Gartner, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Gartner is a global IT research and advisory company with Research, Consulting, and Events segments. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $547.9 million | $519.8 million | $1,019.1 million | $966.5 million |
| Operating income | $85.2 million | $81.8 million | $133.9 million | $140.9 million |
| Operating margin | 15.5% | 15.7% | 13.1% | 14.6% |
| Net income | $51.2 million | $53.0 million | $79.5 million | $90.8 million |
| Diluted EPS | $0.61 | $0.58 | $0.92 | $0.99 |
| Operating cash flow | Not provided separately | Not provided separately | $149.4 million | $152.8 million |
Q2 reported revenue increased 5% year over year; management said growth was 12% excluding foreign-exchange effects. Six-month reported revenue also increased 5%, or 12% excluding FX. Q2 operating income rose 4%, but net income fell 4%; lower weighted-average share count supported higher diluted EPS. For the first half, operating income declined 5% and net income declined 12%.
At June 30, cash and cash equivalents were $357.6 million. Total debt was $715.0 million, up from $405.0 million at year-end 2014; this comprised $390.0 million of term loans, $320.0 million drawn on the revolver, and $5.0 million of other debt. The company had $776.0 million of remaining revolver capacity and reported compliance with its debt covenants. Current assets were $1.066 billion and current liabilities were $1.205 billion.
Six-month cash provided by operations was $149.4 million; capital expenditures were $23.6 million. Cash used for share repurchases was $441.4 million, partly funded by net additional borrowings. Cash declined by $7.7 million from December 31, 2014, including a $17.0 million adverse foreign-exchange effect.
Segments and material changes
- Research: Q2 revenue rose 8% reported and 14% excluding FX. Contract value reached $1.595 billion, up 11% reported and 15% excluding FX. Client retention was 85%; wallet retention was 106%.
- Consulting: Q2 revenue fell 6% reported but rose 2% excluding FX. Six-month revenue declined 7% reported and was approximately flat excluding FX. Backlog was $97.4 million, down 7% year over year; Q2 utilization was 68%, versus 70% a year earlier.
- Events: Q2 revenue rose 9% reported and 15% excluding FX. Gross contribution margin improved to 53% from 50%, with higher average revenue per attendee and exhibitor. Event timing shifted some prior-year events into Q3 2015.
Higher payroll and benefits—reflecting increased headcount, sales investment, commissions, and merit increases—raised cost of services and SG&A. SG&A increased 9% in Q2 and 10% in the first half. Higher debt increased net interest expense. The first-half effective tax rate rose to 35.8% from 33.2%.
Outlook, risks, and unusual items
- Management stated that cash, expected operating cash generation, and available borrowing capacity were adequate for currently anticipated needs. The filing provides no specific revenue or earnings guidance and cautions that interim results may not indicate full-year results.
- Management highlighted volatility from foreign exchange, economic conditions, competition, demand, sales generation, compensation, and the timing of events. Approximately 95% of cash was held outside the U.S.; a 10% currency move across those foreign cash balances would change their reported value by approximately $34 million.
- Interest-rate swaps fixed the base rate on $700 million of borrowings. Borrowings above that amount remain exposed to floating rates; a hypothetical 25-basis-point rate change on the $776 million of available revolver capacity would change annual pretax interest expense by approximately $2 million.
- The May 2015 board authorization provided $1.2 billion for additional repurchases. The company repurchased 5.3 million shares for $441.4 million in the first half, under its prior authorization; the new authorization was reported fully available as of July 30, 2015.
- In July 2015, after quarter-end, Gartner acquired Nubera eBusiness S.L., whose primary asset is the GetApp software discovery and review platform; the purchase used cash held overseas.
- Gross unrecognized tax benefits were $21.7 million; approximately $3.8 million could decrease within 12 months as audits close or statutes expire. Management did not expect ordinary-course litigation or indemnification matters to have a material effect.
Investor verification priorities
- Verify whether Research contract-value growth and retention rates remain strong, particularly after adjusting for currency movements.
- Assess the Consulting segment’s declining reported revenue, backlog, utilization, and average revenue per billable consultant.
- Evaluate the effect of higher selling costs, debt, interest expense, and share repurchases on earnings, leverage, and future financial flexibility.
- Review foreign-exchange exposure, including the overseas concentration of cash, and the company’s sensitivity to interest-rate changes.
- Confirm the terms, financing, and subsequent-period contribution of the Nubera acquisition and progress under the new repurchase authorization.