Gartner Inc (IT) — Q4 2022 Earnings Call Transcript

Good morning, and thanks for joining us today. Gartner drove a strong performance in the fourth quarter with double-digit growth in contract value, revenue, EBITDA, and EPS. We generated nearly $1 billion in free cash flow, and we returned even more than that to shareholders through our ongoing share repurchase program. Enterprise leaders are dealing with high volatility and uncertainty. Inflation accelerated to the highest level in 40 years. The dollar was the strongest it's been in 20 years, and it remains extremely volatile. There are ongoing supply chain issues; energy prices have been volatile. The labor market has been volatile. Enterprises are assessing the impact of remote versus hybrid versus in-person work. There are widespread concerns of a recession. All of these factors and more impact enterprises around the world. Leaders need help navigating this turbulent time, and they know Gartner is the best source for that help. Our services often make the difference between success and failure for executives and their enterprises. We help clients succeed with their mission-critical priorities, whether they're in growth mode or cutting costs. With all this volatility, our most recent research shows that Chief Financial Officers are more carefully scrutinizing expenses. But at the same time, they're increasing investment in mission-critical priorities. Even in enterprises, they are under extreme financial pressure. Our research business continues to be our largest and most profitable segment. We help leaders across all major enterprise functions in every industry around the world. Our market opportunity is fast across all sectors, sizes, and geographies. And we're delivering more value than ever. Research revenue grew 13% in the fourth quarter. Total contract value growth was 12%. Contract value growth was broad-based across practices, industry sectors, company sizes, and geographic regions. We serve the executives and their teams through two distinct sales channels: global technology sales, or GTS, is our largest sales force. GTS contract value grew 11%. The large majority of GTS serves IT leaders and their teams, and we saw double-digit growth with this client segment despite tough compares. GTS also serves leaders at technology vendors, including CEOs and product managers. In this segment, growth moderated but still grew at high-single digits, despite even tougher compares. Global Business Sales, or GBS, serves leaders in their teams beyond IT. This includes HR, supply chain, finance, marketing, sales, legal, and more. GBS contract value grew 19% in 2022. In the five years since we launched our GXL products within GBS, we've seen exceptional compound annual growth rates. Gartner conferences deliver extraordinarily valuable insights and engaged and qualified audiences. In the first half of 2022, we delivered most of our conferences virtually. In the second half, we pivoted back to in-person for nearly all our conferences. Feedback has been excellent. Most in-person conferences were sold out in 2022, and we've sold significantly more than half of our exhibitor space for 2023. 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 24% in the fourth quarter. We exited the year with a strong backlog and pipeline. Our business is fueled by our highly talented associates. During 2022, we grew our team by about 2,900 associates. With this growth, we ended 2022 with the lowest percentage of open positions ever. When we're fully staffed, we provide our clients better service, which results in better retention. We also sell more in territories that are fully staffed. We have carefully aligned our hiring with recent demand and the long-term opportunity we have for growth. Our 2023 outlook reflects our most recent experiences from Q4. We've also been prudent in considering the potential impact of volatility from the global environment. We expect to deliver at least 21.5% margins across a wide range of economic scenarios. And our guidance has opportunity for upside if the business performs in line with historical trends. One of the unique things about Gartner is that we provide value to enterprises that are thriving, struggling, or anywhere in between. By being exceptionally agile and adapting to the changing world, we have sustained a record of success. We're well prepared as we enter 2023. We've carefully aligned staffing levels with demand, and we have the lowest percentage of open positions ever. Our content addresses today's mission-critical priorities. And we know the right things to do to be successful in any environment. In closing, we again saw strong growth across the business. Looking ahead, we are well-positioned to drive growth far into the future. Even as we invest for future growth, we expect margins to increase modestly over time, and we generate significant free cash flow well in excess of net income or return capital to our shareholders through buybacks, which reduces shares outstanding and increases returns over time. With that, I'll hand the call over to our Chief Financial Officer, Craig Safian.

