Good morning, everyone. Welcome to Gartner's Second 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 second quarter 2023 financial results and Gartner's outlook for 2023 as disclosed in today's earnings release and earnings supplement, both posted to our site 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 recent 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.

Good morning. And thanks for joining us today. Garner drove another strong performance in Q2. We delivered double-digit revenue growth and high-single digit growth in contract value. EBITDA. EBITDA margins, and adjusted EPS came in above expectations as a result of modest revenue upside and disciplined cost management. Free cash flow in the quarter was excellent. The environment remains highly uncertain. The tech sector continues to adjust to post pandemic demand. The banking industry is grappling with rising interest rates. Many industries continue to be impacted by supply chain challenges and more. Enterprise leaders and their teams need actionable, objective insight. Gartner is the best source for the insight, tools and advice that make the difference between success and failure for these leaders and the enterprises they serve. We're helping our clients make better decisions, whether they're thriving or struggling or anywhere in between. We do this through consistent execution of operational best practices. Research continues to be our largest and most profitable segment. We guide leaders across all major enterprise functions. Our market opportunity is fast across all sectors, sizes and geographies. We estimate our opportunity at around $200 billion. 95% of our addressable market is with enterprise functional leaders like chief information officers, CFOs, heads of supply chain and more. The balance of the market opportunity is with technology vendors. In the second quarter, we helped clients with a wide range of topics, including cybersecurity, data analytics, artificial intelligence, remote work, cost optimization and more. Research revenue grew 7% in Q2. Subscription revenue grew 9% on an organic basis. Total contract value growth was 9%. Contract value for enterprise function leaders continued to grow at double-digit rates. We serve executives and our teams through distinct sales channels. Global technology sales or GTS stores leaders and their teams within…

Thank you, Gene. And good morning. Second quarter results were strong, with high-single digit growth in contract value and double-digit FX neutral revenue growth. EBITDA, EBITDA margins and adjusted EPS were better than expected as a result of modest revenue upside and disciplined cost management. Free cash flow in the quarter was excellent. With good visibility into the balance of the year, we are increasing our 2023 EBITDA and free cash flow guidance. Second quarter revenue was $1.5 billion, up 9% year-over-year as reported and 10% FX neutral. In addition, total contribution margin was 68% compared to 69% in the prior year as we caught up on hiring during 2022. EBITDA was $384 million, ahead of our guidance and about in line with last year. Adjusted EPS was $2.85, consistent with Q2 of last year. And free cash flow was $410 million. We finished the quarter with 20,104 associates, up 12% from the prior year and 1% from the end of the first quarter. We remain well positioned from a talent perspective, with low levels of open territories and our new associates coming up the tenure curve. We will continue to carefully calibrate headcount and operating expenses based on near term revenue growth and opportunities to invest for the future. Research revenue in the second quarter grew 6% year-over-year as reported and 7% on a FX neutral basis. Subscription revenue grew 9% on an organic FX neutral basis. Second quarter Research contribution margin was 73% compared to 74% in the prior-year period, as we have caught up on hiring and return to the new expected levels of travel. Contract value, or CV, was $4.6 billion at the end of the second quarter, up 9% versus the prior year. The second quarter last year was one of our strongest research quarters…

[Operator Instructions]. And our first question coming from the line of Jeff Meuler with Baird.

Q2 CV and new business sold seemed solid meet, but just want to make sure and 100% confirm that there was no change to Research subscription revenue expectations in the guidance that's signaling, like surprising step down recently or incremental slowing recently in CV. And if it's all limited to just the non-subs, the $70 million reduction on a $422 million revenue base seems like a big mid-year adjustment if you can just talk through the dynamics there.

On the first part of your question, the subscription revenue piece of our business continues to perform very well. As you noted, we do have the tech vendor dynamics impacting the business, but GBS continues to be very strong. The IT and user portion of GBS continues very, very strong. Your point on the CV growth for each of those and the new business dynamics for each of those were spot on in the quarter. And so, essentially, the revision to guidance, where we thought we were going to be from a subscription perspective, it's the non-sub piece that really impacted the guidance. I think – and Gene will hop in here too – the way to think about the impact, so clearly, as we talked about, the non-sub business has direct exposure to tech vendor marketing spending, and that has become very constrained over the last few quarters and more constrained in the first half of this year. And that's essentially what's impacting that business. We do believe that when the tech vendor market stabilizes, that this will get back to being a great growth business for us, just like it will within the GBS subscription part of the business as well. We're just dealing with a little bit of those temporary dynamics that we're talking about. And again, having two quarters of history to be able then to look forward, with the facts we saw in the first half of the year, that led to that revision, but again solely on the non-subscription part of the business.

