Gartner, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Gartner provides research and advisory services through Research, Events, Consulting and Other segments. The 2017 comparison includes CEB results only from its April 5, 2017 acquisition date, so comparisons—especially for the six-month period—are affected by acquisition timing.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $1,001.3 million | $843.7 million | $1,964.9 million | $1,468.9 million |
| Operating income (loss) | $86.1 million | ($98.4 million) | $77.4 million | ($44.9 million) |
| Net income (loss) | $46.3 million | ($92.3 million) | $26.7 million | ($55.8 million) |
| Diluted EPS | $0.50 | ($1.03) | $0.29 | ($0.65) |
| Operating margin | 8.6% | (11.7%) | 3.9% | (3.1%) |
| Operating cash flow | Not separately presented for the quarter | $176.7 million | $82.7 million |
Q2 revenue grew 19% year over year (16% excluding foreign currency effects); six-month revenue grew 34% (30% excluding currency effects). Research revenue increased 26% in Q2, Events 22%, and Consulting 5%. Other revenue declined 51%, primarily following divestitures. Q2 improved profitability reflected stronger Research and Events contribution, lower intangible amortization and lower acquisition/integration charges. Six-month interest expense rose to $72.7 million from $49.9 million.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $141.8 million; the cash-flow statement reports $160.0 million including $18.2 million of restricted cash. Available revolving-credit capacity was $906.0 million.
- Debt principal outstanding was $2.464 billion, down from $3.323 billion at December 31, 2017. Gartner repaid the $496.3 million Term Loan B and made other debt repayments; six-month cash payments on borrowings were $858.6 million. The revolver had $270.0 million drawn. The $800 million senior notes bear 5.125% interest and mature in 2025.
- Six-month cash flows included $366.4 million provided by investing activities, including $405.5 million net proceeds from business divestitures, offset in part by $40.1 million of capital expenditures. Financing activities used $947.3 million, including debt repayments and $96.3 million of share repurchases.
- Gartner reported compliance with its debt covenants. It had $1.0 billion remaining under its $1.2 billion share-repurchase authorization.
Material changes and unusual items
- In Q2 Gartner sold CEB Talent Assessment for $403.0 million and CEB Workforce Survey and Analytics for $28.0 million. It recorded gains of approximately $16.0 million and $8.8 million, respectively; together with other asset sales, the reported gain from divested operations was $25.5 million. These businesses had been acquired with CEB in 2017.
- Acquisition and integration charges were $20.0 million in Q2 versus $98.3 million a year earlier, and $79.2 million for the half versus $111.6 million. Facility exit costs were a major 2018 component; the company estimated approximately $70 million of total net cash payments for these exit costs.
- Research total contract value reached $2.9 billion, up 12% on a foreign-exchange-neutral basis. Global Technology Sales contract value grew 14%; Global Business Sales grew 4%. Retention measures were mixed: GTS client retention was 82% versus 83%, while GBS client retention was 83% versus 79%.
- Events attendance increased 13% in Q2 and 18% for the first half. Consulting backlog was $105.6 million, up 16% year over year and described as approximately four months of backlog.
- Foreign-currency translation reduced other comprehensive income by $39.5 million for the first half. Gartner stated that 92% of cash and cash equivalents was held overseas.
Outlook, risks and contingencies
- The filing provides no specific revenue, earnings or cash-flow guidance. Management said it believed liquidity was adequate for currently anticipated needs and cautioned that interim results may not indicate full-year or future results.
- Business results may fluctuate with event timing, new business and acquisitions, sales bookings, client demand and retention, economic conditions, foreign exchange, competition, and performance compensation. The flagship Symposium/ITxpo series normally occurs in Q4.
- About $1.7 billion of debt was based on floating rates; swaps reduced unhedged floating-rate borrowings to approximately $300 million. A 25-basis-point rate change was estimated to change annual pretax interest expense by about $0.8 million.
- Gartner expected adoption of the new lease standard in 2019 to materially increase balance-sheet assets and liabilities, while not materially affecting operating results, comprehensive income or cash flows.
- Tax accounting for the 2017 Tax Act remained provisional; Gartner expected to complete its analysis by Q4 2018. Gross unrecognized tax benefits were $60.3 million, with approximately $5.2 million possibly decreasing within 12 months. An appellate tax-court ruling against a taxpayer position could affect a potential benefit Gartner had not recorded.
- Management said ordinary-course litigation and indemnification matters were not expected to have a material effect. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much of reported revenue and earnings growth reflects underlying organic performance versus CEB acquisition timing, currency effects and divestitures.
- Whether Research contract-value growth and retention trends persist, and whether Consulting growth and backlog convert into revenue as expected.
- Cash generation after debt repayments, share repurchases and exit-cost payments; also confirm the distinction between cash equivalents and restricted cash.
- Debt reduction progress, floating-rate exposure, covenant headroom and the continuing use of repurchases under the authorization.
- Final tax effects of the Tax Act and future balance-sheet impact of lease-standard adoption.