Thank you, Gene, and good morning. Fourth quarter results were strong with double-digit growth in contract value, revenue, EBITDA, and adjusted EPS. FX neutral growth was even stronger than our reported results. We also delivered better-than-planned EBITDA margins. During 2022, we generated almost $1 billion of free cash flow, and we returned more than that to shareholders through stock repurchases. Our financial performance for the full year 2022 included total contract value growth of 12%, total revenue growth of 16%, EBITDA growth of 14%, diluted adjusted EPS of $11.27, and free cash flow of $993 million. We are introducing 2023 guidance, which reflects higher-than-normal variability in the set of reasonably likely outcomes. The guidance accounts for the tough compares at the start of the year and the opportunity for upside if near-term demand is stronger than we built into the outlook. With the catch-up hiring we did last year, we are very well positioned to add value to enterprise function leaders and their teams across all industries and around the world. Fourth quarter revenue was $1.5 billion, up 15% year-over-year as reported and 20% FX neutral. In addition, total contribution margin was 68%, down 100 basis points versus the prior year. EBITDA was $421 million, up 37% year-over-year, and up 44% FX neutral. Adjusted EPS was $3.70, up 24%, and free cash flow in the quarter was $166 million. We finished the year with 19,505 associates, up 18% from the end of 2021. About 40% of the headcount growth was catch-up from prior years. Our hiring has been carefully calibrated to revenue growth and future demand, and we are well positioned from a talent perspective heading into 2023. Research revenue in the fourth quarter grew 9% year-over-year as reported and 13% on an FX neutral basis driven by our strong contract value growth. Fourth quarter research contribution margin was 74%, consistent with 2021. The contribution margin had a benefit during the quarter from somewhat lower headcount levels and travel expenses still modestly below our post-pandemic expectations. For the full year 2022, research revenues increased by 12% on a reported basis and 16% FX neutral. The gross contribution margin for the year was 74%, in line with 2021. Contract value or CV represents the annualized revenue under contract at a point in time. In looking at our global contract value across both GTS and GBS, more than 75% of our CV is from enterprise function leaders and their teams, with the bulk of the balance coming from leaders at tech vendors. Our enterprise function leader’s business includes IT leaders, who are end users of technology and who we serve through our GTS sales force, and leaders of other business functions who we serve through our GBS sales force. In both cases, we serve leaders around the world and across all industries. We're helping these enterprise function leaders address their most important mission-critical priorities. CV was $4.7 billion at the end of the fourth quarter, up 11.9% versus the prior year and up 12.3% adjusted for the impact of exiting Russia. CV from enterprise function leaders across GTS and GBS grew at strong double-digit rates. CV from tech vendors grew high-single digits, compared to a high-teens growth rate in the fourth quarter of ‘21. Quarterly net contract value increase or NCVI was $189 million, resulting from business of almost $400 million. CV growth was broad-based across practices, industry sectors, company sizes, and geographic regions. Across our combined practices, all industry sectors grew at double-digit rates other than technology and media, which grew at high-single-digit rates. The fastest growth was in the transportation, retail, and manufacturing sectors. We had double-digit growth across all of our enterprise size categories. We also drove double-digit growth in nine of our top ten countries, with high-single-digit growth in the tenth. Global technology sales CV was $3.6 billion at the end of the fourth quarter, up 10% versus the prior year and up 10.5% adjusted for the exit of Russia. GTS had quarterly NCVI of $138 million, while retention for GTS was 105% for the quarter. GTS new business was down 8.5% versus last year. New business with IT function leaders was up modestly year-over-year against a tough compare. New business with tech vendors faced an even tougher compare against Q4 of 2021, which was its strongest quarter ever. GTS quota-bearing headcount was up 18% compared to December of last year; about 40% of the growth was catch-up hiring from 2021. Our continued investments in our sales teams will drive long-term, sustained double-digit growth. Our regular full set of GTS metrics can be found in the appendix of our earnings supplement. Global business sales CV was over $1 billion at the end of the fourth quarter, up 19% year-over-year, which is above the high end of our medium-term outlook of 12% to 16%. All of our GBS practices, other than marketing, grew at double-digit growth rates led by supply chain and HR, which both continued to grow faster than 20%. GBS CV increased $52 million from the third quarter, while retention for GBS was 112%. GBS new business was up 3% versus last year against a very strong compare. The two-year compound annual growth rate for new business was 9%. GBS quota-bearing headcount increased 22% year-over-year, with a little more than 50% of the growth being catch-up from 2021. Headcount we hired in 2022 will help to position us for sustained double-digit growth in the future. As with GTS, our regular full set of GBS metrics can be found in the appendix of our earnings supplement. Conferences revenue for the fourth quarter was $188 million; contribution margin in the quarter was 53%. We held nine in-person conferences in the quarter. It has been very exciting for our business to return to in-person conferences. For the full year 2022, revenue increased 82% on a reported basis and 90% FX neutral. Gross contribution margin was 54%. Fourth quarter consulting revenues increased by 17% year-over-year to $138 million. On an FX neutral basis, revenues were up 24%. Consulting contribution margin was 37% in the fourth quarter. Labor-based revenues were $96 million, up 11% versus Q4 of last year and up 19% on an FX neutral basis. Backlog at December 31 was $140 million, increasing 24% year-over-year on an FX neutral basis with another strong bookings quarter. The inclusion of multi-year contracts in our backlog calculation, a change we described earlier last year, contributed about 13 percentage points to the year-over-year growth rate. Our contract optimization business had a very strong quarter, increasing 36% as reported and 39% on an FX neutral basis versus the prior year. As we have detailed in the past, this part of the consulting segment is highly variable. Full-year consulting revenue was up 15% on a reported basis and 22% on an FX neutral basis. Gross contribution margin of 39% was up 140 basis points from 2021. Consolidated cost of services increased 19% year-over-year in the fourth quarter as reported and 24% on an FX neutral basis. The biggest drivers of the increase were higher headcount to support our continued strong growth and the return to in-person destination conferences. SG&A decreased 3% year-over-year in the fourth quarter as reported and increased 1% on an FX neutral basis. We had lower non-cash non-recurring charges in 2022, compared to 2021. On a comparable basis, SG&A was up due to additional headcount for sales and G&A functions. For the full year, cost of services increased 17% on a reported basis and 21% on an FX neutral basis. SG&A increased 15% on a reported basis and 19% on an FX neutral basis in 2022. EBITDA for the fourth quarter was $421 million, up 37% year-over-year on a reported basis and up 44% FX neutral. Fourth quarter EBITDA upside to our guidance reflected revenue exceeding our forecasts, most notably in consulting and expenses at the low end of our expectations. EBITDA for the full year was $1.47 billion, a 14% increase over 2021 on a reported basis and up 19% FX neutral. Depreciation was $24 million in the fourth quarter, down modestly versus 2021. Net interest expense excluding deferred financing costs in the quarter was $29 million, about flat with the prior year. The modest floating rate debt we have is fully hedged through maturity. The Q4 adjusted tax rate, which we use for the calculation of