IT

Gartner, Inc. 10-Q Summary: Quarter Ended September 30, 2003

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2003, and the nine-month period ended on the same date. Gartner, Inc. provides research, consulting, and events services to the technology sector. The company changed its fiscal year-end from September 30 to December 31 effective January 1, 2003, resulting in a transitional period in late 2002. The company operates in a competitive environment heavily influenced by global economic conditions and IT spending trends.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 11% in the quarter and 7% year-to-date compared to 2002. Excluding foreign currency benefits, the decline was 13% for the quarter and 10% year-to-date.
  • Research: Down 6% (quarter) and 5% (9 months) due to weak IT spending.
  • Consulting: Down 21% (quarter) and 12% (9 months) driven by lower billable headcount and utilization.
  • Events: Up 6% (quarter) and 3% (9 months) despite fewer events, due to higher average revenue per event.
• Profitability: Operating income dropped 52% in the quarter and 41% year-to-date. Net income fell 65% in the quarter and 43% year-to-date.
• Restructuring: The company recorded $5.4 million in "Other Charges" for the nine months ended September 30, 2003, related to workforce reductions (92 employees). This compares to $17.2 million in similar charges in the prior year period.
• Investment Gains: A $5.5 million gain on investments was recorded in the second quarter of 2003 from an insurance recovery related to a prior business sale, partially offsetting operating declines.

Guidance, Outlook, and Risks

• Subsequent Event (Debt Conversion): On October 9, 2003, the company converted $300 million of 6% convertible subordinated notes (plus accrued interest) into approximately 49.4 million shares of Class A Common Stock. This transaction eliminated the debt obligation and increased stockholders' equity by approximately $365.2 million.
• Liquidity: Cash provided by operating activities was $115.9 million for the nine months ended September 30, 2003. The company has a $200 million revolving credit facility with no outstanding balance; borrowing availability was $46.9 million prior to the debt conversion and is expected to be $200 million post-conversion.
• Stock Repurchases: The company repurchased $32.4 million of stock during the nine-month period. The total authorization for the program was increased to $200 million in July 2003.
• Risks: Management cites economic downturns, constrained IT spending, and competitive pressures as primary risks. The company notes that quarterly results may fluctuate due to the timing of contract executions and events, which are often concentrated in the fourth quarter.

Key Facts for Investor Verification

• Debt Elimination: Verify the impact of the October 2003 conversion of $368 million in convertible debt to equity on future interest expense and capital structure.
• Consulting Utilization: Monitor the recovery of consulting backlog and utilization rates, which declined significantly (backlog down 14% year-over-year).
• Contract Value: Research contract value decreased 5% year-over-year to $469.6 million, though it increased sequentially from the prior quarter.
• Restructuring Costs: Confirm the completion of payments for the $5.4 million workforce reduction charge, expected by the end of Q1 2004.
• Pro Forma EPS: Note that if stock-based compensation were calculated under SFAS No. 123 (fair value method), diluted EPS for the nine months ended September 30, 2003, would have been $0.05 instead of the reported $0.21.