Gartner, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Unaudited results; amounts below are in U.S. dollars and generally shown in millions. Gartner provides IT research, consulting, and events through three segments.
Financial results and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $296.1 | $267.5 | $906.2 | $811.0 |
| Operating income | $32.8 | $27.5 | $96.2 | $92.7 |
| Operating margin | 11% | 10% | 11% | 11% |
| Net income | $20.1 | $20.1 | $59.6 | $57.2 |
| Diluted EPS | $0.20 | $0.21 | $0.60 | $0.59 |
| Operating cash flow | — | — | $126.4 | $117.6 |
- Q3 revenue rose 11% (about 12% excluding unfavorable currency effects); nine-month revenue increased 12% as reported. Net income was essentially unchanged in Q3, while diluted EPS declined a cent due to higher diluted share count. Nine-month net income grew 4%.
- Research revenue was $214.7 million in Q3, up 16%; Consulting was $65.4 million, essentially flat; Events was $16.0 million, also essentially flat. Nine-month segment revenue growth was 14% for Research, 4% for Consulting, and 22% for Events.
- Q3 Research contribution margin fell one point to 65%; Consulting improved one point to 37%; Events was unchanged at 37%. Nine-month margins were 65%, 40%, and 39%, respectively.
- Nine-month operating cash flow was $126.4 million; capital expenditures were $12.2 million, implying operating cash flow less capital expenditures of about $114.2 million. Cash and equivalents were $148.4 million at September 30, versus $116.6 million at year-end 2009; 90% of cash was held outside the U.S.
- Debt totaled $300.0 million ($248.5 million current and $51.5 million long-term), down from $329.0 million at year-end 2009. The revolver had $142.0 million of available capacity. Cash less debt was approximately negative $151.6 million. The company reported compliance with its debt covenants.
- Total assets were $1.236 billion and stockholders’ equity was $154.2 million. Current assets were $571.8 million and current liabilities $927.4 million; current liabilities include $496.3 million of deferred revenue.
Material changes and notable items
- Q3 and nine-month comparisons include AMR Research and Burton Group, acquired in December 2009; the 2009 comparative periods exclude them. The acquisitions contributed approximately $14 million of Q3 revenue growth and $40 million of nine-month growth, so reported growth is not wholly organic.
- Q3 acquisition and integration costs were $1.2 million; nine-month costs were $7.1 million. Amortization of acquired intangible assets also increased expense.
- Nine-month share repurchases used $76.5 million of cash. A new $500 million repurchase authorization was approved in August; the filing reported the full $500 million available under that new authorization at September 30.
- The effective tax rate rose to 31.7% in Q3 from 10.7% and to 31.8% for the nine months from 25.8%, largely reflecting discrete items and the estimated geographic mix of income. The 2009 periods included releases of tax reserves.
- Nine-month other income included a $2.4 million insurance recovery relating to a prior-period loss.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided. Management says cash from operations, existing cash, and available borrowing capacity are expected to be sufficient for short- and foreseeable long-term operating needs, while cautioning that interim results may not indicate full-year results.
- The credit agreement expires in January 2012. Gartner was exploring refinancing; refinancing could accelerate repayment and require recognition of some deferred swap losses and financing costs. Debt is floating-rate: management estimated a 25-basis-point rate change would affect annual pretax interest expense by approximately $1.1 million.
- Research contract value was $905.5 million, up 22% year over year; client retention was 82% and wallet retention 95%. Consulting backlog rose 11% to $94.0 million. Management noted event timing can cause quarterly fluctuations; Q3 included 14 events versus 15 a year earlier, while attendee count rose 10%.
- Gross unrecognized tax benefits were $14.5 million. The IRS had completed its examination of the 2007 federal return, but Gartner had not received the findings; the company believes reserves are adequate but cannot assure the ultimate outcome. Ordinary-course litigation was not expected by management to have a material effect beyond accrued amounts.
- A new 15-year Stamford headquarters lease provides up to $25 million for renovations and entails approximately $59 million of minimum lease payments. Certain state incentives depend on employment and investment thresholds.
- Management identified exposure to currency movements: a 10% change in major currencies could change the reported value of cash by approximately $10 million. Forward contracts had $82.5 million notional value and a net unrealized loss of about $0.4 million at quarter-end.
Most important facts for investors to verify
- How much reported revenue and contract-value growth is organic versus attributable to AMR Research and Burton Group, and whether retention and backlog trends persist.
- Refinancing progress and terms before the January 2012 credit-agreement maturity, including any resulting charges or covenant implications.
- Cash generation after repurchases and acquisition-related spending, and the intended pace and funding of the $500 million repurchase authorization.
- Whether the higher effective tax rate persists and how the IRS 2007 examination and other uncertain tax positions resolve.
- Quarterly event timing, foreign-exchange effects, and the assumptions underlying management’s liquidity assessment.