Gartner, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Gartner provides IT research and advisory services through Research, Consulting, and Events. Comparisons below are with the corresponding 2015 periods unless noted.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $574.1 million | $500.2 million | $1,741.3 million | $1,519.3 million |
| Operating income | $48.7 million | $52.5 million | $196.5 million | $186.4 million |
| Net income | $30.5 million | $30.4 million | $127.1 million | $109.9 million |
| Diluted EPS | $0.36 | $0.36 | $1.52 | $1.29 |
| Operating cash flow | Not provided by quarter | $282.3 million | $266.3 million |
- Q3 revenue rose 15%; Research grew 16%, Consulting 6%, and Events 14%. Nine-month revenue also grew 15% as reported, or 16% excluding foreign-exchange effects.
- Q3 operating margin was approximately 8% versus 10% a year earlier; nine-month operating margin was 11% versus 12%. Higher acquisition-related charges and amortization weighed on margins.
- At September 30, cash and cash equivalents were $465.7 million, including 98% held outside the U.S. Current assets were $1,245.9 million and current liabilities were $1,417.4 million. Stockholders’ deficit was $10.5 million.
- Debt had a net carrying value of $736.4 million, comprising $592.5 million of term loans and $147.5 million of revolver borrowings before deferred financing fees. Revolver availability was $1.05 billion. The reported contractual rate on term and revolver borrowings was 1.90%; swaps fixed the base rate on $700 million of borrowings.
- Nine-month cash used in investing was $66.2 million, including $36.9 million of capital expenditures and $29.4 million for acquisitions. Cash used in financing was $130.9 million, including net debt repayments and $52.9 million of share repurchases.
Material changes versus the prior period
- Q3 net income and diluted EPS were essentially flat despite 15% revenue growth; nine-month net income rose 16% and diluted EPS rose 18%.
- Research total contract value increased 9% reported (13% excluding foreign exchange); research contract value also rose 9%. Client retention was 83% versus 84%, and wallet retention was 104% versus 106%.
- Consulting backlog declined 5% to $104.2 million. Q3 Consulting contribution margin fell to 27% from 29%, while Events contribution margin improved to 43% from 39%.
- Gartner refinanced in June 2016 with a new secured five-year $600 million term loan and $1.2 billion revolving facility, replacing its prior credit arrangement. The company reported compliance with its covenants.
- Gartner acquired SCM World in June for $34.2 million cash at closing ($28.3 million net of acquired cash). The deal added goodwill and intangible assets; up to $15 million of earn-out payments and up to $8 million tied to employee service conditions were possible. Purchase accounting remained preliminary.
Outlook, commentary, risks, and unusual items
- No numerical earnings or revenue guidance is provided in the filing. Management said interim results may not indicate results for the rest of 2016 or beyond and stated it believes liquidity is adequate for anticipated needs.
- Management noted that results fluctuate with event timing, including the normally fourth-quarter Symposium/ITxpo, new business, client and service mix, economic conditions, competition, foreign exchange, and performance compensation.
- Q3 acquisition and integration charges were $16.6 million, versus $6.5 million a year earlier; nine-month charges were $33.0 million versus $15.3 million. Q3 charges included a $4.5 million SCM World earn-out fair-value expense and $1.0 million related to employment conditions.
- Early adoption of ASU 2016-09 reduced income-tax expense by $0.5 million in Q3 and $9.0 million for the nine-month period, increasing diluted EPS by $0.01 and $0.11, respectively. It also changed cash-flow classification for excess stock-compensation tax benefits.
- The nine-month effective tax rate declined to 30.3% from 37.4%, reflecting the accounting change, income mix across tax jurisdictions, and higher R&D credits, partly offset by nondeductible acquisition expenses. Gross unrecognized tax benefits were $31.8 million; management said about $2.5 million could reverse within 12 months.
- Key exposures include foreign-currency movements and floating-rate debt. A 10% currency move would change the reported U.S.-dollar value of cash by approximately $23 million; a 25-basis-point rate change was estimated to affect annual pretax interest by about $0.1 million on $40 million of unhedged borrowings.
- Management said ordinary-course litigation beyond accrued amounts was not expected to materially affect financial position or results. The IRS is appealing a tax-court decision involving stock-based compensation in cost-sharing arrangements; Gartner has not recorded a benefit from that case. The filing refers investors to risk factors in the 2015 Form 10-K.
Important facts for investors to verify
- Whether Research contract-value growth and retention trends continue, particularly given the slight year-over-year declines in client and wallet retention.
- SCM World’s final purchase-price allocation, earn-out liability, and integration costs; the acquisition valuation was preliminary at quarter-end.
- Cash generation and debt levels, including the concentration of cash outside the U.S., revolver usage, interest-rate exposure, and covenant compliance.
- How much of the nine-month earnings and cash-flow improvement reflects recurring operations versus the ASU 2016-09 tax and cash-flow effects.
- Fourth-quarter event timing and operating costs, which management identified as sources of material period-to-period fluctuation.