Investment Ideas

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>>> Bull of the Day: Gartner (IT)

By: Zacks Investment Research

August 23, 2022


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Gartner (IT) is $25 billion leader in information technology research and consulting. Headquartered in Stamford, CT, the company offers diverse industry expertise and technology-related insight necessary for informed decision-making at Fortune 1,000 companies.

Gartner's comprehensive services portfolio has enabled customers across sectors to research, analyze and interpret their data-dependent business with greater precision, efficiency and discipline.

You may be familiar with the Gartner Magic Quadrant which as become something like the JD Powers award of technology innovation.

Magic Quadrant (MQ) is a series of market research reports published by Gartner that rely on proprietary qualitative data analysis methods to demonstrate market trends, such as direction, maturity and participants.

Their analyses are conducted for several specific technology industries and are updated every 1–2 years: once an updated report has been published its predecessor is "retired". Thus, the value of making the list frequently as a leader of innovation.

Beat and Raise Quarter

On August 2, Gartner delivered a big beat-and-raise quarterly report. Adjusted earnings (excluding 32 cents from non-recurring items) per share of $2.85 beat the consensus mark by 33% and increased 27% year over year.

Revenues of $1.38 billion beat the consensus estimate by 4.4% and improved 17.9% year over year on a reported basis and 21.8% on a foreign-currency-neutral basis.

Total contract value was $4.3 billion, up 15.4% year over year on a foreign-currency-neutral basis.

Gartner reported Q2 adjusted EPS of $2.85 vs. the consensus of $2.15 and Q2 revenue of $1.377 billion vs. consensus of $1.32B.

CEO Gene Hall commented, "Gartner had another strong quarter with double-digit growth in contract value, revenue, and Adjusted EPS. We are again raising our guidance and remain well-positioned to deliver long-term, sustained, double-digit growth. And we continue to buy back stock, which will increase our per share results this year and beyond."

Quarterly Numbers in Detail

Revenues at the Research segment increased 13.9% year over year on a reported basis and 17.3% on a foreign-currency-neutral basis to $1.14 billion. Gross contribution margin was 73.9% in the reported quarter.

Revenues at the Conferences segment surged 95.1% year over year on a reported basis and 102.2% on a foreign-currency-neutral basis to $114 million. Gross contribution margin dropped to 64.8% in the reported quarter.

Revenues at the Consulting segment grew 13.9% year over year on a reported basis and 20.5% on a foreign-currency-neutral basis to $121 million. Gross contribution margin was 41.6% in the reported quarter.

Adjusted EBITDA of $389 million improved 9.5% year over year on a reported basis and 14.2% on a foreign-currency-neutral basis.

Operating cash flow totaled $416 million while free cash flow was $395 million in the reported quarter. Capital expenditures totaled $21 million. Gartner repurchased 1.8 million common shares for $479 million.

Boosted 2022 View

Adjusted EPS is anticipated to be $8.85 (previous view: $7.80). Adjusted EBITDA is projected to be $1.235 billion (previous view: $1.14 billion). Free cash flow is anticipated to be 985 million (previous view: $930 million).

Based on this guidance, analysts boosted this year's EPS consensus over 12% from $8.08 to $9.08.

Meanwhile, the topline is projected to grow 13.7% to $5.38 billion.

Analyst Commentary

Baird analyst Jeffrey Meuler his price target on Gartner to $365 from $334 and kept an Outperform rating on the shares. The analyst likes Gartner as a multi-year compounder, and likes the risk/reward across a range of potential macro scenarios.

Meuler said he interprets management's updated commentary for go-forward underlying margins in the "low 20s" as a notable positive revision, especially given recent material outperformance of its public targets.

Wells Fargo analyst Seth Weber his price target on Gartner to $345 from $305 and kept an Overweight rating on the shares. The analyst noted that upside Q2 with a raised 2022 outlook underscores Gartner's well-entrenched position within core IT/tech markets, complemented by newer categories such as supply chain and HR.

Weber observed that these areas are supporting strong/resilient growth and considerable cash generation. Meanwhile, updated margin framework commentary should quell fears in that area.

BMO Capital analyst Jeffrey Silber raised his price target on Gartner to $305 from $265 and kept a Market Perform rating on the shares. The company's Q2 earnings beat was driven by strength in all three segments. Silber added that its research revenues also remained strong with retention at records highs.

Barclays analyst Manav Patnaik his price target on Gartner to $315 from $265 and kept an Equal Weight rating on the shares. The company's base margin guidance of low-20s, with modest expansion thereafter, is an encouraging development that could bode well long-term.

After the company report, Gartner shares jumped 7% and then found a few analysts scrambling to revise their lowered price targets from July.

This goes to show that the bull market in technology is alive and well, despite rising inflation and interest rates. You can understand why from my 2018 report The Technology Super Cycle, whose long-tail principles remain in play.

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