Gartner Shares Plunge Despite Third-Quarter Beat and Raised Guidance

Gartner beat third-quarter estimates and raised its full-year guidance on Tuesday, yet its shares plunged intraday as investors questioned the implied fourth-quarter outlook.

Gartner, Inc. (NYSE: IT) sells research and advice to business and technology leaders. Its clients use that research to choose technology and plan budgets. Contract value, the annualized value of subscription research contracts, is its closely watched growth measure.

Results cleared estimates by a wide margin

Adjusted earnings per share, profit excluding some one-off items, were $3.59. That rose 30.1% from a year earlier. FactSet consensus expected $2.84, according to Barron's.

The beat was 26.4% above that consensus, a TickerGrove calculation. Reported revenue was $1.51 billion, above the FactSet consensus of $1.48 billion. Both consensus figures come from FactSet via Barron's.

On a reported basis, net income was $214 million. Diluted earnings per share were $3.35. A year earlier, results carried a $150 million goodwill impairment, a write-down tied to Digital Markets.

On the call, Chief Financial Officer Craig Safian said a lower-than-expected adjusted tax rate helped. He put that rate at about 17%. The tax help sat alongside stronger operating profit.

Shares fell intraday as investors parsed the outlook

Shares were down 13.58% intraday to $203.31 as of 2:59 p.m. ET on Tuesday, according to MarketBeat. The prior close was $235.26. That snapshot is intraday, not the official close.

Barron's characterized the raised outlook as implying a weaker-than-expected fourth quarter. Barron's gave no numeric fourth-quarter consensus. No such consensus is verified in this reporting.

Revenue fell as reported, and rose as adjusted

Reported revenue fell 1.3% from a year earlier. The prior year included $55 million from Digital Markets, a divested operation Gartner has sold. Excluding that operation, adjusted revenue rose 2.4%.

Adjusted EBITDA was $364 million, up 7.5%, excluding the divested operation. EBITDA is earnings before interest, taxes and some noncash charges. Operating cash flow was $294 million, and free cash flow was $275 million.

Contract value and segments grew modestly

Contract value reached $5.3 billion, up 2.5% excluding currency swings. Global Technology Sales contract value was $4.0 billion, up 2.1%. Global Business Sales contract value was $1.3 billion, up 3.7%.

Insights revenue was $1.29 billion, up 1.7%. Conferences revenue was $86 million, up 15.4%. Consulting revenue was $126 million, up 2.3%. Insights is the largest segment by far.

Buybacks shrank the share count and lifted per-share profit

Gartner repurchased 900,000 shares for $138 million in the quarter. Over the last four quarters, it repurchased about $1.7 billion of stock. Chief Executive Gene Hall cited that pace in the release.

Diluted shares were 63.9 million, down from 75.0 million a year earlier. That is a decline of about 15%, or 14.8% as a TickerGrove calculation. Fewer shares spread the same profit across a smaller count.

The buybacks ran alongside a still-liquid balance sheet. At September 30, Gartner held about $1.6 billion of cash against about $3 billion of debt, Safian said. Remaining repurchase authorization was about $1.1 billion.

Guidance rose on the call, not in the release

The release itself contained no numeric guidance. It pointed readers to an earnings supplement. On the earnings call, Chief Financial Officer Craig Safian gave the raised figures.

Safian expected adjusted revenue of at least $6.405 billion, up from $6.375 billion. He expected adjusted EBITDA of at least $1.615 billion, up from $1.570 billion. Those are announced outlook figures, not reported results.

He expected adjusted earnings per share of at least $14.65, up from $14.00. He expected free cash flow of at least $1.235 billion, up from $1.185 billion. Guidance assumed 66 million diluted shares.

For the fourth quarter itself, Safian expected EBITDA of at or above $390 million. The arithmetic is tight: the third-quarter earnings beat was $0.75 a share against FactSet. The full-year earnings guide rose $0.65 a share. Both contrasts are TickerGrove calculations.

What remains unknown

What remains unknown includes the official closing price for Tuesday. Reporting was frozen before the close, so the share move here is the 2:59 p.m. ET intraday snapshot. It is not a closing figure.

A numeric fourth-quarter consensus also remains unknown. Without one, the size of any implied fourth-quarter shortfall cannot be measured. Analyst reaction and any price-target changes after the report are also unknown.

What to watch next

What to watch next is the official close and trading in the sessions that follow. A close near the intraday snapshot would confirm the reaction. A recovery would soften it.

Watch fourth-quarter results against the $390 million EBITDA floor Safian set. Watch, too, whether contract value growth accelerates again. On the call, Safian called the third quarter the third consecutive quarter of acceleration.