Business context and reporting period
Gartner, Inc. is a global IT research and advisory company operating through Research, Consulting and Events. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $470.9 million | $410.7 million | $1,437.5 million | $1,263.5 million |
| Operating income | $49.4 million | $58.7 million | $190.3 million | $186.7 million |
| Net income | $33.8 million | $38.2 million | $124.6 million | $121.4 million |
| Diluted EPS | $0.38 | $0.40 | $1.37 | $1.28 |
- Revenue and segments: Q3 revenue grew 15% reported and 14% excluding foreign exchange. Research revenue rose 15% to $365.3 million; Consulting rose 17% to $82.3 million; Events fell 3% to $23.3 million. For nine months, revenue grew 14%.
- Margins and earnings: Q3 operating margin was 10%, versus 15% a year earlier. Nine-month operating margin was 13%, versus 15%. Q3 net income declined 11%; nine-month net income increased 3% and diluted EPS increased 7%.
- Cash flow: Operating cash flow for nine months was $275.6 million, up 14%. Investing used $147.4 million, including $107.5 million net cash paid for acquisitions and $14.4 million placed in acquisition escrow. Financing used $196.5 million, including $387.1 million for share repurchases. Cash ended at $341.2 million, down from $424.0 million at year-end 2013.
- Debt and liquidity: Debt totaled $370.0 million ($135.0 million term loans, $230.0 million revolver and $5.0 million other debt). Revolver availability was $366.6 million. The company reported covenant compliance and said liquidity was adequate. Approximately 95% of cash was held outside the U.S.
- Balance sheet: Total assets were $1,769.0 million and stockholders’ equity was $152.5 million at September 30, 2014. Current liabilities of $1,358.9 million exceeded current assets of $959.2 million, in part reflecting $847.3 million of deferred revenue.
Material changes versus prior period
- Research contract value increased 12% year over year to $1,485.8 million; enterprise client retention was 84% and wallet retention was 105%.
- Consulting backlog increased 16% to $111.9 million. Utilization rose to 65% in Q3 from 58%.
- Events’ Q3 revenue was affected by scheduling: 12 events were held versus 16. Revenue from the 11 ongoing events held in both quarters increased 17%. Nine-month Events revenue grew 9%.
- Operating costs rose with increased headcount, compensation and sales investment. Acquisition and integration charges were $6.0 million in Q3 and $16.0 million for nine months, versus $0.1 million and $0.3 million, respectively, in 2013.
- Interest expense increased as revolver borrowings rose. Treasury stock purchases reduced shares outstanding; average basic shares for Q3 fell to 88.5 million from 92.7 million.
Outlook, commentary, risks and unusual items
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management said results for the first nine months may not indicate full-year performance and described liquidity as adequate for anticipated needs; it was exploring refinancing options.
- Gartner completed three acquisitions in 2014, including Software Advice. Purchase-price allocations were preliminary; acquisition goodwill totaled $78.6 million. Software Advice also carries up to $31.9 million of additional payments tied to employment conditions, recognized as compensation expense over a two-year service period.
- The company repurchased 5.35 million shares for $387.1 million during the first nine months under an $800 million authorization; approximately $453.8 million remained available at September 30.
- Key exposures include foreign currency movements, floating-rate debt above the $200 million interest-rate-swap hedge, event timing, competitive and economic conditions, and estimates used for goodwill, taxes, receivables and stock compensation. A 10% currency move could change the reported U.S.-dollar value of cash by approximately $26 million.
- Management reported no material effect expected from ordinary-course legal proceedings, no material indemnification payment obligations, and effective disclosure controls. The IRS audit of 2010–2011 returns was substantially complete; management did not expect a material adverse impact.
- Q3 foreign-currency translation reduced other comprehensive income by $12.6 million; the nine-month reduction was $12.0 million. The annual goodwill impairment assessment found reporting-unit fair values above carrying values.
Important facts for investors to verify
- Whether Research contract value, retention and Consulting backlog continue to support growth.
- Whether revenue growth can translate into improved operating margins as headcount, sales investment and acquisition costs rise.
- Cash generation, acquisition-related payments and the pace and funding of share repurchases relative to debt levels.
- Debt refinancing progress, covenant headroom and exposure to interest-rate and foreign-exchange changes.
- Final acquisition purchase-price allocations, contingent compensation obligations and the future performance of acquired businesses.
- Events revenue comparability given scheduling shifts, and any subsequent guidance or material updates not included in this quarterly filing.