Business context and reporting period
Gartner, Inc. is an information technology research and advisory company with Research, Consulting and Events segments. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $345.8 million | $296.1 million | $1,040.9 million | $906.2 million |
| Operating income | $47.3 million | $32.8 million | $144.6 million | $96.2 million |
| Net income | $30.5 million | $20.1 million | $91.9 million | $59.6 million |
| Diluted EPS | $0.31 | $0.20 | $0.92 | $0.60 |
- Q3 revenue increased 17% reported and 12% excluding favorable currency effects. Nine-month revenue increased 15% reported and 11% excluding currency effects.
- Operating margin was 14% in Q3 2011 versus 11% in Q3 2010; it improved 3 percentage points for the nine-month comparison as well. Cost of services and product development declined to 41% of revenue from 43% in both comparisons.
- Research led Q3 growth: revenue rose 19%, and gross contribution margin increased to 68% from 65%. Research contract value reached a reported record $1.036 billion, up 14%; client retention was 82%, while wallet retention rose to 100% from 95%.
- Consulting revenue rose 8% in Q3, but gross contribution margin fell to 35% from 37%; nine-month revenue increased 3% while contribution margin declined to 36% from 40%. Consulting utilization also fell year over year.
- Events revenue rose 18% in Q3 and 22% for nine months. Q3 contribution margin declined to 29% from 37%, partly due to event mix and lower exhibitor revenue; the nine-month margin edged up to 40% from 39%.
- Nine-month operating cash flow was $176.5 million, up from $126.4 million. Investing cash outflow was $23.7 million, including $23.7 million of capital expenditures; financing cash outflow was $111.1 million, including $141.2 million of share repurchases. Cash increased to $156.9 million from $120.2 million at year-end 2010.
- At September 30, cash was $156.9 million and total debt was $210.0 million ($52.5 million current and $157.5 million long-term). The company reported $371.9 million of available revolver capacity and compliance with its credit covenants. Its $200 million interest-rate swap had a negative fair value of $10.3 million.
Changes, outlook, risks and unusual items
- Profit growth outpaced revenue growth, supported by Research operating leverage, lower intangible amortization and the absence of prior-year acquisition and integration charges. Q3 operating income increased 44% and net income 52%; nine-month operating income rose 50% and net income 54%.
- Management provided no specific numerical earnings or revenue guidance in the supplied filing text. It stated that interim results may not indicate full-year results and noted that the timing of the company’s major event series, normally held in Q4, can cause fluctuations in revenue, income and cash flow.
- Management said existing cash, expected operating cash generation and revolver capacity should meet short- and foreseeable long-term needs. Approximately 85% of cash was held outside the United States.
- The company repurchased about 3.9 million shares during the first nine months under its $500 million program; $363.0 million remained available. The filing identifies repurchases as a use of cash and says funding may include operating cash flow or borrowings.
- The IRS disputes certain proposed adjustments for tax year 2007; audits of 2008 and 2009 were underway with no material adjustments proposed at filing. Gross unrecognized tax benefits were $19.1 million, and management did not expect the matters to have a material adverse effect, while noting resolution is uncertain.
- Ordinary-course legal proceedings and contractual indemnities were disclosed; management did not expect potential liabilities beyond accruals to be material. Foreign exchange and floating-rate debt are identified exposures. A 10% move in major currencies could change the reported cash balance by about $9 million; a 25-basis-point rate change would affect annual interest expense on additional revolver borrowing capacity by about $0.9 million.
- Gartner early adopted a goodwill-impairment testing update and concluded reporting-unit fair values exceeded carrying amounts, so no impairment test or charge was recorded. The filing also attributes some increased depreciation to early termination of a lease.
Important facts for investors to verify
- Whether Research contract value and wallet retention gains persist, and whether client retention remains at 82%.
- Whether Consulting utilization and contribution margins recover, and whether Q3 Events margin weakness was temporary or reflects ongoing event economics.
- Cash generation relative to capital spending and substantial repurchases, including the impact of the remaining headquarters renovation reimbursement.
- Debt repayment, interest-rate exposure, covenant headroom and continued access to the revolving facility.
- Outcomes of the IRS dispute and audits, and any changes to unrecognized tax benefits or legal contingencies.
- Potential currency effects and the implications of holding most cash outside the United States.