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Gartner Reports Financial Results for Third Quarter 2017

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Total Contract Value up 15% YoY FX Neutral Excluding CEB

Third Quarter Revenue up 15% YoY and 14% YoY FX Neutral Excluding
CEB

Gartner, Inc. (NYSE:IT), the world's leading research and advisory
company, today reported results for third quarter 2017. Gartner also
updated its financial outlook for full year 2017.

Our consolidated and segment results below for the three and nine months
ended September 30, 2017 include the results of CEB Inc. ("CEB"), which
we acquired on April 5, 2017. References below to "traditional Gartner"
operating results and business measurements refer to Gartner excluding
CEB. References to CEB below refer to the operating results and business
measurements of CEB subsequent to the acquisition. Our commentary below
regarding the impact of CEB is supplemented by a slide presentation
which is available as Exhibit 99.2 to the Company's Current Report on
Form 8-K furnished to the SEC on November 2, 2017, and on the Company's
website.

Consolidated Results Highlights

For third quarter 2017, total revenue was $828.1 million, an increase of
$254.0 million, or 44% over third quarter 2016 as reported and up 43% on
a foreign exchange neutral basis. Traditional Gartner revenue increased
15% on a reported basis and 14% on a foreign exchange neutral basis.
Adjusted revenue was $891.7 million in third quarter 2017. Net loss was
$(48.2) million in third quarter 2017 and operating loss was $(24.3)
million. Adjusted EBITDA was $149.0 million in third quarter 2017, a 64%
increase over third quarter of 2016. GAAP diluted (loss) per share was
$(0.53) in third quarter 2017 compared to GAAP income per share of $0.36
in third quarter 2016. Adjusted EPS was $0.65 per share in third quarter
2017 compared to $0.58 in third quarter 2016. (See "Non-GAAP Financial
Measures" below for definitions of our Non-GAAP measures).

For the nine months ended September 30, 2017, total revenue was
approximately $2.3 billion, an increase of 32% on both a reported and
foreign exchange neutral basis. Traditional Gartner revenue increased
14% on both a reported and foreign exchange neutral basis. Net loss was
$(104.0) million in the 2017 period. Adjusted EBITDA was $440.1 million
in the nine months ended September 30, 2017 compared to $312.0 million
in the same period of 2016, a 41% increase. GAAP diluted (loss) per
share was $(1.19) and GAAP diluted income per share was $1.52 for the
nine months ended September 30, 2017 and 2016, respectively. Adjusted
EPS was $2.13 per share in the 2017 period compared to $1.99 per share
in the 2016 period.

Gene Hall, Gartner's chief executive officer, commented, "Our business
continues to perform extraordinarily well. Our traditional Gartner
business again achieved double-digit contract value growth in every
geography, across every client size and in virtually every industry.
We've successfully integrated CEB's talented associates into Gartner and
are already delivering value to our clients through a "best of both"
approach. I remain extremely excited about our long-term prospects for
growth and delivering shareholder value."

Segment Results Highlights

Research

Revenue for third quarter 2017 was $653.4 million, up 40% compared to
third quarter 2016 on a reported basis and 38% on a foreign exchange
neutral basis. The gross contribution margin was 67% and 69% in third
quarter 2017 and 2016, respectively. Adjusting for the deferred revenue
fair value adjustment related to CEB, the gross contribution margin was
69% in third quarter 2017. Traditional Gartner revenue increased 18% on
a reported basis and 16% on a foreign exchange neutral basis in third
quarter 2017 compared to third quarter 2016.

Traditional Gartner total contract value was $2.1 billion at September
30, 2017, an increase of 14% on a reported basis and 15% on a foreign
exchange neutral basis compared to September 30, 2016. CEB contract
value was $571.0 million at September 30, 2017. Traditional Gartner
client retention was 83% in both third quarter 2017 and 2016, while
wallet retention was 104% in both third quarter 2017 and 2016. CEB
wallet retention was 93% in both third quarter 2017 and 2016.

