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IT > SEC Filings for IT > Form 10-Q on 3-May-2012All Recent SEC Filings

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Form 10-Q for GARTNER INC


3-May-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The purpose of the following Management's Discussion and Analysis ("MD&A") is to help facilitate the understanding of significant factors influencing the quarterly operating results, financial condition and cash flows of Gartner, Inc. Additionally, the MD&A also conveys our expectations of the potential impact of known trends, events or uncertainties that may impact future results. You should read this discussion in conjunction with our condensed consolidated financial statements and related notes included in this report and in our Annual Report on Form 10-K for the year ended December 31, 2011. Historical results and percentage relationships are not necessarily indicative of operating results for future periods. References to "Gartner," "the Company," "we," "our," and "us" in this MD&A are to Gartner, Inc. and its subsidiaries.

Forward-Looking Statements

In addition to historical information, this Quarterly Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are any statements other than statements of historical fact, including statements regarding our expectations, beliefs, hopes, intentions or strategies regarding the future. In some cases, forward-looking statements can be identified by the use of words such as "may," "will," "expect," "should," "could," "believe," "plan," "anticipate," "estimate," "predict," "potential," "continue," or other words of similar meaning.

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in, or implied by, the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Factors That May Affect Future Performance" and elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2011. Readers should not place undue reliance on these forward-looking statements, which reflect management's opinion only as of the date on which they were made. Except as required by law, we disclaim any obligation to review or update these forward-looking statements to reflect events or circumstances as they occur. Readers should review carefully any risk factors described in other reports we filed with the SEC.

BUSINESS OVERVIEW

Gartner, Inc. (NYSE: IT) is the world's leading information technology research and advisory company. We deliver the technology-related insight necessary for our clients to make the right decisions, every day. From CIOs and senior IT leaders in corporations and government agencies, to business leaders in high-tech and telecom enterprises and professional services firms, to supply chain professionals and technology investors, we are the valuable partner to clients in over 12,300 distinct organizations. We work with every client to research, analyze and interpret the business of IT within the context of their individual role. Founded in 1979, Gartner is headquartered in Stamford, Connecticut, U.S.A., and has 5,056 associates, including nearly 1,300 research analysts and consultants, and clients in 85 countries.

The foundation for all Gartner products and services is our independent research on IT and supply chain issues. The findings from this research are delivered through our three business segments - Research, Consulting and Events:

Research provides objective insight on critical and timely technology and supply chain initiatives for CIOs, other IT professionals, supply chain leaders, technology companies and the investment community through reports, briefings, proprietary tools, access to our analysts, peer networking services, and membership programs that enable our clients to make better decisions about their IT and supply chain investments.

Consulting provides customized solutions to unique client needs through on-site, day-to-day support, as well as proprietary tools for measuring and improving IT performance with a focus on cost, performance, efficiency, and quality.

Events provide IT, supply chain, and business professionals the opportunity to attend various symposia, conferences and exhibitions to learn, contribute and network with their peers. From our flagship event Symposium/ITxpo, to Summits focused on specific technologies and industries, to experimental workshop-style Seminars, our events distill the latest Gartner research into applicable insight and advice.

For more information regarding Gartner and our products and services, visit www.gartner.com.


BUSINESS MEASUREMENTS

We believe the following business measurements are important performance
indicators for our business segments:


business segment   business measurements
----------------   -----------------------------------------------------------------
Research           Contract value represents the value attributable to all of our
                   subscription-related research products that recognize revenue on
                   a ratable basis. Contract value is calculated as the annualized
                   value of all subscription research contracts in effect at a
                   specific point in time, without regard to the duration of the
                   contract.

                   Client retention rate represents a measure of client satisfaction
                   and renewed business relationships at a specific point in time.
                   Client retention is calculated on a percentage basis by dividing
                   our current clients, who were also clients a year ago, by all
                   clients from a year ago.

                   Wallet retention rate represents a measure of the amount of
                   contract value we have retained with clients over a twelve-month
                   period. Wallet retention is calculated on a percentage basis by
                   dividing the contract value of clients, who were clients one year
                   earlier, by the total contract value from a year earlier,
                   excluding the impact of foreign currency exchange. When wallet
                   retention exceeds client retention, it is an indication of
                   retention of higher-spending clients, or increased spending by
                   retained clients, or both.

                   -----------------------------------------------------------------

Consulting         Consulting backlog represents future revenue to be derived from
                   in-process consulting, measurement and strategic advisory
                   services engagements.

                   Utilization rates represent a measure of productivity of our
                   consultants. Utilization rates are calculated for billable
                   headcount on a percentage basis by dividing total hours billed by
                   total hours available to bill.

                   Billing Rate represents earned billable revenue divided by total
                   billable hours.

