Gartner, Inc.
Q4 2020 Earnings Call Transcript

Published: 9 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to Gartner's Fourth Quarter 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Cohen, Gartner's GVP of Investor Relations. Thank you. Please go ahead, sir.

[David Cohen:]

Good morning, everyone. We appreciate your joining us today for Gartner's fourth quarter 2020 earnings call, and hope you are well. With me on the call today are Gene Hall, Chief Executive Officer; and Craig Safian, Chief Financial Officer. This call will include a discussion of fourth quarter 2020 financial results and Gartner's outlook for 2021 as disclosed in today's earnings release and earnings supplement both posted to our website, investor.gartner.com. Following comments by Gene and Craig, we will open up the call for your questions. We ask that you limit your questions to one and a follow-up. On the call, unless stated otherwise, all references to EBITDA are for adjusted EBITDA, with the adjustments as described in our earnings release. All growth rates in Gene's comments are FX neutral unless stated otherwise. Reconciliations for all non-GAAP numbers we use are available in the Investor Relations section of the gartner.com website. Finally, all contract values and associated growth rates we discuss are based on 2020 foreign exchange rates unless stated otherwise. As set forth in more detail in today's earnings release, certain statements made on this call may constitute forward-looking statements. Forward-looking statements can vary materially from actual results and are subject to a number of risks and uncertainties, including those contained in the company's 2019 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.

[Eugene Hall:]

Good morning and thanks for joining us. 2020 was an extraordinary year. The COVID-19 pandemic, global macroeconomic conditions, social unrest and geopolitical changes all pose significant challenges to enterprises around the world. In this context, Gartner delivered a strong performance across contract value, revenue, EBITDA and free cash flow. As many of you know, we entered 2020 with a financial plan to align costs with revenues. By executing this plan and taking swift cost actions when the pandemic first began, we quickly stabilized our financial position. We maintained disciplined cost management throughout the year over strong investments to support future growth. We successfully pivoted our global workforce to operate effectively in a remote environment. We grew our capability in key functions across our business. We drove strong operational execution and we were extremely agile in serving our clients. Pivoting our content to address critical contemporary issues, such as the pandemic, remote work environments, cost optimization and business continuity.

[Craig Safian:]

Thank you, Gene, and good morning. I hope everyone remains safe and well. Fourth quarter results were ahead of our expectations headlined by a strong performance in GBS, better-than-planned cost management and outstanding free cash flow generation. As our 2021 guidance highlights, we expect total revenue to increase versus 2020, while also positioning Gartner for return to strong growth. Looking out over the medium term, we continue to expect double-digit CV and revenue growth, modest margin expansion and strong free cash flow generation. Because we can fund growth investments we have ample capital to return to shareholders and to deploy to strategic tuck in acquisitions when we find the right opportunities. Our Board authorized an additional $300 million for repurchases bringing a total available to around $860 million.

[Operator:]

Our first question comes from Jeff Meuler with Baird. Your line is open.

[Jeffrey Meuler:]

Yes, thank you. Good morning. On GTS upselling, I guess, how does it compare to the last downturn anything you're doing operationally different? And I guess any signs that having a higher penetration rate in terms of number of seats per average client coming out of this downturn could be a constraint?

[Eugene Hall:]

Hey, Jeff its Gene. So compared to the last downturn, GTS, in fact the whole company, we took a lot of lessons from the last downturn in terms of operational execution. And we've been better all the way around in terms of operational execution. And so, I think that the -- in terms of every aspect of the business like it looks at new logo growth in Q4, that was very good. Even though, obviously, it's still a tough economic environment out there, et cetera. So I think basically, our operational execution is what that it was during the last downturn.

[Craig Safian:]

And, Jeff, hey, good morning. It's Craig. The other thing I'd add is while we have increased the penetration since the last downturn, we still look at our penetration as sort of woefully under penetrated. Even in our existing enterprises, we're talking about on average four to six seats generally. And so we continue to believe there's an enormous opportunity to continue to penetrate existing enterprises.

