Gartner, Inc. — Q1 2016 Form 10-Q
Business context and period. Gartner is a global IT research and advisory company operating through Research, Consulting and Events. This unaudited report covers the three months ended March 31, 2016, compared with the same 2015 period.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $557.3 million | $471.2 million | +18% reported; +21% excluding FX impact |
| Operating income | $64.4 million | $48.7 million | +32% |
| Operating margin | About 12% | About 10% | Up about 2 percentage points |
| Net income | $40.2 million | $28.4 million | +42% |
| Diluted EPS | $0.48 | $0.32 | +50% |
| Cash from operations | $8.6 million | $5.7 million | +$2.9 million |
| Cash and cash equivalents | $403.9 million at March 31 | $373.0 million at December 31, 2015 | +$31.0 million |
| Total debt | $890.0 million | $825.0 million at December 31, 2015 | +$65.0 million |
At quarter-end, the company had $586.0 million of available revolver capacity and was in compliance with its credit covenants. Current liabilities exceeded current assets. Stockholders’ deficit was $112.7 million. Cash from operations remained modest relative to net income; working-capital movements included a $79.1 million increase in deferred revenue and a $136.3 million decrease in accounts payable, accrued and other liabilities.
Segments and changes versus prior period
- Research: Revenue rose 16% reported (18% excluding FX) to $440.3 million. Gross contribution margin held at 70%. Total contract value increased 9% reported (14% excluding FX); client retention was 84% versus 85%, and wallet retention was 105% versus 106%.
- Consulting: Revenue increased 11% reported (12% excluding FX) to $84.9 million. Gross contribution margin improved to 35% from 34%; backlog rose 13% to $114.1 million.
- Events: Revenue increased 141% to $32.1 million and gross contribution margin rose to 41% from 18%. Management said three large events shifted into Q1; revenue for the nine events held in both periods grew about 16%. The reported segment surge is therefore substantially affected by timing.
Costs increased with higher payroll, headcount and conference charges. Amortization increased to $6.2 million from $2.1 million, primarily reflecting acquired intangibles. Acquisition and integration charges rose to $8.4 million from $5.1 million. Interest expense increased with borrowings. The effective tax rate declined to 33.4% from 35.9%, partly due to income mix in lower-tax countries and favorable tax-law changes. Lower average diluted shares also contributed to EPS growth.
Cash, debt and capital allocation
Operating cash flow was $8.6 million; investing activities used $7.4 million, including $6.6 million of capital expenditures and $0.8 million for an acquisition-related working-capital adjustment. Financing provided $26.8 million. Gartner borrowed an additional $65.0 million net during the quarter and spent $45.5 million on share repurchases, buying 466,823 shares at an average $82.02. Approximately $1.11 billion remained under the $1.2 billion repurchase authorization.
Debt comprised $375.0 million of term loans, $510.0 million of revolver borrowings and $5.0 million of other debt. Interest-rate swaps fixed the base rate on $700.0 million of borrowings; $185.0 million remained unhedged. Management estimated a 25-basis-point rate move would change annual pretax interest expense on that unhedged amount by about $0.5 million.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or revenue guidance. Management said it believed liquidity was adequate for anticipated needs and cautioned that Q1 results may not indicate the remainder of 2016.
- Management identified event timing, new-business generation, client demand, economic conditions, foreign exchange, competition, product timing and performance compensation as factors that can cause results and cash flows to fluctuate.
- Foreign exchange remains a risk: a hypothetical 10% move in foreign currencies held would change reported cash by approximately $19.0 million. The company had 93% of cash outside the United States.
- Interest-rate swaps had a $17.0 million fair-value liability at March 31, 2016. A $7.1 million net-of-tax loss from hedges contributed to other comprehensive loss.
- Acquisition-related cash payments included $22.7 million tied to employment conditions from a 2014 acquisition, partly funded from escrow. The quarter also included $8.4 million of acquisition and integration charges.
- Ordinary-course legal matters were not expected by management to have a material effect beyond accrued amounts. Gross unrecognized tax benefits were $27.0 million; the IRS appealed a tax-court decision concerning stock compensation in intercompany cost-sharing, and Gartner had not recorded a benefit from that decision.
- New accounting standards on share-based compensation, leases and revenue recognition were not yet adopted; management was evaluating their effects. The lease standard is scheduled to take effect for Gartner in 2019 and the revenue standard in 2018.
Most important facts for investors to verify
- Whether Research contract value, retention and renewal trends continue to support reported revenue growth.
- How much Events growth persists after the timing shift of three large events.
- Whether operating cash conversion improves and how deferred revenue and accrued-liability movements affect cash flow.
- Debt levels, borrowing costs, covenant headroom and the company’s use of repurchases funded partly by borrowings.
- Exposure to foreign exchange, tax uncertainties and acquisition-related costs, including any future resolution of the stock-compensation tax case.