                   Average annualized revenue per billable headcount represents a
                   measure of the revenue generating ability of an average billable
                   consultant and is calculated periodically by multiplying the
                   average billing rate per hour times the utilization percentage
                   times the billable hours available for one year.

                   -----------------------------------------------------------------

Events             Number of events represents the total number of hosted events
                   completed during the period.

                   Number of attendees represents the total number of people who
                   attend events.

                   -----------------------------------------------------------------

EXECUTIVE SUMMARY OF OPERATIONS AND FINANCIAL POSITION

We have executed a consistent growth strategy since 2005 to drive double-digit revenue and earnings growth. The fundamentals of our strategy include a focus on creating extraordinary research insight, deliver innovative and highly differentiated product offerings, build a strong sales capability, provide world class client service with a focus on client engagement and retention, and continuously improve our operational effectiveness.

We had total revenues of $369.2 million in the first quarter of 2012, an increase of 12% compared to first quarter 2011 and 13% excluding the foreign exchange impact. Revenues increased by double-digits in our Research and Events segments, at 13% and 29%, respectively, while Consulting was up 6%. For a more complete discussion of our results by segment, see Segment Results below. We had net income of $34.2 million in the first quarter of 2012, an increase of 17% compared to first quarter 2011. Diluted earnings per share increased $0.07 per share quarter-over-quarter, or 24%, to $0.36 per share for first quarter 2012. Our operating cash flow was $18.7 million in first quarter 2012.

We repurchased almost 2.0 million of our common shares in the three months ended March 31, 2012 as part of our continued focus on enhancing shareholder value. We had $139.0 million of cash and cash equivalents on March 31, 2012 and we had $329.3 million of available borrowing capacity under our revolving credit facility. We continue to believe that the Company has adequate liquidity to fund our current plans, including the recently announced cash offer to purchase all of the outstanding shares of Ideas International (see Note 13-Subsequent Events in the Notes to the Condensed Consolidated Financial Statements for additional information).


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements requires the application of appropriate accounting policies and the use of estimates. Our significant accounting policies are described in Note 1 in the Notes to Consolidated Financial Statements of Gartner, Inc. contained in our Annual Report on Form 10-K for the year ended December 31, 2011. Management considers the policies discussed below to be critical to an understanding of our financial statements because their application requires complex and subjective management judgments and estimates. Specific risks for these critical accounting policies are also described below.

The preparation of our financial statements requires us to make estimates and assumptions about future events. We develop our estimates using both current and historical experience, as well as other factors, including the general economic environment and actions we may take in the future. We adjust such estimates when facts and circumstances dictate. However, our estimates may involve significant uncertainties and judgments and cannot be determined with precision. In addition, these estimates are based on our best judgment at a point in time and as such these estimates may ultimately differ materially from actual results. Also, on-going changes in our estimates could be material and would be reflected in the Company's consolidated financial statements in future periods.

Our critical accounting policies are as follows:

Revenue recognition- Revenue is recognized in accordance with the requirements of U.S. GAAP as well as SEC Staff Accounting Bulletins No. 101, Revenue Recognition in Financial Statements ("SAB 101"), and SEC Staff Accounting Bulletin No. 104, Revenue Recognition ("SAB 104"). Revenue is only recognized once all required criteria for revenue recognition have been met. Revenue by significant source is accounted for as follows:

Research revenues are derived from subscription contracts for research products and are deferred and recognized ratably over the applicable contract term. Fees from research reprints are recognized when the reprint is delivered.

Consulting revenues are principally generated from fixed fee and time and material engagements. Revenues from fixed fee contracts are recognized on a proportional performance basis. Revenues from time and materials engagements are recognized as work is delivered and/or services are provided. Revenues related to contract optimization contracts are contingent in nature and are only recognized upon satisfaction of all conditions related to their payment.

Events revenues are deferred and recognized upon the completion of the related symposium, conference or exhibition.

The majority of research contracts are billable upon signing, absent special terms granted on a limited basis from time to time. All research contracts are non-cancelable and non-refundable, except for government contracts that may have cancellation or fiscal funding clauses. It is our policy to record the entire amount of the contract that is billable as a fee receivable at the time the contract is signed with a corresponding amount as deferred revenue, since the contract represents a legally enforceable claim.

Uncollectible fees receivable- We maintain an allowance for losses which is composed of a bad debt allowance and a sales reserve. Provisions are charged against earnings, either as a reduction in revenues or an increase to expense. The measurement of likely and probable losses and the allowance for losses is based on historical loss experience, aging of outstanding receivables, an assessment of current economic conditions and the financial health of specific clients. This evaluation is inherently judgmental and requires estimates. These valuation reserves are periodically re-evaluated and adjusted as more information about the ultimate collectibility of fees receivable becomes available. Circumstances that could cause our valuation reserves to increase include changes in our clients' liquidity and credit quality, other factors negatively impacting our clients' ability to pay their obligations as they come due, and the effectiveness of our collection efforts.

