Gartner - Q2 2023

Transcript

David Cohen (SVP of Investor Relations)

Good morning, everyone. Welcome to Gartner's Second Quarter 2023 Earnings Call. I'm David Cohen, SVP of Investor Relations. At this time, all participants are in a listen-only mode. 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 website, 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.

All contract values and associated growth rates we discuss are based on 2023 foreign exchange rates and exclude contributions related to the 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 a 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.

Gene Hall (CEO)

Good morning, thanks for joining us today. Gartner 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, 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 vast across all sectors, sizes, and geographies. We estimate our opportunity at around $200 billion. 95% of our addressable market is with enterprise function 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 their teams through distinct sales channels. Global technology sales, or GTS, serves leaders and their teams within IT. GTS also serves leaders at technology vendors, including CEOs, chief marketing officers, and senior product leaders. GTS contract value grew 7%. GTS sales to enterprise function leaders performed well in the quarter. GTS sales to leaders at technology vendors were affected by technology sector dynamics and tough year-over-year comparisons. We expect sales to technology vendors will return to our target growth rates over the medium term. 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 grew 15%. Through relentless execution of proven practices, we're able to deliver unparalleled value to our clients.

Our business remains resilient despite a persistent, complicated external environment and tough compares for the technology vendor market. Gartner conferences deliver extraordinarily valuable insights to an engaged and qualified audience. This will be the first full year of in-person conferences since 2019. We're off to a great start. Attendance is strong, exhibitor bookings are at record levels, and feedback continues to be excellent. We had a great first half and the outlook for the year is strong. 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 6% in the second quarter. We updated our 2023 guidance, increasing EBITDA and free cash flow. We've revised our non-subscription research revenue to reflect technology vendor dynamics, and our outlook for conferences is higher.

Craig will take you through the details. In closing, Gartner achieved another strong quarter of growth. 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 are 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.

With that, I'll hand the call over to our Chief Financial Officer, Craig Safian.

Craig Safian (CFO)

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 an 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 returned 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 ever, with outstanding performance on nearly every metric we provide. CV growth is FX neutral and excludes the first quarter 2023 divestiture. EV from enterprise function leaders across GTS and GBS grew at double-digit rates. EV from tech vendors grew low single digits, compared to mid-teens growth in the second quarter of 2022. Quarterly net contract value increase, or NCVI, was $41 million. As we've discussed in the past, there is notable seasonality in this metric.

CV growth was broad-based across practices, industry sectors, company sizes, and geographic regions. Across our combined practices, the majority of industry sectors grew at double-digit rates, again led by the transportation, retail, and public sectors. We had high single-digit growth across all of our enterprise size categories other than the small category, which grew mid-single digits. This category has the largest tech vendor mix. We also drove double-digit or high single-digit growth in the majority of our top 10 countries. Global technology sales contract value was $3.5 billion at the end of the second quarter, up 7% versus the prior year. GTS had quarterly NCVI of $14 million. Wallet retention for GTS was 102% for the quarter, which compares to 107% in the prior year, when we saw a record high for this metric.

IT enterprise function leaders' wallet retention remained above historical GTS levels during the second quarter. GTS new business was down 4% versus last year. New business with IT enterprise function leaders increased high single digits compared to the prior year against a tough compare. GTS quota-bearing headcount was up 13% year-over-year, reflecting the catch-up hiring we did in 2022. We will continue to manage hiring based on both short-term performance and the medium-term opportunity. Our regular full set of GTS metrics can be found in the appendix of our earnings supplement. Global Business Sales contract value was $1 billion at the end of the second quarter, up 15% year-over-year, which remains towards the higher end of our medium-term outlook of 12%-16%.

All of our GBS practices grew at double-digit or high single-digit rates, again led by supply chain and HR. GBS CV increased $27 million from the first quarter. Wallet retention for GBS was 109% for the quarter, which compares to 115% in the prior year, when we saw one of the highest ever results for this metric. GBS new business was up 2% compared to last year against a strong compare. GBS quota-bearing headcount was up 15% year-over-year. This excludes headcount associated with the Q1 divestiture. As with GTS, our regular full set of GBS metrics can be found in the appendix of our earnings supplement. Conferences revenue for the second quarter was $169 million, ahead of our expectations as we saw strong performance with both exhibitors and attendees.

