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Text: We appreciate your joining us today for Gartner's fourth quarter 2020 earnings call and hope you are well.
With me on the call today are Gene Hall, Chief Executive Officer; and Craig Safian, Chief Financial Officer.
All growth rates in Gene's comments are FX-neutral, unless stated otherwise.
Reconciliations for all non-GAAP numbers we use are available on the Investor Relations section of the gartner.com website.
Finally, all contract values and associated growth rates we discuss are based on 2020 foreign exchange rates, unless stated otherwise.
I encourage all of you to review the risk factors listed in these documents.
2020 was an extraordinary year.
The COVID-19 pandemic, global macroeconomic conditions, social unrest and geopolitical changes, all pose significant challenges to enterprises around the world.
In this context, Gartner delivered a strong performance across contract value, revenue, EBITDA and free cash flow.
As many of you know, we entered 2020 with a financial plan to align cost with revenues.
By executing this plan and taking swift cost actions when the pandemic first began, we quickly stabilized our financial position.
We maintained discipline cost management throughout the year over strong investments to support future growth.
We've successfully pivoted our global workforce to operate effectively in a remote environment.
We grew our capability and key functions across our business.
We drove strong operational execution and we were extremely agile in serving our clients.
Pivoting our content to address critical contemporary issues such as the pandemic, remote work environments, cost optimization and business continuity.
We are well positioned to spring back quickly as the macroeconomic environment improves.
Our performance improved in Q4 compared to earlier in 2020.
We delivered strong performances in GBS contract value, research revenues, EBITDA and free cash flow.
Research is our largest and most profitable segment.
This is a vast market opportunity across all sectors, sizes and geographies.
Our research segment serves executives and their teams across all major enterprise functions in every industry around the world.
We are uniquely positioned to support leaders enterprisewide on hundreds of critically important topics.
Topics with the highest interest during Q4 included data and analytics, cost optimization and talent management.
Global Technology Sales or GTS, serves leaders and their teams within IT.
For the full year 2020, GTS contract value grew 4%.
Our key underlying metrics have improved each quarter since Q2.
Fourth quarter 2020 contract value from new logos was up from a year ago, while cancels were about the same.
Our existing clients continued to increase their spend, however it was a slower pace than in 2019.
This was the biggest factor impacting our growth in the quarter.
Client engagement continue to be strong with both content and analyst interactions up 30% versus 2019.
We saw strong performances across several regions and industries, including tech, retail and services.
Some of the topics with the highest interest included digital transformation, application development, cloud management and the digital workplace.
We expect GTS contract value growth 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 contract value continued to perform well throughout the year with contract value growth of 7%.
New business growth was a very strong 26% in the quarter, driven by our GxL product line.
The sales, finance and HR practices all ended Q4 with double-digit growth rates.
And all practices, with the exception of marketing, contributed to GBS's growth.
Across our entire research business, we've 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.
As many of you know, our conferences segment had great momentum coming out of 2019, but was hard hit in 2020 by the global pandemic.
To replace our traditional in-person destination conferences, which were no longer possible in 2020, we pivoted to virtual conferences.
The performance of these conferences exceeded our expectations in 2020.
And now with several months experience under our belt, we've got a set of best practices that will continue to refine.
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.
Beyond personal conferences, operationally, we are preparing 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 was also impacted by the pandemic with revenues down 12% in Q4 and 5% for the full year 2020.
Over the past several years, we've made great progress in our consulting business, and it will continue to serve as an important complement to our IT research business.
Companywide, we continued to strengthen our stance against racism and discrimination.
We appointed a new leader of diversity, equity inclusion.
We established a Center of Excellence dedicated to improvement in this area.
And we strengthened our employee resource groups, which help remove barriers for diverse populations and support associate engagements.
Sustainability is an important factor in how we manage our business.
For example, we've signed contracts for our Stamford headquarters and our U.K. hub to be powered by 100% renewable energy.
We'll be eliminating single-use plastics across our offices.
And finally, we're benchmarking our environmental footprint and development programs to minimize it over time.
Summarizing, we've performed well in the context of a pandemic.
Looking ahead, we are well positioned for sustained growth.
We expect to return to revenue growth in 2021 and are on track to return to double-digit CV and revenue growth thereafter.
We expect to deliver 2021 EBITDA margins, up 2019 and to further expand margins over time.
We've generated significant free cash flow in excess of net income, which will deploy to return capital to our shareholders through share repurchases and make strategic tuck-in acquisitions.
