Gartner, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Gartner provides IT research and advisory services through Research, Consulting, and Events. Financial figures below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $519.8 | $446.0 | $966.5 | $852.8 |
| Operating income | $81.8 | $74.0 | $140.9 | $128.0 |
| Net income | $53.0 | $46.5 | $90.8 | $83.2 |
| Diluted EPS | $0.58 | $0.49 | $0.99 | $0.87 |
| Operating cash flow | Not presented by quarter | $152.8 | $140.3 |
- Q2 revenue rose 17% (16% excluding foreign exchange); net income increased 14%. For the first half, revenue increased 13% and net income 9%.
- Q2 revenue by segment: Research $358.5 (+15%), Consulting $93.5 (+9%), Events $67.8 (+39%). First-half segment growth was 14%, 12%, and 13%, respectively.
- Management reported an approximately 16% operating margin in both Q2 periods and a 15% margin in both first-half periods. Research contract value rose 11% year over year (13% excluding foreign exchange); enterprise client retention was 84% and wallet retention 105%.
- Consulting backlog increased 11% to $104.6. Events’ strong Q2 comparison included seven events shifted into the quarter, contributing approximately $12 million of the revenue increase.
Financial position, liquidity, and capital allocation
- At June 30, cash and cash equivalents were $317.9, versus $424.0 at year-end 2013. Cash declined by $106.4 during the first half.
- Operating cash flow was $152.8, up from $140.3. Investing used $141.0, including $107.5 net cash paid for acquisitions and $14.4 placed in acquisition escrow. Financing used $118.1, including $307.4 of share repurchases.
- Total debt was $375.0, up from $205.0 at year-end; this included $231.3 drawn on the revolving facility. The company reported $365.5 of available revolver capacity and compliance with credit covenants. Debt’s effective annual rate, including the interest-rate swap, was approximately 2.67%.
- Current assets were $971.8 and current liabilities $1,345.5; current liabilities included $847.9 of deferred revenue. The balance sheet reported $246.3 of current debt and $128.8 of long-term debt.
- Gartner repurchased 4.2 million shares in the first half for $307.4 and had $527.5 remaining under its $800 million repurchase authorization. Repurchases were funded from cash and borrowings. Approximately 95% of cash was held outside the United States.
Material changes, outlook, and risks
- Three acquisitions were completed in 2014 through June 30: Software Advice, Market-Visio, and SircleIT. Their reported operating results were not material for the periods. Acquisition and integration charges were $6.6 in Q2 and $10.0 in the first half, versus $0.1 and $0.2, respectively, in 2013. Software Advice also carries up to $31.9 of additional cash payments tied to employee conditions, recognized as compensation over a two-year service period.
- Expense growth reflected higher headcount, compensation, sales commissions, and event costs. Q2 cost of services and product development rose 14%; SG&A rose 18%. Higher revolver borrowings increased interest expense.
- No specific earnings or revenue guidance is provided in the supplied filing text. Management said liquidity was adequate for currently anticipated needs and cautioned that interim results may not indicate the remainder of 2014. Results may fluctuate with event timing, new business, economic conditions, foreign exchange, competition, and performance compensation.
- Interest-rate exposure applies to borrowings above the $200 million hedged amount. The company estimated that a 25-basis-point rate change would alter annual pre-tax interest expense on available revolver capacity by approximately $1.0 million. A 10% currency move could change the reported cash balance by approximately $24 million.
- The company reported ordinary-course legal proceedings and no material expected adverse effect. The IRS was auditing 2010 and 2011 federal returns; management did not expect the ultimate outcome to materially affect financial position, cash flows, or results. Gross unrecognized tax benefits were $17.4, with approximately $4.0 potentially decreasing within 12 months.
- New revenue-recognition guidance was under evaluation and scheduled for adoption in 2017; discontinued-operations guidance was scheduled for prospective adoption in 2015. Management said the latter would affect the statements only if a qualifying disposal occurs.
Important facts for investors to verify
- Whether underlying Research contract value, retention, and renewal trends remain strong, and whether the reported growth persists.
- How much Events’ Q2 growth reflects shifted event timing versus sustainable demand and profitability.
- The return and financing cost of acquisitions and share repurchases, including the effect of higher revolver usage on debt and interest expense.
- Cash availability and currency exposure, particularly given the high proportion of cash held outside the United States.
- Acquisition-related contingent payments, integration charges, tax matters, and any developments in the IRS audit or legal proceedings.