Contribution margin in the quarter was 58%, consistent with typical seasonality. We held 17 destination conferences in the quarter, all in person. Second quarter consulting revenues increased by 5% year-over-year to $126 million. On an FX neutral basis, revenues were up 6%. consulting contribution margin was 37% in the second quarter. Labor-based revenues were $104 million, up 9% versus 2Q of last year, and up 11% on an FX neutral basis. Backlog at June 30th was $172 million, increasing 17% year-over-year on an FX neutral basis, with continued booking strength. Our contract optimization business is highly variable. We delivered $22 million of revenue in the quarter, and the pipeline for both contract optimization and labor-based revenues remained strong.

Consolidated cost of services increased 15% year-over-year in the second quarter, as reported and on an FX neutral basis. The biggest driver of the increase was higher headcount to support our continued strong growth. We also saw an increase in costs year-over-year with the return to in-person conferences. SG&A increased 12% year-over-year in the second quarter as reported, and 14% on an FX neutral basis. SG&A increased in the quarter as a result of headcount growth. EBITDA for the second quarter was $384 million, compared to $389 million in the year ago period. Second quarter EBITDA upside to our guidance reflected revenue exceeding our expectations in conferences and prudent expense management. Depreciation in the quarter of $24 million was up modestly compared to 2022.

Net interest expense, excluding deferred financing costs in the quarter, was $23 million. This was down $5 million versus the second quarter of 2022 due to higher interest income on our cash balances. The modest floating rate debt we have is fully hedged through maturity. The Q2 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 adjust net income was 27% for the quarter. Adjusted EPS in Q2 was $2.85, in line with last year. We had 80 million shares outstanding in the second quarter. This is a reduction of close to 1 million shares, or about 1% year over year. We exited the second quarter with about 80 million shares on an unweighted basis.

Operating cash flow for the quarter was $436 million, up 5% compared to last year. CapEx for the quarter was $26 million, up 21% year-over-year as a result of an increase in technology investments. Free cash flow for the quarter was $410 million. Free cash flow as a percent of revenue on a rolling four-quarter basis was 17% of revenue and 66% of EBITDA. Adjusted for the after-tax impact of the Q1 divestiture, free cash flow conversion from GAAP net income was 119%. Our free cash flow conversion is generally higher when CV growth is accelerating. At the end of the second quarter, we had about $1.2 billion of cash. Our June 30th debt balance was about $2.5 billion.

Our reported gross debt to trailing 12 month EBITDA was under 2x. Our expected free cash flow generation, available 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 $2.2 billion of liquidity, low levels of leverage, and effectively fixed interest rates. We repurchased $132 million of stock during the second quarter. We had about $830 million remaining on our share repurchase authorization at June 30th. We expect the board to continue to refresh the repurchase authorization as needed going forward. As we continue to repurchase shares, our capital base will shrink. Over time, this is accretive to earnings per share, and combined with growing profits, also delivers increasing returns on invested capital over time.

We are increasing our full-year conferences, EBITDA, and free cash flow guidance to reflect the strong Q2 performance. We are updating our research revenue guidance to reflect tech vendor market dynamics on the non-subscription part of the business. For research, we continue to innovate and provide a very compelling value proposition for clients and prospects. We've got tough compares across most of the segment for another quarter. We expect stronger growth from the subscription business than the non-subscription part of the segment, as we indicated last quarter. The non-subscription part of the business has direct exposure to tech vendor spending. The outlook continues to be based on all of our 47 destination conferences for 2023 running in person. There is seasonality to the business based on the conferences calendar, which is different than the historical pattern. We still expect Q4 to be the largest quarter of the year.

