Gartner, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Gartner provides research, conferences and consulting services. Unless otherwise stated, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $994.6 million | $1,000.5 million | $2,986.6 million | $3,041.8 million |
| Operating income | $87.7 million | $69.1 million | $312.0 million | $233.9 million |
| Net income | $17.0 million | $41.4 million | $147.1 million | $165.6 million |
| Diluted EPS | $0.19 | $0.46 | $1.63 | $1.82 |
- Q3 revenue declined 1% year over year; nine-month revenue declined 2%. Operating income rose 27% in Q3 and 33% year to date, reflecting lower costs despite reduced revenue.
- Research revenue grew 6% in Q3 and 7% over nine months. Conferences revenue fell 81% and 90%, respectively; Consulting revenue declined 4% and 3%.
- Q3 operating margin was approximately 8.8%, versus 6.9% a year earlier; nine-month operating margin was approximately 10.4%, versus 7.7%.
- Q3 net income and diluted EPS were substantially affected by a $44.8 million pretax loss on extinguishment of debt. Higher interest expense also weighed on earnings. The nine-month period additionally included $10.0 million of other expense, compared with $7.0 million of other income in 2019.
- Research gross contribution margin was 72% in Q3, up 3 percentage points. Conferences gross contribution was $2.0 million in Q3 and negative $15.2 million year to date. Consulting gross contribution margin was 32% in Q3, up 4 points.
Cash flow, liquidity and debt
- Cash provided by operations for the first nine months was $642.8 million, up from $482.6 million. Capital expenditures were $60.8 million; cash used in investing was $60.8 million. Cash and cash equivalents ended the period at $553.7 million, versus $280.8 million at year-end 2019.
- At September 30, principal debt was approximately $2.0 billion; balance-sheet debt, net of financing fees, was $2.0 billion. The company had approximately $1.0 billion of available capacity on its revolving facility.
- Gartner refinanced debt during 2020, including issuing $800 million of 4.50% notes due 2028 and $800 million of 3.75% notes due 2030. It redeemed $800 million of 5.125% notes due 2025, triggering the $44.8 million extinguishment loss. A new credit agreement included a $400 million term loan and a $1.0 billion revolving facility.
- The company reported compliance with credit covenants; its leverage ratio was 2.3 against a maximum of 5.0. It stated liquidity was adequate for anticipated needs for at least 12 months and suspended share repurchases as a precaution.
Business outlook, risks and unusual items
- COVID-19 sharply curtailed in-person conferences. Gartner held two destination conferences virtually in Q3 and planned 13 virtual events in Q4; management expected virtual events to generate significantly less revenue and gross contribution than in-person events.
- Management expected only a modest decrease in Research revenue for the remainder of 2020, but slower contract-value growth to constrain Research revenue growth in 2021. Research contract-value growth was 5.3% in Q3, versus 10.6% in Q1 and 7.0% in Q2. Consulting revenue was expected to remain lower through the rest of 2020 due to weaker labor-based demand.
- Gartner had about $16 million of prepaid costs related to cancelled conferences and expected to recover most through vendor arrangements or insurance. Its insurer disputed reinstatement and coverage issues; Gartner was litigating. The company said it would not recognize insurance recoveries beyond expenses incurred until proceeds were received.
- Workforce reductions implemented in Q2 generated approximately $17 million of costs in the first nine months; $12 million had been paid, with most remaining charges expected to be paid in Q4. Cost-avoidance measures included limits on hiring and third-party spending and reduced travel; some business investment resumed in Q3.
- Other matters to monitor include uncertain pandemic duration and effects, conference insurance recovery, customer retention and demand, interest-rate and foreign-exchange exposure, tax-rate volatility, and potential future impairment or restructuring charges. Management reported no material asset impairment observed to date and no material change to previously disclosed risk factors.
Key facts for investors to verify
- Whether virtual and future in-person events, and any insurance recovery, offset the continuing conference revenue and contribution shortfall.
- Whether Research contract-value growth and retention stabilize, and how the slowdown affects 2021 revenue growth.
- Whether Consulting demand and backlog recover; Q3 backlog was $96.0 million, down 12% year over year.
- Debt refinancing costs, floating-rate exposure and covenant headroom; interest-rate swaps had a $120.5 million negative fair value at quarter-end.
- Cash-flow sustainability and the timing of remaining workforce-reduction payments, alongside management’s decision to suspend share repurchases.