adjusted net income, was 16.7% for the quarter. The tax rate for the items used to adjust net income was 23.2% for the quarter. The full-year tax rate was 21.6% on the same basis. Adjusted EPS in Q4 was $3.70, up 19% year-over-year. The average share count for the fourth quarter was 80 million shares. This is a reduction of about 3.7 million shares or about 4% year-over-year. We exited the fourth quarter with about 80 million shares outstanding on an unweighted basis. For the full year, adjusted EPS was $11.27; EPS growth for the year was 22%. Operating cash flow for the quarter was $203 million. Excluding insurance proceeds in Q4 of 2021, operating cash flow was down about 7%. Q4 cash flow was impacted by Hurricane Ian, which hit our center of excellence in Fort Myers extremely hard in late September. While we were able to sell and service our clients from Fort Myers, we did have some delays in getting invoices out as quickly as we normally would. Elections for some of these delayed invoices slipped into January, but we are now caught up. CapEx for the quarter was $38 million, up about $16 million year-over-year, led by increases in capitalized technology labor costs and catch-up laptop spend. Free cash flow for the quarter was $166 million. Free cash flow growth continues to be an important part of our business model with modest CapEx needs and upfront client payments. As many of you know, we generate free cash flow well in excess of net income. Our conversion from EBITDA is also very strong. With the differences being cash interest, cash taxes, and modest CapEx, partially offset by strong working capital cash inflows. Free cash flow as a percent of revenue or free cash flow margin was 18% on a rolling fourth-quarter basis. On the same basis, free cash flow was 68% of EBITDA and 123% of GAAP net income. At the end of the fourth quarter, we had almost $700 million of cash. Our December 31 debt balance was $2.5 billion. Our reported gross debt to trailing-12-month EBITDA was under 2 times. Our expected free cash flow generation, unused revolver, and excess cash remaining on the balance sheet provide ample liquidity to deliver on our capital allocation strategy of share repurchases and strategic tuck-in M&A. Our balance sheet is very strong with $1.7 billion of liquidity, low levels of leverage, and effectively fixed interest rates. We repurchased more than $1 billion of stock throughout 2022. We expect the Board will refresh our share repurchase authorization as needed, which they did earlier this month. We now have about $1 billion authorized for share repurchases. Across the past two years, we have returned $2.7 billion to shareholders by repurchasing more than 11 million shares. Over that timeframe, we have reduced our shares outstanding by 11%. As we continue to repurchase shares, our capital base will shrink. This is accretive to earnings per share and combined with growing profits also delivers increasing returns on invested capital over time. Before providing the 2023 guidance details, I want to discuss our base level assumptions and planning philosophy for 2023. For research, we continue to innovate and provide a very compelling value proposition for clients and prospects. Executives and their teams face uncertainty and challenges, and they recognize how Gartner can help regardless of the economic environment. Our plan allows for a higher-than-normal level of uncertainty in the world, as Gene discussed. We've got tough compares across the business, and particularly with tech vendors for another quarter or two. We've taken a prudent approach based on historical trends, as well as more normal patterns, which we reflected in the guidance. If near-term demand is stronger than we've built into the outlook and NCVI phasing, retention rates, and non-subscription growth perform closer to the way they have historically, there would be upside to our guidance. In addition, our teams are focused on driving greater growth than what's embedded in the guidance. Finally, as you think about GBS overall CV and revenue growth for 2023, please keep in mind that we closed on the divestiture of a small non-core asset last week. We sold Talentneuron, which we acquired as part of the CEB transaction for $164 million. In the earnings supplement appendix, we've provided historical contract value updated for 2023 FX rates, as well as the removal of Talentneuron from prior years. For conferences, we are basing our guidance on being 100% in-person for the 47 destination conferences we have planned for 2023. We expect to return to more typical seasonality for the business, with the fourth quarter the largest, followed by the second quarter. For consulting revenues, we have more visibility into the first half based on the composition of our backlog and pipeline as usual. Contract optimization is seasonally slower in the first quarter and remains highly variable. We had a very strong year in 2022, especially in contract optimization in the fourth quarter. Our base level assumptions for consolidated expenses reflect significant headcount increases from 2022 annualizing into 2023. Our plan for headcount for 2023 is more in line with our normal model as we caught up on hiring last year. If demand is stronger than what's in the initial plan, we will have the opportunity to add even more great talent to our teams. We also expect T&E costs to more fully normalize this year. Finally, we continue to invest in our systems and process automation, both client-facing and internal applications as part of our innovation and continuous improvement programs. We will continue both to manage expenses prudently to support future growth and deliver strong margins. At current rates, FX will be a modest tailwind to growth for the full year with the benefit in the second half. Our guidance for 2023 is as follows: we expect research revenue of at least $4.92 billion, which is growth of about 7%. Excluding the effect of the divestment adds 1 percentage point to the year-over-year growth rate. We expect conferences revenue of at least $445 million, which is growth of about 14%. We expect consulting revenue of at least $500 million, which is growth of about 4%. The result is an outlook for consolidated revenue of at least $5.865 billion, which is growth of about 7%. Excluding the divested business from 2022 would add about 80 basis points to the growth rate. As I've mentioned, we've taken a prudent approach to planning for 2023. This applies to revenue, operating expenses, and free cash flow. We expect full-year EBITDA of at least $1.26 billion. We expect to be able to deliver at least 21.5% margins in most economic scenarios. If revenue is stronger than our guidance, we expect upside to EBITDA and margins. Included in the guidance is equity comp of $132 million, up from 2022. We expect 2023 adjusted EPS of at least $8.80 per share. For 2023, we expect free cash flow of at least $920 million. Our EPS guidance is based on 80 million shares, which only assumes repurchases to offset dilution. Finally, for the first quarter of 2023, we expect to deliver at least $310 million of EBITDA. All the details of our full-year guidance are included on our Investor Relations site. Our strong performance in 2022 continued in the fourth quarter. Contract value grew 12%, and adjusted EPS increased 19%, fueled in part by the significant reduction of shares in 2021 and 2022. Over the past few years, our hiring has been carefully calibrated to demand, and we are well positioned from a talent perspective heading into 2023. Our continued investments in our teams will drive long-term sustained double-digit growth. We repurchased more than $1 billion in stock last year and remain committed to returning excess capital to our shareholders over time. As I mentioned, we expect to generate at least $920 million in free cash flow in 2023. In addition, we have ample liquidity and the net proceeds from last week's divestiture for capital deployment initiatives. 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 line with CV growth and G&A leverage, we can modestly expand margins. 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 upfront. And we'll continue to deploy our capital on share repurchases, which will lower the share count over time and on strategic value-enhancing tuck-in M&A. With that, I'll turn the call back over to the operator, and we'll be happy to take your questions.

