2023-05-23 20:11:03 ET
Summary
- Gartner reported its Q1 2023 financial results on May 2, 2023.
- The firm provides research, consulting and event services to organizations worldwide.
- IT leadership has guided 2023 revenue growth materially lower than previous years, so I'm Neutral [Hold] on IT for the near term.
A Quick Take On Gartner
Gartner ( IT ) reported its Q1 2023 financial results on May 2, 2023, beating both revenue and EPS consensus estimates.
The firm provides research, consulting, and related services to clients across numerous industries.
IT has seen quite a positive run over the past year, but management is guiding to lower forward revenue growth.
I’m Neutral [Hold] for Gartner in the near term.
Gartner Overview
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.
Gartner’s Market & Competition
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 the 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 grown per the following chart:
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Gross profit margin by quarter has remained stable, as shown in the chart below:
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Selling, G&A expenses as a percentage of total revenue by quarter have produced no discernible trend:
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Operating income by quarter has trended higher in recent quarters:
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Operating leverage by quarter has generally remained positive:
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Earnings per share (Diluted) have grown in recent quarters:
(All data in the above charts is GAAP)
In the past 12 months, IT’s stock price has risen 30.7% vs. that of much smaller Forrester Research’s ( FORR ) drop of 42.76%, as the chart indicates below:
For the balance sheet, the firm ended the quarter with $899.4 million in cash, equivalents and trading asset securities and $2.46 billion in total debt, of which only $8.4 million was categorized as the current portion due within 12 months.
Over the trailing twelve months, free cash flow was an impressive $986.4 million, of which capital expenditures accounted for $111.9 million. The company paid $103.5 million in stock-based compensation in the last four quarters, the highest rolling 12-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 | 5.1 |
Enterprise Value/EBITDA | 21.1 |
Price/Sales | 4.7 |
Revenue Growth Rate | 14.9% |
Net Income Margin | 16.6% |
EBITDA % | 24.0% |
Market Capitalization | $26,140,000,000 |
Enterprise Value | $28,380,000,000 |
Operating Cash Flow | $1,100,000,000 |
Earnings Per Share (Fully Diluted) | $11.58 |
(Source - Seeking Alpha)
Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:
Assuming generous DCF parameters, the firm’s shares would be valued at approximately $244.80 versus the current price of $326.94, 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 Q1 2023’s results, management highlighted the rapidly-changing business environment as favorable to the firm’s informational product value propositions to clients.
To that end, its Research revenue grew 9% year-over-year as did its Global Technology Sales segment.
Its Global Business Sales segment saw 16% growth during the period. Consulting revenue rose 14%.
The company provided various retention rate metrics for different segments and has seen stabilizing retention for its tech and media industry clients, which had been declining.
Total revenue for Q1 2023 rose 11.6% year-over-year and gross profit margin dropped 1.0 percentage points.
Selling, G&A expenses as a percentage of revenue dropped 1.0 percentage point year-over-year and operating income grew an impressive 14.5%.
Looking ahead, management guided full-year 2023 revenue growth of around 8% on a foreign exchange neutral basis and adjusted EPS of $9.50.
The company had $950 million of share buyback authorization remaining as of the end of the quarter.
The company's financial position is strong, with significant liquidity, nearly $2 billion in long-term debt, but copious free cash flow generation.
Regarding valuation, compared to much smaller firm, Forrester Research, the company's major metric comparison is below:
Metric ((TTM)) | Forrester Research | Gartner | Variance |
Enterprise Value/Sales | 1.0 | 5.1 | 415.3% |
Enterprise Value/EBITDA | 10.6 | 21.1 | 99.3% |
Revenue Growth Rate | 4.2% | 14.9% | 259.3% |
Net Income Margin | 2.6% | 16.6% | 541.9% |
Operating Cash Flow | $29,040,000 | $1,100,000,000 | 3687.9% |
(Source - Seeking Alpha)
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:
I’m most interested in the frequency of potentially negative terms, so management cited ‘Uncertain’ six times, ‘Challeng[es][ing]’ six times, and ‘Macro’ also six times.
The negative terms refer to softness in demand in certain cyclical verticals and in the technology industry, which has been retrenching post-pandemic due to over-hiring in 2020 and 2021.
In its expectations about the use of generative AI technologies, management said it would more immediately see applications in enhancing internal efficiency and with client interface improvement.
A potential upside catalyst to the stock could include a pause in U.S. interest rate hikes, which could lead to a reduction in its debt service costs over time.
However, management is guiding to a significantly lower forward revenue growth outlook than has occurred in previous years, so the stock may have seen its best days for a while, especially given my discounted cash flow calculation, which used very generous growth assumptions and which values the stock at considerably lower than its current price.
As such, I’m Neutral [Hold] on the stock for the near term as we see the dynamic between the potential for a pause or end to interest rate hikes and a possible recession ahead.
For further details see:
Gartner Guides To Lower 2023 Revenue Growth