Gartner, Inc. — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; filed February 15, 2011. Gartner provides IT research, consulting and events services. The filing reports annual results, with quarterly data included; it does not present a standalone “2010 Q4” filing.
Financial performance
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Revenue | $1,288.5 million | $1,139.8 million | +13% |
| Operating income | $149.3 million | $134.5 million | +11% |
| Operating margin | 11.6% (reported as 12%) | 11.8% (reported as 12%) | Broadly flat |
| Net income | $96.3 million | $83.0 million | +16% |
| Diluted EPS | $0.96 | $0.85 | +13% |
| Cash from operations | $205.5 million | $161.9 million | +27% |
| Cash and cash equivalents | $120.2 million | $116.6 million | +$3.6 million |
| Debt outstanding at year-end | $220.2 million | $329.0 million | -$108.8 million |
Research revenue was $865.0 million (+15%), Consulting $302.1 million (+5%), and Events $121.3 million (+21%). Segment contribution margins were 65% for Research, 40% for Consulting and 46% for Events. These are segment contribution measures, not consolidated operating margins.
Fourth-quarter revenue was $382.3 million versus $328.8 million in Q4 2009; operating income was $53.1 million versus $41.7 million, and net income was $36.7 million versus $25.7 million.
Material changes and financial position
- Revenue grew across all three segments and geographic regions. Growth excluding foreign-exchange effects was also 13%. Acquisitions of AMR Research and Burton Group, completed in December 2009, contributed to the year-over-year comparison; the filing says they accounted for approximately 39% of the Research revenue increase.
- Research contract value reached a company record of $977.7 million, up 25%; client retention improved to 83% from 78%, and wallet retention to 98% from 87%.
- Events attendance rose 22% to 37,219, and its contribution margin improved five percentage points. Consulting backlog grew 11% to $100.8 million; utilization remained 68%.
- Operating cash flow increased $43.6 million. Investing cash use was $33.8 million, including $21.7 million of capital expenditures and $12.2 million of acquisition-related payments. Financing cash use was $171.6 million, including $99.8 million of share repurchases.
- In December 2010, Gartner refinanced its debt with a five-year $200 million term loan and a $400 million revolving facility. Year-end available revolver capacity was $376 million. The term loan and revolver carried annualized rates of 2.30% and 2.26%, respectively; a swap fixed the base rate on $200 million of borrowings.
- Stockholders’ equity was $187.1 million, compared with $112.5 million a year earlier. The company repurchased 3.9 million shares for approximately $99.8 million during 2010; $481.9 million remained under its $500 million authorization at year-end.
Outlook, risks and unusual items
The filing provides no specific numerical revenue or earnings guidance. Management said existing cash, expected operating cash flow and revolving-credit availability should meet expected short- and foreseeable long-term operating needs. It cited an improving economic environment and stronger sales effectiveness, while noting ongoing uncertainty in the recovery.
- Key risks include economic weakness affecting subscription renewals, consulting demand and event attendance; competition, including free online information; attracting and retaining skilled analysts and consultants; international and foreign-exchange exposure; and dependence on subscription renewals and non-recurring consulting projects.
- Government contract value and consulting backlog attributable to government clients was approximately $210 million at year-end. Government contracts may depend on appropriations and may be terminated for convenience.
- Debt covenants restrict certain actions, including additional borrowing, acquisitions, dividends and share repurchases. Gartner reported compliance at December 31, 2010. The company hedged the base interest rate on the first $200 million of borrowing, leaving exposure on additional debt.
- Unusual charges included $3.7 million of accelerated pre-tax expense related to termination of the prior credit arrangement and $7.9 million of acquisition and integration charges. The effective tax rate was 28.2% in both 2010 and 2009.
- The IRS completed its examination of the 2007 federal return and proposed adjustments Gartner disputes. The company said it had reserves it considered sufficient, while acknowledging the outcome was uncertain. Other ordinary-course litigation was not expected by management to have a material adverse effect.
- A subsequent event: ValueAct announced a planned sale of approximately 8 million shares, with an option for 1.2 million more; Gartner would receive no proceeds from the offering and agreed to purchase 500,000 shares from ValueAct if it closed.
Important facts for investors to verify
- How much of subsequent growth in revenue and contract value is organic versus attributable to AMR Research and Burton Group.
- Whether research retention and wallet retention remain near the 2010 levels, and whether contract value converts into recognized revenue and cash collections.
- Whether Events’ attendance and margin recovery, and Consulting backlog growth, persist without unusual timing or mix effects.
- Debt repayment, interest-rate exposure, revolver availability and compliance with credit-agreement covenants as repurchases and other capital needs continue.
- Resolution and potential financial impact of the IRS audit adjustments, tax uncertainties and other contingencies.