Ladies and gentlemen, thank you for standing by and welcome to the Gartner’s third quarter 2020 earnings results conference call. At this time, all parties that the lines are on a listen only mode. After the speakers presentation, there will be a question and answer session. To ask a question during the session, please press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, David Cohen, Gartner's VP of Investor Relations. Thank you. Please go ahead, sir.

Good morning, everyone. We appreciate your joining us today for Gartner's third quarter 2020 earnings call and I hope you are well. With me on the call today are Eugene Hall, Chief Executive Officer, and Craig Safian, Chief Financial Officer. This call will include a discussion of third quarter 2020 financial results and our updated outlook for 2020 as disclosed in today's earnings release. In addition to today's earnings release, we have provided a detailed review of our financials and business metrics in an earnings supplement for investors and analysts, and posted the press release and the earnings supplement on our website. Investor relations. Following comments by our speakers, we will open up the call for your questions. We ask that you limit your questions to one and a follow up. Unless stated otherwise, all references to EBITDA are for adjusted EBITDA. The growth rates in Gene's comments are neutral unless stated otherwise. Reconciliations for all non-GAAP numbers we use are available in the investor relations section of the Gartner website. Finally, while contract values and associated growth rates we discuss are based on 2020 foreign exchange rates unless stated otherwise, 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 2019 annual report, information contained in 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. Welcome to our quarterly earnings call. Thanks for joining us. Business leaders need help in all times, but during highly uncertain times like today, they need help more than ever. Those who know Gartner know we are the best source for how to survive and thrive in these difficult times. Beginning in Q1, we made significant changes in response to the pandemic and economic downturn. Our strategy is to ensure our research content addresses the most critical priorities of our clients at any point in time. With the pandemic hitting, the rate of change in the world increased dramatically. We responded with agility. We accelerated the creation of new, highly relevant content for our clients across every function. Topics included adapting to COVID-19, shifting to remote work, accelerating the transition to digital business, strengthening diversity, equity, and inclusion across the enterprise, and more. Clients have highly valued this content addressing their mission-critical priorities. Client engagement with our experts rose significantly. During Q3, client interactions increased more than 20 percent year over year to over 120,000 interactions. Gartner conferences deliver the same unparalleled insights and advice to those who want an immersive experience. We pivoted to virtual conferences to replace our traditional in-person destination conferences. So far, we've delivered seven virtual conferences through October, and the performance of these conferences has exceeded our expectations. Our IT Symposium Expo was a resounding success with more than 15,000 executives attending, about double the number that attended the Orlando Symposium in person last year. Attendees were highly engaged, participating in an average of 11 live sessions. More than 80 percent of IT Symposium Americas attendees reported that the conference met or exceeded their expectations. Exhibitor engagement was also an important element of our conferences. We worked with them to create a great experience for both attendees and themselves. Exhibit revenues were lower compared to our in-person conferences last year but exceeded our expectations. Early on, there was uncertainty about whether virtual conferences would be viable, but the results demonstrate that we can achieve attendance while delivering high value to both attendees and exhibitors. We're early in the virtual conference journey, and each one has been better than the last. We're learning and will continue to improve with eight more virtual conferences planned for 2020, and we already have more than 21,000 attendees registered. We were extremely agile in serving the needs of our clients by adapting our content and pivoting to virtual conferences. We also adapted our operations to work remotely, achieving the same level of operational efficiency as when we were in the office. We took decisive early actions to optimize our costs and prepared for various scenarios. We've achieved strong cost savings by working smarter, not just by getting by with less. For example, we've established specialized teams to handle some tasks, such as background research, which previously was done individually. The specialized teams complete the research in fewer hours and often with higher quality because of their specialization. We also automated some of this work through technology, such as web mining, which lowers costs while increasing quality. These changes didn't begin during the pandemic, but we accelerated the pace of implementation due to it. In addition to cost savings, we have preserved liquidity and maintained financial strength, resulting in a capital structure with less maturity risk and more flexibility. Our clients are more engaged than ever, and we've seen improvements across most of our operational metrics compared to the previous quarter. The combination of all these factors has resulted in improvements in our Q3 financial metrics and guidance, compared to Q2, with strong free cash flow generation. Now, I'll turn the call over to our CFO, Craig Safian for more details on our financial performance and increased guidance.

