2023-08-08 15:54:31 ET
Summary
- Gartner recently reported Q2 2023 financial results, beating revenue and EPS estimates.
- The company provides research, consulting, and related services to clients across industries.
- Facing an uncertain macro environment and declining revenue growth, Gartner's future growth upside is a question, so I'm Neutral (Hold) on IT for now.
A Quick Take On Gartner
Gartner, Inc. ( IT ) reported its Q2 2023 financial results on August 1, 2023, beating both revenue and EPS consensus estimates.
The firm provides research, consulting, and related services to clients across numerous industries.
I previously wrote about Gartner with a Hold outlook.
Given the softness in the macro environment, a declining revenue growth rate, and many consulting clients delaying discretionary projects across the industry, I remain Neutral (Hold) on Gartner, Inc. for the near term.
Gartner's Overview And Market
Stamford, Connecticut-based Gartner was founded in 1979 to provide IT research and advisory services to companies worldwide.
The firm is headed by Chief Executive Officer Eugene Hall, who joined the firm in 2004 and was previously President at Automatic Data Processing and, before that, at McKinsey & Company.
The company's primary offerings include the following:
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Research
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Consulting
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Conferences
Gartner acquires customers through its direct sales and marketing efforts and through partner referrals and industry event outreach.
According to a 2022 market research report by The Business Research Company, the global market for market research services was estimated at $74.4 billion in 2020 and is forecast to reach $91.3 billion by 2025.
This represents a forecast CAGR (Compound Annual Growth Rate) of 4.2% from 2020 to 2025.
The market is further expected to reach $111 billion by 2030, at a projected CAGR of 4.0% from 2025 to 2030.
The main drivers for this expected growth are the increasing use of data analytics by organizations worldwide and increasing outsourcing of back-office functions.
Also, the rise of the use of AI-enabled tools will likely affect the provision of services, and those companies that can develop proprietary tools will have an advantage.
Major competitive or other industry participants include:
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International Data Group
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Forrester
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ASCM
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Nielsen
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Frost & Sullivan
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eMarketer
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Numerous smaller research companies
Gartner's Recent Financial Trends
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Total revenue by quarter has produced the following growth trajectory; Operating income by quarter has plateaued in recent quarters.
Total Revenue and Operating Income (Seeking Alpha)
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Gross profit margin by quarter has trended slightly lower recently; Selling, G&A expenses as a percentage of total revenue by quarter have varied within a narrow range in recent quarters.
Gross Profit Margin and Selling, G&A % Of Revenue (Seeking Alpha)
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Earnings per share (Diluted) have fluctuated according to the following chart.
Earnings Per Share (Seeking Alpha)
(All data in the above charts is GAAP)
In the past 12 months, IT's stock price has risen 14.38% vs. that of the SPDR S&P Software & Services ETF's ( XSW ) rise of 5.12%, as the chart indicates below:
52-Week Stock Price Comparison (Seeking Alpha)
For the balance sheet , the firm ended the quarter with $1.18 billion in cash, equivalents and trading asset securities and $2.46 billion in total debt, of which $9.0 million was categorized as the current portion due within 12 months.
Over the trailing twelve months, free cash flow was $1.0 billion, during which capital expenditures were $116.4 million. The company paid $111.3 million in stock-based compensation in the last four quarters, the highest trailing twelve-month figure in the past eleven quarters.
Valuation And Other Metrics For Gartner
Below is a table of relevant capitalization and valuation figures for the company:
Measure ((TTM)) | Amount |
Enterprise Value/Sales | 5.0 |
Enterprise Value/EBITDA | 21.3 |
Price/Sales | 4.7 |
Revenue Growth Rate | 12.7% |
Net Income Margin | 16.1% |
EBITDA % | 23.2% |
Net Debt To Annual EBITDA | 1.0 |
Market Capitalization | $26,550,000,000 |
Enterprise Value | $28,490,000,000 |
Operating Cash Flow | $1,120,000,000 |
Earnings Per Share (Fully Diluted) | $11.53 |
(Source - Seeking Alpha)
Below is an estimated DCF (Discounted Cash Flow) analysis of the firm's projected growth and earnings:
Discounted Cash Flow Calculation - Gartner (Guru Focus)
Assuming generous DCF parameters, the firm's shares would be valued at approximately $240.97 versus the current price of $335.73, indicating they are potentially currently overvalued, with the given earnings, growth, and discount rate assumptions of the DCF.
Commentary On Gartner
In its last earnings call ( Source - Seeking Alpha ), covering Q2 2023's results, management highlighted the firm's growth despite a 'highly uncertain' macroeconomic environment.
The technology sector remains particularly volatile as tech firms "adjust to post-pandemic demand," while the banking sector has been roiled by sharply rising interest rates.
Total contract value for its primary Research business grew by 9% year-over-year, led by its global business sales segment contract value growth of 15%. Global technology research contract value grew by only 7%.
Total revenue for Q2 2023 rose 9.2% year-over-year and gross profit margin fell 1.6%.
Selling, G&A expenses as a percentage of revenue grew 1.5% YoY and operating income dropped 3.9%.
The company's financial position is strong, with plenty of liquidity, a moderate amount of long-term debt for its size, and very strong free cash flow.
Looking ahead, management guided 2023 full-year revenue growth to 7.4% year-over-year.
If achieved, this would represent a drop in revenue growth versus 2022's growth rate of 15.67% over 2021, indicating a flattening growth trajectory.
From management's most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:
Earnings Transcript Key Terms Frequency (Seeking Alpha)
I'm most interested in the frequency of potentially negative terms, so management or analyst questions cited 'Uncertain' two times, "Challeng(es)(ing)" three times, "Macro" once, "Drop" once and "Volatil(e)(ity)" once.
Analysts questioned company leadership about revenue retention for its technology research business ((GTS)), whether it could fall to under 100%. Management doesn't forecast these figures but said 'we'll have these more challenging quarters in the number for a little while.'
Regarding valuation, my discounted cash flow calculation indicates the stock's current price is overbought.
Given the softness in the macro environment, declining revenue growth rates, and many consulting clients delaying discretionary projects across the industry, I remain Neutral (Hold) on IT for the near term.
For further details see:
Gartner Faces Slower Tech Consulting Revenue Retention Ahead