Gartner, Inc. — FY 2016 Form 10-K
Business context and reporting period: Gartner provides IT research and advisory services through Research, Consulting and Events. This annual report covers the fiscal year ended December 31, 2016; it is not a standalone fourth-quarter filing. Gartner reported 11,122 client enterprises and 8,813 employees at year-end.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $2.445 billion | $2.163 billion | +13% reported; +14% excluding foreign exchange |
| Operating income | $305.1 million | $288.0 million | +6% |
| Net income | $193.6 million | $175.6 million | +10% |
| Diluted EPS | $2.31 | $2.06 | +12% |
| Cash from operations | $365.6 million | $345.6 million | +6% |
| Cash and cash equivalents, year-end | $474.2 million | $373.0 million | +$101.3 million |
Operating margin was reported as 12% versus 13% in 2015. The effective tax rate fell to 32.9% from 35.5%. Early adoption of ASU 2016-09 reduced 2016 tax expense by $10.0 million, adding $0.12 to EPS and $10.0 million to operating cash flow.
At December 31, 2016, gross borrowings were $702.5 million ($694.4 million net of financing fees), including $585.0 million in term loans and $115.0 million drawn on the revolver. Cash was $474.2 million, and $1.1 billion of revolver capacity remained available. Current assets were $1.343 billion and current liabilities were $1.460 billion, including $989.5 million of deferred revenue. The company reported $60.9 million of stockholders’ equity, versus a $132.4 million deficit a year earlier.
Cash used in investing was $84.0 million, including $49.9 million of capital expenditures and $34.2 million for acquisitions. Financing activities used $174.7 million, including $125.0 million of debt payments and fees and $59.0 million of share repurchases.
Segments and changes versus prior year
- Research: Revenue rose 16% to $1.830 billion; contribution margin remained 69%. Contract value reached $1.93 billion, up 9% reported and 14% excluding foreign exchange. Client retention was 84%; wallet retention was 104%.
- Consulting: Revenue increased 6% to $346.2 million, but contribution margin declined to 31% from 33%. Year-end backlog fell 12% to $103.8 million, partly reflecting a large contract booked in 2015; management said backlog was about four months of forward work.
- Events: Revenue increased 7% to $268.6 million; contribution margin declined to 51% from 52%. Gartner held 66 events, with attendance up 4% to 54,602.
Research generated 75% of revenue, up from 73% in 2015. Operating expenses rose with headcount and investment; acquisition and integration charges increased to $42.6 million from $26.2 million. Diluted weighted-average shares fell about 1%. Fourth-quarter 2016 revenue was $703.2 million, operating income $108.7 million, net income $66.5 million and diluted EPS $0.79; fourth-quarter 2015 diluted EPS was $0.78.
Outlook, significant events and risks
- CEB acquisition: In January 2017 Gartner agreed to acquire CEB for approximately $2.6 billion in cash and stock, including about $1.8 billion cash and $0.8 billion in Gartner stock, and to assume and refinance about $0.9 billion of CEB debt. Closing was expected in the first half of 2017, subject to shareholder approval and customary conditions. Gartner had financing commitments totaling $2.275 billion and expected the transaction to materially increase debt. The merger agreement has no financing condition; failure to close could trigger a $125 million reverse termination fee in specified circumstances. Integration and realization of synergies remain uncertain.
- Management described continued investment in staff and growth, and strong subscription-driven operating cash flow. The filing provides no specific 2017 financial guidance.
- Principal risks include subscription renewal and new-sales performance, competition and pricing pressure, economic weakness, consulting demand and utilization, event attendance and disruptions, foreign-exchange movements, cyber and privacy threats, personnel retention, and acquisition integration.
- Gartner identified a material weakness in certain IT general controls over a report-writing application during 2016. Management said it implemented and retrospectively operated controls to remediate the weakness by year-end; management and KPMG concluded internal control over financial reporting was effective as of December 31, 2016. No financial-statement misstatements resulted.
- Other items to monitor include $340 million of undistributed foreign earnings intended for reinvestment (estimated tax if not indefinitely reinvested: $69 million), $37.1 million of unrecognized tax benefits, and $315.2 million of operating lease commitments. The company said ordinary-course legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether the CEB transaction closed on the expected terms and timetable, and the resulting debt, financing costs, dilution and realized synergies.
- Whether Research contract value, client retention and wallet retention continue to support subscription revenue growth.
- Whether Consulting backlog and contribution margin recover, and whether Events margins stabilize.
- How much of 2016 earnings and cash-flow growth reflects the $10 million ASU 2016-09 benefit rather than underlying operations.
- Whether the remediated IT controls remain effective and whether tax, foreign-currency and cyber/privacy risks materially affect results.