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Text: We appreciate you're joining us today for Gartner's first quarter 2021 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.
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 2021 foreign exchange rates unless stated otherwise.
I encourage all of you to review the risk factors listed in these documents.
Gartner performance accelerated in the first quarter of 2021.
We delivered strong results across contract value, revenue, EBITDA and free cash flow.
Total revenues were up 6%, with each of our business segments, research, conferences, and consulting, exceeding our expectations.
Research is our largest and most profitable segment.
Our Research segment serves executives and their teams across all major enterprise functions in every industry around the world.
Research has a vast market opportunity across all sectors, sizes and geographies.
Global Technology Sales, or GTS, source leaders and their teams within IT.
For Q1, GTS contract value grew 5%.
First quarter new business was up 21% as a result of new logos and upsell with existing clients.
Client engagement continue to be strong, with content and analyst interaction volumes up to 26% compared to Q 2020.
We saw strong performances across several regions and industries, including tech and midsized enterprises.
We expect GTS contract value growth to continue to accelerate in 2021 and return to double-digit growth in the future.
Global Business Sales, or GBS, serves leaders and their teams beyond IT.
This includes HR, supply chain, finance, marketing, sales, legal and more.
GBS achieved contract value growth of 12%, its first quarter of double-digit growth.
New business growth was a very strong 87% in the quarter.
All practices, with the exception of marketing, ended Q1 with double-digit contract value growth rates, and all practices delivered positive quarterly NCVI.
Across our entire research business, we practiced relentless execution of proven practices, and we're seeing the results of our efforts.
Our Research business is well positioned to return to sustained double-digit growth over the medium term.
Turning to Conferences, as many of you know, during 2020, our Conferences business pivoted from in-person destination conferences to virtual.
Our value proposition for virtual conferences remains the same as for in-person conferences.
We deliver extraordinarily valuable insights to an engaged and qualified audience.
While Q1 is a small quarter for conferences, the business exceeded our expectations.
Beyond virtual conferences, we continue to prepare to return to in-person conferences in the second half of 2021.
Gartner Consulting is an extension of Gartner Research, and helps clients execute their most strategic initiatives through deeper extended project-based work.
Our Consulting segment also exceeded our expectations, with bookings up 26% during Q1.
Our Consulting business will continue to serve as an important complement to our IT Research business.
One of our objectives is to generate strong cash flow.
Free cash flow for the quarter was $145 million, up significantly versus the prior year.
In addition, we used that cash flow plus cash balances to purchase more than $600 million in stock through April of this year.
With these repurchases, our Board increased our share repurchase authorization by another $500 million.
We recently launched our 2020 Corporate Responsibility Report.
The report details the progress we made in accelerating positive social change and contributing to a more sustainable world.
We want our associates, communities and clients to continue to thrive today and in the future.
The report can be found on gartner.com, and I encourage you to take a look.
Summarizing, Q1 was a strong quarter with all three business segments exceeding our expectations.
Looking ahead, we are well positioned for sustained success.
We have a vast addressable market which will allow us to achieve double-digit contract value and revenue growth over the next five years and beyond.
We expect to deliver modest EBITDA margin expansion going forward from a normalized 2021.
We generate significant free cash flow in excess of net income, which we'll continue to deploy through share repurchases and strategic tuck-in acquisitions.
And with that, I'll hand the call over to Craig.
I hope everyone remains safe and well.
First quarter results were outstanding with very good momentum across the business.
Revenue was well above our expectations.
Despite the lower-than-planned expenses, we are well positioned to take advantage of the strong demand environment.
We will continue to restore spending to support and drive long-term sustained double-digit growth.
With stronger-than-expected results in contract value, nonsubscription research and consulting, we are increasing our revenue growth and normalized margin outlook, which results in a meaningful increase to our 2021 guidance.
The improved outlook reflects the increased visibility we have following the stronger-than-expected first quarter.
First quarter revenue was $1.1 billion, up 8% year-over-year as reported and 6% FX-neutral.
In addition, total contribution margin was 70%, up more than 320 basis points versus the prior year.
EBITDA was $320 million, up 50% year-over-year and up 44% FX-neutral.
Adjusted earnings per share was $2, and free cash flow in the quarter was $145 million.
Research revenue in the first quarter grew 8% year-over-year as reported and 6% on an FX-neutral basis, and we saw strong retention and new business throughout the quarter.
First quarter research contribution margin was 74%, up about 200 basis points versus 2020.
Higher contribution margins reflect both improved operational effectiveness and the avoidance of travel expenses.
Some of the margin improvement compared to historical levels is temporary and will reverse as the world reopens, and we increase spending to support growth.
We are seeing a benefit from increased scale and a mix shift to higher-margin products, including from the discontinuation of certain lower-margin marketing products.
Total contract value grew 6% FX-neutral to $3.7 billion at March 31.
Quarterly net contract value increase, or NCVI, was $59 million, significantly better than the pandemic affected first quarter last year.