With that, I'll hand the call over to Craig.
I hope everyone remain safe and well.
Fourth quarter results were ahead of our expectations, headlined by a strong performance in GBS, better than planned cost management and outstanding free cash flow generation.
As our 2021 guidance highlights, we expect total revenue to increase versus 2020, while also positioning Gartner for a return to strong growth.
Looking out over the medium term, we continue to expect double-digit CV and revenue growth, modest margin expansion and strong free cash flow generation.
Because we can fund growth investments, we have ample capital to return to shareholders and to deploy to strategic tuck-in acquisitions when we find the right opportunities.
Our board authorized an additional $300 million for repurchases, bringing the total available to around $860 million.
Reviewing our year-over-year financial performance, for the full year 2020, total contract value increased 4%, total FX-neutral revenue was down 3%, FX-neutral adjusted EBITDA increased 20%, diluted adjusted earnings per share was a strong $4.89 and free cash flow was $819 million, up almost 100% from 2019.
We did see some timing benefits, which I will discuss a bit later.
Fourth quarter revenue was $1.1 billion, down 8% as reported and 9% FX-neutral.
Excluding conferences, our revenues were up 2% year-over-year FX-neutral.
In addition, total contribution margin was 68%, up more than 580 basis points versus the prior year.
EBITDA was $245 million, up 13% year-over-year and up 10% FX-neutral.
Adjusted earnings per share was $1.59, and free cash flow in the quarter was a robust $237 million.
Research revenue in the fourth quarter grew 5% year-over-year as reported and 4% on an FX-neutral basis.
Fourth quarter research contribution margin was 72%, benefiting in part from the temporary cost avoidance initiatives we put in place starting in the first quarter of 2020.
Total contract value grew 4% FX-neutral to $3.6 billion at December 31.
This was the highest contract value in Gartner history, a notable achievement in a challenging year.
For the full year 2020, research revenues increased by 7%, both on a reported and FX-neutral basis.
The gross contribution margin was 72%, up about 240 basis points from the prior year.
Global Technology Sales contract value at the end of the fourth quarter was $2.9 billion, up almost 4% versus the prior year.
The selling environment continued to improve in the fourth quarter, but we are still seeing less upsell with existing clients than normal.
Our clients are staying with us, but not adding as much incremental CV as we've historically seen given the challenging economic environment.
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, retail and services.
While retention for GTS was 98% for the quarter, down about 600 basis points year-over-year, a majority of our industry groups saw retention improve from the third quarter.
GTS new business declined 5% versus last year, an improvement from both the second and third quarters.
Our regular full set of metrics can be found in our earnings supplement.
Global Business Sales contract value was $696 million at the end of the fourth quarter.
That's about 20% of our total contract value.
CV increased 7% year-over-year.
CV growth was led by the healthcare and technology industries.
The sales, finance and human resources practices, all recorded double-digit CV growth for the year.
All practices contributed to the 7% CV growth rate for GBS with the exception of marketing, which was impacted by discontinued products.
That said, our marketing business saw improving retention rates and a return to year-over-year new business growth in the fourth quarter.
Wallet retention for GBS was 101% for the quarter, down 43 basis points year-over-year.
GBS new business was up 26% over last year, led by very strong growth in HR, finance and legal.
As with GTS, our regular full set of GBS metrics can be found in our earnings supplement.
Overall, GBS continue to demonstrate its resilience and strength as we exited 2020.
The conferences segment was materially impacted by the global pandemic, as you know.
During the year, we pivoted to producing virtual conferences with the focus on maximizing the value we deliver for our clients.
We held 13 virtual conferences in the fourth quarter.
We also held a number of virtual Evanta meetings, shifting these one day local conferences online due to the pandemic.
Conferences revenue for the quarter was $93 million.
Contribution margin in the quarter was 78%.
Our fast transition to virtual conferences has been positive for the overall business.
As we discussed last quarter, virtual conferences offer significant value to our research clients and prospects.
And while we've shown that we can run virtual conferences profitably, it is important to recognize the different economics associated with virtual versus in-person conferences.
Similar to last quarter, I'd highlight two primary differences.
First, our mix of revenue from attendees and exhibitors has essentially flipped, with the in-person format approximately two-thirds of revenue comes from exhibitors and one-third from attendees.
In the virtual format, we've seen about two-thirds of revenue come from attendees.
Second, the vast majority of our attendee revenue has continued to come from research contract entitlements as opposed to incremental tickets.
