Gartner, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Gartner provides IT research and advisory services through Research, Consulting, and Events. Financial figures below are in U.S. dollars; statements are unaudited.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $410.7 million | $374.4 million | $1,263.5 million | $1,141.1 million |
| Operating income | $58.7 million | $49.8 million | $186.7 million | $166.0 million |
| Net income | $38.2 million | $31.4 million | $121.4 million | $107.1 million |
| Diluted EPS | $0.40 | $0.33 | $1.28 | $1.12 |
| Operating margin | About 14% | About 13% | About 15% | About 15% |
- Q3 revenue grew 10% reported and 11% excluding foreign exchange; net income rose 22%. Nine-month revenue increased 11% and net income 13%.
- Q3 revenue by segment: Research $316.5 million, up 11%; Consulting $70.1 million, down 2%; Events $24.0 million, up 29%. Events growth included about $3.3 million from event timing. Nine-month segment revenue growth was 12% in Research, 3% in Consulting, and 19% in Events.
- Research contract value rose 13% year over year; client retention was 82% versus 83%, and wallet retention was 97% versus 99%. Consulting utilization fell to 58% from 64% in Q3, and backlog declined 9% year over year to $96.5 million.
- Research gross contribution margin increased to 70% from 68% in Q3. Consulting margin declined to 30% from 34%; Events margin rose to 30% from 24%, partly reflecting the event schedule.
Cash, debt, and liquidity
- Nine-month operating cash flow was $242.1 million, up 16% from $208.8 million. Capital expenditures were $27.8 million; cash used in investing was $27.8 million.
- Cash and cash equivalents were $374.5 million at September 30, 2013, versus $299.9 million at year-end 2012. About 64% of cash was held outside the United States.
- Total debt was $205.0 million: $146.3 million in term loans, $53.8 million on the revolver, and $5.0 million in other debt. The company reported $543.0 million of available revolver capacity. It was in compliance with credit covenants.
- The $600 million revolving facility and $150 million term loan mature in 2018; the company also has a $200 million interest-rate swap that fixes the base rate on the first $200 million of borrowings. The swap’s fair value was a $7.3 million liability.
- Share repurchases totaled $157.3 million for the nine months, purchasing 2.9 million shares. $83.6 million remained under the $500 million authorization.
- Current liabilities exceeded current assets by about $108.8 million; deferred revenue was $754.1 million. Management said liquidity was adequate for current plans, citing operating cash flow, cash balances, and borrowing capacity.
Changes, outlook, and risks
- Higher payroll and benefits, headcount, sales commissions, and conference costs increased expenses. Management attributed improved Q3 operating margin mainly to higher Research contribution and operating leverage.
- Consulting was the main area of weakness: lower utilization reduced quarterly revenue and contribution, while higher headcount added costs. Management reported a modest sequential improvement in Consulting backlog.
- Management provided no specific revenue or earnings guidance in the supplied filing. It cautioned that interim results may not indicate full-year results and that revenue, operating income, and cash flows fluctuate with event timing, bookings, economic conditions, foreign exchange, and other factors.
- The October 2013 U.S. government shutdown did not affect Q3 results; management did not anticipate a significant Q4 impact, but warned that failure to reach a broader fiscal agreement could materially affect Gartner and its customers.
- Ordinary-course litigation was not expected to have a material effect beyond amounts accrued. The filing noted $18.5 million of gross unrecognized tax benefits and said $5.7 million could decrease within 12 months. The federal tax audit for 2008–2009 closed without material adjustment.
- Goodwill impairment testing using a qualitative assessment found reporting-unit fair values exceeded carrying amounts. Management highlighted estimation uncertainty in revenue recognition, receivable allowances, goodwill, taxes, and stock-based compensation.
Important facts for investors to verify
- Whether Research contract-value growth and retention trends persist, particularly given lower client and wallet retention.
- Whether Consulting utilization, margins, and backlog recover from year-earlier levels.
- How much Events growth reflects sustainable demand versus event timing, launches, and venue changes.
- Whether cash generation supports continued repurchases while maintaining liquidity and compliance with debt covenants.
- Potential exposure to foreign-exchange movements, interest rates on borrowings beyond the $200 million hedge, and unresolved U.S. fiscal-policy risks.