Gartner, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparative period is Q1 2013. Gartner is a global IT research and advisory company with Research, Consulting, and Events segments. Financial statements are unaudited.
Key financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $446.7 million | $406.8 million | +10% |
| Operating income | $59.2 million | $54.0 million | +10% |
| Operating margin | 13% | 13% | Unchanged |
| Net income | $37.7 million | $36.7 million | +3% |
| Diluted EPS | $0.40 | $0.38 | +5% |
| Operating cash flow | $16.5 million | $19.7 million | Down $3.2 million |
Revenue growth was 10% both as reported and excluding foreign exchange. The effective tax rate rose to 33.4% from 29.2%, primarily reflecting the expiration of favorable tax legislation and comparison with retroactive tax changes in 2013. Lower weighted-average share counts, partly from repurchases, helped diluted EPS grow faster than net income.
Segments and operating changes
- Research: Revenue rose 12% to $348.1 million; gross contribution increased 14% to $246.1 million and its margin improved to 71% from 69%. Contract value increased 11% to $1.408 billion. Client retention was unchanged at 82% organization-level and 84% enterprise-level.
- Consulting: Revenue increased 16% to $84.3 million; gross contribution rose 35% to $30.3 million and margin improved to 36% from 31%. Backlog increased 14% to $111.4 million. Management said much of the revenue increase came from contract optimization, which can vary between periods; core consulting revenue grew 5%.
- Events: Revenue declined 40% to $14.3 million, primarily because three large events and one smaller event shifted from Q1 2013 to Q2 2014. The three large events were held in April 2014 and generated $12.8 million, up 39% year over year. Q1 gross contribution margin fell to 21% from 30% due to the calendar shift.
Consolidated cost of services and product development increased 4%, while SG&A increased 13%, mainly due to payroll, headcount, and sales commissions. Quota-bearing sales associates increased 16% year over year to 1,698. Acquisition and integration charges were $3.4 million versus $0.1 million.
Cash, liquidity, debt, and capital allocation
- Cash and cash equivalents were $283.3 million at March 31, 2014, down from $424.0 million at year-end. Management said liquidity was adequate for current plans.
- Operating cash flow was $16.5 million. Investing used $124.5 million, including the Software Advice acquisition and escrow; financing used $32.3 million. Capital expenditures were $9.2 million.
- Total debt was $355.0 million: $142.5 million in term loans, $207.5 million in revolver borrowings, and $5.0 million of other debt. The balance sheet classified $222.5 million as current and $132.5 million as long-term. Revolver availability was $389.2 million, excluding the expansion feature. The company reported compliance with credit covenants.
- The effective annual interest rate on total debt was 3.26%. A $200 million interest-rate swap fixed the base rate on that portion of borrowings; debt above that amount remained exposed to floating rates.
- Gartner repurchased 2.7 million shares for $195.9 million, at an average $70.34 per share. The board authorized a new $800 million repurchase program; $632.2 million remained available at quarter-end.
Acquisition, outlook, and risks
Gartner acquired Software Advice on March 7 for $103.2 million in cash. It recorded preliminary goodwill of $70.9 million and amortizable intangible assets of $29.7 million. Up to an additional $31.9 million is tied to employee conditions and potential indemnified losses; the company expects qualifying amounts to be expensed over two years. The acquired business’s Q1 results were not material.
The filing provides no specific full-year revenue or earnings guidance. Management cautioned that Q1 results may not indicate the remainder of 2014 and cited event timing, new business, sales mix, economic conditions, demand, foreign exchange, competition, and performance compensation as factors that can cause fluctuations. The filing also describes uncertainty in estimates for receivables, goodwill and intangibles, taxes, and stock compensation.
Legal proceedings arise in the ordinary course; management did not expect potential liabilities beyond accruals to materially affect results or financial position. Unrecognized tax benefits were $15.8 million; approximately $4.0 million could decrease within 12 months as audits close or statutes expire. The IRS was auditing 2010 and 2011 federal returns; management did not expect a material adverse effect. Approximately 85% of cash was held outside the United States. A 10% move in major currencies versus the U.S. dollar could have changed reported cash by about $19 million.
Important facts for investors to verify
- Whether Q2 event revenue and the rest-of-year events calendar offset the Q1 timing-related decline as expected.
- Whether Research contract-value growth and retention trends translate into continued revenue growth.
- How Consulting performance evolves given the contribution from variable contract-optimization work.
- Debt and liquidity after acquisition spending and substantial share repurchases; note the filing reports $355 million total debt in the debt note and balance sheet.
- Final Software Advice purchase-price allocation and any contingent employee-related payments or integration costs.
- Tax-rate developments, resolution of IRS audits, and the timing of any decrease in unrecognized tax benefits.