When I hear about tech vendor marketing spend weakness, obviously, we see that in the broader landscape. So what's happening in your non-subs business in Research directionally make sense, but the thing that I would worry about is does Conferences revenue also get hit again or get hit at some point? And I get that the Conferences attendance is strong, but it seems surprising to me that the exhibitor bookings are doing as well as they are in Conferences against that landscape. And maybe if you could compare and contrast, like, if there's a major client difference or if it's just the value prop is so strong or if how you think about, I guess, future risk on exhibitor bookings in Conferences.

Our conferences business is a great business of great value proposition. It's doing extremely well. On the attendee side, we're seeing great growth across the board. We're expanding the number of conferences as quickly as we can do it operationally because we're seeing such great take-up. On the exhibitor side, similarly, because we have such great attendees, it's very attractive to exhibitors. And our exhibitor bookings have been very strong and in line with what we've seen last year, which are also extremely strong. And it's because of the great value proposition we have with both our attendees and with the exhibitors.

And our next question coming from the line of Heather Balsky with Bank of America.

You just kind of talked about your enterprise business and how it's holding up strong. And you talked about it running up double-digits this quarter. I'm just curious, quarter to quarter, I guess 2Q versus 1Q, how that business is trending, where you see demand going in the current environment? And potentially what you think some of the catalysts are in either direction?

I think the trends on the enterprise function leader part of the business were pretty consistent from Q1 to Q2, so nothing within the quarter and really nothing too much from a variability perspective from Q1 to Q2. So those businesses continue to perform very well. And our expectation is they continue to perform very well. So, nothing really to see there from a monthly perspective or from quarter to quarter perspective.

With regard to your outlook for the tech vendors, you talked about that you see it returning to sort of your normalized run rate growth over the midterm. And then I think you just mentioned that it's probably more of a short term trend. I'm just curious, kind of are you seeing any signs of potential improvement as you move through the year or even through 2024? Or just curious why you're talking more over the midterm versus the short term.

What I say is, on a short term basis, no change Q1 to Q2 in terms of tech vendor demand, very similar, with the exception of the non-subscription business, which is we've talked about. It's our perspective that what happened with Gartner, tech industry is that demand got pulled forward during the pandemic. So, there was some demand that was already filled in. And demand will get back to trend once sort of a little time elapses. And how long that takes, we don't know. But we believe that technology business will get back to trend in the medium term.

And our next question coming from the line of Toni Kaplan with Morgan Stanley.

I was hoping that you could talk about the current client spending appetite, if you're seeing cost cutting or if you're seeing just business as usual. It sounds like the subscription business is performing well and it's just this tech vendor piece that's having a little bit of a hiccup. So just wanted to get any color on the overall customer environment.

As you pointed out, contract value for enterprise function leaders continue to grow at double digit rates. I will say while we're growing there, that more decisions are getting escalated and there's more scrutiny than there was your like a year ago. So it's a tougher environment in terms of work relations. But at the end of the day, people see our value and vibe, which is why we had that great performance.

I wanted to ask about whether AI could actually be a help for you with regard to adding additional seats across the enterprise. Are you thinking that corporations will start to need an AI strategy across some of the GBS lines like finance, legal, HR? Could that lead to additional seats? And then similarly, within GTS, could that lead to additional seats as well? Or do you view this as being sort of similar to prior technology trends like cloud, and so therefore, it's just a change of topic.

I expected it's little bit in between, actually, that it is a change of topics. But there's more kind of intense interest in the topic of AI than there was in such a short period with cloud. [indiscernible] of it, we did more than 22,000 interactions in the first half. This is a one-on-one calls with our experts on the subject of AI, which is higher than any other single topic and the rate of growth is very high. We're seeing a lot of demand with enterprises that we hadn't seen before where they're saying, hey, could you please come in and talk to us about AI? So we expect that that will be a positive for our business.

The only thing I'd add is just underscore your point on the broad applicability of AI being a little bit different than some other topics because, to your point, finance leaders care about it, legal leaders care about it, HR leaders care about it, in addition to IT leaders and their teams caring about it. So there is the potential that is a little more broad based to your point than prior technology lens.

And our next question coming from the line of Seth Weber with Wells Fargo.

I wanted to ask just about the implied EBITDA margin raise for the year. Is that just a function of mix? Or is there something else that's supporting the stronger margin outlook for the year?

