have grown our sales force dramatically. And we feel like we’re in a really good position as we go into the end of ‘23 and the ‘24 for the capacity we have. Again, over time we’ll continue to grow that capacity.

Heather Balsky: And so just to clarify then, when you think about the tech vendor opportunity, do you think you can win back those sales with the sales force you have that’s the fair assumption.

Gene Hall: Yes. Over time, Heather, we think that the tech vendor market will return to the kind of growth we’ve seen historically. Again, as 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 overhired and have been having some retrenchment, which has in impacted our business. We think — again, that the tech business is going to grow over time. Their revenues will grow and our business will get back to normal growth over time as well.

Craig Safian: And Heather, it’s Craig. The other thing I would add is as our tech business, as the contract value growth accelerated over the last two years, we also increased the number of territories we had serving that market. And so, we did a lot of hiring across all of both GTS and GBS as Gene mentioned, over the last couple years, tech vendor market included. And so, a lot of new people joined the company in 2022 in selling positions, and they are coming up the tenure curve. And so, as we think about our territory coverage, if you will, heading into 2024 and beyond, as well as the maturation of our sales force heading into 2024, we feel like we’re in a really good position to return to the kind of target growth, that we want to over the medium term.

Operator: Our next question comes from the line of Toni Kaplan.

Toni Kaplan: Thank you. I was hoping you could give us some metrics around the current average tenure of your salespeople, compared to sort of any reference point, maybe it’s year-over-year or pre-pandemic or versus a historical average. Just want to get a sense of where we are now versus some historical point. Thanks.

Craig Safian: Good morning, Toni. Thanks for the question. So, the way to think about it, is if you look at all of the net and gross ads we did in 2022, effectively when we entered this year, we had the least tenured or least experienced salesforce that we’ve ever had. Sort of order of magnitude. We’re typically, and Gene and I have both talked about this in the past like in normal times, call it 35% to 40% of our Salesforce is on the new-ish side. We were in the 50% plus range being brand new to Gartner. As we’ve made our way through this year. Obviously, all those people we hired in 2022 have gained experience and tenure. We did — we were very backend-loaded last year in terms of the hiring. And so those people we hired in third quarter and fourth quarter of last year are now approaching or have just crossed over their one-year anniversary.

And again, that’s sort of getting back to Heather’s question. Gene, around, do we have enough capacity, et cetera, we have enough capacity and the tenuring will look more quote unquote normal as we roll into 2024, but significantly better than what we experienced or more tenured than we experienced over the course of 2023.

Toni Kaplan: Yes. That makes sense. I wanted to ask about client retention. Sort of a step down in both GTS and GPS, the levels I think are still pretty within historical range, but like, I guess, is there anything you’re doing to put in place initiatives to address retention? Or do you feel like you’re at sort of more normal levels and I guess what’s driving that? And any concern to call out?

Craig Safian: No. So, on the GTS side, while we’re still at or above historical levels, it’s really tech vendor drag and it’s really small tech vendor drag there. If you actually broke apart our enterprise function leader in GTS, those client retention rates are at or above your historical levels for GTS. And so, it’s really just the tech vendor market impacting that client retention rate. On the GBS side, it’s down a little, but it’s still 400 basis points or 500 basis points higher than GTS, and so we feel really good about that. That said, we’re never done on retention. And so, I’ll let Gene talk a little bit about that.

Gene Hall : As Craig said, even with the rates we have now, we are never satisfied. And so, we have a whole set of programs designed to improve those retention rates over time. And it includes things like how we use our conferences, the as the tools, the support tools we give to our service delivery associates as well as the training we have when people first come on board, and then the current trains throughout their careers, et cetera. So, we are never satisfied with the matter no matter how good it is, we always want to be better.

Operator: Our next question comes from the line of Seth Weber with Wells Fargo. Please proceed.

Seth Weber : 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 initial framework that you guys were talking about earlier in the year or last year. And I’m just trying to think through, are there any big cost buckets that could come back next year? I think, Craig, you mentioned travel is kind of back T&E. So, I’m just trying to think through the margin leverage going forward in higher revenue, in a revenue growth rate environment. If there’s anything we should be considering.

