Gartner, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2010. Figures are unaudited; dollar amounts below are in millions unless stated otherwise. Gartner provides IT research, consulting, and events. Results include AMR Research and Burton Group, acquired in December 2009; the 2009 comparison excludes those businesses.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $314.2 | $270.0 | $610.0 | $543.5 |
| Operating income | $34.2 | $30.8 | $63.4 | $65.2 |
| Operating margin | 10.9% | 11.4% (calculated) | 10.4% | 12.0% |
| Net income | $20.1 | $17.2 | $39.5 | $37.2 |
| Diluted EPS | $0.20 | $0.18 | $0.40 | $0.39 |
| Operating cash flow | Not separately stated | Not separately stated | $61.6 | $62.5 |
Q2 revenue rose 16%, operating income 11%, and net income 17% year over year. First-half revenue rose 12% (10% excluding favorable currency effects), while operating income declined 3% and net income increased 6%. The six-month effective tax rate was 31.8%, versus 32.0%; Q2 rates were 33.9% and 32.9%, respectively.
Q2 segment revenue and year-over-year growth: Research $209.1 million (+14%), Consulting $75.8 million (+9%), and Events $29.3 million (+75%). Segment contribution margins were 65%, 42%, and 39%, respectively. Events growth was substantially affected by event timing; on a comparable set of 16 events, revenue increased 23%.
Cash, debt, and liquidity
- Cash and equivalents were $122.4 million at June 30, up from $116.6 million at year-end. More than 90% of cash was held outside the United States.
- First-half operating cash flow was $61.6 million; investing used $19.8 million, including $12.2 million for acquisition payments, and financing used $28.3 million. Treasury-share purchases used $75.1 million.
- Total debt was $357.0 million: $103.5 million on the original term loan, $62.5 million on the 2008 term loan, and $191.0 million on the revolver. Revolver availability was approximately $108.0 million. The company reported compliance with financial covenants.
- Term loans and revolving borrowings are due by January 31, 2012, subject to scheduled term-loan repayments. The company stated existing cash, expected operating cash flow, and borrowing capacity should meet foreseeable needs.
Material changes, outlook, and risks
- Research contract value was $872.2 million, up 19% year over year, or 14% excluding favorable currency effects. Client retention was 81% and wallet retention 93%, up 4 and 7 percentage points. Consulting backlog increased 15% to $93.6 million.
- Acquisition-related amortization and $5.8 million of first-half acquisition and integration charges contributed to lower first-half operating income. Management noted that the acquisitions accounted for part of reported revenue growth; the 2009 comparison does not include their results.
- No specific earnings or revenue guidance is provided. Management cautioned that interim results may not indicate full-year performance and that event timing, demand, currency movements, competition, and other factors can cause fluctuations.
- The board approved a new $500 million share-repurchase program on August 5, 2010, after quarter-end. Repurchases may be funded by operating cash flow and credit-facility borrowings. The prior program had $3.5 million remaining at June 30.
- The company renewed its Stamford headquarters lease for a 15-year term beginning after renovations are completed or June 1, 2012, whichever occurs first. Minimum lease payments are approximately $61 million; the landlord may provide up to $25 million for renovations.
- Risks include floating-rate exposure on the unhedged 2008 term loan and revolver, foreign-exchange exposure, uncertain tax positions, and the ongoing IRS audit of 2007. Gross unrecognized tax benefits were $14.0 million. Management said ordinary-course litigation and indemnification matters were not expected to have a material effect.
Key facts for investors to verify
- How much growth reflects underlying business performance versus acquired revenue and favorable currency effects.
- Whether event revenue and margins remain strong when event timing normalizes.
- Progress in operating margins, especially given lower first-half operating income and acquisition-related costs.
- Debt repayment, covenant headroom, and funding plans for the $500 million repurchase authorization.
- Outcomes of the IRS audit and other tax matters, and the eventual costs and timing of the headquarters renovation and lease.