Gartner Inc. Earnings: FX Weighs on Results, but Contract Value Growth Impresses

Source: Gartner.

Gartner reported financial results for its second quarter before the market open Thursday. The information technology research and advisory company delivered earnings that exceeded consensus estimates, but revenue that was slightly below Wall Street's expectations. Gartner's shares initially sold off a few percent on the news, but closed the day up 0.66%.

Second-quarter total revenue rose 5% to $547.9 million, and 12% when excluding the negative impact of foreign exchange rate fluctuations. Wall Street, however, was expecting $550 million in revenue.

Net income was $51.2 million, a decrease of 4% compared to second quarter 2014. Earnings per share, boosted by share repurchases, increased 5% to $0.61. And, excluding non-recurring acquisition and integration charges, adjusted earnings per share were $0.65, compared to $0.64 in second quarter 2014. That topped analysts' estimates for $0.63.

Normalized EBITDA (earnings before interest, taxes, depreciation, and amortization), which excludes stock-based compensation and certain acquisition-related charges, was $110.1 million, an increase of 5% from the year-ago quarter.

Business segment resultsDrilling down into Gartner's individual business segments, we see that research revenue rose 8% (and 14% on a constant-currency basis) to $385.7 million. Contract value was $1.595 billion at June 30, 2015, an increase of 11% and 15% excluding the effects of foreign currency fluctuations. Profitability also improved, with gross contribution margin in the segment rising to 70% from 69% in the year-ago quarter. And, importantly, Gartner continues to do an admirable job of satisfying its customers, with research client retention improving to 85%, up from 84% in the second quarter 2014, and wallet retention (retention times revenue per customer)increasing to 106% from 105% in the year-ago quarter.

Somewhat offsetting the gains in the research division was a 6% decrease in consulting revenue to $88.3 million, which was also negatively affected from changes in foreign exchange rates. Consulting segment gross contribution margin also declined, falling to 38% from 39% in the second quarter of 2014, and utilization fell to 68% compared to 70% in the prior-year period. At the end of the quarter, backlog stood at $97.4 million, down from $104.6 million at the end of Q2 2014. Gartner did, however, grow its consultant force, with billable headcount rising to 564 from 505 in the year-ago quarter.

Revenue in Gartner's smallest segment, its event business, was $73.9 million, representing a year-over-year increase of 9% and 15% on a constant-currency basis. Gross contribution margin for the events segment climbed to 53%, an increase of 3 percentage points the prior-year quarter.

Cash flow and capital return program Gartner's subscription-based business model generates impressive amounts of cash flow, which Gartner has historically passed on to its investors via share buybacks. That's again been the case so far this year, with Gartner producing $149 million in operating cash flow and $125 million in free cash flow in the first half of 2015. Gartner allocated some of this cash along with a portion of its cash reserves, which totaled $358 million at the end of the quarter, to repurchase $441 million worth of its shares in the first six months of 2015.

Guidance Looking ahead, management reiterated its previously announced full-year financial outlook for 2015, including revenue in the range of $2.150 billion to $2.205 billion, which would represent a 6% to 9% year-over-year increase.

Full-year earnings per share are expected to range from $2.11 to $2.30, representing growth of 4% to 13%. And excluding acquisition-related items, adjusted earnings are projected to rise between 1% and 10% to $2.27 to $2.46 per share.

Operating cash flow is expected to be flat to up 8% in the range of $348 million to $374 million, and free cash flow is anticipated to be between $315 million and $340 million, which would be a 1% to 9% increase from 2014.

"We continue to perform extraordinarily well as a company," said Gartner CEO Gene Hall in a press release. "We achieved another quarter of 15% CV growth and we continue to deliver strong results across all our underlying metrics."

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