Gartner, Inc. (IT) Q2 2025 Earnings Call Transcript

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Overview

The earnings call summary shows a mix of positive and negative indicators. While there is strong demand for optimization services and a robust pipeline in AI and cybersecurity, there are concerns about tariffs affecting business and stretched selling cycles. The Q&A section reveals management's evasiveness on AI's cost impact and tariff details, adding uncertainty. Guidance is optimistic, but operational challenges and client behavior shifts temper enthusiasm. Overall, the sentiment is balanced, leading to a neutral stock price prediction.

Key Financial Performance

Contract Value (CV) Second quarter contract value grew 5% year-over-year. Excluding the U.S. federal government, CV growth was about 150 basis points faster at around 6%. The largest headwind was the U.S. federal government due to DOGE initiatives and tariff policies.

Revenue Second quarter revenue was $1.7 billion, up 6% year-over-year as reported and 5% FX neutral. The growth was driven by broad-based performance across practices and geographies, despite challenges from DOGE and tariff-affected industries.

EBITDA EBITDA was $443 million, up 7% as reported and 5% FX neutral versus the second quarter of 2024. The increase was due to modest revenue upside and effective expense management.

Adjusted EPS Adjusted EPS was $3.53, up 10% from Q2 of last year. This was driven by strong profitability and disciplined expense management.

Free Cash Flow Free cash flow was $347 million, up 2% compared with Q2 in 2024. The increase was attributed to strong operational performance and disciplined expense management.

Insights Revenue Insights revenue grew 4% year-over-year as reported and 3% FX neutral. Subscription revenue grew 5% FX-neutral, while non-subscription revenue was affected by shifts in traffic volumes.

Conferences Revenue Conferences revenue for the second quarter was $211 million, increasing 14% as reported and 12% FX neutral compared to Q2 of 2024. Adjusting for conference timing, revenue growth was around 6% FX neutral.

Consulting Revenue Consulting revenue was $156 million, up about 9% as reported and 6% FX neutral compared to Q2 of 2024. Growth was driven by strong demand for contract optimization services.

Labor-based Revenue Labor-based revenue was $110 million, up 3% versus Q2 of last year's reported and about flat FX neutral. The growth was modest due to stable demand.

Contract Optimization Revenue Contract optimization revenue was $46 million, up 26% versus Q2 of last year and 24% FX neutral. The growth was attributed to strong demand for optimization services.

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Operating Highlights

AI-powered tool AskGartner: AskGartner has been rolled out to provide faster, easier access to insights. It uses proprietary data and large language models to deliver structured answers. Clients have reported time savings of up to 75%.

U.S. federal government challenges: Initiatives from the Department of Government Efficiency (DOGE) and tariff policies have created headwinds, impacting client purchases and renewals.

Geographic and industry-specific growth: Energy, banking, transportation, and healthcare sectors led growth, while Canada and Australia saw declines. U.S. federal contracts renewal is expected to stabilize growth.

Cost optimization services: Expanded capabilities to help clients reconfigure supply chains and achieve cost savings due to tariff changes.

Sales and service adaptations: Launched programs to train associates on AI and cost optimization, and expanded sales development programs to improve productivity.

Segment renaming: The Research segment has been renamed to Business and Technology Insights to better reflect its value.

AI integration: AI is being leveraged internally with over 50 applications to improve productivity and externally through AskGartner.

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Risk or Challenges

CEO Confidence and Cost-Cutting Measures: CEO confidence fell to recessionary levels, with 78% of CEOs implementing cost-cutting measures. This could lead to reduced spending on Gartner's services, impacting revenue growth.

U.S. Federal Government Initiatives (DOGE): The Department of Government Efficiency (DOGE) has made it more challenging for clients to purchase or renew Gartner's products, significantly affecting U.S. federal contract value.

Tariff Policies: Higher tariffs have led to cost-saving measures across industries, delaying purchase decisions and impacting Gartner's performance. Even industries not directly affected by tariffs are implementing cost-saving measures.

Longer Sales Cycles: Purchase decisions are being escalated to CFOs or CEOs, leading to longer sales cycles and delayed revenue recognition.

Decline in U.S. Federal Contract Value: Nearly all U.S. federal contracts are up for renewal in 2025, with a year-to-date dollar retention rate of only 47%, posing a risk to future revenue.

Geographic Performance Challenges: Contract value declined in Canada and Australia, which together represent 6% of global contract value, indicating regional challenges.

Tech Vendor Spending: Spending by tech vendors has not fully recovered, with delays in larger deals and tariff impacts on hardware subsegments, affecting growth in this sector.

Non-Subscription Revenue Decline: Non-subscription Insights revenue continues to be affected by shifts in traffic volumes, impacting overall revenue.

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Guidance & Outlook

AI and AskGartner: Gartner is focusing on AI as a significant growth opportunity. The company is rolling out AskGartner, an AI-powered tool designed to provide clients with faster and more structured insights. This tool is expected to enhance client engagement and productivity, with some clients reporting time savings of up to 75%. Gartner is also leveraging AI internally with over 50 applications to improve associate productivity and effectiveness.

Revenue and Growth Projections: Gartner expects consolidated revenue of at least $6.455 billion for 2025, reflecting FX-neutral growth of 2%. Insights subscription revenue is projected to grow by about 4%, while non-subscription revenue is expected to be around $210 million. Conferences revenue is forecasted to grow by about 5% FX-neutral, and consulting revenue is expected to grow by about 1% FX-neutral.

