Gartner, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; financial statements are unaudited. Gartner provides IT research and advisory services through Research, Consulting, and Events.
Financial results
All figures are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $329.6 | $295.8 | +11% reported; approximately +10% excluding favorable currency effects |
| Operating income | $45.8 | $29.2 | +57% |
| Operating margin | 14% | 10% | +4 percentage points |
| Net income | $29.2 | $19.4 | +50% |
| Diluted EPS | $0.29 | $0.19 | +53% |
| Cash from operating activities | $(24.7) | $(8.0) | Outflow increased $16.7 |
- Segments: Research revenue rose 16% to $243.4 million; gross contribution increased 19% to $164.5 million and margin improved to 68% from 66%. Research contract value grew 14% to $983.5 million; client retention was 82% and wallet retention 99%.
- Consulting revenue fell 1% to $70.6 million; gross contribution declined 10% to $25.5 million and margin fell to 36% from 40%. Backlog decreased 2% to $87.1 million.
- Events revenue rose 15% to $15.5 million; attendance increased 29%. Segment contribution margin declined to 37% from 39%, partly because a large event shifted to Q2 2011.
- Margins and costs: Cost of services and product development was 40% of revenue versus 42% a year earlier. SG&A rose 9%, mainly from payroll, commissions, and sales-force investment. Acquisition and integration charges were zero versus $3.5 million in Q1 2010.
- Liquidity and cash flow: Cash was $109.0 million at March 31, down from $120.2 million at year-end. Cash used in investing was $3.7 million; financing provided $17.8 million. Management attributed weaker operating cash flow primarily to approximately $22 million of additional bonus and commission payments, alongside timing and accounting reclassification of excess stock-compensation tax benefits.
- Debt: Total debt was $255.2 million, including $195.0 million of term loans and $60.2 million of revolver and other borrowings. The company reported $336.9 million of available revolver capacity, $3.7 million of letters of credit and compliance with debt covenants. A $200 million interest-rate swap fixes the base rate on that portion of borrowings; debt beyond the hedged amount remains exposed to rate changes.
- Capital returns: Gartner repurchased 1.41 million shares for $51.9 million at an average $36.78 per share. $452.1 million remained under the $500 million authorization.
Changes, outlook, and risks
- Management reported broad growth in Research and Events, while Consulting remained softer. It said the Research margin benefit reflected operating leverage. Consulting margin pressure reflected added headcount and weaker contract-optimization revenue.
- Management stated that cash, expected operating cash generation, and borrowing capacity should cover expected short- and foreseeable long-term operating needs. The filing provides no specific revenue or earnings guidance and cautions that Q1 results may not indicate full-year results.
- Quarterly results can fluctuate with event timing, new business, segment mix, foreign exchange, demand, competition, and product-development timing. The NA Summit event moved from Q1 to Q2 2011; event timing also affected segment margins.
- The effective tax rate increased to 31.5% from 29.6%, primarily due to a change in the estimated geographic mix of pretax income. The IRS disputed certain proposed adjustments for 2007 and planned audits of 2008 and 2009; Gartner said resolution was uncertain but did not expect a material adverse effect.
- Other income in Q1 2010 included a $2.4 million insurance-settlement gain; Q1 2011 had a $0.4 million net other expense. The company reported no goodwill impairment, no material indemnification exposure, and no material change in internal control over financial reporting.
Investor verification priorities
- Track Research contract value, wallet retention, and client retention to assess whether subscription momentum persists.
- Monitor Consulting backlog, utilization, and margins for evidence of improving demand and productivity.
- Reconcile operating cash flow with earnings, bonus and commission timing, and stock-compensation tax-benefit classification.
- Review debt balances, available revolver capacity, covenant compliance, and interest-rate exposure as borrowings change.
- Follow the IRS examinations and any effect of tax settlements on cash, earnings, or recorded uncertain tax positions.