Yes, thank you. Maybe if you could talk through what you think for the outlook for the tech vendor channel? Just given the more recent risks and a need to cycle through kind of renewals on annual and multi-year contracts? And related to that, is there an opportunity or a plan to reallocate some of those sales resources into, kind of, the functional leader channels?

Hey, Jeff. It's Gene, and I'll begin. When we consider the tech vendor channel, I want to start by discussing the tech industry itself. We see it dividing into two segments: enterprise IT and consumer devices. For enterprise IT, we anticipate technology vendors will grow about 7.8% globally in 2023. This growth is robust because enterprise IT spending, which involves large complex B2B sales, usually consists of multi-year contracts and annual increases. These technology vendors are experiencing sustained demand for cloud services, security, and digital modernization. All these factors are growing at a much faster rate than the overall tech industry. When we survey CEOs, we find they are focusing on the speed of their equipment. Their businesses recognize that digital modernization remains critical to address economic challenges, staffing issues, and consumer demands for more technology and services. To summarize, we expect tech vendors in the enterprise IT space to grow about 7.8% globally in 2023. Conversely, the consumer device sector is not looking as promising, with anticipated lower demand due to a lot of it being pulled forward during the recession and pandemic. This creates a contrasting situation within the tech industry. Our own business primarily serves the enterprise IT side, which positions us to perform relatively well compared to consumer and device manufacturers, which we expect to decline in 2023. As for our own results, our sales force targeting technology vendors transitioned from high teens growth to low-single-digit growth, performing reasonably well in the fourth quarter. Looking ahead, since our main focus is on enterprise IT technology vendors, we expect that sector to do quite well moving forward.

