GARTNER, INC.
The purpose of this Management's Discussion and Analysis ("MD&A") is to
facilitate an understanding of significant factors influencing the quarterly
operating results, financial condition and cash flows of Gartner, Inc.
Additionally, the MD&A conveys our expectations of the potential impact of known
trends, events or uncertainties that may impact future results. You should read
this discussion in conjunction with our condensed consolidated financial
statements and related notes included in this Quarterly Report on Form 10-Q and
our Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019
Form 10-K"). Historical results and percentage relationships are not necessarily
indicative of operating results for future periods. References to "Gartner," the
"Company," "we," "our" and "us" in this MD&A are to Gartner, Inc. and its
consolidated subsidiaries.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are any statements other than statements of historical fact, including statements regarding our expectations, beliefs, hopes, intentions, projections or strategies regarding the future. In some cases, forward-looking statements can be identified by the use of words such as "may," "will," "expect," "should," "could," "believe," "plan," "anticipate," "estimate," "predict," "potential," "continue" or other words of similar meaning. We operate in a very competitive and rapidly changing environment that involves numerous known and unknown risks and uncertainties, some of which are beyond our control. Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future quarterly and annual revenues, operating income, results of operations and cash flows, as well as any forward-looking statement, are subject to change and to inherent risks and uncertainties, such as those disclosed or incorporated by reference in our filings with theSecurities and Exchange Commission . Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in our forward-looking statements include, among others, the following: uncertainty of the magnitude, duration, geographic reach and impact on the global economy of the COVID-19 pandemic; the current, and uncertain future, impact of the COVID-19 pandemic and governments' responses to it on our business, growth, reputation, projections, prospects, financial condition, operations, cash flows, and liquidity; the adequacy or effectiveness or steps we take to respond to the crisis, including cost reduction or other mitigation programs; our ability to recover potential claims under our event cancellation insurance; the timing of our Gartner Symposium/Xpo series that normally occurs during the fourth quarter, as well as our other conferences and meetings; the amount of new business generated, including from acquisitions; the mix of domestic and international business; domestic and international economic conditions; theU.K.'s exit from theEuropean Union and its impact on our results; the impact of changes in tax policy and heightened scrutiny from various taxing authorities globally; the impact of restructuring and other changes on our business and operations; cybersecurity incidents; changes in market demand for our products and services; changes in foreign currency rates; changes in macroeconomic and market conditions and market volatility (including developments and volatility arising from the COVID-19 pandemic), including interest rates and the effect on the credit markets and access to capital; risks associated with the creditworthiness, budget cuts, and shutdown of governments and agencies; the timing of the development, introduction and marketing of new products and services; competition in the industry; the payment of performance compensation; uncertainty from the expected discontinuance of LIBOR and transition to any other interest rate benchmark; and other risks and uncertainties detailed in this Form 10-Q and our most recent Form 10-K and other filings that we make with theSEC . The potential fluctuations in our operating income could cause period-to-period comparisons of operating results not to be meaningful and could provide an unreliable indication of future operating results. A description of the risk factors associated with our business is included under "Risk Factors" in Part I, Item 1A. of the 2019 Form 10-K and "Risk Factors" in Part II, Item 1A of our Form 10-Q for the quarterly period endedMarch 31, 2020 , which is incorporated herein by reference. Forward-looking statements are subject to risks, estimates and uncertainties that could cause actual results to differ materially from those discussed in, or implied by, the forward-looking statements, and are currently, or in the future could be, amplified by the COVID-19 pandemic. Factors that might cause such a difference include, but are not limited to, those listed above or described under "Item 1A. Risk Factors" in the 2019 Form 10-K and "Risk Factors" in Part II, Item 1A of our Form 10-Q for the quarterly period endedMarch 31, 2020 . Readers should not place undue reliance on these forward-looking statements, which reflect management's opinion only as of the date on which they were made. Forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date hereof, and forward-looking statements in documents attached that are incorporated by reference speak only as of the date of those documents. Except as required by law, we disclaim any obligation to review or update these forward-looking statements to reflect events or circumstances as they occur. 26 --------------------------------------------------------------------------------
BUSINESS OVERVIEW
Gartner, Inc. (NYSE: IT) is the world's leading research and advisory company and a member of the S&P 500. We equip business leaders with indispensable insights, advice and tools to achieve their mission-critical priorities today and build the successful organizations of tomorrow. We believe our unmatched combination of expert-led, practitioner-sourced and data-driven research steers clients toward the right decisions on the issues that matter most. We are a trusted advisor and an objective resource for more than 14,000 enterprises in more than 100 countries - across all major functions, in every industry and enterprise size.
Our products and services are delivered through three segments - Research, Conferences and Consulting, as described below.