Thank you, Gene, and good morning. I hope everyone remains safe and well. Third quarter results were ahead of our expectations, and we raised our full-year guidance to reflect the modestly better demand environment and strong cost management. We had another successful bond offering during the quarter and amended and extended our credit facility through 2025. As of September 30th, we have a stronger balance sheet than we did at the start of the year, with significant liquidity that provides us financial flexibility. Our annual interest expense will be lower starting in 2021. As we've gained clarity on the economy and our business performance, we resumed targeted spending while managing our costs carefully, remaining focused on positioning ourselves to rebound strongly as the economy recovers. Third quarter revenue was $995 million, down one percent, but neutral, excluding conferences, our revenues were up five percent year over year. The contribution margin was 67 percent, up more than 300 basis points versus the prior year. EBITDA was $168 million, a 20 percent year-over-year increase. Adjusted EPS was 91 cents, and free cash flow in the quarter was a very strong $229 million. Research revenue in the third quarter grew six percent year over year, both on a reported and neutral basis. The research contribution margin was 72 percent, benefiting in part from cost-saving initiatives we implemented at the start of the pandemic. With improvements in the macro environment, we resumed growth spending and started to restore some of the compensation and benefit programs we had previously put on hold. Our total contract value was $3.4 billion at September 30th, representing a natural growth rate of five percent versus the prior year. Global technology sales contract value at the end of Q3 was $2.8 billion, up five percent year over year. Client retention for GTS was 80 percent, down about 160 basis points year over year but slightly improved from last quarter, while retention for GBS was 99 percent for the quarter, down about 600 basis points year over year. GBS new business declined seven percent compared to last year. We ended the third quarter with Enterprise contract values down about three percent from last year. The average contract value for Enterprise is $227,000, reflecting nine percent year over year growth and combining sales with an increased number of subscriptions and price. We are seeing a higher churn among lower spending clients. At the end of Q3, the number of quarter-bearing associates in GTS was down about eight percent year over year. We expect to end 2020 with more than 3,100 quarter-bearing associates, a slight decline year-over-year. We entered this year with a large bench, which is now fully deployed for GTS. Overall, our revenues show strong growth in nearly all our 10 largest countries, with double-digit growth in Brazil, Japan, France, and the Netherlands. The KVI grew across all sectors except for transportation and media. With our entire GTS sales team selling significant amounts of new business in the quarter to both existing and new clients, new logos continue to significantly contribute to our growth. Finally, despite some returning clients, we continue to see increased spending by retained clients on average, although not quite enough to offset dollar attrition. Overall retention and new business improved in Q3 compared to Q2, with global business sales contract volume at $656 million at the end of Q3, accounting for about 20 percent of our total contract value.

The third quarter consulting revenues decreased by four percent year over year to $89 million. Consulting contribution margin was 32 percent in the third quarter, up over 300 basis points versus the prior year quarter, primarily due to cost reductions. Labor-based revenues were $74 million, down five percent compared to Q3 of last year. Global headcount in labor was down nine percent. Utilization was 60 percent, down about three hundred basis points year over year. Backlog at September 30th was $96 million, down twelve percent year over year. Our contract optimization business was down three percent on a reported basis, while our contract optimization growth rate was 74 percent in Q3 of last year. As we discussed last quarter, we had a small workforce optimization in the consulting business to align our headcount with our revenue outlook. We expect to see ongoing improvements in the macro environment going forward, which may aid in demand.

As we continue to focus on margin improvement, we reported EBITDA for Q3 of $168 million, reflecting a 20 percent year-over-year increase on a reported basis. Our operating cash flow for the quarter was $244 million, compared to $220 million last year. The increase in operating cash flow was primarily driven by cost avoidance initiatives, partially offset by an earlier interest payment due to refinancing. Our capital expenditures for the quarter were $15 million, a reduction of 59 percent year-over-year due to lower real estate expansion needs. Free cash flow for the quarter was $229 million, up 25 percent year-over-year, benefiting from strong collections combined with reductions in outflows from our cost avoidance initiatives. Our free cash flow margin was 15 percent on a rolling four-quarter basis, continuing the improvements we've been making over the past few years. During the quarter, we issued $800 million of new senior unsecured notes with a 3.75 percent coupon to continue improving our capital structure. We also amended our credit facility to September 2025 with attractive financial terms and fewer restrictions. The impact of these financing activities has extended our debt maturity profile significantly. At the end of Q3, we had $554 million in cash, and we are in a position to resume share repurchases and strategic acquisitions.