And Jeff, the last part of your question on the territory assignment and where we're putting our growth, we've got a pretty robust territory optimization and analytics team that is always looking at this and we have the ability to very quickly and with a lot of agility flex up or down on where we're putting those territories. And so, obviously, as we're looking at our selling environment and the growth of the business, we're continuing to allocate those resources accordingly. And then the last thing, I mentioned and you sort of had this buried in your question, but I'll pull it out, is our business selling to the enterprise functions, both in IT and outside of IT through GBS performed very, very well in Q4 and for the full year. And it was really the tech vendors that had, as Gene said, a very tough compare going from high-teens growth to high-single-digit growth in the quarter.

Thank you for that. I have a follow-up regarding your comment on the strong sales to the functional leader channel. I understand the productivity metrics and the year-over-year increase in sales headcount, but productivity has declined, and quarterly productivity has also decreased significantly compared to last year. Could you explain the impact of tenure mix on this? I'm not sure if there's anything more to add regarding the tech vendor channel, but I would appreciate your insights to help us understand this situation, as it does seem somewhat concerning. Thank you.

Yes. So Jeff, I mean, again, the way to kind of think about the results in the quarter, and if you look at it on a rolling four-quarter basis, is again that the end user side of the GTS business held up really, really well and performed really well throughout the year and in the fourth quarter, including the productivity. And again just we saw that deceleration from high-teens to high-single-digits, obviously impacting the productivity as well. I think as we have brought in more and more new associates in the salesforce. Last year, we talked about in 2021, rather, we had the best tenure mix we've ever had. In 2022, we had really the highest proportion of new people we've ever had; that's obviously going to impact productivity. We'll start to see the benefits of the tenure over the course of 2023 as all of those people we hired over the course of 2022 start getting up the productivity curves.

Hi, thank you for taking my question. I guess, first off, you've communicated a fair amount during the call that you're taking a prudent approach to guidance. And I know you just addressed the tech center piece of the business, but I'm curious if you can elaborate a little bit in terms of how you're thinking about the overall macro environment in your guide, especially on the research side? And then as well for conferences and consulting, because it seems like the guide for those parts of the business imply the economy holds up pretty well. So just want to kind of get your deeper into your train of thought? Thanks.

Good morning, Heather, and thank you for your questions. To begin with conferences and consulting, we are coming off a very strong 2022. Our consulting backlog is in excellent shape as we started the year, supported by a solid delivery quarter and strong bookings in the fourth quarter. Based on our visibility for the first half of the year, we feel optimistic about the consulting business, which is showing positive trends. Many of our clients, particularly in the tech sector, are undertaking significant digital transformation and tech projects, where our consulting team can deliver great value. Regarding conferences, we had a successful year in 2022 as we returned to in-person events, and our team has been effective in securing future bookings. Currently, over 50% of our pre-bookings are already contracted for 2023, and we are very confident about the conferences business moving forward. On the research side, our enterprise function leader business is performing strongly, and we expect this trend to continue despite facing challenging comparisons. We are committed to delivering exceptional value to our clients and being cautious in our expectations, particularly concerning our tech vendor clients, ensuring we do not assume an immediate return to high growth rates. Nevertheless, our enterprise function leader business is seeing robust double-digit growth, while the tech vendor sector is experiencing high single-digit growth, slightly down from last year.