[Jeffrey Meuler:]

Got it. And another …

[Eugene Hall:]

In fact, there's a lot of growth in existing -- go ahead, Jeff. I was just saying that there's a lot of growth in existing enterprise as well. It wasn't quite as much as in 2019, but still significant growth in existing enterprises.

[Jeffrey Meuler:]

Got it. And then I guess that you're going to give us more financial outlook commentary on Conferences as we get to the second half and know if they're happening in-person or not. But just any framework for thinking about incremental margins as that returns? I know that your guidance is assuming that you don't have the variable facilities based cost to execute in-person conferences, but I think you still preserved quite a bit of SG&A. So not sure how much that -- of that extra return just if you can give us any framework on incremental margins as conferences come back to in-person at some point?

[Craig Safian:]

Yes. Sure, Jeff. Happy to. And again, I mean, I think part of the challenge we have is, we hope we're in a situation where we're able to run a full in-person scenario in the second half of the year. It may vary depending on regions that opened up earlier than others, or certain restrictions that are in place. And so there's no easy yes or no answer here. The way we sort of think about it is, yes, you're right, we did maintain a team in conferences to be able to return to producing our fantastic in-person events, or conferences rather as soon as we can and that is baked into our base level guidance. Obviously, if we pivot to in-person, we generate a lot more revenue. The way we've thought about it in our modeling is it will flow through at historical incremental margin rates, roughly for conferences. And so if you look back to how our incremental margins flow through historically, that's what we're expecting as we make this pivot. Now the other thing I would mention is, as we do return to in-person and I mentioned this in my prepared remarks as well, we don't expect to fully return to the size and scale that we exited 2019 at. It's going to take a little bit of time to grow back and that obviously impacts the flow through economics as well.

[Jeffrey Meuler:]

And I hope to see all of you at one of your in-person conferences later this year. Thanks, both.

[Operator:]

Thank you. Our next question comes from Toni Kaplan with Morgan Stanley. Your line is open.

[Toni Kaplan:]

Thanks very much. Just while we're on Conferences, wanted to ask you've had about 40% monetization versus in-person for the virtual conferences. Is that similar to what we should expect this year? Or is there a progression that you could get higher than that? And basically, in terms of exhibitors, is there any progress that you've made on getting exhibitors involved in the virtual format? And just basically, should we expect sort of a similar model for monetization of conferences this year, ex the in-person obviously.

[Craig Safian:]

Hey, good morning, Toni. Thanks. Thanks for the question. In terms of the monetization, I would say we're still progressing on that, and I wouldn't anchor on that 40%. I think one thing to keep in mind is we did a really great job of very quickly pivoting and a great job of monetizing in the back half of this year. In the last 3 months of the year we ran our Global Symposium Series, which as you know, are typically and historically our largest, most profitable conferences. And we were actually -- we had significant pent up demand, if you will, from not being able to run conferences for the first several months of the year. I think -- so, again, we'll continue to refine our monetization and our ability to market to and sell incremental tickets to those virtual conferences. And so, again, we expect we'll get better and better at this as we move on. In terms of exhibitors, we did a decent job, I would argue, in the fourth quarter. While the revenue mix has shifted, as I mentioned, to being more attendee-driven, still a full third of our revenue was generated from exhibitors in the fourth quarter. And so I think similar to the attendee commentary I just gave you, we continue to get better and better at that as well by providing exhibitors the opportunity to meet with or get exposed to our highly qualified audience. And then on top of that, our attendees generally one of the things that they really put a lot of value on when they come to a conference is that exposure to the exhibitors as well. So I think both are works in process. We've gotten, as Gene mentioned, better and smarter at how we deliver it after each and every conference, and we will continue to refine that as we move forward.

[Toni Kaplan:]

Great. And then in terms of GTS, how are you thinking about headcount growth strategy in '21? Will you start to ramp up ahead of demand or concurrent with demand? Just what are your thoughts on ramping that up? And are you still expecting 1Q to be the inflection point? Thanks.

