Gartner, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Gartner is a global IT research and advisory company with Research, Consulting, and Events segments. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $446.0m (+12%) | $397.5m | $852.8m (+11%) | $766.7m |
| Operating income | $74.0m (+18%) | $62.7m | $128.0m (+10%) | $116.3m |
| Operating margin | 17% | 16% | 15% | 15% |
| Net income | $46.5m (+12%) | $41.5m | $83.2m (+10%) | $75.7m |
| Diluted EPS | $0.49 | $0.43 | $0.87 | $0.79 |
| Operating cash flow | — | $140.3m | $99.5m |
Q2 revenue grew 13% excluding foreign-exchange effects; first-half growth was 12% on that basis. Q2 diluted EPS rose 14%, aided by higher earnings and slightly fewer diluted weighted-average shares. First-half operating cash flow increased 41%. Capital expenditures were $19.6m, implying cash flow after capital expenditures of $120.7m, versus $78.8m in the prior-year first half.
Segments and operating trends
- Research: Q2 revenue increased 12% to $311.2m; gross contribution margin rose to 69% from 68%. Contract value grew 13% to $1.293bn. Client retention was 82% (down 1 point) and wallet retention 97% (down 2 points).
- Consulting: Q2 revenue increased 12% to $85.9m, and contribution margin improved to 39% from 36%. First-half revenue rose 5%, but margin fell to 35% from 37%, reflecting lower utilization and added headcount. Backlog was $94.0m, up 1%.
- Events: Q2 revenue increased 15% to $48.9m; margin declined 1 point to 47%. First-half revenue grew 16%, while margin declined 3 points to 42%. Attendance was slightly lower, with more exhibitors; new events and upgraded or larger venues affected margins.
Consolidated cost of services rose 10% in Q2, below revenue growth; SG&A increased 12%, in line with revenue, largely due to payroll, commissions, and higher headcount. The effective tax rate increased to 35.0% from 31.4% in Q2 and to 32.6% from 31.7% for the first half, primarily reflecting jurisdictional income mix and prior-year state tax credits.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $333.4m at June 30, up from $299.9m at year-end; about 60% was held outside the U.S.
- Total debt was $205.0m, including $148.1m of term loans and $51.9m drawn on the revolver, plus $5.0m of other debt. The company reported $544.9m of remaining revolver capacity and was in compliance with its covenants.
- The March 2013 refinancing established a five-year $150m term loan and $600m revolving facility, with a potential $250m increase subject to conditions. A $200m interest-rate swap fixes the base rate on that amount; effective debt interest rate was 3.64% at quarter-end.
- Current assets were $923.4m versus current liabilities of $1.015bn. Current liabilities include $749.2m of deferred revenue. The company said expected operating cash generation, cash balances, and borrowing capacity were adequate for anticipated needs.
- Gartner repurchased 1.8m shares for $98.0m in the first half. $142.8m remained under its $500m repurchase authorization.
Outlook, risks, and notable items
The filing provides no specific earnings or revenue guidance. Management described a strategy centered on research quality, differentiated offerings, sales capacity, client retention, and operational effectiveness, and cautioned that interim results may not predict the remainder of 2013. Results may fluctuate with event timing, new business, economic conditions, demand, foreign exchange, competition, and incentive compensation.
- Research retention measures eased year over year, and Consulting’s first-half margin and utilization were lower; these are relevant indicators to monitor alongside contract value and backlog.
- Debt is floating-rate, although the swap hedges the first $200m of borrowings. Foreign currency movements affect reported results and cash; a 10% move in major currencies could change reported cash by approximately $16m.
- Gross unrecognized tax benefits were $18.4m; the company said $3.7m could decrease within 12 months. The IRS closed its 2008–2009 audit in July 2013 without material adjustment.
- Ordinary-course litigation and indemnification matters were disclosed; management did not expect excess legal exposure or indemnification obligations to have a material effect. The filing reports no material changes in internal controls.
Most important facts for investors to verify
- Whether Research contract-value growth and retention trends persist.
- Whether Consulting utilization, margins, and backlog improve, and whether Events margins recover as new events mature.
- Cash conversion and working-capital trends, including collections, deferred revenue, and bonus and commission payments.
- Debt, covenant headroom, interest-rate exposure, and the pace and funding of share repurchases.
- Tax-rate assumptions, foreign-exchange effects, and event scheduling that could affect year-to-year comparisons.