Business context and reporting period
Gartner, Inc. provides research, conferences and consulting services to organizations globally. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1.001 billion | $921.7 million | $3.042 billion | $2.887 billion |
| Operating income | $69.1 million | $52.7 million | $233.9 million | $130.1 million |
| Net income | $41.4 million | $11.8 million | $165.6 million | $38.4 million |
| Diluted EPS | $0.46 | $0.13 | $1.82 | $0.42 |
| Operating cash flow | Not presented separately | Not presented separately | $482.6 million | $426.0 million |
- Q3 revenue increased 9% year over year (10% excluding foreign-exchange impact); nine-month revenue increased 5% (8% excluding foreign-exchange impact).
- Q3 operating margin was approximately 6.9%, versus 5.7% a year earlier. Nine-month operating margin was approximately 7.7%, versus 4.5%.
- At September 30, cash was $306.7 million and revolving-credit availability was approximately $1.1 billion. Debt principal was $2.207 billion; cash less debt implies net debt of approximately $1.9 billion.
- Current assets were $1.707 billion and current liabilities $2.527 billion, including $1.803 billion of deferred revenue. Reported working capital was therefore negative; deferred revenue largely reflects advance customer billings.
- Operating, investing and financing cash flows for the first nine months were $482.6 million, negative $98.0 million and negative $232.8 million, respectively. Capital expenditures were $95.7 million and share repurchases used $141.4 million.
Material changes versus the prior comparable period
- Research revenue rose 9% in Q3 and 8% for nine months; segment gross contribution margin was 69% in both periods. Total contract value grew 11% year over year on a foreign-exchange-neutral basis to $3.3 billion.
- Conferences revenue rose 16% in Q3 and 21% for nine months. Q3 gross contribution margin declined three percentage points to 41%, attributed mainly to conference timing; nine-month margin remained 49%.
- Consulting revenue rose 18% in Q3 and 12% for nine months. Q3 gross contribution margin increased five points to 28%, partly due to higher contract-optimization revenue; that revenue can vary significantly.
- SG&A increased 14% in Q3 and 11% for nine months, driven mainly by commissions and higher headcount. Q3 and nine-month SG&A equaled 51% of revenue, compared with 49% and 48%, respectively.
- Net income growth also reflected lower amortization and acquisition costs, lower interest expense and favorable tax comparisons. The prior-year periods included divested-business revenue and gains; those non-core businesses were no longer reported in 2019.
Outlook, commentary, risks and unusual items
- The filing provides no quantified full-year revenue or earnings guidance. Management says interim results may not indicate results for the remainder of 2019 or beyond, and believes available cash and borrowing capacity are adequate for currently anticipated needs.
- Nine-month 2019 tax results included an approximately $38.1 million benefit from an April intercompany intellectual-property sale; management notes tax planning may create future tax-rate volatility. Q3 and nine-month results also included $9.1 million of unrealized appreciation on an equity investment, sold in October 2019.
- Gartner adopted lease accounting in 2019, adding substantial balance-sheet assets and liabilities. At September 30, operating lease liabilities were $856.7 million, with $146.6 million of additional lease commitments for facilities not yet commenced.
- Debt covenants were met at quarter-end. Interest-rate swaps effectively hedged the base-rate exposure on floating-rate borrowings; the swaps had an $80.2 million negative fair value. The filing cites LIBOR transition uncertainty as a risk.
- Other cited risks include fourth-quarter Symposium/ITxpo and conference timing, economic conditions, Brexit, foreign exchange, competition, demand, sales generation and performance compensation. Ordinary-course legal proceedings are not expected by the company to have a material effect beyond amounts accrued.
- On October 1, 2019, Gartner acquired TOPO Research LLC for $33 million, subject to customary adjustments. Its results are included from the acquisition date.
Important facts for investors to verify
- Whether total contract value growth, client retention and wallet retention continue to support Research revenue; GTS and GBS retention rates were 82% and 81%, respectively, and each was lower than a year earlier.
- Whether higher sales and staffing costs convert into sustained revenue growth and margins, and whether Consulting’s contract-optimization contribution is repeatable.
- The sources and sustainability of unusually favorable nine-month earnings comparisons, particularly the intellectual-property tax benefit and lower acquisition and amortization charges.
- Debt repayment, share-repurchase pace, liquidity, interest-rate exposure and the scale and duration of lease commitments.
- The impact of fourth-quarter conference timing and the integration and financial contribution of TOPO.