I'd also highlight that our fourth quarter destination conferences have historically been our largest most profitable conferences.
In 2020, we held our biggest most highly anticipated conferences of the year in the fourth quarter in a virtual format.
For the full year 2020, revenue decreased by 75%, both on a reported and FX-neutral basis.
Gross contribution margin was 48%, down about 290 basis points from 2019 as we maintained some of our cost of service as well as SG&A despite the lower revenue.
We did this to ensure we were in a position to execute our new virtual conferences and to resume in-person conferences when it is safe and permitted.
Lastly, the timing of receiving conference cancellation insurance claims remains uncertain, so we will not record any recoveries in excess of expenses incurred until the receipt of the insurance proceeds.
Fourth quarter consulting revenues decreased by 10% year-over-year to $94 million.
On an FX-neutral basis, revenues declined 12%.
Consulting contribution margin was 26% in the fourth quarter, down about 160 basis points versus the prior year quarter due to lower contract optimization revenue, which usually flows through at high margins.
Labor-based revenues were $73 million, down 10% versus Q4 of last year or 12% on an FX-neutral basis.
Labor-based billable headcount of 730 was down 10%.
Utilization was 63%, up about 300 basis points year-over-year.
Backlog at December 31 was $100 million, down 14% year-over-year on an FX-neutral basis.
Our backlog provides us with about four months of forward revenue coverage.
Our contract optimization business was down 9% on a reported basis versus the prior year quarter.
As we have detailed in the past, this part of the consulting segment is highly variable.
Full year consulting revenue was down 4% on a reported basis and 5% on an FX-neutral basis and its gross contribution margin of 31% was up 68 basis points from 2019.
SG&A decreased 6% year-over-year in the fourth quarter.
SG&A as a percentage of revenue was up year-over-year as we restored certain compensation and benefit costs and had significantly less revenue from conferences.
For the full year, SG&A decreased 3% on a reported and FX-neutral basis.
EBITDA for the fourth quarter was $245 million, up 13% year-over-year on a reported basis and up 10% FX-neutral.
As we have seen improvements in the macro environment, we have resumed growth spending and started to restore some of the compensation and benefit programs, which we'd put on hold when the pandemic first hit.
Fourth quarter EBITDA benefited from several factors.
First, we've continued to maintain very strong cost discipline across the company.
Second, we had better than planned revenue performance in research and conferences, which flowed through with very strong incremental margins.
Third, we had planned for an increase in certain costs, such as travel, which didn't materialize due to pandemic-related shutdowns.
And finally, we have been conservative in our implied fourth quarter guidance given the geopolitical uncertainty due in part to the U.S. election, rising COVID counts and a still recovering global economy.
Depreciation in the quarter was up approximately $4.5 million from last year, including expense acceleration from facilities-related charges.
Amortization was down about $800,000 sequentially.
Net interest expense, excluding deferred financing costs in the quarter was $26 million, flat versus the fourth quarter of 2019.
The Q4 adjusted tax rate, which we use for the calculation of adjusted net income, was 25% for the quarter.
The tax rate for the items used to adjusted net income was 28.4% in the quarter.
The adjusted tax rate for the full year was 21%.
Adjusted earnings per share in Q4 was $1.59.
For the full year, adjusted earnings per share was $4.89.
EPS growth for the year was 25%.
Note that about $7 million of equity compensation expense, which we normally would have incurred in the fourth quarter, has shifted into the first quarter of 2021.
That was a benefit to fourth quarter adjusted earnings per share of about $0.07.
Operating cash flow for the quarter was $260 million compared to $83 million last year.
The increase in operating cash flow was primarily driven by cost avoidance initiatives, improved collections and timing of tax payments.
Capex for the quarter was $23 million, down 57% year-over-year.
Lower capex is largely a function of lower real estate expansion needs due to the pandemic.
We define free cash flow as cash provided by operating activities less capital expenditures.
Free cash flow for the quarter was $237 million, which is up about 700% versus prior year.
Free cash flow as a percent of revenue or free cash flow margin was 20% on a rolling four quarter basis, continuing the improvement we have been making over the past few years.
Free cash flow was well in excess of GAAP and adjusted net income.
Adjusted for timing and one-time benefits, 2020 normalized free cash flow margin is around 13%.
We had a fantastic year for free cash flow, driven by the resiliency of the business, continued strong collections, disciplined cost and cash management and lower cash taxes and deferrals of certain tax payments.
We took a number of actions in 2020 to further strengthen our balance sheet.
We had two successful bond offerings and amended and extended our credit facility.