•Research provides trusted, objective insights and advice on the mission-critical priorities of leaders across all functional areas of an enterprise through reports, briefings, proprietary tools, access to our research experts, peer networking services and membership programs that enable our clients to drive organizational performance.
•Conferences provides business professionals across an organization the opportunity to learn, share and network. From our Gartner Symposium/Xpo series, to industry-leading conferences focused on specific business roles and topics, to peer-driven sessions, our offerings enable attendees to experience the best of Gartner insight and advice. •Consulting combines the power of Gartner market-leading research with custom analysis and on-the-ground support to help chief information officers and other senior executives driving technology-related strategic initiatives move confidently from insight to action.
COVID-19 Impact
The coronavirus disease ("COVID-19") pandemic has affected nearly every region
in the world and has created significant uncertainties and disruption in the
global economy. Gartner is closely monitoring the pandemic-related developments,
and our highest priority is the health and safety of our associates, clients,
vendors, partners, and other stakeholders. We are working closely with our
clients to provide best in class COVID-19 related research to assist them in
achieving their mission critical priorities.
As a result of the COVID-19 pandemic, we temporarily closed Gartner offices
(including our corporate headquarters) in the United States , United Kingdom ,
Europe , parts of Asia and several other impacted locations and implemented
significant travel restrictions. Though many of our employees continue to work
remotely, these changes impact the normal operation of our business. We cannot
predict when or how we will begin to lift the actions put in place as part of
our business continuity plans, including work from home protocols and travel
restrictions. As of the date of this filing, we do not believe our work from
home protocol has affected our internal controls over financial reporting.
We have seen negative impacts to all of our segments with Conferences being the
most impacted. On March 25, 2020 , we announced the cancellation of all
conferences through August. On July 2, 2020 , we announced we cancelled all
destination conferences for the remainder of the year. The Company continues its
operational planning for virtual conferences from September to December, which
are expected to result in significantly less revenue and contribution margin but
aid in client retention and engagement. The safety of our associates and clients
remain our top priority so future destination conferences will be held only if
we determine the relevant impacts of COVID-19 have sufficiently receded in the
jurisdictions where our conferences are to be held.
As of June 30, 2020 , we had approximately $13 million recorded in Prepaid
expenses and other current assets on the balance sheet related to cancelled
conferences. We expect to recover the majority of these and potential
termination costs for future conferences through either force majeure clauses in
our vendor contracts, other arrangements with vendors or event cancellation
insurance claims. For cancelled conferences, our event cancellation insurance
enables us to receive an amount up to the lost contribution margin per
conference plus incurred expenses. Our event cancellation insurance provides up
to $170 million in coverage for 2020 with the right to reinstate that amount one
time if those limits are utilized. The insurer has contested our right to
reinstate limits and to include in reinstated limits conferences cancelled due
to COVID-19. We are in litigation with the insurer on these issues.The timing of
receiving the insurance claims is uncertain so we will not record any insurance
claims in excess of expenses incurred until the receipt of the insurance
proceeds.
Our Research segment has continued to experience a slowdown as contract value
(CV) growth was 7.0% in the second quarter of 2020 compared to 10.6%, in the
first quarter of 2020. CV growth slowed late in the first quarter as the global
virus response led to lower new business growth and lower retention rates.
However, because our revenue and CV have been historically
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stable and predictable as a result of our subscription-based business model, we
are only expecting a modest decrease in Research revenue for the remainder of
the year. Slower CV growth this year however will lead to slower research
revenue growth in 2021. Nonetheless, we believe that our emphasis on producing
COVID-19 and cost optimization related research will continue to drive client
engagement and satisfaction with our Research products.
Our Consulting segment was only mildly impacted by the COVID-19 pandemic as many
engagements are being performed by associates working remotely. Labor based
consulting weakened late in the first quarter due to the pandemic. This weakness
continued in the second quarter due to weaker demand which will likely continue
for the remainder of 2020. Overall, we expect Consulting revenues to be lower
throughout the remainder of the year, due to a slowdown in labor-based demand.
In connection with the cancellation of the majority of 2020 conferences and the
weaker demand in our Consulting segment noted above, in the second quarter of
2020, we implemented workforce reductions. We incurred an aggregate of
approximately $18 million in costs relating to these workforce reductions in the
second quarter of 2020 and expect the majority of these charges to be paid out
in the third and fourth quarters of 2020.
In response to the pandemic's impacts to our business, we have implemented other
actions to include significant limitations on hiring and third-party spending,
reductions to discretionary spending and elimination of non-essential travel and
re-prioritization of capital expenditures. To the extent the business disruption
continues for an extended period, we may need to implement additional cost
management actions.
