Gartner, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Gartner provides IT research and advisory services through Research, Consulting, and Events. Financial statements are unaudited.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $397.5 million | $365.5 million | $766.7 million | $695.1 million |
| Operating income | $62.7 million | $51.6 million | $116.3 million | $97.3 million |
| Net income | $41.5 million | $32.2 million | $75.7 million | $61.4 million |
| Diluted EPS | $0.43 | $0.32 | $0.79 | $0.62 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $99.5 million | $63.9 million |
Quarterly revenue increased 9% (12% excluding unfavorable foreign exchange); first-half revenue rose 10% (12% excluding foreign exchange). Q2 operating margin was 16%, versus 14% a year earlier; first-half operating margin was 15%, versus 14%. Management attributed improved profitability mainly to stronger Research and Events contributions and Research operating leverage. Quarterly net income rose 29%; first-half net income rose 23%.
Research revenue grew 11% in Q2 and 12% in the first half. Research contract value increased 13% year over year (14% excluding foreign exchange); client retention was 83% and wallet retention 99%. Consulting revenue declined 2% in Q2 but increased 2% in the first half; backlog was down 2%. Events revenue rose 13% in Q2 and 18% in the first half, with higher attendance and contribution margins.
Cash, debt, and liquidity
- Cash and cash equivalents were $150.5 million at June 30, 2012, compared with $142.7 million at year-end 2011. About 90% of cash was held outside the United States.
- First-half operating cash flow was $99.5 million, up $35.5 million year over year, primarily reflecting higher net income, collections, and other working-capital changes.
- Investing cash outflow was $30.2 million, including $20.6 million of property and equipment additions and $9.5 million for the Ideas International acquisition. Financing cash outflow was $59.1 million, including $84.7 million of share repurchases.
- Debt outstanding under the credit agreement totaled $200 million: $165 million term loan and $35 million revolver. The effective annual rate was approximately 3.62%, including the interest-rate swap. The company reported $361.8 million of additional revolver capacity and compliance with its debt covenants.
- Current liabilities exceeded current assets at period end, largely reflecting deferred revenue; deferred revenue was $659.7 million, up from $611.6 million at December 31, 2011. Management stated liquidity was adequate for anticipated needs.
Material changes and unusual items
- On May 31, Gartner acquired Ideas International for $18.7 million in cash. Preliminary purchase accounting recorded $7.5 million of goodwill and $8.4 million of amortizable intangible assets, assigned to Research. The acquired business’s results were not material in the reported periods.
- Acquisition and integration charges were $1.2 million in Q2 and the first half; there were none in the comparable 2011 periods.
- Gartner repurchased 2.16 million shares for $84.7 million in the first half, at an average price of $39.12. $231 million remained under the $500 million authorization at June 30.
- The effective tax rate declined to 31.4% in Q2 from 33.1%, and to 31.7% for the first half from 32.4%, primarily due to state tax credits, partly offset by changes in the estimated geographic mix of income.
Outlook, risks, and contingencies
The filing provides no specific revenue or earnings guidance. Management said interim results may not indicate full-year results and described quarterly performance as subject to event timing, new business, segment mix, foreign exchange, demand, competition, and product-development timing. The company uses a $200 million interest-rate swap through September 2015; exposure remains on borrowings above the hedged amount. A 10% move in major currencies versus the U.S. dollar would change reported cash by approximately $9.1 million.
Gartner is disputing proposed adjustments from the IRS examination of its 2007 tax year; IRS audits of 2008 and 2009 had not resulted in material proposed adjustments at filing. Gross unrecognized tax benefits were $19.3 million, with $3.4 million reasonably possible to decrease within 12 months. Management did not expect these matters or ordinary-course litigation to have a material adverse effect, but outcomes are uncertain. The company reported no material indemnification obligations or off-balance-sheet arrangements.
Investor verification priorities
- Track Research contract value and retention measures, particularly wallet retention, and assess whether growth continues excluding foreign exchange.
- Monitor Consulting revenue and backlog after the Q2 decline, and the durability of Events growth and margins.
- Review cash conversion, receivables collections, capital spending, and the impact of ongoing headquarters renovation.
- Verify debt repayment, revolver usage, interest-rate exposure, covenant compliance, and the pace of share repurchases.
- Follow the final Ideas International purchase-price allocation and integration, and developments in the IRS audits and uncertain tax positions.