Business context and reporting period
Gartner, Inc. provides Research, Conferences and Consulting services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022; comparisons are with the same 2021 periods. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1,331.9m | $1,156.3m | $3,971.1m | $3,427.6m |
| Operating income | $253.4m | $230.2m | $767.8m | $730.3m |
| Net income | $173.5m | $148.9m | $551.0m | $584.2m |
| Diluted EPS | $2.17 | $1.76 | $6.77 | $6.72 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $898.3m | $1,077.7m |
Q3 operating margin was approximately 19.0% versus 19.9% a year earlier; nine-month operating margin was approximately 19.3% versus 21.3%. The filing reports segment contribution margins separately: Research 74% in both comparable periods; Conferences 52% in Q3 (47% prior year) and 55% for nine months (63% prior year); Consulting 35% in Q3 (33% prior year) and 40% for nine months (38% prior year).
At September 30, 2022, cash and cash equivalents were $528.7m; principal debt was $2.489bn, with a net carrying amount of $2.462bn. The company had about $1.0bn of available revolver capacity and reported compliance with debt covenants. Current assets were $1.980bn and current liabilities $3.086bn, including $2.230bn of deferred revenue. Stockholders’ equity was a deficit of $64.9m. Management said liquidity was adequate for anticipated needs over the next 12 months and foreseeable future.
Nine-month cash used in investing was $74.6m and cash used in financing was $1.013bn, including $1.026bn of share repurchases. Cash and cash equivalents declined from $756.5m at year-end 2021; the filing attributes the decline also to cash outflows and foreign-exchange effects. Cash provided by operations fell year over year, partly because 2021 included $150m of insurance proceeds.
Material changes versus prior comparable periods
- Q3 revenue rose 15% reported (20% excluding foreign currency effects); nine-month revenue rose 16% reported (20% excluding FX). Research grew 11% in Q3 and 13% year to date; Conferences grew 216% and 87%; Consulting grew 13% and 15%, respectively.
- Research contract value reached $4.5bn, up 15% year over year excluding FX. Global Technology Sales contract value increased 13% and Global Business Sales 21%. Retention metrics also improved modestly.
- Conferences growth reflected the return of in-person destination events. Q3 attendees were 14,619 versus 6,472; nine-month attendees were 32,990 versus 27,123.
- Operating income increased, but expenses grew materially: nine-month SG&A rose 23%, primarily due to higher personnel, commissions and headcount, and included $37.5m of real-estate impairment charges.
- Nine-month net income decreased 6% despite higher revenue and operating income, largely because 2021 included a $135.5m pre-tax event-cancellation insurance gain. Nine-month 2022 other income included $51.7m of gains on de-designated interest-rate swaps.
Outlook, risks and unusual items
The filing provides no numerical revenue or earnings guidance. Management expects near-term SG&A expense as a percentage of revenue to rise as hiring continues, and expects Conferences contribution margin to be below 2021 levels as the mix of in-person events increases. It expects to continue evaluating its real-estate footprint; additional exits or unsuccessful subleasing could produce further costs.
Management cited risks from economic conditions and inflation, interest rates and capital markets, staffing and retention, competition, client renewals and contract growth, foreign-currency movements, COVID-19 effects, and the war in Ukraine and related sanctions. Inflation had not materially affected results to date, but personnel-cost inflation may not be fully offset by pricing. Gartner was winding down its non-material Russia business and had no business in Ukraine.
Gartner is litigating with its event insurer over disputed coverage and reinstatement rights for COVID-related cancelled events. Timing and recovery of remaining insurance proceeds are uncertain; 2022 coverage excludes communicable-disease cancellations. Legal proceedings in the ordinary course are not expected by management to have a material effect beyond accrued amounts. The company is evaluating possible effects of the Inflation Reduction Act, including the corporate alternative minimum tax and excise tax on share repurchases.
Other notable items: $37.5m of nine-month impairment charges related primarily to office leases and associated long-lived assets; $4.1m of deferred Pulse acquisition consideration paid in Q3, with up to $4.5m of additional employment-contingent payments; and $4.9bn of transaction price allocated to unsatisfied performance obligations on contracts longer than one year, expected to be recognized mainly over the remainder of 2022 and 2023.
Most important facts for investors to verify
- Whether Research contract value, client retention and wallet retention continue to support subscription revenue growth.
- Whether operating expenses—especially SG&A, commissions and hiring costs—grow faster or slower than revenue, and the resulting margin trend.
- Conference attendance, in-person event economics and the expected decline in segment contribution margin as event mix changes.
- Operating cash flow conversion, cash levels and the pace of repurchases relative to debt and available liquidity.
- Progress and potential outcomes of the event-cancellation insurance litigation, and any additional real-estate impairment or exit costs.
- Debt and interest-rate exposure, foreign-currency impacts, and any tax consequences from the Inflation Reduction Act.