On the margins, as we've talked about, the margins can pop around a little bit from quarter to quarter, depending on spending trends and where the revenue is trending as well. And so, our margins were a little bit higher than we had initially anticipated in the first half of the year. And I'd say it's really just a combination of revenue modestly exceeding our expectations in the first half and expenses modestly being a little bit below our expectations. Or said another way, we're just more prudently managing our OpEx as we work our way through the year. So, again, margins can pop around. There's no mega trends there, I would say, other than a little bit of modest revenue upside and us making sure that – again, we talked about, in our prepared remarks, really carefully calibrating our headcount levels and our OpEx levels to ensure that we deliver consistently strong margins.

Just on the big ramp in the quota-bearing headcount, can you just talk to where you think you are from an efficiency perspective for the new hires? Are they kind of on track or any kind of metrics that you could call out as far as efficiency or productivity goes with the new hires?

To your point, we've ramped up our sales force with the lowest number of opens we've had in a long time. And the talent that we're hiring, if you look at kind of how we track the quality of the talent, is very, very high. And we ramped up hiring the most last year. So these people are starting to get a little bit of tenure under their belt. And we expect over the next three years, as they get up to full tenure, that actually the productivity will be very good. And we're seeing the ramp we'd expect at this point.

And our next question coming from the line of Manav Patnaik with Barclays.

Just on the margin front, Craig, I think on the call, you mentioned T&Es back to normal or something of that effect. So I was just curious, are we at those normalized levels where you're talking about kind of the long term margin being in the low 20s? Or is there more normalization to occur still overall with all the different moving pieces?

We are back to what we believe to be roughly the new normal from both T&E perspective. And last year, in particular, we were playing catch-up on hiring throughout the course of the year. And so, as you look at our operating expenses now, I think we're at pretty "normal level" of operating expenses. And so, what we're looking at from Q2 through the end of this year is normal seasonality from an OpEx perspective with our new normal levels of T&E minus headcount growth and make sure that we're investing for the future, et cetera, kind of baked in. So I think it is a good, normalized, if you will, OpEx level that we're working off of this year.

Just on the second half, a little bit more specifically, can you just talk about, I suppose, the hiring expectations. It may be even just on the cost side, it seems a little conservative, but maybe there's some things we're missing here.

Yeah, I think there's a few things in there. One is the seasonality with our Conferences business. We are performing really, really well in Conferences. And Q4 is by far our largest Conference quarter. And that means you generally see expenses up in the fourth quarter just to deliver those conferences. And then because it's the fourth quarter, because we have so many conferences, there's a lot of additional travel and marketing activity that spikes in the fourth quarter as well, which, again, is sort of back to our typical seasonality that we had from an OpEx perspective pre-pandemic. So if you think about OpEx, it's relatively flattish from 2Q to Q3. A little bit of step down because it's a lighter conferences quarter and then a pretty big step up in OpEx from Q3 to Q4, driven by the conferences calendar, significant travel to support our conferences calendar, and marketing to support the conferences calendar and the close of our year as well. We are running a number of scenarios and we are planning in a very agile way in terms of the headcount that we plan to add between now and the end of this year. And there's a wide range of scenarios. And we've got a wide range of recruiting scenarios as well. One of the things that we've been very careful about is making sure that we maintain our recruitment capacity, so that when supercharged growth returns, we are more than ready to turn that dial from a recruitment perspective. So we're maintaining our recruitment capacity, and we're ready to tune those dials up or down, depending on what the second half of the year looks like, predominantly from a contract value growth perspective.

And our next question coming from the line of Josh Chan with UBS.

I guess on GTS, obviously, the wallet retention is impacted by the overall environment. I was just wondering what you think the trajectory of the GTS wallet retention will be over the coming quarters? Would it surprise you if it went below 100% or is that too drastic of a scenario?

I think important to disaggregate the enterprise function leader portion of GTS and the tech vendor portion of GTS. So, overall, we are still well over 100% on wallet retention, and that's with the enterprise function portion of our GTS wallet retention being above historical averages. And so, we expect that to continue. The tech vendor side, wallet retention is a rolling four quarter metric. And so, we'll have these more challenging quarters in the number for a little while. But I would say we don't forecast wallet retention. I shouldn't say we don't forecast it, we don't guide wallet retention or contract value. But given that the enterprise function leader part of the GTS business is the predominant part of it, call it 70-ish percent of the business, that continues to be very strong, and that should drive the wallet retention over the coming quarters.

On your comments about headcount, I guess, what indicators are you looking for in order to kind of toggle up or toggle down the recruitment in the second half?

The main thing we look at is what our CV growth is. So, we look at what our bookings are and how sales are going because we want to make sure we match our headcount growth to the amount of bookings that we have, and that kind of helps ensure that our focus of business going forward in the right space from both a growth viewpoint as well as margin viewpoint.