Consulting

Revenue for third quarter 2017 was $72.1 million compared to $73.7
million for third quarter 2016, a decline of 2% on a reported basis and
3% on a foreign exchange neutral basis. The gross contribution margin
was 22% and 25% in third quarter 2017 and 2016, respectively. Third
quarter 2017 utilization was 61% compared to 63% in third quarter 2016.
As of September 30, 2017, billable headcount was 682 compared to 630 at
September 30, 2016. Backlog was $91.4 million at September 30, 2017
compared to $89.9 million at September 30, 2016.

Events

Revenue for third quarter 2017 was $45.0 million compared to $33.5
million in third quarter 2016, an increase of $11.5 million, or 34% on a
reported basis and 31% on a foreign exchange neutral basis. Traditional
Gartner revenue increased 25% on a reported basis and 22% on a foreign
exchange neutral basis in third quarter 2017 compared to third quarter
2016. Gross contribution margin was 36% in third quarter 2017 compared
to 43% in the prior year quarter. The Company held a total of 17 events
in the third quarter of 2017, with the Gartner traditional events
business holding 16 events with 10,075 attendees in third quarter 2017
compared to 15 events with 7,431 attendees in third quarter 2016. CEB
held 1 event with 565 attendees in third quarter 2017.

Talent Assessment & Other

The Talent Assessment & Other segment is a new reporting segment for the
Company resulting from the CEB acquisition. Revenue for third quarter
2017 was $57.6 million while gross contribution margin was 54%. On
October 4, 2017, the Company announced that it has initiated a process
to explore and evaluate strategic alternatives for its Talent Assessment
business, which is a significant portion of the Talent Assessment &
Other segment. As part of this process, the Company intends to consider
a range of strategic options, which may include, among other things, a
sale of the Talent Assessment business.

Cash Flow and Balance Sheet Highlights

The Company generated $232.3 million of cash from operating activities
in the nine months ended September 30, 2017 compared to cash generated
of $282.3 million in the same period in 2016. Free Cash Flow was $250.3
million in the nine months ended September 30, 2017 compared to $270.2
million in the same period in 2016 (See "Non-GAAP Financial Measures"
below for the definition of Free Cash Flow). During the nine months
ended September 30, 2017, the Company used $2.6 billion in cash (net)
for acquisitions, $37.2 million to repurchase its common shares, $75.6
million for capital expenditures, and $93.6 million for acquisition and
integration payments. The Company had $630.0 million of cash and cash
equivalents and $534.0 million of additional borrowing capacity under
its revolving credit facility as of September 30, 2017.

Financial Outlook for 2017

The table below, which includes CEB, provides the Company's updated
financial outlook for full year 2017:

 
($ in millions, except per share data) (1)
 
2017 Projected Range
Revenue (GAAP):    
Research $ 2,455 $ 2,480
Consulting 320 335
Events 323 338
Talent Assessment & Other $ 159   $ 174  
Total Revenue (GAAP) $ 3,257 $ 3,327
Deferred Revenue Fair Value Adjustment (Non-GAAP) 203   203  
Total Adjusted Revenue (Non-GAAP) $ 3,460   $ 3,530  
 
Operating income (GAAP) $ 14 $ 39
 
Diluted EPS (GAAP) $ (0.85 ) $ (0.65 )
 
Adjusted EBITDA (Non-GAAP) $ 685 $ 710
 
Adjusted EPS (Non-GAAP) $ 3.39 $ 3.50
 
Operating Cash Flow (GAAP) $ 335 $ 345
Acquisition and Integration Payments 115 125
Capital Expenditures (115 ) (125 )
Free Cash Flow (Non-GAAP) $ 335   $ 345  

(1)

   

See "Non-GAAP Financial Measures" below for definitions of our
Non-GAAP metrics.

 

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 may not
be 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, or superior, 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
(loss) income excluding stock-based compensation expense; depreciation,
amortization, and accretion on obligations related to excess facilities;
amortization of pre-acquisition deferred revenues; acquisition and
integration charges; and other non-recurring items. We believe Adjusted
EBITDA is an important measure of our recurring operations as it
excludes items not representative of our core operating results.