BUSINESS MEASUREMENTS
We believe that the following business measurements are important performance indicators for our business segments:
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BUSINESS SEGMENT BUSINESS MEASUREMENT
Research Total contract value represents the value attributable to all of our
subscription-related contracts. It is calculated as the annualized value
of all contracts in effect at a specific point in time, without regard to
the duration of the contract. Total contract value primarily includes
Research deliverables for which revenue is recognized on a ratable basis,
as well as other deliverables (primarily Conferences tickets) for which
revenue is recognized when the deliverable is utilized. Comparing
contract value year-over-year not only measures the short-term growth of
our business, but also signals the long-term health of our Research
subscription business since it measures revenue that is highly likely to
recur over a multi-year period. Our total contract value consists of
Global Technology Sales contract value, which includes sales to users and
providers of technology, and Global Business Sales contract value, which
includes sales to all other functional leaders.
Client retention rate represents a measure of client satisfaction and
renewed business relationships at a specific point in time. Client
retention is calculated on a percentage basis by dividing our current
clients, who were also clients a year ago, by all clients from a year
ago. Client retention is calculated at an enterprise level, which
represents a single company or customer.
Wallet retention rate represents ameasure of the amount of contract
value we have retained with clients over a twelve-month period. Wallet
retention is calculated on a percentage basis by dividing the contract
value of our current clients, who were also clients a year ago, by the
total contract value from a year ago, excluding the impact of foreign
currency exchange. When wallet retention exceeds client retention, it is
an indication of retention of higher-spending clients, or increased
spending by retained clients, or both. Wallet retention is calculated at
an enterprise level, which represents a single company or customer.
Conferences Number of destination conferences represents the total number of hosted
destination conferences completed during the period. Single day, local
meetings are excluded.
Number of destination conferences attendees represents the total number
of people who attend destination conferences. Single day, local meetings
are excluded.
Consulting Consulting backlog represents future revenue to be derived from
in-process consulting and measurement engagements.
Utilization rate represents a measureof productivity of our consultants.
Utilization rates are calculated for billable headcount on a percentage
basis by dividing total hours billed by total hours available to bill.
Billing rate represents earned billable revenue divided by total billable
hours.
Average annualized revenue per billable headcount represents a measure of
the revenue generating ability of an average billable consultant and is
calculated periodically by multiplying the average billing rate per hour
times the utilization percentage times the billable hours available for
one year.
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EXECUTIVE SUMMARY OF OPERATIONS AND FINANCIAL POSITION
The fundamentals of our strategy include a focus on creating extraordinary research insight, delivering innovative and highly differentiated product offerings, building a strong sales capability, providing world class client service with a focus on client engagement and retention, and continuously improving our operational effectiveness.
We had total revenues of$1.0 billion during the second quarter of 2020, a decrease of 9% compared to the second quarter of 2019. During the second quarter of 2020 revenues for Research increased by 6% year-over-year, while Conferences and Consulting revenues declined by 100% and 6%. For a more complete discussion of our results by segment, see Segment Results below. For the second quarter of 2020, we had net income of$55.1 million and diluted income per share of$0.61 . Cash provided by operating activities was$398.9 million and$263.1 million during the six months endedJune 30, 2020 and 2019, respectively. As ofJune 30, 2020 , we had$356.6 million of cash and cash equivalents and$1.2 billion of available borrowing capacity on our revolving credit facility. For a more complete discussion of our cash flows and financial position, see the Liquidity and Capital Resources section below.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For information regarding our critical accounting policies and estimates, please refer to Part II, Item 7, "Critical Accounting Policies and Estimates" contained in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . There have been no material changes to the critical accounting policies previously disclosed in that report.
RECENTLY ISSUED ACCOUNTING STANDARDS
The FASB has issued accounting standards that have not yet become effective and
that may impact the Company's consolidated financial statements or its
disclosures in future periods. Note 1 - Business and Basis of Presentation in
the Notes to Condensed Consolidated Financial Statements provides information
regarding those accounting standards.
RESULTS OF OPERATIONS
Consolidated Results
The table below presents an analysis of selected line items and
period-over-period changes in our interim Condensed Consolidated Statements of
Operations for the periods indicated (in thousands).