Craig Safian: Good morning, Seth. great question. So, I think, there’s a couple things, going on within your question. So, from an operating expense perspective, we are I guess relatively back to sort of normalized level of expenses, there are obviously always going to be puts and takes, but a relatively normalized level of expenses. I would note, and this is obviously embedded in the guidance, that there’s 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 other client activity marketing related to conferences and Q1 activity, et cetera. So, it reflects sort of a normal Q3 to Q4 step up, but just make sure you kind of bake that 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 when the revenue flows through. And so, we are 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.

Seth Weber : Okay. That’s helpful. Thanks. And then it just falling on that, is there any reason to think that pricing would be softer next year than it was in 2023?

Gene Hall: It’s Gene. It says what we are seeing in the marketplace is, clients value our products greatly. We expect pricing, the pricing environment will be the same next year as it is this year.

Seth Weber : Perfect. Okay. Thank you, guys.

Operator: [Operator Instructions]. Comes from the line of Jeff — from Wells Fargo. Please proceed. Jeff?

Unidentified Analyst: Hello?

Operator: Your line is open. Please proceed.

Unidentified Analyst: Can you hear me now?

Operator: Yes.

Unidentified Analyst: 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 am understanding the management of sales headcount appropriately. So, is this that you have already seen a slowing environment and you have already rebuilt your sales capacity? So, with those dynamics, you are well-calibrated? Or should we be reading into it that there’s any sort of, like, incremental weakening you are seeing because we are not seeing that in any of your externally reported metrics?

Gene Hall: Yeah, Jeff. So, you should not read into it in any way that we are seeing any kind of weakening. It is what we talked about earlier, which is that we expanded our salesforce a lot over the last two years. For general GTS, it’s up about 18% since the end of 2021, that’s a lot of capacity. So, we have added a lot of capacity. On top of that, as Craig mentioned, a lot of those people are now coming into tenure. And so, as we look, especially for ’24, we feel like we are really well-situated in terms of actual capacity between the larger number of additions we have made in the last two years and the fact that those people we come up with tenure curve and kind of being at the really, really good spot at the tenure curve during ’24. And by the way, the ’25 as well.

Unidentified Analyst: Okay. And then, Craig, you just alluded to this, but, I guess, I was surprised to see subscription revenue performance as well as it did in research. And I am not sure if there is some FX impact or divestiture impact or something. But, to see it on Slide 7 actually accelerate, while CV’s still been decelerating, if you can just address why research subscription revenue would be accelerating, with those dynamics.

Craig Safian: Jeff, I think there is a little bit of FX in there. Obviously, I do think, over the course of Q3, and this is part of the reason why we are able to increase the research guide a little bit too is, NCBI or growth came in earlier in the quarter than we had originally anticipated. And so again, the combination of, it if books in July, we get to take two months of it. If it books at the end of September, it’s all in Q4. And so, we got a little bit of that benefit flowing through into Q3. And then, obviously, we are able to raise the full-year guide for the research segment as well because of the beating our expectations for the third quarter in NCBI.

Operator: Comes from the line of Andrew Nicholas with William Blair. Please proceed.

Andrew Nicholas: Hi, good morning. Thanks for taking my question. I wanted to — again, ask on the headcount question and maybe ask it a different way, which is given where you feel you are with headcount and territory coverage and the ramp for what was previously a lower tenured Salesforce, is it fair for us to expect next year for a bigger gap between CV growth and headcount growth than maybe the 4% to 5% that you’ve talked about historically as all those dynamics kind of come together?

Craig Safian: Hey, good morning, Andrew. It’s Greg. I think the way we’re thinking about it again, we’ll provide full guidance in February, but 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 headcount, sort of quarter-to-quarter, there can obviously be a little bit of noise in those numbers. And so, as Gene and I both included too, there’s really nothing to see there. And as we roll into next year and beyond the algorithm that we continue to think about is we’re going to grow our territories and our headcount in that kind of within four points – four points to five points of contract value growth. And the four points to five points is really dependent on what we’re seeing from a wage inflation perspective.

And so, wage of inflation is abating a little bit, will be closer to CV minus four. 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-to-quarter it may shift a little bit just given what’s going on. But over the long term, given the huge addressable market opportunity, that’s the algorithm we’re going to go after.

Andrew Nicholas: Makes sense. Thank you. And then for my follow up, I just wanted to ask curious how the last year or so, given all the macro uncertainty, geopolitical dynamics, tech vendor weakness, all these different kinds of noisy items that performance and that growth has remained very strong and within your medium-term target. So, I’m just wondering if, having been through that the past couple years, if you have any kind of updated views on kind of the cyclicality of that business specifically? Because it does seem to have been more resilient than I would’ve expected, particularly off difficult comps last year. Thank you.

