Gartner, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Dollar amounts are in millions unless stated otherwise. Results include CEB from its April 5, 2017 acquisition and L2 from March 9, 2017, limiting direct comparability with 2016.
Business context
Gartner provides research, consulting, events, and talent assessment services. Following the CEB acquisition, it reported four segments: Research, Consulting, Events, and Talent Assessment & Other. Gartner acquired CEB for approximately $3.52 billion and L2 for $134.2 million during 2017.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $828.1 | $574.1 | $2,297.0 | $1,741.3 |
| Operating income (loss) | $(24.3) | $48.7 | $(69.2) | $196.5 |
| Net income (loss) | $(48.2) | $30.5 | $(104.0) | $127.1 |
| Diluted earnings (loss) per share | $(0.53) | $0.36 | $(1.19) | $1.52 |
| Operating cash flow | Not provided by quarter in this filing | $232.3 | $282.3 |
- Q3 revenue rose 44% reported (43% excluding foreign-exchange effects); CEB contributed $165.1 million of the increase. Nine-month revenue rose 32%, with CEB contributing $317.7 million of the increase.
- Q3 Research revenue increased 40% and Events revenue increased 34%; Consulting revenue declined 2%. Talent Assessment & Other contributed $57.6 million, with no comparable 2016 segment reported.
- Q3 Research gross contribution margin was 67%, down 2 percentage points; Consulting margin was 22%, down 3 points. These are segment measures, not consolidated operating margins.
- Higher acquisition-related amortization, integration costs, and interest expense contributed to the move from profit to loss. Q3 acquisition and integration charges were $30.5 million versus $16.6 million; nine-month charges were $142.1 million versus $33.0 million.
- Cash and cash equivalents were $630.0 million at September 30, versus $474.2 million at December 31, 2016. Current assets were $1,812.3 million and current liabilities $2,482.0 million.
- Debt principal outstanding was $3,387.9 million; balance-sheet carrying value, net of financing fees, was $3,341.8 million. The company had $534.0 million of available revolving-credit capacity and reported compliance with debt covenants.
- Cash used in investing was $2,710.4 million, primarily reflecting acquisition payments; financing provided $2,605.6 million, including substantial borrowing. Approximately 97% of cash was held overseas.
Material changes, outlook, and risks
- CEB acquisition financing materially increased leverage and interest costs. Debt included $800 million of 5.125% senior notes due 2025, term loans, and revolver borrowings. About $2.6 billion of debt was floating-rate; swaps reduced, but did not eliminate, exposure. The filing estimates a 25-basis-point rate move would change annual pretax interest expense by about $3.0 million.
- Management said liquidity was adequate for currently anticipated needs. The filing provides no specific revenue, earnings, or cash-flow guidance.
- On October 4, 2017, Gartner announced a review of strategic alternatives for its Talent Assessment business, which may include a sale. There is no announced timetable or assurance a transaction will occur.
- Management attributed weaker profitability to acquisition-related costs and amortization, the CEB deferred-revenue fair-value adjustment, and higher interest expense. Research margin was also affected by lower-margin acquired offerings; Consulting cited lower utilization and lower contract-optimization revenue.
- Risks include integration and execution of CEB and L2, the new talent-assessment and public-sector businesses, and the ability to sublease CEB-related Arlington office space. Gartner accrued $21.1 million for certain excess-space exit costs. The company also cited ordinary-course litigation and tax uncertainties; it said any excess legal liability was not expected to be material.
- Gartner’s annual goodwill assessment found no impairment. CEB and L2 purchase-price allocations remained preliminary. Acquired businesses were excluded from the company’s 2017 internal-control assessment as permitted for recent acquisitions; integration of controls was expected to continue into 2018.
Most important facts for investors to verify
- How much reported revenue growth and future contract value convert into organic growth, particularly as CEB is included for only part of 2017.
- Whether integration costs, deferred-revenue accounting effects, and acquired-intangible amortization decline as expected, and whether segment margins recover.
- Debt repayment, interest-rate exposure, covenant headroom, and the use of cash concentrated outside the United States.
- The outcome and financial implications of the Talent Assessment strategic review and the ability to sublease excess Arlington space.
- Completion of acquisition purchase-price allocations and internal-control integration, plus any material changes in tax or legal contingencies.