Gartner, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; year-over-year comparisons are with Q1 2017. Gartner provides research, events, consulting and talent-assessment services. Results include CEB, acquired in April 2017, so comparisons reflect a significant acquisition-related change in scope.
Financial results and position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $963.6 million | $625.2 million |
| Operating income (loss) | $(8.7) million | $53.5 million |
| Net income (loss) | $(19.6) million | $36.4 million |
| Diluted EPS | $(0.22) | $0.43 |
| Cash from operating activities | $2.7 million | $(29.6) million |
- Revenue growth: 54% reported and 49% excluding foreign-currency effects, primarily reflecting CEB. Research revenue was $763.9 million (+49%); Events $46.1 million (+31%); Consulting $82.9 million (+5%); Talent Assessment & Other $70.7 million, versus none reported in Q1 2017.
- Margins and earnings: Operating margin was approximately negative 0.9%, compared with positive 8.6% a year earlier. Cost of services was 37% of revenue versus 38%; SG&A was 51% versus 49%. Segment gross contribution margins were Research 70%, Events 35%, Consulting 29%, and Talent Assessment & Other 61%.
- Drivers of the earnings decline: Operating costs rose, including acquisition and integration charges of $59.3 million versus $13.3 million and intangible amortization of $51.6 million versus $6.3 million. Net interest expense increased to $35.1 million from $5.9 million, largely due to higher borrowings. A $23.3 million income-tax benefit partly offset the pretax loss.
- Balance sheet and liquidity: At March 31, cash and cash equivalents were $190.0 million; cash plus restricted cash and cash classified as held-for-sale totaled $227.6 million. Current assets were $2.31 billion and current liabilities $3.19 billion, including $1.72 billion of deferred revenue and $789.7 million of current debt. The company reported $866.0 million of available revolver capacity.
- Debt: Principal debt outstanding was $3.02 billion ($2.98 billion net carrying amount); the average effective interest rate was 4.14%. The company was in compliance with credit covenants. On April 30, 2018, it repaid $450 million of debt.
- Cash movements: Operating cash flow was slightly positive despite the net loss; working-capital improvements were substantially offset by lower earnings and higher interest and integration-cost payments. Investing used $16.7 million, while financing used $329.1 million, including $304.8 million of debt repayments. Cash and restricted cash declined $343.0 million during the quarter.
Material changes and unusual items
- CEB materially expanded the business and increased reported revenue, costs, debt and amortization; the prior-year quarter did not include CEB, which was acquired in April 2017.
- In April 2018, Gartner sold CEB Talent Assessment for $400 million and CEB Workforce Survey & Analytics for $29 million, subject to customary adjustments and expenses. The businesses contributed about $47 million of Q1 revenue and $2.1 million of pretax income in aggregate for Talent Assessment, as disclosed for the Talent Assessment business. Their Q1 results remain in the reported period.
- Q1 acquisition and integration charges included higher professional fees, severance, stock compensation and facility-exit costs. The exit-cost liability was $52.5 million at quarter-end; estimated total net cash payments for these activities were approximately $61.2 million.
- The effective tax rate was 54.3%, versus 24.9% in Q1 2017. Management attributed the change principally to stock-based compensation effects, the lower U.S. tax rate and tax benefits related to unrealized capital losses associated with the Talent Assessment divestiture. Accounting for aspects of U.S. tax reform remained provisional; Gartner expected to complete its analysis by Q4 2018.
- Adoption of the new revenue standard did not materially affect results, but changed certain balance-sheet classifications. Adoption of the intra-entity transfer tax standard reduced opening accumulated earnings by $13.7 million.
Outlook, commentary and risks
- No specific revenue, earnings or cash-flow guidance is provided in the supplied filing text. Management cautions that Q1 results may not indicate results for the rest of 2018.
- Management stated that available cash and borrowing capacity were adequate for currently anticipated needs. It also reported Research total contract value of approximately $2.9 billion, up 12% year over year on a foreign-exchange-neutral basis; Research client and wallet retention remained key business indicators.
- Management cited volatility from event timing, new business and acquisitions, customer and economic conditions, product demand, competition, foreign exchange and performance compensation. Interest-rate exposure included approximately $800 million of unhedged floating-rate borrowings; a 25-basis-point rate change could alter annual pretax interest expense by about $2 million.
- Legal proceedings and ordinary-course indemnities were not expected by management to have a material effect, and no material indemnification payment obligations were reported. Goodwill impairment, tax estimates and integration and restructuring costs remain subject to management estimates and uncertainty.
Investor verification priorities
- Separate CEB’s contribution from underlying organic growth and assess comparability of Q1 2017.
- Track whether revenue growth converts into operating profit and cash flow as acquisition and integration charges and amortization evolve.
- Verify the final proceeds and any adjustments from the April divestitures, and the effect of losing those businesses on subsequent revenue and segment results.
- Review debt reduction, refinancing and interest-rate exposure after the $450 million repayment, alongside covenant headroom and liquidity.
- Monitor Research contract value, retention, deferred revenue and receivables, and confirm the quality and persistence of working-capital-driven cash-flow improvement.
- Follow completion of tax-reform accounting and the realization of expected tax benefits, as well as facility-exit payments and remaining integration costs.