Gartner, Inc. — FY 2017 Form 10-K
Business context and reporting period. Gartner provides research, consulting, events, and talent-assessment services. This filing covers the fiscal year ended December 31, 2017; it is an annual report, not a standalone fourth-quarter filing. Results include CEB from its April 5, 2017 acquisition and L2 from March 9, 2017, so year-over-year comparisons are affected by acquisitions.
Financial results and key metrics
- Revenue: $3.311 billion, up 35% from $2.445 billion in 2016. CEB contributed approximately $522.9 million of the increase. Research was $2.471 billion (+33%); Consulting $327.7 million (+3%); Events $337.9 million (+26%); and Talent Assessment & Other $174.7 million (new segment).
- Profitability: Operating loss was $6.3 million, compared with operating income of $305.1 million in 2016. Net income was $3.3 million versus $193.6 million; diluted EPS was $0.04 versus $2.31. The 2017 net result includes a $59.6 million one-time tax benefit related to U.S. tax reform, which increased EPS by approximately $0.66.
- Segment contribution margins: Research 67% (down 2 points); Consulting 29% (up 1 point); Events 48% (down 3 points); Talent Assessment & Other 52%. Research margin was pressured in part by the acquisition-related deferred-revenue fair-value adjustment.
- Cash flow: Cash from operations was $254.5 million, down from $365.6 million. Capital expenditures were $110.8 million, versus $49.9 million in 2016. Investing activities used $2.746 billion, primarily reflecting the CEB and L2 acquisitions.
- Liquidity: Cash and cash equivalents were $538.9 million, plus $10.0 million classified as held for sale. The company reported $558.0 million of available revolving-credit capacity. Management said liquidity was adequate for anticipated needs, including the transition-tax liability.
- Debt: Gross principal debt was $3.323 billion at year-end, versus $702.5 million a year earlier; balance-sheet debt net of financing fees was $3.279 billion. Debt financing supported the CEB acquisition. The company was in compliance with credit-facility covenants at year-end. Approximately $1.1 billion of borrowings was exposed to unhedged interest-rate risk.
- Balance sheet: Total assets were $7.283 billion and stockholders’ equity was $983.5 million. Current assets were $2.589 billion and current liabilities were $2.823 billion; deferred revenue was a substantial component of current liabilities.
Material changes versus 2016
- Revenue growth reflected the addition of CEB and L2 as well as underlying growth. Heritage Gartner Research revenue rose 16%; its contract value increased 15% to $2.213 billion. Heritage Gartner client retention was 84%, and wallet retention was 106%.
- Costs rose sharply: acquisition and integration charges were $158.5 million versus $42.6 million, and intangible amortization was $176.3 million versus $24.8 million. Higher payroll and operating costs also contributed to the operating-profit decline.
- Net interest expense increased to $124.9 million from $25.1 million, primarily due to higher borrowings. Cash from operations fell amid lower earnings, working-capital movements, and higher bonus, commission, interest, and acquisition-related payments.
- Research revenue represented about 75% of total revenue. The company’s reported employee count increased to 15,131 from 8,813, largely because of acquisitions and continued hiring.
Outlook, commentary, risks, and unusual items
- The filing provides no specific numerical financial guidance. Management described its strategy as investing in research, products, sales capacity, client service, and operational effectiveness, and said it believed the expanded Gartner-CEB offering increased its market opportunity.
- On February 6, 2018, Gartner announced a definitive agreement to sell the CEB Talent Assessment business to Exponent Private Equity for approximately $400 million, with closing expected in the first half of 2018, subject to customary conditions. The business contributed approximately $126.1 million of revenue and incurred a pretax loss of approximately $19.3 million from acquisition through year-end. Its assets and liabilities were classified as held for sale at December 31.
- Key risks include integrating CEB and realizing expected benefits; elevated debt and interest-rate exposure; retaining research subscription clients; competition, including free information sources; economic, foreign-currency, privacy, cybersecurity, and regulatory risks; and execution of office consolidation and expansion plans. The company also cautioned that events and quarterly results can fluctuate.
- U.S. tax reform produced complex provisional tax accounting, including a one-time transition-tax liability; the company said it expected to complete its accounting for the law during 2018. Approximately 97% of cash was held overseas at year-end.
- Ordinary-course litigation was reported; management did not expect resolution of known matters to have a material adverse effect. KPMG issued unqualified opinions on the financial statements and on internal control over financial reporting; acquired businesses were excluded from the 2017 internal-control assessment.
Investor verification priorities
- Separate acquisition-driven growth from organic performance, including the contribution and integration progress of CEB and L2.
- Assess recurring Research contract value, renewal and wallet-retention trends, and the effect of acquired deferred-revenue fair-value adjustments.
- Reconcile reported earnings with acquisition costs, amortization, financing expense, and the one-time tax benefit; review the provisional tax estimates and transition-tax payments.
- Review debt maturities, covenant headroom, interest-rate hedges, and the extent to which overseas cash is available for domestic obligations.
- Track completion and net proceeds of the Talent Assessment sale, including working-capital adjustments and the treatment of associated liabilities.