Adjusted Net Income: Represents GAAP net
(loss) income adjusted for the impact of certain items directly related
to acquisitions and other non-recurring items. These adjustments include
the amortization of identifiable intangibles from acquisitions;
incremental and directly-related acquisition and integration charges
related to the achievement of certain performance targets and employment
conditions, as well as legal, consulting, severance, and other costs;
fair value adjustments on pre-acquisition deferred revenues; and other
non-recurring items. We believe Adjusted Net Income is an important
measure of our recurring operations as it excludes items not indicative
of our core operating results.

Adjusted EPS: Represents Adjusted
Net Income divided by the number of Non-GAAP diluted shares. 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 cash provided by
operating activities determined in accordance with GAAP 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 repay debt obligations, repurchase our stock,
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.

Conference Call Information

Gartner has scheduled a conference call at 8:00 a.m. eastern time on
Thursday, November 2, 2017 to discuss the Company's financial results
for third 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 888-680-0879 and the
international dial-in number is 617-213-4856. The participant passcode
is 79608857#. 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.

About Gartner

Gartner, Inc. (NYSE:IT) is the world's leading research and advisory
company. The Company helps business leaders across all major functions
in every industry and enterprise size with the objective insights they
need to make the right decisions. Gartner's 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 more than 14,000
associates serving clients in over 11,000 enterprises in approximately
100 countries. For more information, visit www.gartner.com.

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 within the meaning of Section 27A of the
Securities Exchange Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking
statements involve known and unknown risks, estimates, 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, as well as
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, and our Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 2017, both of
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
September 30,

   

Nine Months Ended
September 30,

 
2017 (a)   2016 2017 (a)   2016
Revenues:
Research (b) $ 653,443 $ 466,877 40% $ 1,778,481 $ 1,371,157 30%
Consulting (b) 72,117 73,707 (2)% 242,404 237,876 2%
Events 44,953 33,475 34% 171,427 132,290 30%
Talent Assessment & Other 57,572     100% 104,673     100%
Total revenues 828,085 574,059 44% 2,296,985 1,741,323 32%
Costs and expenses:
Cost of services and product development 332,207 223,122 49% 921,820 666,585 38%
Selling, general and administrative expense 421,163 269,902 56% 1,133,633 799,322 42%
Depreciation 17,340 9,531 82% 45,637 27,390 67%
Amortization of intangibles 51,224 6,221 >100% 123,014 18,614 >100%
Acquisition and integration charges 30,500   16,557   84% 142,104   32,958   >100%
Total costs and expenses 852,434   525,333   62% 2,366,208   1,544,869   53%
Operating (loss) income (24,349 ) 48,726 >-100% (69,223 ) 196,454 >-100%
Interest expense, net (38,762 ) (5,932 ) >100% (88,624 ) (19,294 ) >100%
Other income, net 1,171   1,954   (40)% 1,653   5,086   (67)%
(Loss) income before income taxes (61,940 ) 44,748 >-100% (156,194 ) 182,246 >-100%
(Benefit) provision for income taxes (13,760 )   14,264   >-100% (52,166 )   55,149   >-100%
Net (loss) income $ (48,180 )   $ 30,484   >-100% $ (104,028 )   $ 127,097   >-100%
 
Net (loss) income per share:
Basic $ (0.53 ) $ 0.37 >-100% $ (1.19 ) $ 1.54 >-100%
Diluted $ (0.53 ) $ 0.36 >-100% $ (1.19 ) $ 1.52 >-100%
Weighted average shares outstanding:
Basic 90,624 82,638 10% 87,585 82,549 6%
Diluted 90,624   83,803   8% 87,585   83,761   5%
(a)     Includes the results of CEB beginning on April 5, 2017, the date of
acquisition. The Company's Research segment includes the results of
CEB's core subscription-based best practice and decision support
research activities. Events includes the results of CEB's former
Evanta business and destination event activities, while the Talent
Assessment & Other segment, which is a new segment, includes the
results of CEB's previously disclosed Talent Assessment business as
well as certain CEB non-subscription based talent products and
services.
(b) Effective June 30, 2017, the Company is reporting the results of its
strategic advisory services ("SAS") business in the Research segment
whereas previously the SAS business was reported with Consulting.
The impact of the reclassification was not significant, however
prior periods have been updated to conform to the current period
presentation.
 