Increase
Three Months Ended Three Months Ended Increase (Decrease)
June 30, 2020 June 30, 2019 (Decrease) %
Total revenues $ 973,135 $ 1,070,882 $ (97,747) (9) %
Costs and expenses:
Cost of services and product development 322,551 387,999 (65,448) (17)
Selling, general and administrative 494,840 514,976 (20,136) (4)
Depreciation 22,728 20,099 2,629 13
Amortization of intangibles 31,208 32,164 (956) (3)
Acquisition and integration charges 2,157 (358) 2,515 nm
Operating income 99,651 116,002 (16,351) (14)
Interest expense, net (30,296) (24,749) 5,547 22
Other expense, net (10,399) (247) 10,152 nm
Less: Provision (benefit) for income taxes 3,879 (12,400) 16,279 nm
Net income $ 55,077 $ 103,406 $ (48,329) (47) %
nm = not meaningful
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Increase
Six Months Ended Six Months Ended Increase (Decrease)
June 30, 2020 June 30, 2019 (Decrease) %
Total revenues $ 1,992,026 $ 2,041,326 $ (49,300) (2) %
Costs and expenses:
Cost of services and product development 663,829 734,644 (70,815) (10)
Selling, general and administrative 991,479 1,033,746 (42,267) (4)
Depreciation 45,245 39,874 5,371 13
Amortization of intangibles 63,387 65,847 (2,460) (4)
Acquisition and integration charges 3,716 2,414 1,302 54
Operating income 224,370 164,801 59,569 36
Interest expense, net (56,644) (49,596) 7,048 14
(Loss) gain from divested operations - (2,075) (2,075) nm
Other expense, net (11,915) (1,071) 10,844 nm
Less: Provision (benefit) for income taxes 25,637 (12,142) (37,779) nm
Net income $ 130,174 $ 124,201 $ 5,973 5
Total revenues for the three months ended June 30, 2020 were $1.0 billion , a
decrease of $97.7 million , or 9% compared to the same period in 2019 on a
reported basis and 8% excluding the foreign currency impact. Total revenues for
the six months ended June 30, 2020 were $2.0 billion , a decrease of $49.3
million , or 2% compared to the same period in 2019 on a reported basis and 1%
excluding the foreign currency impact. Refer to the section of this MD&A below
entitled " Segment Results " for a discussion of revenues and results by
segment.
Cost of services and product development was $322.6 million during the three
months ended June 30, 2020 , a decrease of $65.4 million compared to the same
period in 2019, or 17% on a reported basis and 16% excluding the foreign
currency impact. The decrease in Cost of services and product development was
primarily due to decreased costs related to cancellations or postponements of
conferences during the second quarter of fiscal year 2020 in response to the
COVID-19 pandemic, lower travel and entertainment costs during the quarter as
well as the implementation of various cost cutting initiatives. Cost of services
and product development as a percent of revenues was 33% and 36% during the
three months ended June 30, 2020 and 2019, respectively. Cost of services and
product development was $663.8 million during the six months ended June 30,
2020 , a decrease of $70.8 million compared to the same period in 2019, or 10% on
a reported basis and 9% excluding the foreign currency impact. The decrease was
primarily due to the same factors that caused the year-over-year quarterly
decrease, partially offset by higher payroll and benefits costs. Cost of
services and product development as a percent of revenues was 33% and 36% during
the six months ended June 30, 2020 and 2019, respectively.
Selling, general and administrative ("SG&A") expense was $494.8 million during
the three months ended June 30, 2020 , a decrease of $20.1 million compared to
the same period in 2019, or 4% on a reported basis and 2% excluding the foreign
currency impact. The decrease in SG&A expense was primarily due to reduced
internal meetings and travel and entertainment costs resulting from the COVID-19
pandemic for the three months ended June 30, 2020 . There was a decrease to
quota-bearing sales associates in Global Technology Sales and Global Business
Sales to 3,089 and 834, respectively, at June 30, 2020 . On a combined basis, the
total number of quota-bearing sales associates decreased by 5% when compared to
June 30, 2019 . SG&A expense as a percent of revenues was 51% and 48% during the
three months ended June 30, 2020 and 2019, respectively. SG&A expense was $991.5
million during the six months ended June 30, 2020 , a decrease of $42.3 million
compared to the same period in 2019, or 4% on a reported basis and 3% excluding
the foreign currency impact. The decrease in SG&A expense was primarily due to
the same factors that caused the year-over-year quarterly decrease, partially
offset by payroll related expenses. SG&A expense as a percent of revenues was
50% and 51% during the six months ended June 30, 2020 and 2019, respectively.
Depreciation increased by 13% during the three and six months ended June 30,
2020 , respectively, compared to the same periods in 2019. This increase for the
three and six months ended June 30, 2020 was due to additional investments,
including new leasehold improvements, (as additional office space went into
service), and capitalized software.
