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Gartner Reports Financial Results for First Quarter 2017

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Gartner, Inc. (NYSE:IT) is the world's leading research and advisory
company and today reported results for first quarter 2017. Gartner also
provided an update to its financial outlook for full year 2017, which
includes its projections for CEB Inc. ("CEB"), which Gartner acquired on
April 5, 2017, as previously announced.

For first quarter 2017, total revenue was $625.2 million, an increase of
12% over first quarter 2016 and 13% adjusted for the foreign exchange
impact. Net income was $36.4 million in first quarter 2017, while
Adjusted EBITDA was $106.1 million, an increase of 3% over first quarter
2016 as reported and 1% adjusted for the foreign exchange impact. GAAP
Diluted EPS was $0.43 in first quarter 2017 compared to $0.54 in first
quarter 2016. Adjusted EPS was $0.60 in first quarter 2017 compared to
$0.67 in first quarter 2016. (See "Non-GAAP Financial Measures" below
for definitions of Adjusted EBITDA and Adjusted EPS). For first quarter
2016, both the previously reported GAAP Diluted EPS and Adjusted EPS
have increased by $0.06 per share due to the Company's adoption of FASB
Accounting Standards Update (ASU) No. 2016-09 (see below for additional
discussion).

Gene Hall, Gartner's chief executive officer, commented, "We delivered
another strong quarter of double-digit growth in revenue and contract
value for the first quarter of 2017. We closed the acquisition of CEB
and remain extremely excited about our prospects for long term growth in
both the Gartner and CEB businesses".

Business Segment Highlights

Research

Revenue for first quarter 2017 was $504.7 million, up 15% compared to
first quarter 2016 on both a reported basis and adjusted for the foreign
exchange impact. The quarterly gross contribution margin was 69% and 70%
in first quarter 2017 and 2016, respectively. Total contract value was
$1.95 billion at March 31, 2017, an increase of 13% on a reported basis
and 15% on a foreign exchange neutral basis compared to March 31, 2016.
Client retention was 83% and 84% in first quarter of 2017 and 2016,
respectively. Wallet retention was 104% and 105% in first quarter 2017
and 2016, respectively.

Consulting

Revenue for first quarter 2017 was $85.2 million, which was flat on a
reported basis compared to first quarter 2016 but an increase of 2%
adjusted for the foreign exchange impact. The gross contribution margin
was 33% and 35% in first quarter 2017 and 2016, respectively. First
quarter 2017 utilization was 65% compared to 67% in first quarter 2016.
As of March 31, 2017, billable headcount was 650 compared to 618 at
March 31, 2016. Backlog was $103.2 million at March 31, 2017 compared to
$114.1 million at March 31, 2016.

Events

Revenue for first quarter 2017 was $35.3 million compared to $32.1
million in the first quarter 2016, an increase of 10% on a reported
basis and 11% adjusted for the foreign exchange impact. The gross
contribution margin was 38% in first quarter 2017 compared to 41% in the
prior year quarter. The Company held 11 events with 9,035 attendees in
first quarter 2017 compared to 12 events with 7,640 attendees in first
quarter 2016.

Cash Flow and Balance Sheet Highlights

Gartner used $29.6 million of cash in its operating activities in the
first quarter of 2017 compared to cash generated of $13.3 million in the
first quarter of 2016. Free Cash Flow for the first quarter of 2017 was
$(22.7) million compared to $17.9 million in first quarter of 2016 (See
"Non-GAAP Financial Measures" below for the definition of Free Cash
Flow). During first quarter 2017 the Company used $22.0 million in cash
to repurchase its common shares, $129.3 million for acquisitions, $10.7
million for capital expenditures, and $17.6 million for acquisition and
integration payments. After the close of the CEB transaction, the
Company had $640.0 million of cash and $630.0 million of additional
borrowing capacity under its revolving credit facility.

Acquisition of CEB

On April 5, 2017, Gartner completed the acquisition of CEB by acquiring
all of the outstanding shares of CEB in a cash and stock transaction
with a total enterprise value of approximately $3.5 billion gross.
Additional information regarding the acquisition is provided in the
Company's March 31, 2017 Quarterly Report on Form 10-Q or on Gartner's
website at http://investor.gartner.com.

