GARTNER INC quarterly report, Q1 FY2017

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Gartner, Inc. — Q1 2017 Form 10-Q

Reporting period: Three months ended March 31, 2017. Gartner provides research, consulting and events services. Results are unaudited and may not indicate full-year performance.

Financial performance

  • Revenue: $625.2 million, up 12% year over year (13% excluding foreign-exchange effects). Research revenue rose 15% to $504.7 million; Events rose 10% to $35.3 million; Consulting was essentially flat at $85.2 million.
  • Profit: Operating income was $53.5 million, down 17%; operating margin was approximately 9%, versus 12%. Net income fell 19% to $36.4 million. Diluted EPS was $0.43, down from $0.54.
  • Cash flow: Operations used $29.6 million, compared with $13.3 million provided in Q1 2016. Investing used $140.0 million, primarily reflecting acquisitions. Financing provided $917.3 million, mainly from borrowings. Ending cash was $1.228 billion.
  • Liquidity and debt: At March 31, cash was $1.228 billion and available revolver capacity was $927 million. Gross debt was $1.658 billion, including $800 million of 5.125% notes due 2025; net carrying debt was $1.629 billion after financing fees. The company reported compliance with credit covenants.
  • Margins and operating indicators: Research gross contribution margin was 69%, down 1 point; Consulting was 33%, down 2 points; Events was 38%, down 3 points. Research total contract value increased 13% (12% excluding L2); client retention was 83% and wallet retention 104%. Consulting backlog was $103.2 million, down 10% reported, or about 4% excluding a prior-year large contract; utilization was 65%.

Changes versus Q1 2016

  • Revenue grew, led by Research and Events, but operating income and earnings declined as costs rose faster than revenue. SG&A increased 18%, including higher payroll, commissions, stock compensation and corporate costs; headcount increased 15%.
  • Acquisition and integration charges rose to $13.3 million from $8.4 million.
  • Stock-based compensation expense increased to $22.6 million from $15.5 million. The 2016 comparison reflects Gartner’s retrospective adoption of ASU 2016-09, which increased previously reported Q1 2016 net income and operating cash flow by $4.8 million.

Outlook, transactions and risks

  • CEB acquisition: Completed April 5, 2017, after quarter-end, for approximately $3.5 billion gross enterprise value; Gartner paid $2.7 billion cash and issued 7.4 million shares. It borrowed approximately $2.8 billion for the transaction, bringing total debt after closing to approximately $3.6 billion. Post-close cash was approximately $640 million and available revolver capacity approximately $630 million; management said liquidity was adequate for anticipated needs.
  • L2 acquisition: Gartner acquired L2 on March 9 for a stated $155 million purchase price. L2’s Q1 results were not material; purchase-price allocation remained preliminary.
  • No specific earnings or revenue guidance is provided in the filing. Management notes that results fluctuate with bookings, event timing, compensation payments, economic conditions, competition and foreign exchange.
  • Key exposures include CEB integration and increased leverage, variable-rate debt (partly hedged), foreign-exchange movements, and estimation risks involving receivables, goodwill, taxes and stock compensation. A 10% currency move would change the reported value of foreign-currency cash by approximately $18 million.
  • Ordinary-course legal matters were not expected to have a material effect beyond amounts accrued. Gartner disclosed $42.6 million of gross unrecognized tax benefits and an ongoing IRS appeal concerning stock-compensation treatment; no benefit from the related court decision had been recorded.

Investor verification priorities

  1. Track post-CEB debt, interest expense, covenant headroom and progress toward reducing leverage.
  2. Assess CEB integration costs, realized synergies and the acquired business’s contribution to growth and cash flow.
  3. Monitor Research contract-value growth and retention, alongside Consulting backlog and utilization.
  4. Determine whether rising operating expenses and acquisition charges continue to pressure margins and EPS.
  5. Review the final L2 purchase-price allocation and the outcomes of material tax and legal matters.