 

BUSINESS SEGMENT DATA

(Unaudited; in thousands)

 
  Revenue  

Direct
Expense

 

Gross
Contribution

 

Contribution
Margin

Three Months Ended 9/30/17 (a), (b)
Research (c) $ 653,443 $ 217,221 $ 436,222 67%
Consulting 72,117 55,929 16,188 22%
Events 44,953 28,942 16,011 36%
Talent Assessment & Other 57,572   26,357   31,215   54%
TOTAL $ 828,085   $ 328,449   $ 499,636   60%
 
Three Months Ended 9/30/16 (b)
Research $ 466,877 $ 144,231 $ 322,646 69%
Consulting 73,707 55,492 18,215 25%
Events 33,475 18,946 14,529 43%
Talent Assessment & Other       —%
TOTAL $ 574,059   $ 218,669   $ 355,390   62%
 
Nine Months Ended 09/30/17 (a), (b)
Research $ 1,778,481 $ 590,575 $ 1,187,906 67%
Consulting 242,404 170,846 71,558 30%
Events 171,427 92,114 79,313 46%
Talent Assessment & Other 104,673   56,161   48,512   46%
TOTAL $ 2,296,985   $ 909,696   $ 1,387,289   60%
 
Nine Months Ended 09/30/16 (b)
Research $ 1,371,157 $ 416,881 $ 954,276 70%
Consulting 237,876 166,766 71,110 30%
Events 132,290 68,716 63,574 48%
Talent Assessment & Other       —%
TOTAL $ 1,741,323   $ 652,363   $ 1,088,960   63%
(a)     Includes the results of CEB beginning on April 5, 2017, the date of
acquisition. The Company's Research segment includes the results of
CEB's core subscription-based best practice and decision support
research activities. Events includes the results of CEB's former
Evanta business and destination event activities, while the Talent
Assessment & Other segment, which is a new segment, includes the
results of CEB's previously disclosed Talent Assessment business as
well as certain CEB non-subscription based talent products and
services.
(b) Effective June 30, 2017, the Company is now reporting the results of
its strategic advisory services ("SAS") business in the Research
segment whereas previously the SAS business was reported with
Consulting. The impact of the reclassification was not significant,
however prior periods have been updated to conform to the current
period presentation.
(c) The Research gross contribution margin was 69% in third quarter 2017
when adjusted for the deferred revenue fair value adjustment
resulting from the CEB acquisition.
 
 

SELECTED STATISTICAL DATA (unaudited)

 
  Traditional Gartner   CEB

September
30, 2017

 

September
30, 2016

September
30, 2017

 

September
30, 2016

Research
Total contract value (a), (b) $ 2,063 $ 1,815 $ 571 $ 578
Client retention 83 % 83 % na na
Wallet retention 104 % 104 % 93 % 93 %
Client enterprises 11,338 10,673 na na
 
Consulting
Backlog (c), (d) $ 91,400 $ 89,900 na na
Quarterly utilization 61 % 63 % na na
Billable headcount 682 630 na na
Average annualized revenue per billable headcount (c) $ 355 $ 368 na na
 
Events
Number of events for the quarter (e) 16 15 1 1
Number of attendees for the quarter (e) 10,075 7,431 565 767
(a)     In millions.
(b) The 2016 CEB contract value was calculated based on Gartner's 2017
foreign exchange rates.
(c) In thousands.
(d) The September 30, 2016 traditional Gartner $89.9 million backlog was
restated to reflect the reclassification of the SAS business.
(e) Excludes single day, local events.
 
na- not applicable or not available.
 

SUPPLEMENTAL INFORMATION

The following tables provide reconciliations of certain Non-GAAP
financial measures used in this Press Release with the most directly
comparable GAAP measure. See "Non-GAAP Financial Measures" above for
definitions of these Non-GAAP financial measures.

