Gartner, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Gartner is a global IT research and advisory company operating through Research, Consulting, and Events.
Financial results
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $500.2 | $470.9 | $1,519.3 | $1,437.5 |
| Operating income | $52.5 | $49.4 | $186.4 | $190.3 |
| Operating margin | 10.5% | 10.5% | 12.3% | 13.2% |
| Net income | $30.4 | $33.8 | $109.9 | $124.6 |
| Diluted EPS | $0.36 | $0.38 | $1.29 | $1.37 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $266.3 | $275.6 |
Q3 revenue grew 6% as reported and 13% excluding foreign-exchange effects; nine-month revenue also grew 6% reported and 13% excluding FX. Q3 operating income rose 6%, but net income fell 10%, reflecting higher interest expense and a higher effective tax rate. For the nine months, operating income fell 2% and net income fell 12%. The filing does not provide quarterly cash-flow figures.
Segments and operating trends
- Research: Q3 revenue increased 8% reported (16% excluding FX); contract value rose 11% reported (14% excluding FX). Client retention was 84% and wallet retention was 106%.
- Consulting: Q3 revenue decreased 9% reported and 3% excluding FX; gross contribution margin declined to 29% from 30%. Backlog was $109.6 million, up 1% year over year.
- Events: Q3 revenue increased 26% reported and 38% excluding FX; gross contribution margin improved to 39% from 30%, with 29% more attendees.
Cash, debt, and liquidity
- Cash and cash equivalents were $371.2 million at September 30, 2015. Cash increased $5.9 million from year-end, including a $27.6 million adverse exchange-rate effect.
- Nine-month operating cash flow was $266.3 million; investing used $231.5 million, including $195.5 million net cash paid for acquisitions and $36.1 million of capital expenditures. Financing used $1.2 million, after $453.0 million of share repurchases and $435.0 million of additional borrowings.
- Total debt was $840.0 million, compared with $405.0 million at December 31, 2014. The company had $645.6 million of available revolver capacity and reported compliance with credit covenants. Management said liquidity was adequate for currently anticipated needs.
- Stockholders’ equity was a deficit of $159.6 million, compared with positive equity of $161.2 million at year-end; treasury-stock repurchases were a major balance-sheet movement. Cash and cash equivalents were 94% held outside the United States.
Material changes, outlook, and risks
- Gartner acquired Capterra and Nubera for an aggregate $206.2 million cash purchase price; net cash paid was $195.5 million. The acquisitions added $144.7 million of goodwill and $72.0 million of amortizable intangibles. Results from the businesses were not material to the reported periods. Up to $32.0 million of additional payments may be recognized as compensation expense over three years, subject to employee conditions.
- The $1.2 billion share-repurchase authorization had approximately $1.182 billion remaining at September 30. Nine-month repurchases totaled $453.0 million.
- The effective tax rate increased to 41.4% from 27.1% in Q3 and to 37.4% from 31.7% for the nine months. Management cited lower foreign tax-credit benefits, acquisition-related nondeductible expenses, and a greater share of income expected in higher-tax countries.
- Q3 and nine-month other income included a $5.4 million pretax gain from selling state tax credits. The filing also describes a favorable state tax-audit settlement and an offsetting tax-credit reduction.
- Management provided no specific forward financial guidance in this filing. It cautioned that results fluctuate with event timing, new business, economic conditions, foreign exchange, competition, and compensation costs. Consulting revenue and productivity measures weakened; FX reduced reported revenue growth. Goodwill values were assessed as exceeding carrying values at September 30, 2015.
- Interest-rate exposure remains on debt above the $700 million hedged amount; a 25-basis-point rate change was estimated to change annual pretax interest expense by about $2.0 million. Legal matters are described as ordinary-course proceedings, with no material excess liability expected; unrecognized tax benefits were $22.8 million.
Investor verification priorities
- Assess whether Research contract-value growth and retention can sustain revenue growth, and whether Consulting’s decline reverses.
- Separate underlying earnings from the $5.4 million tax-credit gain and evaluate the higher tax rate and interest burden.
- Review acquisition valuation, integration progress, contingent employee payments, and the expected contribution from Capterra and Nubera.
- Track debt, covenant headroom, interest-rate exposure, and the funding of continued share repurchases against cash generation.
- Evaluate FX exposure, including the concentration of cash overseas, and the effect of currency movements on reported growth and equity.