Gartner, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless noted. Gartner provides Research, Conferences and Consulting services. The quarter was affected by the emerging COVID-19 pandemic, particularly through conference cancellations and travel restrictions.
Financial results and position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $1,018.9 million | $970.4 million | +5% reported; +6% excluding foreign exchange |
| Operating income | $124.7 million | $48.8 million | +156% |
| Operating margin | 12.2% | 5.0% | +7.2 percentage points |
| Net income | $75.1 million | $20.8 million | +261% |
| Diluted EPS | $0.83 | $0.23 | +$0.60 |
| Cash from operating activities | $55.7 million | $35.6 million | +$20.2 million |
Revenue growth and lower operating expenses drove higher operating income. The effective tax rate rose to 22.5% from 1.2%, partly because stock-based compensation tax benefits had less effect relative to higher pretax income. Q1 2020 results included no loss from divested operations, versus a $2.1 million loss in Q1 2019.
Segments: Research revenue increased 10% to $909.3 million; gross contribution margin was 72%, versus 70%. Conferences revenue fell 73% to $13.9 million, and its gross contribution was a loss of $6.1 million, versus income of $18.9 million. Consulting revenue increased 3% to $95.7 million; gross contribution margin remained 31%.
Cash, liquidity and debt: Cash and equivalents were $227.9 million at March 31, down from $280.8 million at year-end. Operating cash flow was $55.7 million; capital expenditures were $24.5 million; financing activities used $68.5 million, including $73.2 million of share repurchases. Principal debt outstanding was $2.21 billion; net carrying debt was $2.18 billion. The company had approximately $1.0 billion of revolver availability at quarter-end and reported compliance with its then-current debt covenants. Working capital was negative by approximately $757.7 million, reflecting current liabilities that included deferred revenue.
Material changes, outlook and risks
- COVID-19 outlook: Gartner reported that most 2020 destination conferences and more than half of Evanta conferences had been cancelled. At filing, it estimated these cancellations would reduce planned 2020 revenue by $214 million and contribution margin by $128 million; later conferences could also generate below-plan revenue. All in-person conferences through August had been cancelled or postponed.
- Research and Consulting: Research contract-value growth slowed late in Q1; CV growth was 10.6% versus 11.7% in Q4 2019. Management expected a modest Research revenue decline for the remainder of 2020 and warned slower CV growth could moderate 2021 Research revenue growth. Consulting demand weakened in March and April; Gartner expected lower Consulting revenue for the rest of 2020.
- Cost actions and event recovery: Gartner limited hiring and third-party spending, reduced discretionary costs and travel, and reprioritized capital spending. In April it announced Conference-segment furloughs and workforce reductions affecting about 45% of Conference employees (about 3% of total employees), with expected costs of $5–6 million, mostly in Q2. It expected to recover most recorded conference cancellation and potential termination costs through vendor force-majeure provisions or insurance, but timing was uncertain; it would not recognize insurance proceeds before receipt.
- Liquidity actions: On April 1, Gartner drew an additional $300 million on its revolver to preserve flexibility and suspended share repurchases as a cautionary measure. On May 6, it amended its credit agreement, raising maximum leverage covenant thresholds through December 31, 2021. The amendment increases loan margins if the leverage ratio exceeds 4.50 to 1.00.
- Other notable items: Gartner expected an April intercompany intellectual-property sale to have a material favorable tax effect on Q2 results, while noting potential future tax-rate volatility. COVID-19 duration, client spending and retention, event cancellations, consulting demand, liquidity and economic conditions were identified as significant uncertainties. Management reported no material asset impairments observed to date from COVID-19. Ordinary-course legal matters were not expected to have a material effect beyond accrued amounts.
Important facts for investors to verify
- Whether the projected $214 million conference revenue and $128 million contribution-margin reductions, and the anticipated insurance or vendor recoveries, were realized.
- Subsequent Research contract value, client and wallet retention, and Consulting demand and utilization trends, given the stated potential effects on 2021 growth.
- Cash generation, revolver borrowings and covenant headroom after the $300 million draw and May 2020 covenant amendment.
- The actual Q2 tax benefit from the intellectual-property transaction and any related changes in the effective tax rate.
- Actual costs and operational effects of the Conference workforce reductions, and when share repurchases may resume.