Gartner, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. Gartner provides IT research and advisory services through Research, Consulting, and Events.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $369.2 million | $329.6 million | +12% (+13% excluding FX) |
| Operating income | $53.6 million | $45.8 million | +17% |
| Operating margin | 14.5% | 13.9% | +0.6 percentage points |
| Net income | $34.2 million | $29.2 million | +17% |
| Diluted EPS | $0.36 | $0.29 | +24% |
| Operating cash flow | $18.7 million | $(24.7) million | Improved $43.3 million |
| Cash and cash equivalents | $139.0 million | $142.7 million at Dec. 31, 2011 | Down $3.8 million |
| Total debt | $240.3 million | $200.0 million at Dec. 31, 2011 | Up $40.3 million |
Research revenue was $274.6 million (+13%), Consulting $74.6 million (+6%), and Events $20.0 million (+29%). Segment gross contribution margins were 69% for Research, 37% for Consulting, and 39% for Events. Consolidated cost of services and product development remained 40% of revenue.
Cash generation improved mainly through stronger receivable collections and other working-capital changes, higher net income, and lower bonus and severance payments; higher income-tax payments partly offset the improvement. Investing cash use was $7.1 million, primarily capital expenditures. Financing used $17.6 million, including $77.2 million of share repurchases, partly offset by debt proceeds and stock-related proceeds.
Balance sheet, debt, and liquidity
At March 31, 2012, current assets were $676.8 million and current liabilities $911.1 million; deferred revenue was $650.7 million. Debt comprised a $172.5 million term loan and $67.8 million of revolver and other borrowings. The company reported $329.3 million of available revolver capacity, a 3.43% effective annual interest rate on total debt, and compliance with its credit covenants. Approximately 90% of cash was held outside the United States.
Management said available cash, expected operating cash flows, and borrowing capacity were adequate for anticipated needs, including the proposed acquisition described below. The $500 million repurchase authorization had $237.5 million remaining.
Material changes and management commentary
- Revenue growth was broad-based, led by Research and Events. Research contract value rose 13% to $1.111 billion; client retention remained 82% and wallet retention 99%.
- Consulting backlog increased 10% to $95.5 million; utilization improved to 70% from 67%. Events held 13 events versus 11 a year earlier, including two events shifted into Q1. Management attributed about $3.0 million of Events’ revenue increase to those timing shifts.
- Operating expenses increased with higher payroll, headcount, sales commissions, and event-related costs. Sales associates with quotas increased 18%. Lower amortization expense, as certain intangibles became fully amortized, also benefited operating results.
- Share repurchases totaled approximately 1.98 million shares at an average $38.98 per share. The lower weighted-average share count contributed to EPS growth.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management cautioned that first-quarter results may not indicate results for the remainder of 2012 and noted that event timing, new business, client demand, competition, foreign exchange, and product timing can make results fluctuate.
- On April 19, 2012, Gartner agreed to make a cash takeover offer for Ideas International at AUD 1.40 per share, with aggregate consideration of AUD 20 million (approximately US$20.7 million). Completion depended on conditions including tenders of at least 90% of outstanding shares; closing was expected in June 2012 if conditions were met.
- The company was disputing proposed adjustments in its IRS examination of tax year 2007; IRS audits of 2008 and 2009 had not produced proposed material adjustments. Gross unrecognized tax benefits were $19.0 million, and the company said up to $3.2 million could decrease within 12 months. Management did not expect the audits’ ultimate resolution to have a material adverse effect, while acknowledging uncertainty.
- Ordinary-course litigation and indemnification obligations were disclosed; management did not expect material adverse effects. Letters of credit and related guarantees totaled $6.6 million.
- Interest-rate exposure remained on debt above the $200 million hedged amount. The $200 million swap fixed the base rate at 2.26%; a 25-basis-point rate move would change annual pre-tax interest expense on additional revolver capacity by approximately $0.8 million. A 10% move in major currencies could change reported cash by approximately $8.0 million.
- Reported net income included $10.9 million of stock-based compensation expense. The filing also notes estimation uncertainty in receivables, goodwill, taxes, compensation, and other accruals. No goodwill impairment was reported; the latest annual assessment, as of September 2011, found reporting-unit fair values substantially above carrying values.
Key facts for investors to verify
- Whether Research contract value and retention trends continue, and whether growth translates into durable revenue and operating-margin gains.
- How much Events growth reflects shifted event timing versus underlying demand, attendance, and pricing.
- Whether operating cash flow remains positive after working-capital timing effects, and how repurchases and acquisition spending affect cash and debt.
- Completion, funding, and integration of the Ideas International offer, subject to its stated conditions.
- Developments in the IRS disputes and audits, interest-rate and currency exposure, and any changes in credit-covenant compliance.