Craig Safian : Hey, Andrew, sorry, you cut out at the very beginning. Are you talking about consulting?

Andrew Nicholas: Sorry. No, I was asking about GBS CV growth. Just kind of the resilience of the CV growth there.

Craig Safian : Yes, I mean, I think it is just consistent with the story, and the facts 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. We’ve gotten better at the insights we create. We’ve gotten better with our selling motions. We’ve gotten better in everything we do. But the net of it is — is that business leaders have problems and we have great products to help them solve those problems. And again, we believe that that won’t change moving forward.

Operator: Does that answer your question, Andrew?

Andrew Nicholas: Yes, thank you.

Operator: Our next question, please. And it’s from the line of Josh Chan with UBS. Please proceed.

Joshua Chan : You mentioned that NCVI was better this quarter than you expected. So, is there any themes in terms of types of clients to call out and do you think that the strength is more a function of the market turning or is it your Salesforce gaining traction there?

Gene Hall: Yeah, I guess, Josh, I’d say that we saw a pretty consistent market environment between Q2 and Q3. If we get — a minute ago, which is that our experts look at what are the most important issues facing executives in each of their functional areas? And we have we give them advice on how to address those things that’s done in all kinds of environments, whether it’s a really robust environment or not as robust for that individual enterprise. And so, I think we see as just that clients give a lot of value out of our research and it’s been true over time.

Joshua Chan : Thank you for that Gene, and 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 string is more a function of where we are in the cycle and clients looking to, I guess, optimize their spend? Or is that more of a kind of a one-time type of event for you? Do you expect kind of sustained strength in the contract optimization business for the next couple of quarters, I guess?

Gene Hall: Yeah, 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 is something different in the market, whatever. It’s really just a matter of when deals happen to come in and what clients have to be looking for that point in time. And so, the only way you really look at that business is kind of like over a year-long period or something from quarter to quarter. You can’t really draw any conclusions. I do think, Josh, one other thing I’d add is that clients like saving money in any operating environment. So, again, I think, it’s obviously a really strong value proposition even in a not choppy economic environment.

Operator: And it’s from the line of Manav Patnaik with Barclays. Please proceed.

Manav Patnaik : Thank you. Good morning. Craig, just to ask the expense question a little differently. I mean, obviously, the seasonal tick-up going into 4Q, but if you look at the full year thus far, like has that expense base been more normal or are there any other puts and takes we need to consider as we go into next year?

Craig Safian : Yes. Good morning, Manav. I think it is — I would characterize it as roughly normal. I do think that as we pivot into next year we are likely to get back to a little bit faster headcount and territory growth. And so, we need to model that in. But that’s probably the biggest lever on that operating expense base. Other than the timing of conferences and things like that. It is just — as Jean mentioned earlier, we grew a lot, particularly in 2022. And so, this year we have been, we are sort of operationalizing maturing, and digesting a lot of that growth. And so there has not been a huge amount of net headcount growth baked into the 2023 numbers. There is some, but not, as much as we have had historically. I think we get back to a more normal level of that next year. So that would have to be modeled in our normal wage inflation and merit increase, and things like that. But the other stuff is generally normal course.

Manav Patnaik : Got it. Okay. And then my second question just around the new sales environment. Obviously, fourth quarter is the big quarter. Any color on that plus, just I think the new sales numbers you gave for GTS and GBS were positive mid to high single-digits. Like, how much of that was comps versus and just talk about the momentum there, I guess.

Gene Hall: So, in terms of the selling environment, again, I think it is unchanged. We see the same selling grind sort of Q2, Q3, and we are expecting the same environment in Q4 in terms of comp outlook. Craig?

Craig Safian: Correct. And, I mean, I think you are referring to the headcount numbers. And so, I mean, GBS headcount was up 10% year-over-year. GTS up 4.5%. Again, we are constantly, as we have talked about, you are probably tired of hearing me say recalibrating those numbers around a variety of different scenarios for the end of the year. Obviously, there is only another two months left in the year. But we expect to end the year, sort of aligned from an account perspective and CV perspective. So that we roll into next year with the right size salesforce. And then we will continue to grow that salesforce moving forward to go after that huge market opportunity.