We reduced our maturity risk and our annual interest expense will be lower starting in 2021.
Our December 31 debt balance was $2 billion.
At the end of the fourth quarter, we had about $1 billion of revolver capacity.
Our reported gross debt to trailing 12 month EBITDA is about 2.5 times.
At the end of the fourth quarter, we had $713 million of cash.
We resumed our share repurchases after pausing earlier in the year, buying back $100 million in stock at an average price of $156 per share.
The board recently increased our share repurchase authorization by $300 million because we have significant capacity for buybacks from cash on hand and expected free cash flow.
As of February 8, we have around $860 million available for open-market repurchases.
We expect the board will refresh the repurchase authorization as needed going forward.
We will deploy excess cash for share repurchases and strategic tuck-in acquisitions.
Before providing the 2021 guidance details, I want to discuss our base level assumptions and planning philosophy for 2021.
For research, most of our 2021 revenue is determined by our year end 2020 contract value.
As we move through the year, we will revisit the research revenue outlook.
Operationally, we are planning to relaunch in-person one day events in the third quarter and in-person destination conferences starting in September.
Our guidance includes fixed costs, primarily people and marketing, related to both the full year of virtual and in-person conferences.
We've excluded the variable costs, primarily venue-related, associated with the in-person conferences from our guidance.
We've been able to run profitable virtual conferences in 2020, and that is reflected in our 2021 guidance.
If we are able to run in-person conferences, we expect incremental upside to both our revenue and profitability for 2021.
The economics in 2021, even in a partial in-person year, won't be fully back to normal.
As we get closer to the go-no-go decision point, we'll provide additional insight to sizing the incremental revenue and profits.
For consulting revenues, the compares get easier as we move through the year.
We have more visibility into the first half based on the composition of our backlog and pipeline as usual.
For expenses, we have planned for the full reinstatement of benefits that were either canceled or deferred in 2020.
This includes our annual merit increase and certain other benefits.
We are also returning to growing our sales forces, with planned quota-bearing headcount growth in the high-single-digits for both GTS and GBS.
We have also planned for several additional programs, including technology investments.
The impact of most of these expense restorations or investments impact our P&L, starting in the second quarter.
As you know, travel expense was close to zero from April through December.
Our current plans 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.
Our guidance for 2021 is as follows.
We expect research revenue of at least $3.815 billion, which is growth of at least 5.9%.
We expect conferences revenue of at least $160 million, which is growth of at least 33%.
We expect consulting revenue of at least $390 million, which is growth of at least 3.6%.
The result is an outlook for consolidated revenue of at least $4.365 billion, which is growth of 6.5%.
Based on current foreign exchange rates and business mix, the consolidated growth includes an FX benefit of about 200 basis points.
We expect full year adjusted EBITDA of at least $760 million, which is a decline of about 7% and reported margins of at least 17.4%.
This is based on conferences running virtual only.
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 expect 2021 adjusted earnings per share of at least $4.10.
For 2021, we expect free cash flow of at least $630 million.
This is before any insurance proceeds related to 2020 conference cancellations.
It is also important to note that we have revalued our contract value at current year FX rates, which had a modest overall impact.
Our 2020 ending contract value at 2021 FX rates is $2.9 billion for GTS and $706 million for GBS.
Details are included in the appendix of the earnings supplement.
All the details of our full year guidance are included on our Investor Relations site.
Finally, we expect to deliver at least $200 million of EBITDA in Q1 of 2021.
In summary, despite an unfavorable economic environment, we delivered better than planned financial results in 2020.
We had outstanding free cash flow and strong EBITDA.
We strengthened our balance sheet and moved quickly to implement cost avoidance initiatives, while still investing for future growth.
While there is still uncertainty in the macro outlook, our contract value held up better than in the last downturn.
We were able to launch and monetize virtual conferences and virtual Evanta meetings.
We will continue with targeted investments and restoration of certain expenses to ensure we are well positioned to rebound when the economy recovers.
As I mentioned at the start of my remarks, looking out over the medium term, we continue to expect double-digit CV and revenue growth, modest margin expansion and strong free cash flow generation.
Because we could fund growth investments, we have ample capital to return to shareholders through our buyback programs and to deploy to strategic tuck-in acquisitions when we find the right opportunities.

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compname posts q4 adjusted earnings per share $1.59.
q4 revenue $1.1 billion versus refinitiv ibes estimate of $1.07 billion.
q4 adjusted earnings per share $1.59.

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