Impact of the Adoption of FASB ASU No. 2016-09 on our Previously
Reported Q1 2016 Numbers

In the third quarter of 2016 the Company early adopted Financial
Accounting Standards Board Update 2016-09, Improvements to Employee
Share-Based Payment Accounting
("ASU No. 2016-09"), which changed
the accounting for stock-based awards. The accounting changes required
by ASU No. 2016-09 were applied to the beginning of the Company's 2016
fiscal year, and as a result certain previously reported financial
results for the three months ended March 31, 2016 have changed. These
changes include a $4.8 million increase in net income, and a $0.06
increase in each of GAAP basic earnings per share, GAAP diluted earnings
per share and Adjusted earnings per share. In addition, our previously
reported operating cash flow for the three months March 31, 2016
increased by $4.8 million. Note 1 in the Notes to the Financial
Statements in the Company's March 31, 2017 Quarterly Report on Form 10-Q
provides additional information.

Financial Outlook for 2017

The Company also provided an update to its financial outlook for full
year 2017, to include CEB:

   
($ in millions, except per share data) (1)

 

2017 Projected Range

Gartner CEB   Combined
Revenue (GAAP):            
Research $   2,070 $   2,105     $   2,070 $   2,105
Consulting 345 360 345 360
Events 285 300 285 300
CEB         $   519 $   549 $   519   $   549  
Total Revenue (GAAP) $ 2,700 $ 2,765 $ 519 $ 549 $ 3,219 $ 3,314
Deferred Revenue Fair Value Adjustment 209 209 209 209
Total Adjusted Revenue (Non-GAAP) $  

2,700

$   2,765 $   728 $   758 $   3,428   $   3,523  
 
Adjusted EBITDA (Non-GAAP) $   495 $   530 $   190 $   205 $   685   $   735  
   
Operating Income (GAAP) $   (42 ) $   8  
 
Diluted EPS (GAAP) $ (1.16 ) $ (0.76 )
 
Adjusted EPS (Non-GAAP) $ 3.32 $ 3.60
 
Operating Cash Flow (GAAP) $

315

$

345

Acquisition and Integration Payments

115

125

Capital Expenditures     (95 )    

(105

)
Free Cash Flow (Non-GAAP) $   335   $   365  
 

(1) See "Non-GAAP Financial Measures" below for definitions of Adjusted
Revenue, Adjusted EBITDA, Adjusted EPS, and Free Cash Flow.

Conference Call Information

Gartner has scheduled a conference call at 8:00 a.m. eastern time on
Thursday, May 4, 2017 to discuss the Company's financial results for
first quarter 2017. The conference call will be available via the
Internet by accessing the Company's website at http://investor.gartner.com
or by dial-in. The U.S. dial-in number is 888-680-0865 and the
international dial-in number is 617-213-4853. The participant passcode
is 16757805#. The question and answer session of the conference call
will be open to investors and analysts only. A replay of the webcast
will be available for approximately 30 days following the call on the
Company's website. In addition, a transcript of the call will also be
available on the Company's website shortly after the conclusion of the
call.

Annual Meeting of Stockholders

Gartner will hold its 2017 Annual Meeting of Stockholders at 10:00 a.m.
eastern time on June 1, 2017 at the Company's offices in Stamford,
Connecticut.

About Gartner

Gartner, Inc. (NYSE:IT) is the world's leading research and advisory
company. We help business leaders across all major functions in every
industry and enterprise size with the objective insights they need to
make the right decisions. Our comprehensive suite of services delivers
strategic advice and proven best practices to help clients succeed in
their mission-critical priorities. Gartner is headquartered in Stamford,
Connecticut, U.S.A., and has 13,000 associates serving clients in over
11,000 enterprises in over 90 countries. For more information, visit www.gartner.com.

Non-GAAP Financial Measures

Certain financial measures used in this Press Release are not defined by
generally accepted accounting principles ("GAAP") and as such are
considered non-GAAP financial measures. We provide these measures to
enhance the user's overall understanding of the Company's current
financial performance and the Company's prospects for the future.
Investors are cautioned that these Non-GAAP financial measures are not
defined in the same manner by other companies and as a result may not be
comparable to other similarly titled measures used by other companies.
Also, these Non-GAAP financial measures should not be construed as
alternatives to other measures determined in accordance with GAAP.

The Company's Non-GAAP financial measures are as follows:

Adjusted Revenue: Represents GAAP revenue
plus non-cash fair value adjustments on pre-acquisition deferred
revenues. The majority of the pre-acquisition deferred revenue is
recognized ratably over the remaining period of the underlying revenue
contract. We believe Adjusted Revenue is an important measure of our
recurring operations as it provides a more accurate period-over-period
comparison of trends in revenues.