Manav Patnaik : Apologies, Craig. I was referring to the new business number, but I appreciate the headcount color as well.

Craig Safian: Okay. Great. Sorry about that. So, on the new business side, I think it is a combination of a little bit easier comps, and the maturation of the sales force, coming up tenure curve.

Manav Patnaik : Okay. Thank you so much.

Operator: One moment for the next question, please. And it comes from the line of George Tong with Goldman Sachs. Please proceed.

George Tong: Hi. Thanks. Good morning. Going back to tech vendor trends, you mentioned that, research non-subscription revenues were similar in terms of performance to 2Q, and tech vendor CV growth was in the low single-digits. Can you elaborate a little bit more on what you are seeing with tech vendors? And if you are updated 2023 guide, assumes stabilization or improvement in performance.

Gene Hall: So, I would say for Q3, we didn’t see any change in the tech vendor environment, just the same as we have seen in Q2. In terms of the guidance, I will let Craig talk.

Craig Safian: I mean, I think it’s stabilization, George. So, we haven’t yet seen signs 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 would 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 sell in Q4 really has almost a de minimis impact on the full-year research revenue numbers from a subscription revenue perspective. And so, stabilization baked in there and similarly on the non-sub line 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.

George Tong: Got it. That’s helpful. And then perhaps to ask the margin question a little bit differently, you’ve 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 if the factors that led to your improved full-year outlook for EBITDA margins can also lead to an improved view on structural margins?

Craig Safian: Sure. Happy to. So, I think, the view is really not changed from prior quarters and prior discussions. So, what I’d say is, our view on our margin profile today is that the base or foundational margins are in the low 20s. 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 over time. We’ll give guidance in February as we always do. We talked about on some of the other OpEx questions, this year’s operating expense as 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 and 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 revenue and the CV relationship, both when CV 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, just be mindful of that as you think about 2024 as well. We’ll provide all those details in February when we come out with our initial guidance for 2024.

George Tong: Got it. Thank you.

Operator: One moment for our next question, please. And it comes from the line of Jeffrey Silber with BMO Capital Markets.

Jeffrey Silber: 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 when you start instituting price increases, and I’m just wondering how that been? If you’ve seen any pushback in terms of client may be pushing back on what they’re buying. Thanks.

Gene Hall : Alright, Jeff, I’ll get started. Which is — as I mentioned earlier, we haven’t seen any, it is the time we increased prices. It rolls through obviously as clients renew. And I’d say it’s a normal environment. We haven’t seen any pushback.

Craig Safian : Yes, I mean, Jeff, so the major price increase for us goes in went into place two days ago on November 1st. 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 $250,000 or $260,000 a year with us. So, the difference between 4% and 5% is 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 $250,000 or $260,000. So, we’re generally able to sell the price increase, again, sort of as a normal course of business for us.

Jeffrey Silber: Okay. That’s helpful, appreciate. 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, and maybe as we go into next year, you might see some softness in that business?

Gene Hall: So, Jeff, I think the key thing driving the business is that our clients, our enterprise functional leaders have a lot of challenges. And we’ve done a good job at laying out what those challenges are and how they should address them. As we market our conferences to potential attendees, we focus on here are the issues we face, and here’s how we’re going to help you with that. You can come to the conference. And so, I think, the biggest single thing that’s driving our conference performance is that we’re on the issues people care. Our attendees have a lot of issues and we are on the, our experts have a lot of solutions to those issues that they get a lot of value from. I think that’s kind of the biggest thing. In addition to that, obviously, we’ve been adding conferences back and so we’re getting, I think some people that couldn’t go to conferences in the past now can go.

And so, you sort of see that in terms of comparison points, but it’s really how you do more about the value. I think most of all.

Jeffrey Silber: Okay. Thanks, so much.

Operator: Thank you. And this concludes the Q&A session. I would like to turn the call over to Eugene Hall for his closing comments.

Gene Hall: Well, here’s what I’d like you to take away for today’s call. Gartner drove another strong performance in Q3. We deliver unparalleled value to enterprise leaders in their teams across every major function with a thriving, struggling, or anywhere in between. We’re exceptionally 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 of 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, we’ll return significant levels of excess capital, to our shareholders. This reduce the shares outstanding and increases for returns over time. Thanks for joining us today, and we look forward to updating you again next quarter.

Operator: And thank you all for participating and you may now disconnect.