Reconciliation - GAAP Revenue to Adjusted Revenue (a) (Unaudited;
in thousands):

   

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017   2016 2017   2016
Total Revenue (GAAP) $ 828,085 $ 574,059 $ 2,296,985 $ 1,741,323
Deferred Revenue Fair Value Adjustment 63,655     155,340  
Adjusted Revenue $ 891,740   $ 574,059   $ 2,452,325   $ 1,741,323
(a)     The majority of the pre-acquisition deferred revenue is recognized
ratably over the remaining period of the underlying revenue contract.
 

Reconciliation - Operating (Loss) Income to Adjusted EBITDA (Unaudited;
in thousands):

   

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017   2016 2017   2016
GAAP net (loss) income $ (48,180 ) $ 30,484 $ (104,028 ) $ 127,097
Interest expense, net 38,762 5,932 88,624 19,294
Other expense (income), net (1,171 ) (1,954 ) (1,653 ) (5,086 )
Tax (benefit) provision (13,760 ) 14,264   (52,166 ) 55,149  
Operating (loss) income $ (24,349 ) $ 48,726 $ (69,223 ) $ 196,454
Adjustments:
Stock-based compensation expense (a) 13,198 9,520 52,331 36,128
Depreciation, accretion, and amortization (b) 68,960 15,776 169,098 46,071
Amortization of pre-acquisition deferred revenues (c) 63,655 155,340
Acquisition & integration charges and other nonrecurring items (d) 27,523   16,985   132,507   33,386  
Adjusted EBITDA $ 148,987   $ 91,007   $ 440,053   $ 312,039  
(a)     Consists of charges for stock-based compensation awards.
(b) Includes depreciation expense, accretion on excess facilities
accruals, and amortization of intangibles.
(c) Consists of the amortization of 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 customer contract.
(d) Consists of incremental and directly-related charges related to
acquisitions and other non-recurring items.
 

Reconciliation - GAAP Net (Loss) Income to Adjusted Net Income and
Adjusted EPS
(Unaudited; in thousands, except per share amounts):

   

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017   2016 2017   2016
GAAP net (loss) income $ (48,180 ) $ 30,484 $ (104,028 ) $ 127,097
Acquisition and other adjustments:
Amortization of acquired intangibles (a) 51,130 6,127 122,732 18,332
Amortization of pre-acquisition deferred revenues (b) 63,655 155,340
Acquisition & integration charges and other nonrecurring items (c)
(d)
31,282 16,985 145,276 33,386
Tax impact of adjustments (e) (38,371 ) (5,371 ) (129,729 ) (11,832 )
Adjusted net income $ 59,516   $ 48,225   $ 189,591   $ 166,983  
 
GAAP basic shares 90,624 82,638 87,585 82,549
Potentially dilutive shares (f) 1,423   1,165   1,393   1,212  
Non-GAAP diluted shares (f) 92,047   83,803   88,978   83,761  
Adjusted EPS $ 0.65   $ 0.58   $ 2.13   $ 1.99  
(a)     Consists of non-cash amortization charges from acquired intangibles.
(b) Consists of the amortization of 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.
(c) Consists of incremental and directly-related charges related to
acquisitions and other non-recurring items.
(d) Includes the amortization and write-off of deferred financing fees
for both the three and nine months ended September 30, 2017 which is
recorded in Interest expense, net in the Consolidated Statement of
Operations and in the Adjusted EBITDA table presented above.
(e) The effective tax rate was 26% and 31% for the three and nine months
ended September 30, 2017, respectively, and 23% for both the three
and nine months ended September 30, 2016.
(f) Non-GAAP diluted shares includes basic shares calculated in
accordance with GAAP and potentially dilutive shares related to the
Company's stock-based compensation awards.
 

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

   

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017   2016 2017   2016
Cash provided by operating activities $ 149,549 $ 120,480 $ 232,267 $ 282,263
Adjustments:
Cash paid for acquisition and integration activities (a) 28,504 12,985 93,604 24,856
Cash paid for capital expenditures (33,992 )   (11,540 )   (75,619 ) (36,877 )
Free Cash Flow $ 144,061   $ 121,925   $ 250,252   $ 270,242  
(a)     Consists of payments for activities that are incremental and
directly-related to our acquisitions.
 

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