Gartner, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Gartner provides research, events and consulting services. In 2018, it sold the three non-core businesses comprising its Other segment; it ceased recording additional Other-segment operating activity effective September 1.
Financial performance
| Metric | Q3 2018 | Nine months 2018 |
|---|---|---|
| Revenue | $921.7 million, up 11% year over year (13% excluding FX) | $2,886.6 million, up 26% (24% excluding FX) |
| Operating income (loss) | $52.7 million, versus a $24.3 million loss | $130.1 million, versus a $69.2 million loss |
| Net income (loss) | $11.8 million; diluted EPS $0.13 | $38.4 million; diluted EPS $0.42 |
| Operating margin | Approximately 5.7%, versus negative 2.9% | Approximately 4.5%, versus negative 3.0% |
| Operating cash flow | Not presented as a quarterly figure | $426.0 million, versus $232.3 million |
Q3 revenue rose in Research (18%), Events (27%) and Consulting (9%). Segment gross contribution margins were 69% for Research, 44% for Events and 23% for Consulting. For the nine-month period, segment revenue grew 30%, 25% and 6%, respectively. These segment measures are not consolidated operating margins.
Q3 results included a $13.0 million gain from divested operations; the nine-month gain was $38.5 million. Q3 acquisition and integration charges were $17.1 million, down from $30.5 million; nine-month charges were $96.3 million, down from $142.1 million. Nine-month interest expense was $99.6 million, up from $88.6 million.
Financial position and liquidity
- At September 30, cash and cash equivalents were $211.0 million. Cash, including restricted cash, was $213.3 million.
- Debt principal was $2.203 billion; balance-sheet debt carrying value, net of financing fees, was $2.171 billion. The company repaid $1.120 billion of borrowings during the first nine months, including fully repaying its $500 million Term Loan B.
- Available revolving-credit capacity was $1.149 billion. Gartner reported compliance with debt covenants.
- Cash from investing activities was $440.2 million, including $520.7 million of net divestiture proceeds, partly offset by $64.6 million of capital expenditures. Financing activities used $1.214 billion, primarily for debt repayment and share-related activity.
- Current deferred revenue was $1.651 billion. Fees receivable, net, was $979.2 million, down from $1.177 billion at year-end 2017.
Material changes, outlook and risks
- Divestitures generated approximately $504.8 million in net cash from business divestiture and acquisition activity, which Gartner said it used to reduce debt. The sales produced a combined $38.5 million gain from divested operations for the nine-month period.
- Management said higher Research subscription revenue, stronger event attendance and exhibitor participation, and improved segment contribution margins supported the return to operating and net income. The nine-month revenue comparison also reflects CEB, acquired in April 2017, so it is not wholly organic growth.
- No specific financial guidance was provided in the supplied filing text. Management said results may fluctuate with event timing, bookings, client demand, economic conditions, foreign exchange, competition and compensation costs, and cautioned that interim results may not indicate full-year or future performance.
- Gartner expected adoption of the new lease accounting standard in January 2019 to add approximately $0.9–$1.0 billion of operating lease liabilities and $0.7–$0.8 billion of right-of-use assets to the balance sheet; management did not expect a material effect on the income statement or cash flows.
- The Q3 effective tax rate was 69.0%, primarily due to the taxable gain on the Challenger business sale exceeding its book gain. The nine-month rate was 45.2%. Accounting for certain Tax Act effects remained provisional, and the company had $62.6 million of gross unrecognized tax benefits.
- CEB-related facility exit costs were a significant integration item: the related liability was $57.4 million at quarter-end, with estimated future net cash payments of approximately $76.9 million. Gartner identified ordinary-course legal proceedings but said any exposure beyond accrued amounts was not expected to be material.
Important facts for investors to verify
- Whether Research contract value growth, client retention and wallet retention persist; total contract value was approximately $3.0 billion, up 12% year over year on a foreign-exchange-neutral basis.
- How much of revenue and earnings growth is organic versus attributable to CEB and divestiture-related effects, including gains and prior-year acquisition accounting adjustments.
- Whether cash generation remains strong after substantial debt repayments, and how the remaining debt, floating-rate exposure and upcoming lease liabilities affect leverage and liquidity.
- Final tax accounting under the Tax Act, resolution of tax uncertainties, and actual cash payments for CEB-related exit costs.