[Eugene Hall:]

Hey, Toni, it's Gene. So we are focused on long-term double-digit growth and headcount growth is an important part of that. And so as we go through '21, we expect to increase our headcount both in GTS and GBS not so much to impact '21, but really so we have the capacity in '22 to make sure we can hit very attractive growth rates in '22.

[Craig Safian:]

And Toni, just on the phasing, I think because of what Gene just mentioned which this is really about seeding the investments for '22 and beyond, you won't necessarily see an inflection point in Q1. Like most of our cost restoration and cost investments, we're really turning these things on from Q2 and beyond. So it really impact the P&L Q2 and beyond.

[Toni Kaplan:]

Thanks a lot.

[Operator:]

Thank you. Our next question comes from Gary Bisbee with Bank of America. Your line is open.

[Gary Bisbee:]

Hey guys. Good morning. Great job on the results and outlook. Craig, I wanted to ask about free cash flow. The last two quarters I feel like you've been discussing that a little differently. Historically, it was sort of a conversion rate as a percent of adjusted earnings that we talked about, now you're talking about a free cash flow margin. And frankly, it's a lot higher, right, if we go back at that old metric than it used to be. So I'm trying to understand, what's really driving this significant improvement in your free cash flow generation? And is that 13% of revenue a good bogey going forward, because the guidance implies a higher level than that in 2021? Thank you.

[Craig Safian:]

Yes. Good morning, Gary, and thanks for the comments and the question. So I think that, obviously, our business model is one that should generate significant amounts of free cash flow. And when we were in 2017 to 2019 timeframe, we were investing significantly both from operating P&L perspective and also from a CapEx perspective as we were dealing with all the growth. And we had some challenges with our collection pacing and DSOs and things of that nature as well. I think in 2020, we got everything back on track. And so we did a fantastic job on collections in 2020, especially in a really tough environment, which was great. And obviously that flowed through in 2020 and we expect to maintain that level of collection pacing moving forward. The other big factor I would say is CapEx. And so we had a significant amount of investment, as I mentioned, in capital expenditures, primarily behind facilities to support our very significant investment in growth and headcount. Obviously, we muted that in 2020. And our 2021 guidance assumes that we're going to run at roughly the same level of CapEx spending as we had in 2020. And I think moving forward, we can expect that to remain at roughly the levels that we are today, sort of in that percent of revenue range. So it will increase, but we don't see it going back to the roughly $150 million that we spent on it in 2018. So I think the combination of those two things and really getting the benefit of our upfront negative working capital model is what we're seeing flow through, and so we focused on it. We sort of straight from it for a year or two. We got real focus on it again, and we saw the benefits of that in 2020. Obviously, 2020 was sort of an extraordinary year with a lot of unique things in it. But you're right, our 2021 guidance for free cash flow margin, if you will, is even a little bit higher than that normalized rate that we saw in 2020. So we feel really good about the free cash flow generation capability and forecast and outlook moving forward.

[Gary Bisbee:]

Great. And then just the other question, the other thing that really stood out to me was the 2021 margin a lot higher than what you indicated was likely a quarter ago. Obviously, revenue is trending better, and that's helpful. Is there anything else you would call out other than how the top-line is going? And I guess maybe as part of that, has your thinking progressed at all from last quarter around the potential for permanent cost reductions now that you've run the business through the pandemic? Thanks a lot.

[Craig Safian:]

Yes, I think that's a smart observation. I think as we progress through -- let me back up for a second. So when we entered 2020, our operating plan was essentially, let's make sure 100% that we have revenue growth and cost growth in line and set ourselves up to then be able to modestly expand margins moving forward. I think as we progressed through 2020 with an eye toward cost discipline and cost management, we were able to flex on things that we didn't necessarily think were possible previously. And so I think as we look at our cost savings that we generated and cost avoidance that we generated in 2020, portions of that were permanent and we'll be able to yield the benefits of that moving forward. Portions of them were what I would characterize as semi-permanent will get smarter around the way we spend in the future based on what we learned in 2020, and some of them will come right back, right? So like the benefit stuff that we saved and our compensation and benefit savings in 2020, we're obviously bringing that back in 2021 and we think it's really important from an associate perspective to keep everyone motivated and running toward our goals. But there certainly are things that we definitely see permanent and/or semi-permanent savings from that we learned in 2020 that will be able to help us manage to that better margin outlook moving forward.