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Amortization of intangibles decreased by 3% and 4% during the three and six
months ended
Acquisition and integration charges increased by$2.5 million and$1.3 million during the three and six months endedJune 30, 2020 , respectively, compared to the same periods in 2019. Operating income was$99.7 million and$116.0 million during the three months endedJune 30, 2020 and 2019, respectively. The decrease in operating income was due to lower revenue, primarily in our Conferences segment, partially offset by reduced Costs of services and product development and SG&A expense. Operating income was$224.4 million and$164.8 million during the six months endedJune 30, 2020 and 2019, respectively. The increase in operating income reflects several factors, including (i) higher revenue primarily in our research segment and (ii) reduced Cost of services and product development and SG&A expense. Interest expense, net increased by$5.5 million and$7.0 million during the three and six months endedJune 30, 2020 , respectively, compared to the same periods in 2019. The increase was primarily due to higher weighted average annual effective rates related to the replacement of expired interest rate swaps with interest rate swaps with higher effective interest rates in late 2019. Additionally, we wrote-off$1.8 million of deferred financing costs related to the prepayment of$787.9 million on the Term Loan A credit facility during the three months endedJune 30, 2020 .
Loss from divested operations of
Other expense, net for the periods presented herein included the net impact of foreign currency gains and losses from our hedging activities. Other expense, net for the three and six months endedJune 30, 2020 also includes the release of$10.3 million from Accumulated other comprehensive loss, net related to forecasted interest payments that were no longer probable on our interest rate swap contracts, due to the prepayment of$787.9 million of our Term loan A credit facility and repayment of all amounts outstanding under our revolving credit facility. The provision for income taxes for the three months endedJune 30, 2020 and 2019 was an expense of$3.9 million and a benefit of$12.4 million , respectively. The provision for income taxes for the six months endedJune 30, 2020 was an expense of$25.6 million compared to a benefit of$12.1 million for the six months endedJune 30, 2019 . The effective income tax rate was an expense of 6.6% and a benefit of 13.6% for the three months endedJune 30, 2020 and 2019, respectively. The effective income tax rate was an expense of 16.5% for the six months endedJune 30, 2020 compared to a benefit of 10.8% for the six months endedJune 30, 2019 . Both periods include material benefits from intercompany sales of certain intellectual property, as well as movements in unrecognized tax benefits. The changes in effective tax rates are largely attributable to the differences in the relative impacts of these items period over period. We completed intercompany sales of certain intellectual property in both 2020 and 2019. As a result, we recorded tax benefits of approximately$28.3 million during the three and six months endedJune 30, 2020 and$38.1 million during the three and six months endedJune 30, 2019 . These benefits represent the value of future tax deductions for amortization of the assets in the acquiring jurisdiction. InJuly 2020 , we completed an intercompany contribution of a significant amount of intellectual property. We will not be claiming future tax deductions for amortization of the assets in the acquiring jurisdiction. Our intellectual property footprint continues to evolve and may result in tax rate volatility in the future. Net income for the three months endedJune 30, 2020 and 2019 was$55.1 million and$103.4 million , respectively, while net income for the six months endedJune 30, 2020 and 2019 was$130.2 million and$124.2 million , respectively. Our diluted net income per share during the three and six months endedJune 30, 2020 (decreased)/increased by$(0.52) and$0.09 , respectively, compared to the same periods in 2019. The decrease during the three months endedJune 30, 2020 was primarily the result of the decrease in revenues noted above, increased Interest expense and Other expense, net and increased income tax expense, partially offset by reduced operating expenses. The increase for the six months endedJune 30, 2020 was the result of an increase in our 2020 operating income, partially offset by Interest expense and Other expense, net and increased income tax expense. 32 --------------------------------------------------------------------------------
SEGMENT RESULTS
We evaluate reportable segment performance and allocate resources based on gross contribution margin. Gross contribution is defined as operating income or loss excluding certain Cost of services and product development expenses, SG&A expenses, Depreciation, Amortization of intangibles, and Acquisition and integration charges. Gross contribution margin is defined as gross contribution as a percent of revenues. Reportable Segments
The Company's reportable segments are as follows:
•Research provides trusted, objective insights and advice on the mission-critical priorities of leaders across all functional areas of an enterprise through reports, briefings, proprietary tools, access to our research experts, peer networking services and membership programs that enable our clients to drive organizational performance.
•Conferences provides business professionals across an organization the
opportunity to learn, share and network. From our Gartner Symposium/Xpo series,
to industry-leading conferences focused on specific business roles and topics,
to peer-driven sessions, our offerings enable attendees to experience the best
of Gartner insight and advice.
•Consulting combines the power of Gartner market-leading research with custom
analysis and on-the-ground support to help chief information officers and other
senior executives driving technology-related strategic initiatives move
confidently from insight to action.
The sections below present the results of the Company's three reportable
business segments.