Quarterly NCVI is a helpful way to measure contract value performance in the quarter, even though there is notable seasonality in this metric.
Global Technology Sales contract value at the end of the first quarter was $3 billion, up 5% versus the prior year.
GTS CV increased $34 million from the fourth quarter.
The selling environment continued to improve in the first quarter but while retention isn't yet fully back to normal.
Moving forward, we expect win backs and a return to more expansion with existing clients to contribute to growth in 2021, consistent with our experience coming out of the last downturn.
By industry, CV growth was led by technology, healthcare and services, while retention for GTS was 98% for the quarter, down about 560 basis points year-over-year.
Sequentially, a majority of our industry groups saw retention improve from the fourth quarter.
GTS new business was up 21% versus last year with strength in new logos and an improvement in upsell with existing clients.
Our regular full set of metrics can be found in our earnings supplement.
Global Business Sales contract value was $731 million at the end of the first quarter, up 12% year-over-year.
GBS CV increased $25 million from the fourth quarter.
This was the strongest first quarter performance we've seen from GBS.
CV growth was led by the healthcare and technology industries.
All practices recorded double-digit CV growth with the exception of marketing, which was impacted by discontinued products.
However, our marketing practice saw improving retention rates and a return to year-over-year new business growth in the quarter.
All of our practices, including marketing, showed sequential increases in CV from the fourth quarter.
While retention for GBS was 104% for the quarter, up more than 330 basis points year-over-year, GBS new business was up 87% over last year, led by very strong growth across the full portfolio.
As with GTS, our regular full set of GBS metrics can be found in our earnings supplement.
Conferences revenue for the quarter was $25 million.
We had about $10 million of onetime revenue in the quarter.
This reflected contract entitlements, which we extended beyond the end of 2020 as a result of the pandemic.
Contribution margin in the quarter was 56%.
We held five virtual conferences in the quarter.
We also held a number of virtual Avanta meetings.
First quarter consulting revenues increased by 4% year-over-year to $100 million.
On an FX-neutral basis, revenues were flat.
Consulting contribution margin was 39% in the first quarter, up 860 basis points versus the prior year quarter.
Labor-based revenues were $84 million, up 4% versus Q1 of last year and down 1% on an FX-neutral basis.
Labor-based billable headcount of 744 was down 8% due to headcount actions taken in Q2 and Q3 of last year.
Utilization was 68%, up about 550 basis points year-over-year.
Backlog at March 31 was $116 million, up 3% year-over-year on an FX-neutral basis after a strong bookings quarter.
Our backlog provides us with about four months of forward revenue coverage.
Our Contract Optimization business was up 6% on a reported basis versus the prior year quarter and 3% FX-neutral.
As we have detailed in the past, this part of the consulting segment is highly variable.
Consolidated cost of services decreased 2% year-over-year and 4% FX-neutral in the first quarter.
Cost of services declined due to lower travel and entertainment costs during the quarter, as well as the continuation of various cost avoidance initiatives.
SG&A decreased 2% year-over-year and 4% FX-neutral in the first quarter as well.
SG&A declined due to lower facilities, travel, entertainment, and conference-related expenses, as well as the continuation of various cost avoidance initiatives.
As CV rebounds this year, our traditional sales productivity metrics will also improve.
For 2021, we have ample sales capacity to drive increasing CV growth, a more tenured-than-usual sales force, several consecutive quarters of strong client engagement which should drive improving retention, and the insights to help our clients address their most critical priorities.
Going forward, in addition to the initiatives to improve sales force productivity and cost effectiveness we've been discussing the past few years, this year, we are investing to upgrade many of our sales technology tools.
We will be ramping up our sales force hiring later in the year to ensure we have the team in place to drive strong CV growth next year.
We still anticipate high single-digit growth in both GTS and GBS headcount by the end of 2021.
EBITDA for the first quarter was $320 million, up 50% year-over-year on a reported basis and up 44% FX-neutral.
First quarter EBITDA reflected revenue above the high end and costs toward the low end of our expectations for the first quarter.
Depreciation in the quarter was up about $3 million versus 2020, including real estate and software, which went into service since the first quarter of last year.
Net interest expense, excluding deferred financing costs in the quarter, was $25 million, flat versus the first quarter of 2020.
The Q1 adjusted tax rate, which we used for the calculation of adjusted net income, was 23.5% for the quarter.
The tax rate for the items used to adjust net income was 22.4% in the quarter.
Adjusted earnings per share in Q1 was $2.
Recall that about $6 million of equity compensation expense, which we normally would have incurred in the fourth quarter of 2020, shifted into the first quarter of 2021.
The weighted average fully diluted share count for the first quarter was 89.1 million shares.
The ending fully diluted share count at March 31st was 87.7 million shares.
Operating cash flow for the quarter was $157 million compared to $56 million last year.
The increase in operating cash flow was primarily driven by EBITDA growth, improved collections and cost avoidance initiatives.
capex for the quarter was $13 million, down 49% year-over-year.
Lower capex is largely a function of lower real estate investments.