Adjusted EBITDA: Represents GAAP operating
income excluding stock-based compensation expense, depreciation and
amortization, accretion on obligations related to excess facilities,
acquisition and integration adjustments, and other charges. We believe
Adjusted EBITDA is an important measure of our recurring operations as
it excludes items that may not be indicative of our core operating
results.

Adjusted EPS: Represents GAAP
diluted earnings per share adjusted for the impact of certain items
directly related to acquisitions and other charges. The adjustment items
consist of the amortization of identifiable intangibles; incremental
acquisition and integration charges related to the achievement of
certain performance targets and employment conditions, as well as legal,
consulting, severance, and other costs; and non-cash fair value
adjustments on pre-acquisition deferred revenues. We believe Adjusted
EPS is an important measure of our recurring operations as it excludes
items that may not be indicative of our core operating results.

Free Cash Flow: Represents GAAP cash (used
in) provided by operating activities plus cash acquisition and
integration payments less payments for capital expenditures. We believe
that Free Cash Flow is an important measure of the recurring cash
generated by the Company's core operations that may be available to be
used to repurchase our stock, repay debt obligations, invest in future
growth through new business development activities, or make acquisitions.

Tables provided in this Press Release provide reconciliations of these
Non-GAAP financial measures with the most directly comparable GAAP
measure.

Safe Harbor Statement

Statements contained in this press release regarding the Company's
growth and prospects, projected financial results and all other
statements in this release other than recitation of historical facts are
forward-looking statements (as defined in the Private Securities
Litigation Reform Act of 1995). Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause
actual results to be materially different.

Such factors include, but are not limited to, the following: our ability
to achieve and effectively manage growth, including our ability to
integrate our recent CEB acquisition and other acquisitions, and
consummate and integrate future acquisitions; our ability to pay our
debt, which has increased substantially with the recent CEB acquisition;
our ability to maintain and expand our products and services; our
ability to expand or retain our customer base; our ability to grow or
sustain revenue from individual customers; our ability to attract and
retain a professional staff of research analysts and consultants as well
as experienced sales personnel upon whom we are dependent; our ability
to achieve continued customer renewals and achieve new contract value,
backlog and deferred revenue growth in light of competitive pressures;
our ability to carry out our strategic initiatives and manage associated
costs; our ability to successfully compete with existing competitors and
potential new competitors; our ability to enforce or protect our
intellectual property rights; additional risks associated with
international operations including foreign currency fluctuations; the
impact of restructuring and other charges on our businesses and
operations; general economic conditions; risks associated with the
creditworthiness and budget cuts of governments and agencies; and other
factors described under "Risk Factors" contained in our Annual Report on
Form 10-K for the year ended December 31, 2016, which can be found on
Gartner's website at www.investor.gartner.com
and the SEC's website at www.sec.gov.

Forward-looking statements included herein speak only as of the date
hereof and Gartner disclaims any obligation to revise or update such
statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events or circumstances.

     

GARTNER, INC.

Condensed Consolidated Statements
of Operations

(Unaudited; in thousands, except per
share amounts)

 

Three Months Ended
March 31,

2017   2016
Revenues:
Research $   504,652 $   440,271 15 %
Consulting 85,248 84,940 %
Events 35,269   32,055   10 %
Total revenues 625,169 557,266 12 %
Costs and expenses:
Cost of services and product development 237,609 212,041 12 %
Selling, general and administrative 304,244 257,411 18 %
Depreciation 10,240 8,834 16 %
Amortization of intangibles 6,290 6,183 2 %
Acquisition and integration charges 13,272   8,368   59 %
Total costs and expenses 571,655   492,837   16 %
Operating income 53,514 64,429 (17 )%
Interest expense, net (5,906 ) (6,006 ) (2 )%
Other income, net 889   1,884   (53 )%
Income before income taxes 48,497 60,307 (20 )%
Provision for income taxes 12,064   15,320   (21 )%
Net income $   36,433   $   44,987   (19 )%
 
Income per common share:
Basic $ 0.44 $ 0.55 (20 )%
Diluted $ 0.43 $ 0.54 (20 )%
Weighted average shares outstanding:
Basic 82,835 82,451 %
Diluted 84,095   83,464   1 %
 