We expect Q3 will be the smallest revenue quarter of the year, as I noted in May. For consulting revenues, contract optimization remains highly variable. We had a very strong year in 2022, especially in contract optimization in the fourth quarter. We will continue both to manage expenses prudently to support future growth and deliver strong margins. Our updated 2023 guidance is as follows: We expect research revenue of at least $4.855 billion, which is FX neutral growth of about 6%, or 7% excluding the Q1 divestiture. The update to research revenue guidance reflects the effect of tech vendor market dynamics on the non-subscription part of the business. We expect conferences revenue of at least $490 million, which is growth of about 26%. We have increased our outlook for conferences by $20 million.

We expect consulting revenue of at least $505 million, which is growth of about 5% FX neutral, consistent with the outlook we gave in May. The result is an outlook for consolidated revenue of at least $5.85 billion, which is FX neutral growth of 7%. The guidance reflects an update to non-subscription research revenue, partially offset by an increase to conferences. We now expect full year EBITDA of at least $1.36 billion, up $30 million from our prior guidance, and an increase in our margin outlook as well. We will deliver on our margin guidance in most economic scenarios. If revenue is stronger than our outlook, EBITDA would be better than our guidance. We now expect 2023 Adjusted EPS of at least $10.

For 2023, we now expect free cash flow of at least $975 million, up $55 million from our prior guidance. This higher free cash flow reflects a conversion from GAAP net income of about 140%, excluding the after-tax divestiture proceeds. Our guidance is based on 80 million fully diluted weighted average shares outstanding, which reflects the repurchases made through the end of June. Finally, for the third quarter of 2023, we expect EBITDA of at least $275 million. We had a strong first half, despite continuing global macro uncertainty and a dynamic tech vendor market. CV and revenue grew high single digits in the quarter. Conferences and EBITDA performance exceeded our expectations, and we increased our guidance as well. Margins are strong, consistent with our prior commentary.

Free cash flow was strong in the quarter. We increased the guidance for the full year. We repurchased over $230 million in stock during the first half and remain committed to returning excess capital to our shareholders, and we have ample liquidity that we are ready to deploy on behalf of shareholders over the coming quarters. Looking out over the medium term, our financial model and expectations are unchanged. With 12%-16% research CV growth, we will deliver double-digit revenue growth. With gross margin expansion, sales costs growing in line with CV growth over time 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.

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. Operator?

Operator (participant)

Thank you. Ladies, and gentlemen, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Now, first question coming from the line of Jeff Meuler with Baird. Your line is open.

Jeff Meuler (Senior Research Analyst)

Yeah, thanks. Q2 CV and new business sold seem solid to me, just want to make sure to 100% confirm that there was no change to research non- or I'm sorry, research subscription revenue expectations in the guidance that's signaling, like, a surprising step down recently or incremental slowing recently in, in CV. If it's all limited to just the non-subs, a $70 million reduction out of $422 million revenue base seems like a big mid-year adjustment, if you could just talk through the dynamics there.

Craig Safian (CFO)

Yeah, Jeff, good morning, and thanks for the questions. On, on the first part of your question, the subscription revenue piece of our business continues to perform, you know, very well. As you noted, we do have the tech vendor dynamics impacting the business, but GBS continues to be very strong. The IT end user portion of GTS continues to be very, very strong. Your point on, you know, the CV growth for each of those and the new business dynamics for each of those were spot on in the quarter. You know, essentially, the, you know, the revision to guidance, you know, we're, we're where we thought we were gonna be from a subscription perspective. It's the non-sub piece that really impacted the guidance.

You know, I think, and, and Gene will hop in here, too. You know, the way to think about, the, the impact, so clearly, as we've talked about, the non-sub business, has direct exposure to tech vendor marketing spending, and that has become, you know, very constrained over the last few quarters and more constrained in the first half of this year. That's essentially what, what's, 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 GTS subscription part, part of the business as well. We're just dealing with a little bit of, those temporary dynamics that we're talking about.

Again, you know, having two quarters of history to be able then to look forward, you know, with, 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.

Jeff Meuler (Senior Research Analyst)

Okay. 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 and research directionally makes sense. The thing that I would worry about is, does conferences revenue also get hit again at, or get hit at some point? I get that the conferences attendance is strong, but it, it seems surprising to me that the exhibitor bookings are doing as well as they are in conferences against that landscape. 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. Thank you.