And our next question coming from the line pf Stephanie Moore with Jefferies.

I wanted to touch on the Research pricing environment. I believe you tend to increase those in the fall of the year. So just wanted to get an update on how you're thinking about price increases for this year into next?

I think one of our core goals with pricing is to make sure that, at a minimum, we are offsetting our projected wage inflation. And so, the past few years, when we were seeing higher wage inflation, we went a little bit stronger on price increase. This year, again, the labor market, for the type of people that we are recruiting is still relatively strong. But the wage inflation we expect to be a little bit more muted. We're still working through all the details of the price increase, which, again, to your point, goes into effect in November. But I would suspect it's a little bit lighter than what we've done the last few years, just given the inflationary environment, particularly wage inflationary environment, had abated a little bit.

And our next question coming from the line of George Tong with Goldman Sachs.

Following up on some of the tech vendor non-subscription trends, can you talk about which products specifically are seeing reduced demand due to a slowdown in tech vendor marketing spend? And generally, is the non-subscription demand leading coincident or lagging with broader client IT spend?

Just want to clarify your question. So it was which products are most impacted? Is that what the question was?

Yeah, within your non-subscription book of products?

Within the non-subscription part of the business, which, again, represents around 8% – or less than 10% of, let's call it, of our overall research revenue, the predominant way we derive revenue there is through lead generation for tech vendors and really focus on the, I call it, non-enterprise IT market. So, smaller businesses, et cetera. And so, our GTS business is really focused on enterprise tech companies, whereas the non-subscription business is really focused on a combination of enterprise and really small business focused technology companies. And so, that's where we've seen, on the small technology companies, the companies most focused on selling into small businesses, that's where we've seen the biggest challenge. Again, you've covered all the things that are happening in the tech market from funding and the overall dynamics there. But as those companies are recalibrating their operating expenses, clearly, marketing and lead gen is a place that they often look to get a big handle on. And I think that's what's happening. That said, they are still spending and spending well in that business. And as Gene mentioned earlier, and I think I mentioned too, we fully expect, once the market is recalibrated, it will get back to growing, but it's predominantly around the lead gen stuff and the focus on lead gen in smaller businesses.

Separately, can you talk about how the tech vendor non-subscription performance trended over the course of the quarter? Did you see a bottoming? Did you see further deterioration as you move through the quarter? And does your updated guide assume trends stabilize from 2Q levels or worsen from two key levels?

I think it's been relatively consistent with normal levels of volatility week to week and actually even day to day, but trends pretty consistent Q1 to Q2. And what we've modeled into our guide is essentially stabilization from those Q2 levels for the balance of the year.

And our next question coming from the line of Jeff Silber with BMO Capital Markets.

I'm sorry to keep on focusing on the non-subscriptions piece. Normally, can you just tell us from a breakdown perspective, what percentage comes from tech vendors and what percentage comes from enterprise customers? And if we could just focus in on the enterprise customers component of that, can you talk about how that's trending?

100% of the revenue comes from tech vendors in the non-subscription part of the business. So, 100% of that less than 10% of our overall Research business is tech vendor focused.

I wanted to actually circle back and talk about AI, but the potential impact on your business internally. Do you think it's going to make your analysts more efficient? Do you think you might be able to reduce headcount from an analyst perspective just to take advantage of technology? Any thoughts would be great.

We're looking at AI from a lot of perspectives. The first and most important one is what I talked about earlier, which is there's a tremendous amount of client demand, and we're the best source for clients to get help in AI. And it's of a tremendous interest with them. So that's the key place that we are most focused on. We actually use AI in our business today. We have for years in different parts of our business. And so, internally, we look at are there cost optimization opportunities we use internally? As I said, we've been doing that. We're increasing the amount of that over time. We're also looking at, can we support provide customer services [indiscernible] enhanced, all those kinds of things. I'd say, internally, those kinds of uses are going to be normal course of business. We always focus on improved productivity. We have a lot of tools. Technology is a big part of the toolkit. And AI is just one of those tools improving productivity over time, which we've always been focused on. And so, I don't see any kind of, like, some costs dropping by 50% or something because [indiscernible] part of our ongoing continuous improvement and continuous innovation that we've been doing for years.

Thank you. I'm showing no further questions in the queue. At this time, I will now turn the call back over to Mr. Gene Hall for any closing remarks.

So here's what I'd like you to take away from today's call. Gartner drove another strong performance in Q2. 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 exceptionally agile and continuously adapt to the changing world. 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 revenue growth. We expect 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'll return significant levels of excess capital to our shareholders. This reduces shares outstanding and increases returns over time. Thanks for joining us today and we look forward to updating you again next quarter.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.