Gartner, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Gartner provides research, conference and consulting services. In 2018, it divested the businesses that comprised its Other segment; reported year-over-year comparisons therefore include a prior-period contribution from divested operations.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1,070.9 million | $1,001.3 million | $2,041.3 million | $1,964.9 million |
| Operating income | $116.0 million | $86.1 million | $164.8 million | $77.4 million |
| Net income | $103.4 million | $46.3 million | $124.2 million | $26.7 million |
| Diluted EPS | $1.13 | $0.50 | $1.36 | $0.29 |
| Operating margin | 10.8% | 8.6% | 8.1% | 3.9% |
Q2 revenue grew 7% reported and 9% excluding foreign currency effects; first-half revenue grew 4% reported and 7% excluding currency effects. Q2 Research revenue rose 7%, Conferences 27%, and Consulting 7%. First-half segment revenue growth was 8%, 23%, and 10%, respectively. Research contract value increased 11% year over year on a foreign-exchange-neutral basis to $3.2 billion; Consulting backlog rose 7% to $110.4 million.
Q2 operating income benefited from higher segment contributions, lower intangible amortization and lower acquisition and integration charges, partly offset by higher SG&A. SG&A increased 12% in Q2, driven mainly by commissions and payroll/headcount; as a share of revenue it rose to 48% from 46%. Consulting Q2 contribution margin declined to 33% from 35%, reflecting personnel costs. Conferences and Research margins were unchanged at 57% and 69%.
Cash, debt and liquidity
- First-half cash from operations was $263.1 million, up from $176.7 million. Capital expenditures were $59.5 million; cash used in investing was $61.8 million.
- Cash and cash equivalents were $218.5 million at June 30, 2019. The company reported approximately $1.1 billion of available revolving-credit capacity and said it believed liquidity was adequate for anticipated needs.
- Debt principal outstanding was $2.207 billion; the balance-sheet carrying amount, net of financing fees, was $2.180 billion. The company was in compliance with credit-agreement covenants. Approximately $1.4 billion of floating-rate borrowings was effectively hedged against base-rate risk.
- Adoption of the new lease standard materially increased reported assets and liabilities. At June 30, operating lease right-of-use assets were $637.7 million and lease liabilities totaled $841.5 million.
- Cash used in financing was $142.1 million, including $109.6 million of debt repayments and $46.6 million for share repurchases. No open-market repurchases occurred in 2019’s first half; Q2 repurchases were for stock-award settlements.
Changes, outlook and risks
- Net income growth included a $38.1 million tax benefit from an April 2019 intercompany intellectual-property sale. The six-month effective tax rate was a 10.8% benefit, versus a 17.1% expense in the prior-year period; management cautioned tax planning may cause future rate volatility.
- Interest expense fell year over year, which management attributed primarily to lower average debt and lower effective borrowing rates. The 2018 comparison also included a $25.5 million gain and $406.5 million of net cash proceeds from divestitures; 2019 recorded a $2.1 million divestiture-related loss for working-capital adjustments.
- No specific full-year revenue or earnings guidance is provided in the filing text. Management cautioned that quarterly results may fluctuate, including due to the timing of the fourth-quarter Symposium/ITxpo conference series, new business, economic conditions, demand, foreign exchange, competition, incentive compensation and the transition away from LIBOR.
- Other matters to monitor include the Ninth Circuit reversal of a Tax Court decision concerning stock-based compensation in an intercompany cost-sharing arrangement; the company recorded no benefit for open tax years related to that matter. Legal proceedings were described as ordinary-course matters not expected to have a material effect beyond amounts accrued.
Investor verification points
- Assess the durability of Research contract-value growth and retention, particularly the weaker Global Business Sales measures: client retention 81% versus 83%, and wallet retention 95% versus 97%.
- Check whether Conferences growth and attendance persist beyond the reported periods, given conference timing and seasonality.
- Track Consulting margin, utilization and revenue per billable headcount, alongside backlog conversion.
- Separate recurring operating improvement from the one-time tax benefit, prior-year divestiture gains, reduced acquisition costs and lower amortization when evaluating earnings growth.
- Monitor leverage, refinancing and interest-rate exposure, lease commitments and sublease receipts, and potential tax effects from unresolved matters.