 
BUSINESS SEGMENT DATA
(Unaudited; in thousands)
      Revenue  

Direct
Expense

 

Gross
Contribution

 

Contribution
Margin

Three Months Ended 3/31/17
Research $   504,652 $   157,944 $   346,708 69%
Consulting 85,248 56,906 28,342 33%
Events 35,269   21,702   13,567   38%
TOTAL $   625,169   $   236,552   $   388,617   62%
Three Months Ended 3/31/16
Research $ 440,271 $ 132,085 $ 308,186 70%
Consulting 84,940 55,562 29,378 35%
Events 32,055   19,072   12,983   41%
TOTAL $   557,266   $   206,719   $   350,547   63%
 
       

SELECTED STATISTICAL DATA (unaudited)

 

March 31,
2017

March 31,
2016

Total contract value (a), (b) $ 1.953 $ 1.721
Research client retention 83 % 84 %
Research wallet retention 104 % 105 %
Research client enterprises 11,166 10,474
 
Consulting backlog (c) $ 103,200 $ 114,100
Consulting—quarterly utilization 65 % 67 %
Consulting billable headcount 650 618
Consulting—average annualized revenue per billable headcount (c) $ 359 $ 386
 
Events—number of events for the quarter 11 12
Events—attendees for the quarter 9,035   7,640  
(a)     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 Events tickets) for which revenue is recognized when the
deliverable is utilized.
(b) In billions.
(c) In thousands.
 
 

SUPPLEMENTAL INFORMATION

 

Reconciliation - Operating income to Adjusted EBITDA (a)
(Unaudited; in thousands):

 

Three Months Ended
March 31,

2017   2016
Net income $   36,433 $   44,987
Interest expense, net 5,906 6,006
Other income, net (889 ) (1,884 )
Tax provision 12,064   15,320  
Operating income $ 53,514 $ 64,429
Normalizing adjustments:
Stock-based compensation expense (b) 22,576 15,495
Depreciation, accretion, and amortization (c) 16,553 15,038
Acquisition and integration adjustments (d) 13,415   8,368  
Adjusted EBITDA $   106,058   $   103,330  
 
(a)     Adjusted EBITDA is based on GAAP operating income adjusted for
certain normalizing adjustments.
(b) Consists of charges for stock-based compensation awards.
(c) Includes depreciation expense, accretion on excess facilities
accruals, and amortization of intangibles.
(d) Consists of directly-related incremental expenses from acquisitions
and non-cash fair value adjustments on pre-acquisition deferred
revenues.
 
 

Reconciliation - GAAP Diluted Earnings Per Share to Adjusted
Earnings Per Share
(a) (Unaudited; in thousands, except per
share amounts):

      Three Months Ended March 31,
2017   2016

Total
Amount

  EPS

Total
Amount

  EPS
GAAP diluted earnings per share $   36,433 $   0.43 $   44,987 $   0.54
Acquisition and other adjustments:
Amortization of acquired intangibles (b) 6,196 0.07 6,089 0.07
Acquisition and integration adjustments (c) 13,415 0.16 8,368 0.10
Tax impact of adjustments (d) (5,406 ) (0.06 ) (3,715 ) (0.04 )
Adjusted earnings per share (e) $   50,638   $   0.60   $   55,729   $   0.67  
 
(a)     Adjusted earnings per share represents GAAP diluted earnings per
share adjusted for the impact of certain items directly-related to
acquisitions and other items.
(b) Consists of non-cash amortization charges from acquired intangibles.
(c) Consists of directly-related incremental charges from acquisitions
and non-cash fair value adjustments on pre-acquisition deferred
revenues.
(d) The effective tax rates were 28% and 26% for the three months ended
March 31, 2017 and 2016, respectively.
(e) Calculated based on 84.1 million and 83.5 million shares for the
three months ended March 31, 2017 and 2016, respectively.
 
 

Reconciliation - Cash Provided by Operating Activities to Free
Cash Flow (a)
(Unaudited; in thousands):

     

Three Months Ended
March 31,

2017   2016
Cash (used in) provided by operating activities $   (29,605 ) $   13,331
Adjustments:
Cash acquisition and integration payments 17,585 11,100
Cash paid for capital expenditures (10,700 ) (6,560 )
Free Cash Flow     $   (22,720 ) $   17,871  
 
(a)     Free cash flow is based on cash provided by operating activities
determined in accordance with GAAP plus cash acquisition and
integration payments less additions to capital expenditures.

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