Research
As Of And For The As Of And For The Percentage As Of And For The As Of And For The Percentage
Three Months Ended Three Months Ended Increase Increase Six Months Ended Six Months Ended Increase Increase
June 30, 2020 June 30, 2019 (Decrease) (Decrease) June 30, 2020 June 30, 2019 (Decrease) (Decrease)
Financial Measurements:
Revenues (1) $ 875,329 $ 826,055 $ 49,274 6 % $ 1,784,620 $ 1,651,429 $ 133,191 8 %
Gross contribution (1) $ 632,624 $ 572,297 $ 60,327 11 % $ 1,286,094 $ 1,147,465 $ 138,629 12 %
Gross contribution margin 72 % 69 % 3 points - 72 % 69 % 3 points -
Business Measurements:
Global Technology Sales (2):
Contract value (1), (3) $ 2,767,000 $ 2,582,000$ 185,000 7 % Client retention 80 % 82 % (2) points - Wallet retention 100 % 105 % (5) points - Global Business Sales (2): Contract value (1), (3)$ 643,000 $ 603,000 $ 40,000 7 % Client retention 83 % 81 % 2 points - Wallet retention 100 % 95 % 5 points -(1)Dollars in thousands. (2)Global Technology Sales includes sales to users and providers of technology. Global Business Sales includes sales to all other functional leaders. (3)Contract values are on a foreign exchange neutral basis. Contract values as ofJune 30, 2019 have been calculated using the same foreign currency rates as 2020. 33 -------------------------------------------------------------------------------- Research revenues increased by$49.3 million during the three months endedJune 30, 2020 compared to the same period in 2019, or 6% on a reported basis and 8% excluding the foreign currency impact. The segment gross contribution margin was 72% and 69% during the six months endedJune 30, 2020 and 2019, respectively. For the six months endedJune 30, 2020 , Research revenues increased by$133.2 million compared to the same period in 2019, or 8% on a reported basis and 10% excluding the foreign currency impact. The increase in revenues during 2020 was primarily due to the same factors driving the trend in our Research contract value, which are discussed below. The improvement in margin of 3 points for both the three and six months ended compared to prior year was primarily due to headcount growing at a slower pace than the corresponding revenue and a decline in travel and entertainment expenses due to COVID-19 travel restrictions. Total contract value increased to$3.4 billion atJune 30, 2020 , or 7% compared toJune 30, 2019 on a foreign exchange neutral basis. Global Technology Sales ("GTS") contract value increased by 7% atJune 30, 2020 when compared toJune 30, 2019 . The increase in GTS contract value was primarily due to new business from new and existing clients. Global Business Sales ("GBS") contract value increased by 7% year-over-year, primarily driven by increased spending by existing clients and improved retention. GTS client retention was 80% and 82% as ofJune 30, 2020 and 2019, respectively, while wallet retention was 100% and 105%, respectively. GBS client retention was 83% and 81% as ofJune 30, 2020 and 2019, respectively, while wallet retention was 100% and 95%, respectively. The increase in GBS wallet retention was largely due to increased spending by existing clients. The number of GTS client enterprises declined by 3% when compared to prior year, while GBS client enterprises declined by 7% atJune 30, 2020 when compared toJune 30, 2019 . Conferences As Of And For The As Of And For The Percentage As Of And For The As Of And For The Percentage Three Months Ended Three Months Ended Increase Increase Six Months Ended Six Months Ended Increase IncreaseJune 30, 2020 June 30, 2019 (Decrease) (Decrease)June 30, 2020 June 30, 2019 (Decrease) (Decrease) Financial Measurements: Revenues (1) $ 317$ 141,174 $ (140,857) (100) %$ 14,187 $ 193,106 $ (178,919) (93) % Gross contribution (1)$ (11,230) $ 80,570 $ (91,800) (114) %$ (17,290) $ 99,446 $ (116,736) (117) % Gross contribution margin nm 57 % nm nm (122) % 51 % nm nm Business Measurements: Number of destination conferences (2) - 27 (27) (100) % 5 39 (34) (87) % Number of destination conferences attendees (2) - 26,416 (26,416) (100) % 3,364 37,946 (34,582) (91) % nm = not meaningful(1)Dollars in thousands. (2)Single day, local meetings are excluded. We held no destination conferences during the three months endedJune 30, 2020 and due to the outbreak of COVID-19, we cancelled all destination conferences scheduled for the remainder of 2020 and are now planning to hold 15 virtual conferences in the second half of 2020. As such, Conferences revenues decreased by$140.9 million during the three months endedJune 30, 2020 compared to the same period in 2019, or 100% on a reported basis and excluding the foreign currency impact. Conference revenues decreased by$178.9 million during the six months endedJune 30, 2020 compared to the same period in 2019, or 93% on a reported basis and excluding the foreign currency impact. Gross contribution declined to a loss of$11.2 million compared to income of$80.6 million in the same period last year. 34
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Consulting
As Of And For The As Of And For The Percentage As Of And For The As Of And For The Percentage
Three Months Ended Three Months Ended Increase Increase Six Months Ended Six Months Ended Increase Increase
June 30, 2020 June 30, 2019 (Decrease) (Decrease) June 30, 2020 June 30, 2019 (Decrease) (Decrease)
Financial Measurements:
Revenues (1) $ 97,489 $ 103,653 $ (6,164) (6) % $ 193,219 $ 196,791 $ (3,572) (2) %
Gross contribution (1) $ 33,542 $ 34,236 $ (694) (2) % $ 62,925 $ 62,954 $ (29) - %
Gross contribution margin 34 % 33 % 1 point - 33 % 32 % 1 point -
Business Measurements:
Backlog (1), (2) 99,000 110,500 (11,500) (10) %
Billable headcount 796 773 23 3 %
Consultant utilization 59 % 63 % (4) points - 61 % 66 % (1) point -
Average annualized revenue per
billable headcount (1) $ 353 $ 379 $ (26) (7) % $ 360 $ 390 $ (30) (8) %
(1)Dollars in thousands.
