Gartner, Inc. — FY2015 Form 10-K
Business context and reporting period: Gartner provides IT research and advisory services through Research, Consulting and Events. This annual filing covers the fiscal year ended December 31, 2015; fourth-quarter results are also included below. All dollar amounts are U.S. dollars.
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $2,163.1 million | $2,021.4 million | +7% reported; +13% excluding foreign exchange |
| Operating income | $288.0 million | $286.2 million | +1% |
| Operating margin | 13% | 14% | Down 1 percentage point |
| Net income | $175.6 million | $183.8 million | -4% |
| Diluted EPS | $2.06 | $2.03 | +1% |
| Cash from operations | $345.6 million | $346.8 million | Down $1.2 million |
| Cash and equivalents, year-end | $373.0 million | $365.3 million | +$7.7 million |
| Total debt, year-end | $825.0 million | $405.0 million | +$420.0 million |
Research revenue was $1,583.5 million (+10%) and its contribution margin was 69%, unchanged. Consulting revenue was $327.7 million (-6%; essentially flat excluding foreign exchange), with a 33% contribution margin versus 34%; backlog rose 15% to a record $117.7 million, while utilization fell to 66% from 68%. Events revenue was $251.8 million (+11%; +18% excluding foreign exchange), and contribution margin increased to 52% from 49%.
At year-end, Research contract value was $1.761 billion (+10% reported; +14% excluding foreign exchange); client retention was 84% and wallet retention 105%. Events held 65 events and recorded 52,595 attendees, both 7% above 2014.
Liquidity and capital allocation: Gartner reported $656.0 million of available revolver capacity, in addition to cash, and said existing cash, operating cash generation and borrowing capacity should meet anticipated needs. The company repurchased 6.2 million shares for $509.0 million and spent $196.2 million net cash on acquisitions. Stockholders’ equity moved from positive $161.2 million to a deficit of $132.4 million, primarily amid substantial share repurchases. The filing reports $820.0 million outstanding under the credit agreement; total debt of $825.0 million also includes a $5.0 million state loan.
Fourth-quarter results
| Metric | Q4 2015 | Q4 2014 |
|---|---|---|
| Revenue | $643.8 million | $584.0 million |
| Operating income | $101.6 million | $95.8 million |
| Net income | $65.8 million | $59.1 million |
| Diluted EPS | $0.78 | $0.66 |
Material changes, outlook and risks
- Revenue growth was led by Research and Events; Consulting declined. Foreign exchange materially reduced reported growth.
- Operating expenses increased with hiring and investment: SG&A rose 10% reported, while acquisition and integration charges were $26.2 million versus $21.9 million. Interest expense nearly doubled to $20.8 million, reflecting higher borrowings.
- The effective tax rate rose to 35.5% from 33.1%. Other income included a $6.8 million gain from selling state tax credits. Net income fell despite slightly higher operating income; lower average diluted shares helped EPS rise.
- Management gave no specific revenue or earnings guidance in the supplied filing text. It cited adequate anticipated liquidity, but warned of weaker expected economic growth and uncertainty in 2016 that could affect client retention, spending, consulting utilization and event attendance.
- Key risks include competition and free online information; renewal dependence (subscription products generated about 73% of revenue); economic and foreign-exchange exposure; government contract appropriations and termination rights; cybersecurity and privacy issues; tax uncertainty; and debt covenants. The company was in compliance with credit covenants at year-end. Most government contracts can be terminated for convenience.
- Nubera and Capterra were acquired in 2015 for $206.9 million aggregate purchase price; up to a further $32.0 million may be payable subject to continued employment conditions. Acquisition-related goodwill and intangibles increased. The annual goodwill test found reporting-unit fair values above carrying values; no long-lived asset impairment was recorded.
- Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect after accrued amounts and insurance. KPMG issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Whether Research contract-value growth and retention trends continue, and whether client retention stabilizes after slipping from 85% to 84%.
- Whether Consulting revenue and utilization recover as the record backlog converts to revenue, and how much contract optimization contributes.
- Debt repayment, borrowing costs, covenant headroom and the funding of continued repurchases; the filing notes approximately $1.1 billion remained under the repurchase authorization.
- Cash-flow and liquidity implications of foreign-held cash: $351.0 million was held outside the U.S.; the company estimated $60.0 million of tax if accumulated undistributed foreign earnings were not indefinitely reinvested.
- Acquisition performance, purchase-price allocation and contingent employee payments, along with the impact of the higher tax rate and unresolved tax positions.