Moving forward, our outlook reflects better performance, a modestly improved demand environment, and the successful launch of virtual conferences. We now forecast research revenue of at least $3.57 billion for the full year, representing almost 6 percent growth versus 2019, and includes the incremental revenue we expect from virtual conferences and events. Additionally, we anticipate consulting revenue to be at least $370 million for the year, a decline of approximately six percent. Overall, we expect consolidated revenue of at least $4.05 billion, showing a reported decline of about five percent compared to 2019. Our adjusted EBITDA is projected to be at least $740 million, with full-year margins of approximately 18.3 percent, which reflects ongoing improvements in operational efficiency and strong cost management.

As a reminder, ladies and gentlemen, to ask a question, you may press star one on your telephone. To withdraw your question, press the pound key. Our first question comes from the line of Jeff Miller from Baird. Your line is now open.

Thank you. Good morning. I always find your sales productivity metric somewhat challenging during periods of a lot of acceleration or deceleration. One of the things that jumped out to me today was the year-over-year trends in new business relative to the trends in sales headcount across each of the segments. Are you using that as an internal metric? What do you say about that trend in how you're managing sales headcount? Thank you.

We definitely look at new business per salesperson as a key metric because that will directly result in growth. We manage client retention and new business effectively. The trend of our performance has improved significantly between Q2 and Q3, as Craig’s numbers illustrated. As for managing headcount, it varies by market. In less mature markets, we have more business developers—people without contract value accounts—but in mature markets like the U.S., especially for GTS, we have more account managers, mostly because the business is more penetrated.

Can you elaborate on any avoided costs still left to be brought back? And do you expect margins to be down year-over-year relative to the guidance you provided earlier?

Prior to 2020, we were in an investment phase focused on improving our margins over time. Part of the reason why 2020 margins are better than 2019 is due to that investment. However, some expenses are lower this year, such as travel costs. Once we can, travel will increase but likely not return to pre-pandemic levels.

We were very aggressive in our cost management during the initial days of the pandemic. As we stabilized, we turned on certain expenses related to compensation and benefits for our associates. While we have restored several costs and we expect to continue to do so, it's difficult to predict exactly where margins will settle post-pandemic, but we are committed to managing costs tightly.

Thank you, Gene. You mentioned higher demand from clients. Could you provide more details on which regions have been strong and how you see business rebounding as regions open up post-COVID?

Certainly, Toni. We’ve seen significant improvements between Q2 and Q3 in demand. Regions like China and Japan have recovered quite well, with new business growth being quite good. If the rest of the world follows a similar recovery pattern, we could see a quicker rebound.

Sales headcount will be aligned with our contract volume growth over time. We significantly expanded headcount leading into 2020, and while that hasn't fully materialized due to the pandemic, as the market improves, we will be well-positioned to capitalize on new business opportunities.

Good morning. Can you provide more color on the GB's contract value growth and how the bookings have been performing?

GBS is the key driver in our business, and we believe we crossed the threshold of 10,000 seats, which is a major milestone for us. We are seeing growth driven by our services as clients are looking for solutions to their mission-critical priorities. Our sales teams have been effective at reaching prospects and responding to their needs.

Good morning. With Q3 results in mind, do you feel you have a better sense of contract value trends over the next couple of quarters? Are there any changes in your outlook for the potential trough in contract value growth?

We expect some deceleration in contract value growth rates over the next quarter or two, especially when comparing against a strong Q4 of last year. Our current estimates indicate that we might not see as much new business or renewal rates as in previous years based on the economic environment.

The guidance includes assumptions around regional lockdowns. However, we have seen that our teams can operate effectively in both lockdown and non-lockdown environments. We are continuously adapting strategies and focusing on sales and renewals, regardless of changes in the macro environment.

Can you share some of the lessons learned from hosting virtual conferences? Do you think there are opportunities to expand reach through a hybrid model in the future?

We have learned a great deal from virtual conferences, especially what technologies work best and how to optimize content and session lengths. We are well-positioned to meet demand for both in-person and virtual conferences going forward, and we will adjust our offerings based on what our clients need. To summarize what you've heard in today's call, we accelerated the creation of new, highly relevant content for our clients across every function. We successfully pivoted to virtual conferences that delivered high value to our clients. Our clients are more engaged than ever, resulting in improvements across most of our operational metrics. This has resulted in improvements in our Q3 financial metrics and guidance compared to Q2. Revenue and EBITDA performed better than we expected, and free cash flow generation remains very strong. Thanks for joining us, and I look forward to updating you again later in the New Year.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.