Thank you. As a follow-up to the earlier question about new associates and your hiring practices, you're facing a potentially challenging environment in 2023 with a relatively young sales team. How are you preparing your teams for this situation, and what are your thoughts on attracting new customers with associates who have around a year of experience?

Hey, Heather, it's Gene. We consistently train our associates on the key priorities that are critical for our clients and prospects. One of the concerns that will likely be present in various industries is cost reduction. Therefore, we instruct our sales team on how to assist clients with this. Our services represent a minimal cost for clients, so they won't save significantly by cutting us. However, we can help them save much more than what they spend on us in their overall business. Moreover, as I mentioned earlier, many companies still seek to invest in technology, particularly in automation to manage their labor costs and other expenses. There is also an ongoing shift towards more digital services across nearly all industries. We educate our new salespeople on how to communicate this value proposition, emphasizing the digital transition, as well as ways to optimize their IT spending for better efficiency over time. Combining these strategies with our traditional selling skills, where we excel at training new salespeople to sell effectively, allows these new team members to be quite competent, even if not as productive as their more experienced counterparts, within the broader context.

Thanks so much. Wanted to start out on the margins. Margins in the quarter, really exceptionally strong again. And obviously, the guide being 21.5% next year. You've had about 2.5 quarters, let's say, of this sort of higher sales headcount level. I guess, are you fully back on T&E? What's really going to drive the margins to that sort of low 20s level?

Good morning, Toni. The transition from 2022 to 2023 aligns with what we have mentioned over the past several quarters. The main factor is the annualization of all the hiring we conducted in 2022, which means we will be incurring the full costs associated with those new hires throughout 2023. This is the largest factor affecting our expenses. A significant portion of our hiring occurred later in the year, so we expect a noticeable increase in annual costs as we account for all these individuals. Additionally, travel and entertainment expenses are also a consideration. The fourth quarter expenses aligned with our expectations, but during the early part of 2022, we were primarily in lockdown and not traveling. We anticipate higher travel and entertainment costs in 2023 as we adapt to a post-pandemic travel routine. While there are some other minor factors, the two main ones are the annualization of headcount and increased travel and entertainment expenses.

Okay. Great. And wanted to ask about free cash flow. I know you mentioned a couple of things in the prepared remarks, but maybe just talk about why the free cash flow came in below the guidance and then the '23 guidance also looked a little bit lighter than I was thinking. So any puts and takes on free cash flow would be helpful. Thanks.

Yes, absolutely. So in 2022, the bulk of the story is what I discussed in my prepared remarks, which is just some invoicing delays coming out as a result of the hurricane. And we thought we would be able to get all caught up on that in 2022, and a bunch of it did slip into 2023. And actually, through the end of January, we actually are all caught up on that. So we feel good about both the '22 finish and getting that all behind us. In terms of 2023, obviously, there can be a lot of variability to the free cash flow numbers. If you look at it on the surface from the guidance, the free cash flow margin is in line with what we'd expect; free cash flow as a percent of EBITDA is roughly where we'd expect, and the free cash flow conversion as a percent of GAAP net income is in the range as well. And so, I think the free cash flow guidance and the free cash flow expectation is sort of in line with the business performance. I do think there are a couple of things impacting '23 that potentially put it a little bit below your expectations, probably, most notably cash taxes. So because of all that extra earnings in 2022, we have more to pay in taxes, and that's obviously reflected into 2023 free cash flow guidance as well.

Hi, good morning. Thanks for taking my questions. First one I wanted to ask was just on conferences. I think you said in your prepared remarks that there would be 47 conferences in '23, or at least that's what's planned at this point and all in-person. Obviously, a decent bit lower than where you were running pre-pandemic. So just looking for an update in terms of strategy there. I know you've talked about adding conferences to different functional lines over the course of the next couple of years. Where does '23 sit relative to your ultimate goal on conferences? And is there the potential for additional destination conferences to be added as we move through the year?

Yes. Our strategy includes hosting conferences for all key functional areas of our businesses, such as IT, HR, finance, and cybersecurity applications. We are still in the early stages of this plan, and we aim to have conferences in each major geographic region as well. It will take time to reach our goal of having a conference for every significant area in each region. These conferences provide substantial value to attendees, so we want to expand them as quickly as possible, but our pace is limited by our operational capacity and hiring. We believe we have reached our operational limit for conferences in 2023, but if we find opportunities for more, we will pursue them. We expect to continue expanding these conferences in 2024, 2025, and 2026 due to the high value they offer to attendees, our existing clients, and potential clients.