Gene Hall (CEO)

Hi, Jeff. Our conferences business is a great business, a great value proposition. It's doing extremely well. You know, 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 takeup. 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, and, you know, in line with what we've seen last year, which are also extremely strong. It's because of the great value proposition we have with both our attendees and with the exhibitors.

Jeff Meuler (Senior Research Analyst)

Okay. Thank you.

Operator (participant)

... Thank you. We'll move on to our next question. Our next question coming from the line of Heather Balsky, Bank of America. Your line is open.

Heather Balsky (Research Analyst)

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

Craig Safian (CFO)

Good, good morning, Heather. Thanks. You know, I think the, the trends on the enterprise function leader part of the business were pretty consistent, from Q1-Q2, so nothing, you know, within the quarter and really nothing too much, you know, from a variability perspective, from Q1 to Q2. You know, those businesses continue to perform very well. You know, our expectation is they continue to perform very well. Nothing really to see there from a monthly perspective or from a quarter-to-quarter perspective.

Heather Balsky (Research Analyst)

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

Gene Hall (CEO)

Hey, Heather, it's Gene. What I'd say is, on a short-term basis, no change Q1-Q2 in terms of tech vendor demand, very similar, with the exception of the non-subscription business, which is we, we've talked about. You know, it's our perspective that what happened was going on in the tech industry is that demand got pulled forward during the recession, during the, during the pandemic, and that so there was some demand that was already built in, and demand will get back to trend once sort of a little time elapses. How long that takes, we don't know, but we believe the technology business will get back to trend in the medium term.

Heather Balsky (Research Analyst)

Appreciate it. Thank you.

Operator (participant)

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

Toni Kaplan (Executive Director of Equity Research)

Thanks so much. I was hoping that you could talk about the current client spending appetite, you know, 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. Just wanted to get any color on the overall customer environment.

Gene Hall (CEO)

Yeah. Hey, Toni. 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, you know, there are more decisions getting escalated, and there's more scrutiny than there was, you know, like, a year ago. It's a tougher environment in terms of more escalations. At the end of the day, people see our value and buy, which is why we've had that great performance.

Toni Kaplan (Executive Director of Equity Research)

Terrific. 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, you know, corporations will start to need an AI strategy across some of the GBS lines, like finance, legal, HR? Could that lead to additional seats? 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? Thanks.

Gene Hall (CEO)

I, I expect it's a 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. To give you a flavor of it, we did more than 22,000 interactions in the first half. This is, you know, one-on-one calls with our experts in on the subject of AI, which is, you know, is higher than any other single topic, and the rate of, of growth is very high. We're seeing a lot of demand with enterprises that we hadn't, you know, seen before, where they're saying, "Hey, could you please come in and talk to us about AI?" We expect that that will be a positive for our business.

Craig Safian (CFO)

Sorry, Toni, 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. There, there is the potential that it is a little more broad-based, to your point, than prior technology waves.

Toni Kaplan (Executive Director of Equity Research)

Thanks so much.

Operator (participant)

Thank you. Our next question coming from the line of Seth Weber with Wells Fargo. Your line is open.

Seth Weber (Equity Research Analyst)

Hey, good morning, guys. 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? Thanks.

Craig Safian (CFO)

Good morning, Seth. You know, on the margins, as we've talked about, you know, the margins can pop around a little bit from quarter-to-quarter, depending on spending trends and, and where the revenue is trending as well. Our margins, you know, were a little bit higher than we had initially anticipated in the first half of the year. I'd say it's really just a combination of you know, revenue modestly exceeding our expectations in the first half, and expenses modestly being a little bit below our expectations. Said another way, we're just, you know, more prudently managing our, our, our OpEx as we work our way through the year. 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, you know, consistently strong margins.

Seth Weber (Equity Research Analyst)

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

Craig Safian (CFO)

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

Seth Weber (Equity Research Analyst)

Got it. Thank you, guys.

Operator (participant)

Thank you. Our next question coming from the line of Manav Patnaik with Barclays. Your line is open.

