Gartner, Inc. — Second-Quarter 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Gartner is a global IT research and advisory company with Research, Consulting and Events segments. Financial amounts below are in U.S. dollars.
Financial performance
- Second-quarter revenue: $610.0 million, up 11% year over year (12% excluding foreign-exchange effects). Research revenue rose 16%, Consulting rose 6%, and Events declined 10%, primarily due to event timing.
- Six-month revenue: $1.167 billion, up 15% (16% excluding foreign-exchange effects). Research rose 16%, Consulting 8%, and Events 13%.
- Profit and margins: Q2 operating income was $83.3 million, down 2%, with operating margin of about 14% versus 16% a year earlier. Net income was $47.9 million, down 6%; diluted EPS was $0.57 versus $0.61. For the first half, operating income increased 10% to $147.7 million and net income increased 11% to $88.1 million; diluted EPS rose 14% to $1.05.
- Segment indicators: Research gross contribution margin held at 70%; total contract value grew 9% reported (13% excluding currency effects), while client retention was 83% versus 85% and wallet retention was 104% versus 106%. Consulting backlog rose 11% to $108.6 million, but Q2 gross contribution margin fell to 35% from 38%. Events Q2 margin rose to 54% from 53%; management attributed the revenue decline to calendar timing, noting comparable events’ revenue increased 16%.
- Cash flow: First-half operating cash flow was $153.3 million versus $149.4 million. Investing used $55.2 million, including the acquisition; financing used $33.8 million. Cash increased to $445.1 million from $373.0 million at year-end.
- Liquidity and debt: At June 30, cash was $445.1 million and gross borrowings were $835.0 million ($600 million term loan and $230 million revolver, plus $5 million other debt). Revolver availability was $966 million. The company said it had adequate liquidity; 94% of cash was held outside the U.S. The balance sheet reported a stockholders’ deficit of $52.8 million.
Material changes and notable items
- Gartner refinanced in June 2016 with a secured five-year $600 million term loan and $1.2 billion revolving facility, replacing its prior credit arrangement. Borrowings carried a 1.84% contractual rate at quarter-end; swaps fixed the base rate on $700 million. The company was compliant with covenants.
- Gartner acquired SCM World on June 28 for $34.2 million gross cash consideration ($28.9 million net of acquired cash). The agreement also provides for up to $15 million in performance-based earn-outs and up to $8 million contingent on employment conditions. Purchase-price allocation was preliminary; acquisition goodwill is not expected to be tax deductible.
- Q2 cost growth and acquisition-related charges weighed on operating performance. Acquisition and integration charges were $8.0 million in Q2 and $16.4 million for the half, up from $3.7 million and $8.8 million, respectively. Q2 interest expense also increased, partly reflecting higher borrowings and a $1.3 million write-off of prior financing fees.
- First-half share repurchases were $52.0 million, substantially below $441.4 million in the comparable 2015 period. A $1.2 billion repurchase authorization remained, with approximately $1.1 billion available at June 30.
Outlook, risks and contingencies
- The filing provides no specific 2016 revenue or earnings guidance. Management cautions that interim results may not indicate full-year performance and that revenue, operating income and cash flow fluctuate with event timing, new business, client demand, economic conditions, foreign exchange, competition and incentive payments.
- Interest-rate exposure remains on $130 million of unhedged borrowings; a 25-basis-point rate move was estimated to change 2016 annual pretax interest expense by about $0.3 million. A 10% foreign-currency move was estimated to change the reported value of cash by approximately $22 million.
- Gross unrecognized tax benefits were $31.6 million; approximately $2.7 million could decrease within 12 months. The company has not recognized potential benefits from a pending tax case involving stock-based compensation cost-sharing.
- Management stated ordinary-course litigation and claims, beyond amounts accrued, were not expected to materially affect financial position, cash flows or results. The filing also identifies uncertainty in estimates, customer collections, goodwill valuation and future accounting-standard changes.
- New accounting standards discussed include credit losses (effective 2020), leases (2019), revenue recognition (2018) and stock-based compensation (2017); impacts were still being assessed.
Most important facts for investors to verify
- Whether Research contract value and retention trends strengthen or weaken in subsequent quarters, and whether revenue growth converts into improved operating margins.
- Whether the Q2 Events decline reverses as event timing normalizes, and whether Consulting margins recover.
- SCM World’s post-acquisition performance, final purchase-price allocation and any earn-out or employment-contingent payments.
- Debt balances, interest costs, covenant compliance, cash location and availability under the revolver; assess the implications of the secured facilities and stockholders’ deficit.
- Cash-flow conversion, acquisition spending and the pace of share repurchases relative to operating cash generation.