[Gary Bisbee:]

Thank you.

[Operator:]

Thank you. Our next question comes from George Tong with Goldman Sachs. Your line is open.

[George Tong:]

Hi, thanks. Good morning. On GTS you mentioned we won't see an inflection in CV in 1Q, but rather in 2Q and beyond if spending comes back. Since 2021 CV largely depends on the 2020 sales force headcount, what are the assumptions underlying sales force productivity as you move through 2021?

[Craig Safian:]

Good morning, George. So the way to think about it is, we have invested in growing both our GTS and GBS sales forces over the past several years. Obviously, in 2020, we didn't do that. We actually paired down a little bit. We were able to work through a pretty large dense that we had built at the end of 2019. And so we feel really good about our capacity -- our sales capacity, our selling capacity entering 2021. And so we've got a significant amount of sellers in both GTS and GBS ready to go and tackle 2021. And so the way to think about the inflection and what we expect from a CV perspective is that, obviously, Q1 is the last, if you will, tough compare from a semi-normal environment and the compares to get easier in Q2 and beyond. So that's why we expect that inflection point from a CV growth perspective to sort of pivot upwards after Q1. I think there's a variety of different productivity scenarios you can run. If we're able to get back to 2019 levels of productivity, obviously, that would drive a really nice rebound and very significant contract value growth in 2021. But you can also get there getting somewhere in between where we finished 2020 and where we finished 2019. And so as we think about it, we believe that there is no reason why in the future, not necessarily in 2021, in the future, we can't get back to the productivity levels we were at pre-pandemic. It's going to take potentially a little bit of time to get there. But even if we glide up to that level, we can see a pretty nice rebound in the contract value growth for GTS over the course of both 2021 and into 2022.

[George Tong:]

Very helpful. And then on GBS, in the quarter, you saw a significant upside there. Can you talk a little bit elaborate on what the sources of upside were and how you expect those sources of upside to persist into 2021?

[Eugene Hall:]

Yes, it's Gene. I think the answer is that the clients and prospects see a lot of value in our offerings. We help -- we identify what their most important initiatives are and how they can execute them better. People have those challenges to address in good times and bad. And what we've seen is that the uptake from prospects and clients with the GBS products are really good, and that's because the value they see in them.

[George Tong:]

Got it. Thank you.

[Operator:]

Thank you. Our next question comes from Andrew Nicholas with William Blair. Your line is open.

[Trevor Romeo:]

Hi. Good morning. You've actually got Trevor Romeo here in for Andrew. Thank you for taking my questions. First of all, just curious on GTS, if you could maybe give us an update on buying activity for clients that are kind of in some of the highly affected industries from the pandemic, like travel, hospitality, et cetera. And to what degree have you seen client win backs at this point? And how much opportunity do you see for further win backs in those areas in the future?

[Eugene Hall:]

Yes, great question. So first, we -- even through the pandemic, we saw pretty good rates of buying -- renewal rates and buying from existing clients even in trouble industries. Not all clients were the same, some clients actually would go from five seats to four seats or something like that. And so we did see some of that. But overall, we saw a pretty good performance there. In terms of win backs, for the ones that did downgrade, and there obviously were some of those. Actually we are going to see win backs. And in fact, in Q4, particularly in December, we saw some win backs from some of the business we lost earlier in the year. As we go through '21, we would expect that to continue.

[Trevor Romeo:]

Okay, great. Thank you. And then for my follow-up. Within GBS, in the marketing practice specifically, have you now lapped the shift away from those lower margin products that you're going through? And how would you expect that vertical to grow relative to the other practices within GBS in the future?

