Gartner, Inc. — 2018 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2018; it also reports fourth-quarter results. Gartner provides research and advisory subscriptions, conferences, and consulting to organizations worldwide. The 2017 CEB acquisition expanded its research across business functions. In 2018, Gartner divested the three non-core businesses comprising its Other segment.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $3,975.5 million | $3,311.5 million |
| Operating income (loss) | $259.7 million | $(6.3) million |
| Net income | $122.5 million | $3.3 million |
| Diluted EPS | $1.33 | $0.04 |
| Cash provided by operating activities | $471.2 million | $254.5 million |
- Revenue grew 20% reported (19% excluding foreign-currency effects). Research revenue was $3,105.8 million (+26%); Conferences $410.5 million (+21%); Consulting $353.7 million (+8%). Other revenue fell 40% to $105.6 million, reflecting divestitures.
- Segment contribution margins: Research 69% (up 2 points), Conferences 50% (up 2 points), and Consulting 29% (unchanged). Research contract value reached $3.2 billion, up 11% on a foreign-currency-neutral basis. Consulting backlog was $110.7 million, up 16%.
- Fourth-quarter revenue was $1,088.9 million, operating income $129.6 million, net income $84.0 million, and diluted EPS $0.92. Fourth-quarter 2017 net income included a substantial tax benefit.
- Cash and cash equivalents were $156.4 million at year-end; cash flow statement ending cash, including restricted cash, was $158.7 million. The company reported $1.0 billion of available revolving-credit capacity.
- Debt principal was $2.312 billion at year-end, down from $3.323 billion a year earlier. Gartner repaid approximately $1.0 billion of debt during 2018. Stockholders’ equity was $850.8 million.
Material changes and items affecting comparability
- Revenue and earnings comparisons reflect CEB being included for a full year in 2018 versus from April 5 in 2017. Gartner cited the much smaller impact of CEB acquisition-related deferred-revenue fair-value adjustments in 2018 as a factor in improved Research contribution and profitability.
- Acquisition and integration charges declined to $107.2 million from $158.5 million. These costs, along with higher selling, administrative, and amortization expenses, remained significant.
- 2018 included a $45.4 million gain from divested operations. The divestitures generated $526.8 million in cash proceeds and proceeds were used to reduce debt. The businesses sold contributed about $97.3 million of 2018 revenue before sale.
- The effective tax rate was 32.4%, versus 102.6% in 2017. The 2017 result was affected by tax-reform-related benefits, including a $59.6 million benefit that increased diluted EPS by approximately $0.66.
- Gartner adopted the new revenue-recognition standard in 2018; it reported no material effect on consolidated financial statements. It adopted the new lease standard on January 1, 2019 and expected recognition of $835–$855 million in operating lease liabilities and $637–$657 million in right-of-use assets.
Outlook, risks, and contingencies
- The filing provides no specific financial guidance or quantified forecast for 2019. Management said it believed current liquidity was adequate for anticipated needs and emphasized continued growth, client retention, sales capacity, and operating efficiency.
- Key risks include economic weakness, competition and free information sources, subscription renewal and pricing, changing technology and client demand, conference disruptions, and the project-based nature of Consulting. Research client retention was 83% at both year-end 2018 and 2017; wallet retention varied by sales group.
- Other material exposures include $2.3 billion of debt principal, variable-rate interest exposure, foreign-currency movements, tax audits and uncertain tax positions, privacy and cybersecurity, international operations, and acquisition integration and leased-office commitments. Approximately $1.5 billion of debt was floating-rate, with swaps hedging much of the exposure; unhedged exposure was about $110 million.
- Gartner disclosed cooperation with a South African government commission reviewing consulting agreements procured through a sales agent. The commission recommended that the revenue service explore lawful options to invalidate agreements and seek recovery of certain payments. Gartner voluntarily disclosed the matter to the SEC and DOJ and said it would cooperate; management did not expect a material financial effect, while acknowledging an adverse outcome could affect results or liquidity.
- Ordinary-course legal proceedings were not considered likely to have a material adverse effect, after accrued amounts and insurance. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Underlying organic growth and the contribution from the CEB acquisition, divestitures, and foreign exchange.
- Research contract-value growth, especially slower GBS contract-value growth (1%) and GBS wallet retention (95%, down from 100%).
- Whether higher operating cash flow is sustained and how management balances debt reduction, share repurchases, and investment; 2.1 million shares were repurchased for $260.8 million in 2018.
- Debt maturities, interest-rate hedging, covenant compliance, and the impact of substantial lease obligations.
- Developments in the South African commission matter and any SEC or DOJ inquiries, as well as tax audits and unrecognized tax benefits ($90.3 million at year-end).