EBITDA and Free Cash Flow: The company projects full-year EBITDA of at least $1.515 billion, with margins of 23.5%. Free cash flow for 2025 is expected to be at least $1.145 billion, reflecting a conversion from GAAP net income of 141%.

Double-Digit Growth Path: Gartner is implementing operational changes and focusing on cost optimization insights, the rollout of AskGartner, and other initiatives to return to double-digit growth. The company expects to achieve high single-digit growth in 2026 and double-digit growth in 2027 and beyond.

U.S. Federal Contracts and Tariff-Affected Industries: Most U.S. federal contracts will come up for renewal in 2025, and Gartner expects to remove DOGE-related headwinds, adding around 200 basis points to CV growth in 2026. Clarity around trade policies in tariff-affected industries is expected to add at least 100 basis points to growth.

Sales Productivity and Market Recovery: Gartner is focusing on improving sales productivity and expects to return to historical productivity levels, contributing to double-digit CV growth. The company is also optimistic about the recovery of tech vendor spending, which is expected to add 100 basis points to growth.

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Shareholder Return Plan

Share Repurchase Program: Since the end of the first quarter, Gartner has increased the pace of share repurchases. The company bought $274 million in Q2 and an additional $282 million since the end of the second quarter, bringing the year-to-date repurchase total to approximately $720 million. The Board recently increased the repurchase authorization to about $1 billion and is expected to refresh the authorization as needed. The company aims to generate more free cash flow and have fewer shares outstanding over the next several years, creating significant value for shareholders.

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Key Q&A

Q:What is the size of the tariff-affected industries in terms of CV?

A:The tariff-affected industries represent around 35% to 40% of CV across both GTS and GBS.

Q:Can you quantify the operational efficiency impact of AI on cost structure or margin profile?

A:The company has implemented about 50 internal AI applications, mostly custom-built. While some applications show promising early results, it is too early to determine their long-term impact on cost structure or margins.

Q:What are the most common questions or topics clients come to Gartner for?

A:Clients frequently seek help with mission-critical priorities such as building cybersecurity capabilities, leveraging AI, and using technology for financial transformation. Gartner assists clients with complex, multi-year initiatives by providing proprietary data, expert insights, and unbiased advice.

Q:Are there any changes in client feedback during renewal periods?

A:Clients in tariff-impacted industries have escalated purchase decisions to CFOs or CEOs due to cost concerns. This has stretched out selling cycles but has not significantly changed close rates. Non-tariff-impacted industries are also beginning to show similar behavior.

Q:How are new purchases among federal government clients performing?

A:New purchases among federal government clients have not come to a full standstill but are significantly down year-over-year. The dollar retention rate is just below 50%, and the contracting process remains challenging.

Q:What is the distribution of tariff impact between GTS and GBS?

A:GBS, particularly the supply chain practice, is more concentrated with tariff-affected industries compared to GTS.

Q:What is different about Gartner's business in the current tariff environment?

A:Clients in tariff-affected industries are cutting costs to maintain margins and revenues, leading to escalated purchase decisions and stretched selling cycles. This behavior is consistent with past recessions.

Q:What is driving new business pipelines?

A:New business pipelines are driven by strong demand for services, particularly in areas like AI and cybersecurity. Growth is balanced across additional licenses, new logos, and cross-sell opportunities.

Q:What is Gartner's confidence in tariffs being the driver of business slowdown?

A:Gartner tracks every deal and gathers detailed feedback from clients and salespeople. This data confirms that tariffs and cost-cutting in tariff-affected industries are significant factors in the business slowdown.

Q:Is AI impacting the demand for Gartner's services?

A:AI is not materially impacting demand negatively. Gartner's pipeline remains robust, and the company is training its sales and service teams to address any client concerns about AI.

Q:What is the rollout process for AskGartner?

A:AskGartner, a Gen AI tool, is being rolled out to all licensed users by the end of the year. Clients who prioritize its importance can be moved to the top of the rollout queue.

Q:Are there differences in client behavior between U.S. and international clients regarding tariffs?

A:There is no significant difference in behavior between U.S. and international clients in tariff-affected industries. However, Canada and Australia face unique challenges unrelated to tariffs, such as procurement process changes and government transitions.

Q:What are the headcount expectations for QBH?

A:Gartner expects QBH headcount to remain roughly flat this year, with plans to optimize territories and reinvest in higher-opportunity areas. Growth in QBH headcount is anticipated as the company reaccelerates in 2026 and beyond.

Q:What percentage of clients are not getting the full value of their Gartner subscription?

A:Many clients are not utilizing the full suite of Gartner services, such as peer interactions and contract reviews. Efforts are underway to train sales and service teams to ensure clients are aware of and use these services.

Q:Is the use of publicly available large language models a reason for client cancellations?

A:The use of publicly available large language models is not a material reason for client cancellations.

Q:Why has the number of client enterprises been declining?

A:The decline in client enterprises is primarily driven by higher churn among small tech vendors, which are counted as individual enterprises regardless of spending.

Q:Review of Unclear Management Responses

A:Management avoided providing a direct answer to the long-term impact of AI on cost structure and margins, citing it as too early to determine. Additionally, they did not provide a precise breakdown of the tariff impact between GTS and GBS, only offering general insights.

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Earnings Word Cloud

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