Manav Patnaik (Managing Director and Equity Research Analyst)

Thank you. I was just, you know, on the margin front, Craig, I think in the call you mentioned, you know, T&E is back to normal or, or something to that effect. I was just curious, you know, are we at, you know, those normalized levels where you talk about, you know, kind of the long-term margin being in the low 20s? Or is there more, you know, normalization to occur still, you know, overall with all the different moving pieces?

Craig Safian (CFO)

Yeah, good morning, Manav. It's a great question. You know, we, we are back to what we believe to be roughly the, the new normal from both a T&E perspective. You know, last year in particular, we were playing catch up on hiring throughout the course of the year. You know, as you look at our operating expenses now, I think we're, we're, we're at a pretty quote, unquote, "normal level of operating expenses." You know, what we're looking at from Q2, you know, through the end of this year is normal seasonality from an OpEx perspective, with, you know, our new normal levels of T&E, modest headcount growth to make sure that we're investing for the future, et cetera, kind of, baked in.

I think it is a, a good, normalized, if you will, OpEx level that we're working off of this year.

Manav Patnaik (Managing Director and Equity Research Analyst)

Got it. Okay. Then just on the second half, a little bit more specifically, can you just talk about, you know, the, I, I suppose, the hiring expectations and, you know, and maybe even just on the, on the cost side? It just seems like it could be, it seems a little conservative, but, maybe there's some, you know, things we're missing here.

Craig Safian (CFO)

Yeah. I, I think there's a, there's a few things in there, Manav. One is the seasonality with our conferences business. You know, we are performing really, really well in conferences, Q4 is, you know, by far our largest conferences quarter, and that means you generally see expenses pop in the fourth quarter just to deliver those conferences. Because it's the fourth quarter and 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, is, sort of, back to our typical seasonality that we had from an OpEx perspective pre-pandemic. You know, if you think about OpEx, it's relatively flattish from 2Q-Q3.

Little bit of step down because of it's a lighter conferences quarter. A pretty big step up in OpEx from Q3-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, 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. There's a wide range of scenarios, and we've got a wide range of, you know, recruiting scenarios as well.

I mean, one of the things that we've been very careful about is making sure that we maintain our recruitment capacity, so that when, you know, supercharged growth returns, we are more than ready to turn that dial from a recruitment perspective. We're maintaining our recruitment capacity and, you know, we're ready to tune those dials, you know, up or down, depending on, you know, what the second half of the year looks like, predominantly from a, a contract value growth perspective.

Manav Patnaik (Managing Director and Equity Research Analyst)

Got it. Thank you, Craig.

Operator (participant)

Thank you. Our next question coming from the line of Josh Chan with UBS. Your line is open.

Josh Chan (Director and Equity Research Analyst)

Hi, good morning, thanks for taking my questions. 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?

Craig Safian (CFO)

Hey, Josh, good morning. You know, I think important to, to disaggregate the enterprise function leader portion of GTS and the, the tech vendor portion of GTS. You know, 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. You know, we expect that to continue. You know, the tech vendor side, while retention is a rolling four-quarter metric, and so we'll have, you know, these more challenging quarters in the number for a little while. You know, I would say, you know, we, we don't forecast wallet retention. I shouldn't say we don't forecast it. We don't guide wallet retention or contract value.

Given that, the enterprise function leader, part of the GTS business is the predominant part of it, you know, call it, you know, 70% ish of the business, that continues to be very strong, and that should drive the wallet retention over the coming quarters.

Josh Chan (Director and Equity Research Analyst)

Okay, that's helpful. Thank you for that. Then on, on your comment about headcount, I guess, what indicators are you looking for in order to, to kinda toggle up or, or toggle down the, the recruitment in, in the second half? Thanks for the color.

Gene Hall (CEO)

Yeah, the main thing we look at is what our CD 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. That kind of helps ensure that our, you know, forms of business going forward is in the right space from both a growth viewpoint as well as a margin viewpoint.

Josh Chan (Director and Equity Research Analyst)

Okay, great. Thank you both for the color.

Operator (participant)

Thank you. Our next question coming from the line of Stephanie Moore with Jefferies. Your line is open.

