Gartner (IT) Beats Q3 Earnings on Solid Revenue Improvement

Information technology services provider Gartner, Inc. IT reported strong third-quarter 2017 results with stellar growth in revenues and total contract value. Adjusted earnings for the reported quarter were $59.5 million or 65 cents per share compared with $48.2 million or 58 cents per share in the year-ago quarter. Adjusted earnings for third-quarter 2017 comfortably beat the Zacks Consensus Estimate of 52 cents.

However, Gartner recorded GAAP net loss of $48.2 million or loss of 53 cents per share as against a net income of $30.5 million or 36 cents per share in the prior-year quarter. The year-over-year decrease in earnings, despite significant top-line growth, was primarily attributable to high operating costs which increased 62% year over year to $852.4 million.

Total non-GAAP revenue for the reported quarter increased to $891.7 million from $574.1 million due to solid contract value growth and accretive acquisitions, and exceeded the Zacks Consensus Estimate of $853 million. Total contract value for traditional Gartner business was approximately $2.1 billion, up 14% year over year. Adjusted EBITDA (earnings before interest, tax, depreciation and amortization) for the quarter increased to $149 million from $91 million in the prior-year period.

Segmental Performance

Gartner has reorganized its operating segments to better reflect the enlarged scale and breadth of its advisory services post the successful integration of CEB. The company has added a new business segment titled Talent Assignment & Other to its existing three segments. The new business segment includes CEB's previously disclosed Talent Assessment business as well as certain CEB non-subscription based talent products and services.

Research segment’s revenues increased 40% to $653.4 million and accounted for 78.9% of GAAP revenues. Client retention was 83%, while wallet retention was 104%. The quarterly gross contribution margin was 67% for the quarter, down from 69% in the year-ago period.

Consulting revenues declined to $72.1 million from $73.7 million in the prior-year period, accounting for 8.7% of total revenue. Backlog, the key leading indicator of future revenue growth for the Consulting business, was $91.4 million compared with $89.9 million in the prior-year period. Gross contribution margin was 22% compared with 25% in the year-earlier quarter.

Events revenue was significantly up from $33.5 million to $45 million. Gross contribution margin was 36%, down from 43% in the third quarter of 2016.

Talent Assessment & Other revenue for third-quarter 2017 was $57.6 million, while gross contribution margin was 54%.

Balance Sheet and Cash Flow

At quarter end, Gartner had about $630 million in cash and cash equivalents with long-term debt of $2.9 billion. Net cash from operating activities for the first nine months of 2017 was $232.3 million compared with cash flow of $282.3 million in the year-earlier period, resulting in respective free cash flow of $250.3 million and $270.2 million.

During the first nine months of 2017, Gartner used $37.2 million in cash to repurchase shares, $2.6 billion for acquisitions, $75.6 million for capital expenditures, and $93.6 million for acquisition and integration payments. As of Sep 30, 2017, the company had $534 million of additional borrowing capacity under its revolving credit facility.

Guidance

In order to better reflect the successful integration of CEB, Gartner has updated its earlier guidance for full year 2017. The company currently expects GAAP revenues in the range of $3,257–$3,327 billion, compared with earlier expectations of $3,225–$3,320 billion, and adjusted EPS in the range of $3.39–$3.50, compared with $3.32–$3.49 expected earlier. Operating cash flow is likely to be within $335–$345 million, up from $315–$335 million expected earlier.

Gartner presently has a Zacks Rank #2 (Buy). Some other stocks worth considering in the industry include FTI Consulting, Inc. FCN, CRA International, Inc. CRAI and Exponent, Inc. EXPO, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

FTI Consulting is currently trading at a forward P/E of 20.7x.

CRA International topped estimates twice in the trailing four quarters with an average positive earnings surprise of 0.5%.

Exponent has topped estimates thrice in the trailing four quarters with an average positive earnings surprise of 12.4%.

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