[Eugene Hall:]

Yes, marketing has a same great value proposition that the other GBS practices have. And as you pointed out, we had some products that we discontinued, which has dragged the overall growth rate down. But if you look at the products that -- if you separate that out, which we did -- we can do internally, obviously, the products -- the new products are quite attractive and are selling well. In terms of whether we've lapped, we've not quite lapped it, but we've got -- we've discontinued most of those products. Some of the clients were in multi-years and some of those multi-years extended into 2021. And so it will take 2021 to get through all of it, but again, the majority we've already gotten through of those discontinued products.

[Trevor Romeo:]

All right, great. Thank you very much for the color.

[Operator:]

Thank you. Our next question comes from Manav Patnaik with Barclays. Your line is open.

[Manav Patnaik:]

Thank you. Good morning, guys. Just on the events business, you talked about the mix in attendees. I was just wondering if you could talk about Evanta, like the smaller events versus the bigger events, and perhaps you if there is a difference in profitability as well that you guys have assumed from virtual to in-person?

[Craig Safian:]

Yes. Good morning, Manav. Happy to. So I think as we mentioned, we have pivoted to virtual in both our destination conference portfolio and in our one day Evanta portfolio. And if you look at Q4 as an example, historically, Evanta contributed about 20% to our overall conferences revenue. It was a little bit higher than that in Q4, but not significantly higher than that. So it's been a pretty consistent contributor. They actually were able to pivot a little sooner to virtual just given the size of the communities and the size of the events or the meetings that they run. And so again, we're very, very pleased with what we've been able to do from a monetization perspective on both Evanta one day meetings and the destination meetings. We do believe as we look at our 2021 calendar that we will be able to return to in-person Evanta meetings, perhaps a little bit sooner, really dependent on the geography and what is allowed or permitted in those geographies. But we do think given the size of them that we'll be able to return to them a little bit earlier. But many event we've focused or we've pivoted to really driving virtual value in absence of in-person value, clearly I think our members and exhibitors in that business are itching to get back to in-person value, but we expect Evanta to continue to be a really nice contributor to the overall conferences portfolio.

[Manav Patnaik:]

Okay. Got it. And then if I could just ask on your comments around M&A, just firstly, just a quick clarification. How much did TOPO add to the GBS contract value this quarter? But broadly, do you see more opportunities like dislocation because of your smaller, I guess, targets maybe not being able to handle it like you guys did?

[Eugene Hall:]

Yes, Manav. I'll take the non-TOPO question. In terms of the number of small companies, there are a lot of small innovative companies out there. We track many, many -- I think hundreds of companies who are looking for innovative ideas that we can add into our portfolio. And so when we see it as a core part of our strategy where we see small innovative companies and it makes sense to buy rather than build. Obviously, we can -- in the absence of that, we can do just fine with organically, but if we can see M&A opportunities that are accretive and help strategically, we will certainly do that. And Craig on .

[Craig Safian:]

Hey, Manav -- yes, sure. Of course. I mean, actually TOPO CV was included in Q4 2019. So over the course of Q4 and the first three quarters of this year, it added about 60 basis points to the GBS growth rate. It's actually apples-to-apples in the Q4 numbers, so it didn't -- that's why you don't see any sort of dislocation really between the reported GBS rate and the organic rate given TOPO CV is in both balances.

[Manav Patnaik:]

All right. Thanks a lot guys.

[Operator:]

Thank you. Our next question comes from Henry Chien with BMO Capital Markets. Your line is open.

[Henry Chien:]

Hey, good afternoon. Thanks for taking the question. So I guess, just looking forward relative to other cycles, any suggestion that there might be some change in terms of the incremental or the new demand coming forward in terms of CV growth whether that's by industries or just any change in the character of this recovery?

