Gartner, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Gartner provides information technology research and advisory services through Research, Consulting, and Events.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $471.2 million | $446.7 million; up 5% reported, 12% excluding foreign-exchange impact |
| Operating income | $48.7 million; 10% of revenue | $59.2 million; 13% of revenue |
| Net income | $28.4 million | $37.7 million; down 25% |
| Diluted EPS | $0.32 | $0.40; down 20% |
| Operating cash flow | $5.7 million | $16.5 million |
| Cash and cash equivalents | $281.7 million at March 31 | $365.3 million at December 31, 2014 |
| Total debt | $665.0 million | $405.0 million at December 31, 2014 |
Revenue by segment: Research $381.1 million, up 9% reported (15% excluding FX); Consulting $76.8 million, down 9% reported; Events $13.3 million, down 7% reported. Research contract value grew 11% reported (15% excluding FX), with 85% client retention and 106% wallet retention. Consulting backlog was $101.4 million, down 9%; Events attendance rose 20% to 4,065.
Cash used in investing was $11.6 million, primarily capital expenditures. Financing used $54.4 million, including $324.0 million of share repurchases, partly offset by net borrowing proceeds. Foreign-exchange movements reduced reported cash by $23.3 million. About 96% of cash was held outside the U.S. Current assets were $1,000.6 million versus current liabilities of $1,420.7 million; stockholders’ equity was a deficit of $139.5 million.
Material changes and management commentary
- Research growth was offset by reported declines in Consulting and Events. Consulting’s contract-optimization business had an unusually strong Q1 2014 and returned to its historical range; core Consulting revenue increased 5% excluding FX.
- Operating income fell 18%, as higher payroll, sales commissions, headcount, and acquisition-related charges outweighed revenue growth. SG&A rose 12% reported; cost of services and product development rose 4%.
- Interest expense increased 55% with additional revolver borrowings. The effective tax rate rose to 35.9% from 33.4%, primarily reflecting jurisdictional income mix and nondeductible expenses.
- Gartner repurchased 4.1 million shares in the quarter at an average $81.83 per share. On May 5, 2015, the board authorized a new $1.2 billion repurchase program after the prior $800 million authorization was fully used; future purchases may be funded with cash and borrowings.
Liquidity, outlook, and risks
Management said liquidity was adequate for current plans, citing $281.7 million in cash and $831.8 million of available revolver capacity. Debt outstanding comprised $395 million of term loans and $265 million of revolver borrowings, plus $5 million of other debt. The company reported compliance with credit covenants. Interest-rate swaps fixed the base-rate exposure on the first $400 million of borrowings; debt above that amount remained exposed to floating rates.
The filing gives no specific revenue or earnings guidance. Management cautioned that Q1 results may not indicate full-year performance and noted variability from event timing, new business, client and service mix, economic conditions, competition, currency movements, and incentive payments. Currency was a significant headwind to reported revenue and cash; a 10% currency move was estimated to change the U.S.-dollar value of foreign-currency cash by approximately $27 million. Legal proceedings and indemnifications were described as ordinary-course matters with no material expected exposure beyond accrued amounts. The company continued evaluating the forthcoming revenue-recognition standard; adoption was then expected January 1, 2017, subject to a proposed deferral.
Important facts for investors to verify
- Whether Research contract-value growth and retention continue, and whether Consulting backlog and segment margins stabilize.
- Whether reported revenue and cash-flow trends improve as currency effects, operating costs, and working capital fluctuate.
- How additional debt and the $1.2 billion repurchase authorization affect leverage, liquidity, and share count.
- Whether foreign-exchange and floating-rate exposures, tax uncertainties, and acquisition-related costs develop materially differently from current estimates.