Gartner, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; comparisons are with the same 2019 periods. Gartner provides Research, Conferences and Consulting services. The filing describes substantial COVID-19 disruption, especially to Conferences.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $973.1 million | $1,070.9 million | $1,992.0 million | $2,041.3 million |
| Operating income | $99.7 million | $116.0 million | $224.4 million | $164.8 million |
| Net income | $55.1 million | $103.4 million | $130.2 million | $124.2 million |
| Diluted EPS | $0.61 | $1.13 | $1.45 | $1.36 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $398.9 million | $263.1 million |
- Q2 revenue declined 9% reported (8% excluding foreign exchange); first-half revenue declined 2% reported (1% excluding foreign exchange). Q2 operating income fell 14% and net income fell 47%. First-half operating income rose 36% and net income rose 5%.
- Q2 revenue by segment: Research $875.3 million, up 6%; Conferences $0.3 million, down 100%; Consulting $97.5 million, down 6%. First-half Research revenue rose 8%, while Conferences fell 93% and Consulting fell 2%.
- Research gross contribution margin was 72% in Q2, up 3 percentage points. Consulting margin was 34%, up 1 point. Conferences generated a gross contribution loss of $11.2 million, versus $80.6 million of contribution in Q2 2019.
- Cash and equivalents were $356.6 million at June 30, 2020, versus $280.8 million at year-end 2019. Fees receivable were $1.05 billion and deferred revenue was $1.77 billion, both lower than at year-end.
- Debt principal was $2.01 billion ($1.98 billion net carrying value), down from $2.21 billion at year-end. The company had approximately $1.2 billion of available revolving-credit capacity. It reported compliance with credit covenants; leverage ratio was 2.76 against a 5.00 maximum.
Material changes and management commentary
- COVID-19 sharply curtailed conferences: Gartner held no destination conferences in Q2 and canceled destination conferences for the rest of 2020. It planned 15 virtual conferences in the second half, which management expected to produce significantly less revenue and contribution margin.
- Research contract value grew 7% year over year in Q2, slowing from 10.6% growth in Q1. Management expected a modest Research revenue decrease in the remainder of 2020 and slower Research revenue growth in 2021.
- Consulting demand weakened, particularly in labor-based engagements. Management expected Consulting revenue to remain lower for the rest of 2020. Q2 backlog was $99.0 million, down 10% year over year; utilization was 59%, versus 63%.
- Gartner recorded approximately $18 million of Q2 workforce-reduction costs, with most expected to be paid in Q3 and Q4. It also limited hiring and third-party spending, reduced discretionary costs and reprioritized capital spending.
- Six-month operating cash flow increased by $135.8 million year over year, supported by higher pretax income and working-capital movements. Investing cash use was $45.9 million, primarily capital expenditures; financing cash use was $275.8 million.
Debt, liquidity, risks and unusual items
- In June, Gartner issued $800 million of 4.50% senior notes due 2028 and used proceeds to prepay $787.9 million of Term Loan A debt. The transaction also led to de-designation of interest-rate swaps and a $10.3 million charge to other expense. Other expense also reflected foreign-exchange hedging effects.
- The credit agreement was amended to increase permitted leverage limits through December 31, 2021, providing additional covenant flexibility. The filing states the company was compliant at June 30.
- Conference cancellation costs included approximately $13 million in prepaid expenses. Gartner expected to recover most costs through vendor arrangements, force majeure provisions or event-cancellation insurance. Coverage was stated as up to $170 million for 2020, but the insurer disputed reinstatement and COVID-related coverage; Gartner was litigating the issue and had not recorded unreceived insurance proceeds.
- Tax rates were affected by intellectual-property transactions and movements in uncertain tax benefits. A July 2020 intercompany IP contribution will not generate future amortization deductions in the receiving jurisdiction; management cautioned that its evolving IP footprint may cause tax-rate volatility.
- Management said it had not observed material asset impairments or significant changes in asset fair values attributable to COVID-19 through June 30. It warned that prolonged pandemic impacts could increase impairment, credit-loss or restructuring risks. No formal numerical full-year guidance is provided in the filing.
- Gartner suspended share repurchases as a liquidity precaution. First-half treasury-stock purchases were $73.9 million, including stock-plan-related purchases and open-market activity.
Most important facts for investors to verify
- Whether virtual conferences and insurance recoveries offset any meaningful portion of lost destination-event revenue and costs, including the outcome of the insurer dispute.
- Whether Research contract-value growth and client retention stabilize, and whether the slowdown translates into weaker 2021 Research revenue growth.
- Whether Consulting demand, utilization and backlog recover or continue to weaken.
- Cash-flow durability and covenant headroom under continued disruption, alongside the company’s debt maturities, interest costs and suspended buybacks.
- The timing and amount of workforce-reduction costs, potential further cost actions, and tax-rate effects of the IP restructuring.