Gartner, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with the three months ended March 31, 2020. Gartner provides research, conferences and consulting services.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $1.104 billion | $1.019 billion | Up 8% reported; up 6% excluding foreign currency impact |
| Operating income | $225.4 million | $124.7 million | Up 81% |
| Operating margin | 20.4% | 12.2% | Up 8.2 percentage points |
| Net income | $164.1 million | $75.1 million | Up 119% |
| Diluted EPS | $1.84 | $0.83 | Up $1.01 |
| Cash provided by operations | $157.3 million | $55.7 million | Up $101.5 million |
- Revenue by segment: Research was $979.7 million, up 8%; Conferences was $24.8 million, up 79%; Consulting was $99.5 million, up 4%. Conferences’ comparison reflects pandemic-related disruption in the prior-year quarter.
- Segment gross contribution margins: Research 74% versus 72%; Conferences 56% versus negative 44%; Consulting 39% versus 31%.
- Cash and liquidity: Cash and equivalents were $446.0 million at quarter-end, down from $712.6 million at December 31, 2020. The company reported approximately $1.0 billion of available revolving-credit capacity and said it expects adequate liquidity for anticipated needs for at least 12 months.
- Debt: Principal debt outstanding was approximately $2.0 billion; balance-sheet carrying amount, net of financing fees, was $1.970 billion. The company had $15.4 million of principal scheduled for repayment during the remainder of 2021. Swaps effectively convert floating base rates on variable-rate borrowings to fixed rates.
- Capital spending and repurchases: Investing cash outflow was $12.5 million, primarily capital expenditures. Financing cash outflow was $403.2 million, including $398.5 million of share repurchases. Repurchases included 2.27 million shares at an average $180.44 per share.
Material changes and operating trends
- Revenue growth and lower costs supported the improvement in operating income. Cost of services and product development declined 2%, and SG&A declined 2%; management cited reduced travel, conference and facilities costs, and continuing cost-avoidance actions.
- Research contract value grew 6% year over year on a foreign-currency-neutral basis to approximately $3.7 billion. Global Technology Sales contract value grew 5% and Global Business Sales grew 12%. Global Technology Sales wallet retention fell to 98% from 104%; Global Business Sales wallet retention rose to 105% from 101%.
- Consulting backlog was $116.5 million, up 3% on a foreign-currency-neutral basis. Utilization increased to 68% from 62%, while billable headcount decreased 8% to 744.
- Cash from operations benefited from higher pretax income and increased deferred revenue, partly offset by higher bonus payments. The large financing outflow primarily reflected share repurchases.
Outlook, risks and unusual items
- Outlook: The filing gives no quantified company-wide revenue or earnings guidance. Management said slower Research contract-value growth in 2020 and Q1 2021 is likely to mean slower Research revenue growth in 2021. Results for the quarter may not indicate results for the rest of the year.
- COVID-19 and conferences: In-person conferences were canceled through at least August 2021; management planned to resume them starting in September, subject to conditions. Five virtual conferences were held in Q1 and 18 more were planned through August. Management expects virtual events to generate significantly less revenue and gross contribution than in-person events.
- Conference insurance: Approximately $15 million of canceled-conference-related costs was recorded in prepaid expenses and other current assets. Gartner is litigating with its insurer over reinstatement and scope of event-cancellation coverage; timing and recovery of proceeds are uncertain. Gartner said it would not record insurance claims beyond incurred expenses before receiving proceeds.
- Unusual earnings item: Other income included a $15.8 million gain on de-designated interest-rate swaps, contributing to the year-over-year earnings increase. Stock-based compensation expense rose to $36.1 million from $25.1 million, including $6.5 million of incremental cost from a modification to 2020 executive performance-award payouts.
- Other risks: Management identified continuing uncertainty from COVID-19, conference timing and attendance, customer renewals and growth, competition, debt obligations, foreign exchange, interest rates, cybersecurity, and tax and regulatory matters. It reported no material change to the risk factors in its 2020 Form 10-K. Ordinary-course legal proceedings were not expected to have a material effect; the filing describes no material indemnification payment obligations.
- Subsequent event: On April 29, 2021, the board authorized an additional $500 million of repurchases. At the end of April, approximately $290 million remained under prior authorizations.
Important facts for investors to verify
- Whether Research contract-value growth, particularly Global Technology Sales wallet retention, improves or continues to lag.
- Whether in-person conferences resume as planned and how virtual-event economics and the insurance litigation affect results and cash flows.
- How much of Q1 earnings growth was recurring operating improvement versus the $15.8 million swap gain and pandemic-related cost reductions.
- Cash generation, debt repayment capacity and the pace of buybacks relative to liquidity and the company’s investment plans.
- Potential effects of foreign-currency movements, taxes and other disclosed risks; the filing reports that a 10% currency move could change the reported value of cash by approximately $38.7 million.