Gartner, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. Gartner provides IT research and advisory services through Research, Consulting, and Events. This unaudited quarterly report covers the three and six months ended June 30, 2011, compared with the corresponding 2010 periods. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $365.5 million | $314.2 million | $695.1 million | $610.0 million |
| Operating income | $51.6 million | $34.2 million | $97.3 million | $63.4 million |
| Net income | $32.2 million | $20.1 million | $61.4 million | $39.5 million |
| Diluted EPS | $0.32 | $0.20 | $0.62 | $0.40 |
| Operating margin | 14% | 11% | 14% | 10% |
- Q2 revenue rose 16% year over year (11% excluding favorable foreign-currency effects); first-half revenue increased 14% (11% excluding currency effects). Q2 net income increased 60%; first-half net income increased 55%.
- Q2 segment revenue: Research $250.0 million, up 20%; Consulting $78.0 million, up 3%; Events $37.6 million, up 28%. Research contract value was $1.007 billion, up 15%; client retention was 82% and wallet retention 100%.
- First-half cash from operations was $63.9 million, compared with $61.6 million. Investing used $9.5 million, chiefly capital expenditures; financing used $49.7 million, including $87.9 million of treasury-stock purchases. Cash increased to $125.3 million from $120.2 million at year-end.
- At June 30, cash was $125.3 million and total debt was $220.0 million ($55.0 million current and $165.0 million long-term). The company reported $367.0 million of available revolver capacity and compliance with credit covenants. Cash less debt was approximately negative $94.7 million. Approximately 88% of cash was held outside the U.S.
- Total assets were $1.296 billion and stockholders’ equity was $215.8 million. Current liabilities ($799.4 million) exceeded current assets ($625.6 million); deferred revenue was $572.1 million.
Material changes versus the prior comparable period
- Research and Events drove most of the revenue and contribution growth. Research gross contribution margin rose to 67% from 65%; Events rose to 46% from 39% in Q2.
- Consulting remained comparatively weak: Q2 revenue increased 3% reported but declined about 2% excluding currency effects. Its gross contribution margin fell to 37% from 42%, with utilization down to 64% from 71%. First-half consulting margin was also lower, at 37% versus 41%.
- Operating income benefited from higher Research and Events contributions and the absence of acquisition and integration charges recorded in 2010 ($2.3 million in Q2; $5.8 million in the first half). SG&A rose 17% in Q2 and 13% in the first half, primarily reflecting payroll, sales commissions, headcount investment, and currency effects.
- Interest expense declined as average debt outstanding was lower. First-half other expense was $1.0 million, versus $1.1 million of other income in 2010, which included a $2.4 million insurance-settlement gain.
- First-half share repurchases totaled 2.34 million shares for $87.9 million; $416.2 million remained under the $500 million authorization at June 30.
Outlook, commentary, risks, and unusual items
- Management said existing cash, operating cash generation, and revolver capacity should be sufficient for expected short- and foreseeable long-term needs. The filing provides no specific revenue or earnings guidance and cautions that interim results may not indicate full-year results.
- Results can fluctuate with event timing, new business, product demand, competition, currency movements, and other factors. The NA Summit event moved into Q2 2011 from Q1 in 2010, affecting the Events comparison; event attendance and average revenue also increased.
- Consulting’s lower utilization and margin, increased costs from hiring and sales investment, and dependence on subscription renewals and event attendance warrant monitoring. A 10% change in major foreign-exchange rates would change reported cash by approximately $7.5 million. A $200 million interest-rate swap hedged the base rate on the first $200 million of borrowings; borrowing above that amount remained exposed.
- The IRS disputes adjustments proposed for the 2007 tax year; audits of 2008 and 2009 were in early stages. Gross unrecognized tax benefits were $17.8 million. Management did not expect the ultimate outcome to materially adversely affect the company, while acknowledging uncertainty.
- Ordinary-course legal proceedings and indemnities were disclosed; management did not expect liabilities beyond accrued amounts to have a material effect. No goodwill impairment was recorded in the first half. Disclosure controls were assessed as effective, with no reported material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Research contract value, wallet retention, and revenue growth continue, and whether currency effects change materially.
- Whether Consulting utilization, backlog, and contribution margins recover after the reported declines.
- How much of Events’ growth reflects durable demand versus event timing, and whether attendance and pricing remain strong.
- Whether operating cash flow sustains earnings growth after bonus, commission, tax, and working-capital movements, while funding repurchases and debt obligations.
- Developments in the IRS disputes and audits, and any effect on tax expense, cash flow, or recorded tax liabilities.
- Debt levels, covenant compliance, interest-rate exposure, and the pace and terms of further share repurchases.