Free cash flow for the quarter was $145 million, which was up about 360% versus the prior year.
Free cash flow growth continues to be an important part of our business model, with modest capital expenditure needs and upfront client payments.
Free cash flow as a percent of revenue or free cash flow margin was 22% on a rolling 4-quarter basis, continuing the improvement we've been making over the past few years.
Free cash flow is well in excess of both GAAP and adjusted net income.
At the end of the first quarter, we had $446 million of cash.
Our March 31st debt balance was $2 billion.
At the end of the first quarter, we had about $1 billion of revolver capacity.
Our reported gross debt to trailing 12-month EBITDA was about 2.2 times.
We remain very comfortable with our current gross debt level and the corresponding lower leverage multiple.
The multiple has reduced predominantly from increased EBITDA.
Our expected free cash flow generation and excess cash remaining on the balance sheet provide ample liquidity and cash to deliver on our capital allocation strategy of share repurchases and strategic tuck-in M&A.
During the first quarter, we repurchased $398 million in stock at an average price of about $180 per share.
In the month of April, we repurchased more than $200 million of our stock.
At the end of April, the Board increased our share repurchase authorization for the second time this year, adding another $500 million.
As of April 30, we have around $790 million available for open market repurchases.
We expect the Board will continue to refresh the repurchased authorization as needed going forward.
As we continue to repurchase shares, we expect our capital base to shrink going forward.
This is accretive to earnings per share and combined with growing profits, also delivers increasing returns on invested capital over time as well.
We are updating our full year guidance to reflect Q1 performance and an improved and increased outlook for the remainder of the year.
For Research, the strong start to the year in CV performance and improvements to nonsubscription revenue are contributing to higher-than-previously expected research revenue.
For Conferences, our guidance is still based on being virtual for the full year.
Operationally, we are planning to relaunch in-person Avanta meetings in the third quarter and in-person destination conferences starting in September.
Our guidance includes fixed costs, primarily people and marketing related to both a full year of virtual and a partial year of in-person conferences.
We've excluded the variable costs, primarily venue-related associated with in-person conferences from our guidance.
If we are able to run in-person conferences, we expect incremental upside to both our revenue and profitability for 2021.
For Consulting revenues, demand started the year better than we expected and the backlog improved during the first quarter.
For expenses, we have reinstated benefits, which were either canceled or deferred in 2020.
This includes our annual merit increase, which took effect April 1.
We also plan to increase quota-bearing head count in the high single digits for both GTS and GBS by the end of 2021.
Additionally, we continue to invest in several other programs.
The impact of most of these expense restorations or investments impact our P&L starting in the second quarter.
As you know, travel expenses were close to 0 from April 2020 through March 2021.
Our current plans continue to assume a modest ramp-up in travel-related expenses over the course of 2021.
Most of this ramp is built into the second half of the year.
If travel restrictions remain in place for longer than we've assumed, we'd see expense savings.
For our revenue guidance, we now expect Research revenue of at least $3.935 billion, which is growth of at least 9.2%.
We expect Conferences revenue of at least $170 million which is growth of at least 42%.
We now expect consulting revenue of at least $400 million, which is growth of at least 6.4%.
The result is an outlook for consolidated revenue of at least $4.5 billion, which is growth of 9.9%.
Based on current foreign exchange rates and business mix, the consolidated growth includes an FX benefit of about 200 basis points.
The year-over-year FX benefit is more pronounced in the first half of the year.
With the ongoing business momentum we are seeing, we are planning to restore growth spending as we move through the year.
We now expect full year adjusted EBITDA of at least $1 billion, which is an increase of about 22.3% versus 2020 and reported margins of at least 22%.
This is based on conferences running virtual only.
The 18% to 19% expected margins in the back half of the year should provide a reasonable run rate for thinking about the margins going forward as we will have more fully restored costs and resumed growth hiring.
We expect our full year 2021 adjusted net interest expense to be $102 million.
We expect an adjusted tax rate of around 22% for 2021.
We now expect 2021 adjusted earnings per share of at least $6.25.
For 2021, we now expect free cash flow of at least $850 million.
This is before any insurance proceeds related to 2020 conference cancellations.
All the details of our full year guidance are included on our Investor Relations site.
Finally, we expect to deliver at least $270 million of EBITDA in Q2 of 2021.
We expect the second quarter tax rate in the high 20s.
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 cost growing in line with CV growth over time and G&A leverage, we can modestly expand margins from a normalized 2021 level of around 18% to 19%.
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.
We will repurchase shares over time, which will lower the share count as well.
We had a strong start to the year with momentum across the business.
We have meaningfully updated our outlook for 2021 to reflect the stronger demand environment and our enhanced visibility.
We are restoring certain expenses and investing to ensure we are well positioned to rebound as the economy recovers.
We repurchased more than $600 million worth of stock this year through the end of April and remain committed to returning excess capital to our shareholders.

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q1 revenue rose 8.4 percent to $1.1 billion.
board of directors increased share repurchase authorization by $500 million in april 2021.

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