Gartner, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018. Gartner provides Research, Conferences and Consulting services. Results are unaudited.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $970.4 million | $963.6 million |
| Operating income (loss) | $48.8 million | $(8.7) million |
| Net income (loss) | $20.8 million | $(19.6) million |
| Diluted EPS | $0.23 | $(0.22) |
| Cash provided by operating activities | $35.6 million | $2.7 million |
Reported revenue increased 1%; management reported 4% growth excluding foreign-exchange effects. Operating margin was approximately 5.0%, compared with approximately negative 0.9% a year earlier. Net margin was approximately 2.1%, versus approximately negative 2.0%.
Revenue by segment: Research $825.4 million (+8% reported; +11% excluding FX), Conferences $51.9 million (+13%; +17% excluding FX), and Consulting $93.1 million (+12%; +16% excluding FX). Gross contribution margins were 70% for Research (unchanged), 36% for Conferences (up 1 point), and 31% for Consulting (up 2 points).
Cash and cash equivalents were $149.3 million at quarter-end; approximately $1.0 billion of revolving-credit capacity remained available. Debt principal was $2.328 billion (balance-sheet carrying amount $2.300 billion); subtracting cash, principal debt less cash was approximately $2.179 billion. The company reported compliance with credit covenants. Current liabilities exceeded current assets by approximately $852.9 million, with deferred revenue a substantial component of current liabilities.
Investing activities used $22.4 million, primarily for capital expenditures. Financing activities used $23.4 million, including $44.8 million of cash payments for repurchases; the filing says all quarter’s repurchases related to settlement of stock-based awards, not purchases under the announced authorization.
Material changes and unusual items
- Reported revenue growth understates the performance of ongoing segments: Q1 2018 included $70.7 million of revenue and $43.0 million of gross contribution from the divested Other businesses. Gartner recorded no Other-segment revenue in Q1 2019.
- Operating results improved substantially, aided by lower amortization ($33.7 million versus $51.6 million) and acquisition and integration charges ($2.8 million versus $59.3 million). The prior-year acquisition charges included $41.6 million of office-space exit costs.
- Interest expense, net, declined to $24.8 million from $35.1 million, primarily due to lower average borrowings. Q1 2019 also included a $2.1 million loss from divested operations, mainly related to working-capital adjustments.
- The effective tax rate was 1.2%, versus 54.3% in Q1 2018; management attributed the change primarily to the relative impact of stock-compensation tax benefits and prior-year divestiture tax benefits. In April 2019, Gartner completed an intercompany intellectual-property sale expected to have a material favorable Q2 tax impact. It was also assessing a tax accounting-method change that could result in a material favorable tax impact.
- Adoption of the lease standard on January 1, 2019 added material balance-sheet amounts: at March 31, operating lease right-of-use assets were $634.1 million and lease liabilities were $836.5 million. Management said adoption did not materially affect Q1 earnings or operating cash flow.
Outlook, commentary and risks
The filing provides no specific company-wide revenue or earnings guidance. Management said it believes liquidity is adequate for currently anticipated needs. It cited Research subscription prepayments, client retention and working-capital management as supports for operating cash generation. Contract value increased 11% year over year; Global Technology Sales contract value rose 14%, while Global Business Sales was flat. Global Business Sales performance reflected a strategic shift away from certain large legacy products toward seat-based products. Consulting backlog increased 7% to $108.3 million, described as approximately four months of backlog and in line with the company’s operational target.
Management cautioned that quarterly results fluctuate with conference timing, sales bookings, business mix, economic conditions, foreign exchange, competition and performance compensation; the flagship conference series normally occurs in Q4. Contract-optimization consulting revenue can vary significantly, so Q1 results may not indicate the rest of 2019.
Market risks include floating-rate debt and foreign-currency exposure. Approximately $122 million of borrowings was unhedged; a hypothetical 25-basis-point rate change could change annual pretax interest expense by approximately $0.3 million. A 10% exchange-rate movement across foreign currencies held could change reported cash by approximately $11 million. Legal matters arise in the ordinary course; Gartner stated that any liability above accrued amounts was not expected to materially affect financial position, cash flows or results.
Important facts for investors to verify
- Assess continuing-business growth separately from the prior-year divested Other segment, and monitor Research contract value, retention and the Global Business Sales transition.
- Check whether the expected favorable tax effects of the April IP transaction and the pension-plan accounting-method change are realized, and confirm their size and timing.
- Monitor debt, available revolver capacity, interest-rate hedging and lease obligations; distinguish lease liabilities from funded debt.
- Evaluate whether higher SG&A and sales headcount translate into sustained bookings and operating leverage, and whether Consulting’s Q1 contract-optimization growth persists.
- Consider conference seasonality, foreign-exchange movements, execution risks and the effect of stock-based compensation when comparing future quarters.