(2)Backlog is on a foreign exchange neutral basis. Backlog as of June 30, 2019
has been calculated using the same foreign currency rates as 2020.
Consulting revenues decreased 6% during the three months ended June 30, 2020
compared to the same period in 2019 on a reported basis and 5% excluding the
foreign currency impact, with a revenue decrease in labor-based core consulting
of 13%, partially offset by an increase in contract optimization of 18%, on a
reported basis. Contract optimization revenue may vary significantly and, as
such, revenues for the second quarter of 2020 may not be indicative of results
for the remainder of 2020 or beyond. The segment gross contribution margin was
34% and 33% for the three months ended June 30, 2020 and 2019, respectively. The
increase in gross contribution margin during the second quarter of 2020 was
primarily due to strong contract optimization performance and benefits derived
from certain cost-reduction initiatives, including a decline in travel and
entertainment expenses due to COVID-19 travel restrictions. Consultant
utilization decreased by 4 points during the three months ended June 30, 2020
compared to the same period in 2019 due to a reduction in backlog, as well as,
an increase in billable headcount.
For the six months ended June 30, 2020 , Consulting revenues decreased 2%
compared to the same period in 2019 on a reported basis and 1% excluding the
foreign currency impact, while the segment gross contribution margin increased
by 1 point. The decrease in revenues was due to the same factors that caused the
decrease during the second quarter of 2020.
Backlog decreased by $11.5 million , or 10%, from June 30, 2019 to June 30, 2020 .
The $99.0 million of backlog at June 30, 2020 represented approximately four
months of backlog, which is in line with the Company's operational target.
35
--------------------------------------------------------------------------------LIQUIDITY AND CAPITAL RESOURCES
We finance our operations through cash generated from our operating activities and borrowings. Note 7 - Debt in the Notes to Condensed Consolidated Financial Statements provides additional information regarding the Company's outstanding debt obligations. AtJune 30, 2020 , we had$356.6 million of cash and cash equivalents and approximately$1.2 billion of available borrowing capacity on the revolving credit facility under our 2016 Credit Agreement. We believe that the Company has adequate liquidity to meet its currently anticipated needs. As a cautionary measure, we have elected to suspend our share repurchase activity. We have historically generated significant cash flows from our operating activities. Our operating cash flow has been maintained by the leverage characteristics of our subscription-based business model in our Research segment, which is our largest business segment and historically has constituted a significant portion of our total revenues. The majority of our Research customer contracts are paid in advance and, combined with a strong customer retention rate and high incremental margins, has resulted in historically strong operating cash flow. Cash flow generation has also benefited historically from our ongoing efforts to improve the operating efficiencies of our businesses as well as a focus on the optimal management of our working capital as we increase sales. Our cash and cash equivalents are held in numerous locations throughout the world with 85% held overseas atJune 30, 2020 . We intend to reinvest substantially all of our accumulated undistributed foreign earnings, except in instances where repatriation would result in minimal additional tax. As a result of theU.S. Tax Cuts and Jobs Act of 2017, we believe that the income tax impact if such earnings were repatriated would be minimal.
The table below summarizes the changes in the Company's cash balances for the periods indicated (in thousands).