Great. Thank you. And then for my follow-up, switching gears a little bit. I just wanted to ask more specifically about growth in GBS. You talked about some of the things that have kind of evolved outside of the functional leader channel in GTS. But can you speak to the different businesses within GBS, how conversations with clients have evolved over the past couple of months there? And if there's any individual businesses there to call out, either positively or negatively relative to last quarter? Thank you.

We had great performance in GBS during 2022, including the fourth quarter. There's tremendous opportunity in GBS. As with the rest of our business, we aim to grow GBS as quickly as possible to capture that enormous opportunity. We experienced robust growth across all functional areas. In some instances, growth was slightly slower due to internal operational challenges, such as hiring delays in certain areas. However, we believe that the slower performance in some parts of GBS resulted from these internal issues we are addressing. Overall, the performance was very strong, and we are pleased with it.

Yes. And Andrew, just to underscore that, I mean, 18.9% growth for the full year coming off of a 24% full-year growth in 2021 is really, really strong, continued consistent growth. And as I mentioned in my prepared remarks, both supply chain and HR were well above 20% year-over-year growth again, coming off of really strong years in 2021 as well. And so, really strong demand there. It's indicative of the fact that across all of GBS, we are providing enormous value to the functional leaders that we serve in finance, HR, supply chain, marketing, sales, legal, and so on.

Hey, good morning, guys. Gene, in an answer to one of the prior questions, you mentioned customers looking to manage costs better. I'm wondering if you're getting any pushback on pricing, less appetite for multiyear contracts? Or can you just talk about the pricing environment and how perceptive customers are? And what you think that might look like in an environment where inflation starts to come down? Thanks.

Yes. So we've had larger-than-usual price increases over the recent past because of accelerated inflation. And we've had, I'd say, essentially zero pushback from our clients on it. And if you look at the cost of Gartner for an individual user or for even a contract for the company, it's a small ticket item. And whether it increases 3% or 7% isn't a swing factor. The swing factor is the value we provide. And we provide a tremendously better value to these clients for the costs that they have to pay, spend any alternative and can provide some credible value. So we have had, I'd say, kind of, no measurable pushback on our price increases, even though they're at higher rates. Yes, absolutely. In fact, again, many of our clients prefer multi-year contracts. It's a small ticket item, and they have administrative costs in dealing with it. And so, many, if not most of our clients actually prefer multi-years because the procurement people don't want to waste their time doing this over and over again. And so, to actually see demand from our clients for multi-years as opposed to the other way around.

Yes. And on top of that, obviously, their mission-critical priorities are not founded by a contractual term. And so, they want to make sure that they have support and insight to support their mission-critical priorities. And so, we've seen no pushback at all on our ability to sell multi-year contracts.

Okay. Craig, you mentioned the 50% sign-up pre-booking for the conference business. Can you compare that to pre-COVID levels for this time of the year?

Yes, it's a great question. So actually, significantly greater than 50% is actually what both Gene and I said. We're actually comparable or perhaps even a little bit stronger than we were pre-pandemic on that metric.

Hi, thanks. Good morning. You mentioned headcount growth in 2023 for Research will be more in line with the normal model. Can you discuss how hiring is progressing in GTS and GBS, given the tight labor market? And what level of headcount growth do you think will be achievable this year?

Hey, George. We are a very attractive employer in the marketplace. When we seek talent, we are a place that people want to work. It's actually quite challenging to become less selective as well. We've had no issues with hiring, which is why our growth rate in our associate body has accelerated significantly, as I mentioned earlier. Once again, we are an appealing place to work, and people want to join us. We have a strong associate value proposition, so we don't struggle to hire individuals.

I think, George, to build on Gene's comments, we have invested in rebuilding our recruiting function and capacity in 2021 and 2022, which is now fully operational going forward. As Gene mentioned, we have a strong brand that helps recruiters attract talent. Looking at our headcount growth for this year, we expect it to align with our standard model, where headcount is projected to grow 4 to 5 points lower than CV growth. However, with our recruitment capacity and market position, if we see an acceleration in CV growth, we have the potential to increase our pace. Conversely, if we encounter business challenges, we can easily slow down. We have developed a plan that we feel confident about, which aligns with our typical model while also allowing us the flexibility to adjust based on demand.

Got it. That's helpful. And then as a follow-up, you're guiding to at least 21.5% EBITDA margins in 2023. Under what conditions could you outperform the 21.5% target?

Yes, I believe the primary way we could outperform is through increased revenue. As mentioned in our prepared remarks, we've taken a cautious approach regarding revenue, expenses, and free cash flow. If revenue exceeds expectations, we would expect potential improvements in our margins, which is our main focus. We are carefully managing all our expenses, particularly headcount, in line with our revenue projections. We're also ensuring that our investments are aligned with sustaining future growth while delivering strong margins. We feel confident about our current balance. Our structural margins are significantly higher than they were before the pandemic, and we believe there is potential for modest margin expansion on a year-over-year basis moving forward.

