GARTNER INC quarterly report, Q1 FY2015

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

MetricQ1 2015Q1 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.