Stephanie Moore (SVP of Equity Research)

Hi, good morning. Thank you. I, I wanted to touch on the research pricing environment. I, I believe you tend to increase those in the fall of the year. Just wanted to get an update on how you're thinking about price increases for this year into next.

Craig Safian (CFO)

Yeah, good morning, Stephanie. I think, you know, one of our core goals with pricing is to make sure that at a minimum, we are offsetting our projected wage inflation. You know, in the past few years, when we were seeing higher wage inflation, we went a little bit stronger on, on the price increase. This year, you know, again, the, the labor market for the type of people that we are recruiting is still relatively strong. 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.

I would suspect it's a little bit lighter than what we've done in the last two years, just given the, you know, the inflationary environment, particularly wage inflationary environment, has abated a little bit.

Stephanie Moore (SVP of Equity Research)

Great. That's really helpful. I'll leave it at that. Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question coming from the line of George Tong with Goldman Sachs. Your line is open.

George Tong (Managing Director and Senior Equity Analyst)

Hi, thanks. Good morning. 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? Generally, is the non-subscription demand leading, coincident, or lagging with broader client IT spend?

Craig Safian (CFO)

Hey, George, I just want to clarify your question. So it was which products are most impacted? Is that what the question was?

George Tong (Managing Director and Senior Equity Analyst)

Yeah, within your non-subscription book of products.

Craig Safian (CFO)

Yeah, sure. You know, within the non-subscription part of the business, which, again, you know, represents, around 8% or less than 10%, let's call it, of our overall research revenue. You know, the predominant way we derive revenue there is through, lead generation for tech vendors and really focused on the, I call it, non-enterprise IT market, so smaller businesses, et cetera. You know, our GTS business is really focused on enterprise, tech companies, whereas the, the non-subscription business is really focused on a, a combination of enterprise and, and really small business-focused, technology companies. You know, 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.

You know, again, you've covered all the things that are happening in the, in the tech market, from funding and, and, and, and the overall dynamics there. 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, that's what's happening. That said, you know, they are still spending and, and spending well in that business. You know, as Gene mentioned earlier, and I think I mentioned, too, we fully expect once the market is recalibrated, it will get back to, to growing. It's predominantly around the lead gen stuff, and, and the focus on lead gen in smaller businesses.

George Tong (Managing Director and Senior Equity Analyst)

Okay, got it. That's, that's helpful. Then separately, could you, could you talk about how the, 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 moved through the quarter? Does your updated guide assume trends stabilize from 2Q levels or worsened from 2Q levels?

Gene Hall (CEO)

Yeah, it's a great question. Yeah, I think, it's been relatively consistent, you know, with normal levels of volatility-

... market week to week and actually even day to day. Trends pretty consistent Q1-Q2, and what we've modeled into our guide is essentially stabilization from those Q2 levels for the balance of the year.

George Tong (Managing Director and Senior Equity Analyst)

Got it. Very helpful. Thank you.

Operator (participant)

Thank you. Our next question coming from the line of Jeff Silber with BMO Capital Markets. Your line is now open.

Jeff Silber (Managing Director)

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

Gene Hall (CEO)

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

Jeff Silber (Managing Director)

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

Gene Hall (CEO)

Yeah, Jeff. 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 tremendous interest with them. That's the key place that we are most focused on. We, we actually use AI in our business today. We have for years, in different parts of our business. Internally, we look at are there cost optimization opportunities where we use it internally? As I said, we've been doing that. We are increasing the amount of that, over time. We're also looking at can we provide customer services using AI that would be enhanced, all those kinds of things.

All of I'd say internally, those kinds of uses are going to be normal course of business, being we always focus on improved productivity. There are a lot of tools, a lot, you know, technology is a big one, 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. I don't see any kind of like, some costs dropping by 50% or something because I see more of it's part of our ongoing continuous improvement and continuous innovation that we've been doing for years.

Jeff Silber (Managing Director)

All right, that's really helpful. Thanks so much.

Operator (participant)

Thank you. Now 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.

Gene Hall (CEO)

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 to expand modestly over time. 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.

Operator (participant)

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