Gartner, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise noted. Gartner provides IT research and advisory services through Research, Consulting, and Events. Figures below are in millions, except per-share data and percentages.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $406.8 | $369.2 | +10% (+11% excluding unfavorable FX) |
| Operating income | $54.0 | $53.6 | +1% |
| Operating margin | 13.3% | 14.5% | Down about 1.2 percentage points |
| Net income | $36.7 | $34.2 | +7% |
| Diluted EPS | $0.38 | $0.36 | +6% |
| Cash from operations | $19.7 | $18.7 | +$1.0 |
| Capital expenditures | $9.6 | $7.1 | +$2.5 |
Net margin was approximately 9.0%, versus 9.3% a year earlier. Cost of services and product development was 40% of revenue in both periods. SG&A rose 11%, mainly from higher payroll, commissions, and headcount; the company said added staffing, including a 13% increase in quota-bearing sales associates, weighed on operating margin. The lower effective tax rate—29.2% versus 32.1%—included approximately $1.5 million of benefits from the American Taxpayer Relief Act.
Segments and material changes
- Research: Revenue increased 13% to $310.3 million; gross contribution rose 14% to $215.2 million, with margin steady at 69%. Contract value grew 14% to $1.269 billion. Client retention was 82%, unchanged; wallet retention eased to 98% from 99%.
- Consulting: Revenue fell 3% to $72.6 million; gross contribution declined 18% to $22.5 million and margin fell to 31% from 37%. Utilization dropped to 65% from 70%, while backlog increased 2% to $97.5 million. Management cited weaker strategic advisory and contract optimization revenue, as well as lower utilization.
- Events: Revenue grew 19% to $23.8 million, but gross contribution fell 10% to $7.1 million and margin declined to 30% from 39%. Two events shifted into Q1 contributed about $2.2 million of the increase; higher costs, including upgraded or larger venues, pressured contribution.
Operating income grew only modestly despite revenue growth, reflecting increased operating costs and weaker Consulting and Events contributions. Other income was $0.2 million, versus a $1.0 million expense in Q1 2012, primarily reflecting foreign currency gains and losses.
Cash, debt, and liquidity
Cash and equivalents were $269.1 million at March 31, 2013, down from $299.9 million at year-end. Operating cash flow was $19.7 million; investing used $9.6 million and financing used $36.9 million. Financing included $48.5 million of share repurchases and debt refinancing activity. Cash was also reduced by a $3.9 million foreign-exchange impact. The filing states that 62% of cash was held outside the United States.
Total debt was $205.0 million: $150.0 million of term loans, $50.0 million drawn on the revolver, and $5.0 million of other debt. Gartner refinanced in March with a five-year $150 million term loan and $600 million revolving facility, plus a conditional $250 million expansion feature. Revolver availability was $546.7 million. A swap fixed the base rate on the first $200 million of borrowings at 2.26%; the effective annual rate on those borrowings, including margin, was 3.64%. Gartner reported compliance with all loan covenants and said liquidity was adequate for anticipated needs.
Current assets were $875.0 million and current liabilities $975.1 million; deferred revenue was $736.7 million. The company had a $500 million repurchase authorization, with approximately $186.6 million remaining at quarter-end, and repurchased 976,943 shares for $48.5 million during the quarter.
Outlook, risks, and unusual items
- The filing provides no specific numerical full-year revenue or earnings guidance. Management said current liquidity was adequate, while cautioning that Q1 results may not indicate results for the rest of 2013.
- Management identified business variability from event timing, new business, customer and product mix, economic conditions, foreign exchange, competition, and performance compensation. Events revenue comparisons are affected by events shifted between quarters.
- Market risks include floating-rate exposure on borrowings above the $200 million hedged amount and foreign-currency translation and transaction risk. A 25-basis-point rate change was estimated to alter annual interest expense by about $1.4 million on additional revolver capacity, excluding the expansion feature. A 10% move in major currencies could change reported cash by approximately $12 million.
- The IRS was auditing 2008 and 2009 federal returns and had proposed adjustments; Gartner expected settlement in 2013 and did not expect a material adverse effect. Gross unrecognized tax benefits were $18.1 million; approximately $3.5 million could decrease within 12 months.
- Gartner reported ordinary-course legal proceedings but did not expect liabilities beyond amounts accrued to materially affect its financial position, cash flows, or results. It reported no indemnification agreements expected to require material payments.
- Other notable items included $0.3 million of debt-cost write-offs from refinancing, $3.6 million of new debt issuance costs, and $0.1 million of acquisition and integration charges. The Stamford headquarters renovation was substantially complete by April 2013.
Most important facts for investors to verify
- Whether Research contract-value growth converts into sustained revenue growth, and whether retention metrics remain stable.
- Whether Consulting utilization and Events margins recover; assess the impact of event timing on reported growth.
- Cash-flow conversion, working-capital movements, planned repurchases, and the use of available credit capacity.
- Debt covenant headroom, floating-rate exposure beyond the swap hedge, and the effect of FX movements on cash and results.
- Resolution of the IRS audit and developments in unrecognized tax benefits and other contingencies.
- Whether higher staffing and other operating costs translate into revenue growth without further margin pressure.