Thanks so much. You mentioned the divestiture of the Talentneuron business. Can we get a little bit more color on that? It looks like you own that business for about five or six years. What did it do? Why we sell it now? And should we expect any other kind of divestitures?

Hi, Jeff. Talentneuron is a business that provides labor market data primarily to companies involved in long-term workforce planning. We acquired this business through our purchase of CEB. After evaluating it, we determined that it didn’t align with our strategic goals moving forward and recognized that there are better owners for that business. Consequently, we chose to divest it and focus on our core HR business, which is not directly related to Talentneuron. Regarding other potential divestitures, we will consider selling any parts of our operations that do not fit with our core business, and we will discuss those when appropriate.

All right. Great. Sorry, I got the name mixed up with Jimmy Neutron. In terms of my follow-up, nothing mid take here, you provided a tremendous amount of data. But in looking at wallet retention, it did decline slightly year-over-year. Is there anything to read into it? Are you giving pricing concessions or people pushing back on reordering, et cetera?

Jeff, I won't comment on your Jimmy Neutron comment. We'll save that for later. In terms of wallet retention, again, I think it's consistent with the way we talked about all of the GTS business earlier and the overall research business as well. Our enterprise function leader business performed very, very well across GBS and GTS. And essentially, what you're seeing in the wild is just that deceleration of the tech vendor business from high teens growth to single-digit growth. Even with that, it's still really strong at 105%, obviously, well above 100% and significantly in excess of client retention. And so, the core value is still there. But the slight deceleration or variance on a year-over-year basis can be completely attributed to the tech center business. And again, I underscore the enterprise function business in both GTS and GBS performed very well in the fourth quarter.

Thank you. Good morning. I just wanted to clarify on the tech lender side again. I think you said it was a quarter of your business. It grew high-single-digits. And did I hear you say that even for '23, you assume it's going to be growing high-single-digits? I was just curious if that deceleration was due to churn or new business and how that's going to come basically?

Good morning, Manav. We haven't discussed expectations for CV growth related to any segment of the business, as we do not provide specific CV guidance. In developing our plan and guidance for 2023, we considered retention, new business, and productivity metrics from the fourth quarter as key inputs for our expectations. Particularly regarding the tech vendor side, there is a lot happening in that industry currently, and we are navigating through it. High-single-digit growth is still quite positive, though it’s not at the high teens levels we might hope for. We believe that the value we offer to leaders in that sector is strong, and we have a compelling set of products. We will continue to support those clients with their critical priorities just as we do for the enterprise function leaders in both GTS and GBS.

Okay. I understand. Regarding the sales force growth, you mentioned it is 4 to 5 points below the target. Additionally, you indicated that the number of open positions is at its lowest level. Does this imply that this year's growth will be lower, perhaps significantly below the typical 10% we have seen in the past?

We adjusted our approach to expanding the sales force back in 2019. The situation in 2022 was unusual since we needed to catch up. Moving forward, our strategy is to avoid increasing our overall cost of sale. We plan to grow the sales team by about 4 to 5 points, depending on wage inflation, at a rate slower than our CV growth. This is our approach for 2023. So, we will not see a 10% to 15% increase in headcount unless CV growth reaches 15% to 20%. As I noted earlier, we are prepared to adjust our hiring based on CV growth trends. If CV growth starts to rise, we can increase our recruitment efforts; if it slows down, we can scale back. We believe we are in a strong position regarding talent. Both Gene and I are carefully managing headcount growth and expenses, and we feel we have achieved the right balance between investing in future growth and maintaining strong margins.

Here's what I'd like you to take away from today's call. In the fourth quarter of 2022, we again saw strong growth across the business. Gartner delivers incredible value to enterprises that are thriving, struggling, or anywhere in between. By being exceptionally agile and adaptive to a changing world, we've delivered a sustained record of success. We're well prepared as we enter 2023. We've carefully aligned staffing levels with demand and with the lowest percentage of open positions ever. Our content is today's mission-critical priorities. And we know the right things to do to be successful in any environment. Looking ahead, we're well-positioned to drive growth far into the future. Even as we invest for future growth, we expect margin to increase modestly over time. We generate significant free cash flow well in excess of net income. We'll return capital to our shareholders through buybacks, which reduce shares outstanding and increase returns over time. Thanks for joining us today, and we look forward to updating you again next quarter.