Gartner, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; financial statements are unaudited. Gartner provides IT research and advisory services through Research, Consulting, and Events.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $374.4 million | $345.8 million | $1,141.1 million | $1,040.9 million |
| Operating income | $49.8 million | $47.3 million | $166.0 million | $144.6 million |
| Net income | $31.4 million | $30.5 million | $107.1 million | $91.9 million |
| Diluted EPS | $0.33 | $0.31 | $1.12 | $0.92 |
- Q3 revenue increased 8% year over year, or 12% excluding unfavorable foreign exchange. Nine-month revenue grew 10%, or 12% excluding foreign exchange.
- Q3 operating margin was approximately 13.3% versus 13.7%; nine-month operating margin was approximately 14.6% versus 13.9%. Net margins were approximately 8.4% and 8.8% for Q3, and 9.4% and 8.8% for the nine-month periods, respectively.
- Research led growth: Q3 revenue rose 11% and nine-month revenue 12%; Q3 contract value increased 13% to $1,174.7 million. Consulting revenue rose 1% in Q3 and 2% for nine months. Events revenue declined 2% in Q3 but increased 13% for nine months.
- Operating cash flow for nine months was $208.8 million, up from $176.5 million. Cash at September 30 was $255.4 million, compared with $142.7 million at year-end 2011.
- Capital expenditures were $30.8 million; investing cash outflow was $41.1 million, including $10.3 million net cash paid for an acquisition. Financing cash outflow was $58.4 million, including $89.3 million of share repurchases.
Debt, liquidity, and balance sheet
- Debt totaled $200.0 million: $157.5 million term loan and $42.5 million revolver. The balance sheet classifies $80.0 million as current and $120.0 million as long-term. The facility matures in December 2015; the reported effective annual interest rate, including the swap, was 3.76%.
- Gartner reported more than $354 million of additional revolver capacity and stated that available cash, operating cash generation, and borrowing capacity were adequate for anticipated needs. Approximately 65% of cash was held outside the U.S.
- The company was in compliance with its credit agreement covenants. A $200 million interest-rate swap fixed the base rate on the first $200 million of borrowings; debt above that amount remains exposed to rate changes.
- Working capital, calculated from reported current assets less current liabilities, was negative $186.9 million, chiefly reflecting $682.6 million of deferred revenue.
Changes, outlook, and notable items
- Revenue growth and higher Research contribution drove nine-month operating income up 15% and net income up 17%. Q3 net income rose 3%; operating income rose 5%.
- Management attributed higher costs primarily to increased headcount, compensation, sales commissions, and travel. Sales headcount rose 15% year over year. Research cost leverage supported a one-point reduction in cost of services as a share of revenue.
- Q3 Events results were affected by two large events moving from Q3 2011 to Q4 2012. Management noted that event timing, demand, currency movements, and other factors can make quarterly results fluctuate and that interim results may not indicate full-year results.
- On May 31, 2012, Gartner acquired Ideas International for $18.8 million cash consideration. Its results were not material for the reported periods; the company recorded $2.1 million of acquisition and integration charges for nine months. Purchase-price allocations, including tax-related items, remained preliminary.
- No specific financial guidance was provided in the filing. Management said liquidity was adequate for current plans. The annual goodwill impairment assessment found reporting-unit fair values substantially above carrying values.
- Tax matters include a dispute over the 2007 IRS examination and ongoing IRS audits of 2008 and 2009. Gross unrecognized tax benefits were $20.0 million; the company said $4.8 million could decrease within 12 months. Management did not expect the audits to have a material adverse effect, while noting outcomes are uncertain.
- Ordinary-course litigation and indemnification matters were disclosed; management did not expect potential liabilities beyond accrued amounts to have a material effect. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Check Research contract-value growth alongside client retention of 83% and wallet retention of 99%, including the effect of foreign exchange.
- Assess whether Consulting’s 14% backlog growth converts to revenue and whether the Q3 Events decline was primarily timing-related as described.
- Review cash generation, negative working capital, debt repayment schedule, revolver availability, and the interest-rate exposure above the swap’s $200 million coverage.
- Track share repurchases: $89.3 million spent in the first nine months and $231 million remaining under the authorization at September 30, 2012.
- Follow resolution of the tax dispute and audits, the final Ideas International purchase-price allocation, and any changes in acquisition-related costs or impairment assumptions.