Six Months Ended Six Months Ended Increase
June 30, 2020 June 30, 2019 (Decrease)
Cash provided by operating activities $ 398,917 $ 263,078 $ 135,839
Cash used in investing activities (45,865) (61,774) 15,909
Cash used in financing activities (275,753) (142,128) (133,625)
Net increase in cash and cash equivalents 77,299 59,176 18,123
Effects of exchange rates (1,502) 614 (2,116)
Beginning cash and cash equivalents 280,836 158,663 122,173
Ending cash and cash equivalents $ 356,633 $ 218,453 $ 138,180
Operating
Cash provided by operating activities was $398.9 million and $263.1 million
during the six months ended June 30, 2020 and 2019, respectively. The
year-over-year increase was primarily due to higher pre-tax income in the 2020
period and an increase in accounts payable and accrued and other liabilities due
to increased accrued payroll, fringe benefits and customer deposits and reduced
income tax payments, offset by higher bonus payments made in 2020 related to
2019.
Investing
Cash used in investing activities was $45.9 million and $61.8 million during the
six months ended June 30, 2020 and 2019, respectively. The cash used in both
periods was primarily for capital expenditures.
Financing
Cash used in financing activities was$275.8 million and$142.1 million during the six months endedJune 30, 2020 and 2019, respectively. During the 2020 period, we repaid a net$175.0 million on our revolving credit facility, and used$73.9 million of cash for share repurchases. During the 2019 period, the Company borrowed$5.0 million , paid$46.6 million in debt principal repayments and paid$46.6 million for share repurchases. 36 --------------------------------------------------------------------------------
Debt
As ofJune 30, 2020 , the Company had$2.0 billion of principal amount of debt outstanding, of which$25.3 million is to be repaid in fiscal 2020. Note 7 - Debt in the Notes to Condensed Consolidated Financial Statements provides additional information regarding the Company's outstanding debt obligations. From time to time, the Company may seek to retire or repurchase its outstanding debt through various methods including open market repurchases, negotiated block transactions, or otherwise, all or some of which may be effected through Rule 10b5-1 plans. Such transactions, if any, depend on prevailing market conditions, our liquidity and capital requirements, contractual restrictions, and other factors, and may involve material amounts. We have a credit facility that currently provides a$1.5 billion Term loan A facility and a$1.2 billion revolving credit facility. The 2016 Credit Agreement contains certain customary restrictive loan covenants, including, among others, financial maintenance covenants that apply a maximum consolidated leverage ratio, a maximum consolidated secured leverage ratio and a minimum consolidated interest expense ratio. OnMay 6, 2020 , the 2016 Credit Agreement was amended with the consent of the required lenders to, among other things, modify certain financial maintenance covenants to provide additional flexibility to Gartner throughDecember 31, 2021 . The amendment increases the maximum consolidated leverage ratio to 5.00 to 1.00 and maximum consolidated secured leverage ratio to 3.75 to 1.00 (each as determined in accordance with the 2016 Credit Agreement), in each case for fiscal quarters ending onJune 30, 2020 through and includingDecember 31, 2021 . The amendment only increased the applicable margin for all outstanding Revolving Loans and Tranche A Term Loans (each as defined in the 2016 Credit Agreement) to the extent the consolidated leverage ratio (as determined in accordance with the 2016 Credit Agreement) exceeds 4.50 to 1.00. We were in full compliance with the covenants noted above as ofJune 30, 2020 and on the date this Quarterly Report on Form 10-Q is filed. Note 7 - Debt in the Notes to Condensed Consolidated Financial Statements provides additional information regarding the Company's outstanding debt obligations. Our financial covenants as ofJune 30, 2020 are summarized in the table below: As of Covenants* : Maximum/Minimum* June 30, 2020 Consolidated Leverage Ratio < 5.00 2.76 Consolidated Secured Leverage Ratio < 3.75
0.58
Consolidated Interest Expense Ratio ? 3.25
7.25
*- metrics as defined in the 2016 Credit Agreement
OnJune 22, 2020 , the Company issued$800.0 million aggregate principal amount of 4.50% Senior Notes due 2028 (the "2028 Notes"). The 2028 Notes were issued pursuant to an indenture, dated as ofJune 22, 2020 (the "Indenture"), among the Company, the guarantors party thereto andU.S. Bank National Association , as trustee (the "Trustee"). The 2028 Notes were offered and sold only to persons reasonably believed to be qualified institutional buyers (as defined in the Securities Act of 1933, as amended (the "Securities Act")) pursuant to Rule 144A under the Securities Act and outsidethe United States only to non-U.S. persons in accordance with Regulation S under the Securities Act. The 2028 Notes were issued at an issue price of 100.00% and bear interest at a rate of 4.50% per annum. Interest on the 2028 Notes is payable onJanuary 1 andJuly 1 of each year, beginning onJanuary 1, 2021 . The Notes will mature onJuly 1, 2028 .
We used proceeds from the 2028 Notes to prepay
37
--------------------------------------------------------------------------------OFF BALANCE SHEET ARRANGEMENTS
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