[Eugene Hall:]

Yes. Henry, every recession is different. We've tracked carefully what our performance was last recession to see if there's things that are indicative. One thing is for sure, which is, we are operationally much better. As we went through the last recession, we sat down and figured out kind of the things that work the best and we made sure we ran those plays very early in this recession. Obviously, one big difference was that we literally couldn't hold conferences. In the last recession, you would hold conferences. People might have been restraining the travel expenses. You had less people going, but not -- but we would actually hold them. That's very different than this year. And so I think one big difference in terms of how it recovers is, Craig mentioned earlier, we're looking forward to being able to -- we will continue the virtual conference and we had, but we also think that there is value in in-person conferences and look forward to go into those as we -- as the economy recovers.

[Henry Chien:]

Got it. Okay. Yes, I appreciate it. And I guess, just -- and in terms of perhaps contract value growth there or research growth, has there been any change or anything that you're expecting going forward in terms of just the -- yes, I guess, the characterizing the recovery?

[Eugene Hall:]

I would say two things. One is that our -- again, because we are operationally better, I think the CV growth will hold up better than it did the last recession, it has been already. And I do think that for the ones that we -- for clients that did decide to buy four seats instead of five or maybe even discontinued altogether, just like the last recession, we will see some uptick from that. And so there will be some clients that come back to give us a boost as well over the next several months.

[David Cohen:]

And Henry, the one thing I would add is, obviously, from a medium term outlook or medium term objective perspective, no change in how we're thinking about the market opportunity or our ability to grow both the GTS and GBS businesses at strong double-digit growth rates.

[Henry Chien:]

Yes. Got it. All right. Thanks a lot guys.

[Operator:]

Thank you. Our next question comes from Hamzah Mazari with Jefferies. Your line is open.

[Mario Cortellacci:]

Hi. This is Mario Cortellacci filling in for Hamzah. I just had a question on consulting. I wanted to see if you can give us a sense for what the sales cycle looks like for consulting today versus what it looked like a few months ago? And do you think a vaccine rollout changes that as we enter 2021?

[Eugene Hall:]

Yes. I would say to your point, the consulting selling cycle is longer now. What many companies did is just in response to the downturn of pandemic is just stopped all outside spending, put a pause on it, which obviously increases your selling cycle, and we certainly saw that. I do think as both with the vaccine, but also as companies understand how stable their financial situation is, we will see that selling cycle start to come down a bit both -- from both of those factors.

[Mario Cortellacci:]

Great. And then could you just also talk about how sustainable the -- I'm sorry, the sequential improvement in GBS is? And are you doing anything differently there? Is it a factor of your sales force being more tenured? Are you -- is there anything new in terms of products or is it just simply that things are getting better from an economy standpoint?

[Eugene Hall:]

So GBS, like GTS, has an enormous untapped market opportunity. And we have products that provide great value to capture that market opportunity. That's what's driving the GBS improvement. And I think we're going to continue to see that acceleration over time for the same reason. The clients find a lot of value in the products. I do think that we introduced GxL products. It took time to -- for the sales force to figure out the value proposition expansion clients. And that's part of the reason we're seeing sort of the acceleration more recently. But I think at the heart of it is, drive market opportunity with products that provide tremendous value to our clients.

[Mario Cortellacci:]

Great. Thank you so much.

[Operator:]

Thank you. And I’m currently showing no further questions at this time. I would like to turn the call back over to Gene Hall for closing remarks.

[Eugene Hall:]

So as you heard today, Gartner delivered a strong performance in the context of what was a truly extraordinary year. We continue to have a vast and largely un-penetrated addressable market. The Gartner formula for sustained long-term growth continues to drive success in our research business. And looking ahead, we are well-positioned for sustained success. We will return to revenue growth in 2021. And beyond 2021, over the medium and long-term, we expect to return to sustained double-digit contract value and revenue growth. We expect to deliver EBITDA margins up from 2019 and to further expand margins over time. We generate significant free cash flow in excess of net income, which we'll deploy to return capital to our shareholders through share repurchases and to make strategic tuck-in acquisitions. And finally, we expect to come out of this recession strong and well positioned to drive long-term sustained double-digit growth for years to come. Thanks again for joining us, and I look forward to updating you again next quarter.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.