The following table provides our total fees receivable, along with the related allowance for losses, as of the date indicated (in thousands):

                        March 31,     December 31,
                           2012           2011
                        ----------   --------------
Total fees receivable   $  391,227   $      428,293
Allowance for losses        (7,102 )         (7,260 )
                        -- -------   -- -----------
Fees receivable, net    $  384,125   $      421,033
                        -- -------   -- -----------


Goodwill and other intangible assets- Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value of the tangible and identifiable intangible net assets acquired. Goodwill is not amortized against earnings, but is periodically evaluated for impairment in accordance with FASB ASC Topic, which requires goodwill to be assessed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In addition, an impairment evaluation of our amortizable intangible assets may also be performed on a periodic basis should events or circumstances indicate potential impairment. If we determine that the fair value of a reporting unit or an intangible asset is less than its related carrying amount, we must recognize an impairment charge against earnings. Among the factors we consider important that could trigger an impairment review are the following:

Significant under-performance relative to historical or projected future operating results;

Significant changes in the manner of our use of acquired assets or the strategy for our overall business;

Significant negative industry or general economic trends;

Significant decline in our stock price for a sustained period; and

Our market capitalization relative to net book value.

The determination of the estimated fair value of our reporting units, whether based on a quantitative or qualitative assessment, contains judgments and assumptions regarding future trends and events, with both the precision and reliability of the resulting estimates subject to uncertainty. As a result, if the Company deems it necessary in the future to modify its judgments and assumptions, or if actual results are materially different from our expectations, then the estimated reporting unit values could change, potentially resulting in goodwill impairment charges in future periods.

The Company completed its most recent required annual goodwill impairment assessment as of September 30, 2011 and concluded that the fair value of its reporting units substantially exceeded their respective carrying amounts.

Accounting for income taxes- As we prepare our consolidated financial statements, we estimate our income taxes in each of the jurisdictions where we operate. This process involves estimating our current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We record a valuation allowance to reduce our deferred tax assets when future realization is in question. We consider the availability of loss carryforwards, existing deferred tax liabilities, future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. In the event we determine that we are able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment is made to reduce the valuation allowance and increase income in the period such determination is made. Likewise, if we determine that we will not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the valuation allowance is charged against income in the period such determination is made.

Accounting for stock-based compensation- The Company accounts for stock-based compensation in accordance with FASB ASC Topics 505 and 718, as interpreted by SEC Staff Accounting Bulletins No. 107 ("SAB No. 107") and No. 110 ("SAB No. 110"). The Company recognizes stock-based compensation expense, which is based on the fair value of the award on the date of grant, over the related service period, net of estimated forfeitures (see Note 4 - Stock-Based Compensation in the Notes to the Condensed Consolidated Financial Statements).

Determining the appropriate fair value model and calculating the fair value of stock-based compensation awards requires the input of certain complex and subjective assumptions, including the expected life of the stock-based compensation awards and the Company's Common Stock price volatility. In addition, determining the appropriate amount of associated periodic expense requires management to estimate the rate of employee forfeitures and the likelihood of the achievement of certain performance targets. The assumptions used in calculating the fair value of stock-based compensation awards and the associated periodic expense represent management's best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and the Company deems it necessary in the future to modify the assumptions it made or to use different assumptions, or if the quantity and nature of the Company's stock-based compensation awards changes, then the amount of periodic stock-based compensation expense may need to be adjusted which could be materially different from what has been recorded in the current period.

Restructuring and other accruals- We may record accruals for severance costs, costs associated with excess facilities that we have leased, contract terminations, asset impairments, the integration of acquired businesses, and other costs as a result of on-going actions we undertake to streamline our organization, reposition certain businesses and reduce ongoing costs, or acquire other companies. Estimates of costs to be incurred to complete these actions, such as future lease payments, sublease income, the fair value of assets, and severance and related benefits, are based on assumptions at the


time the actions are initiated. These accruals may need to be adjusted to the extent actual costs differ from such estimates. In addition, these actions may be revised due to changes in business conditions that we did not foresee at the time such plans were approved. We also record accruals during the year for our various employee cash incentive programs. Amounts accrued at the end of each reporting period are based on our estimates and may require adjustment as the ultimate amount paid for these incentives are sometimes not known with certainty until the end of our fiscal year.

RESULTS OF OPERATIONS

Overall Results

The following tables summarize the changes in selected income and expense lines
in our interim Condensed Consolidated Statements of Operations for the periods
indicated (dollars in thousands):

For the three months ended March 31, 2012 and 2011:


                                             Three Months      Three Months        Income          Income
                                                Ended             Ended           Increase        Increase
                                              March 31,         March 31,        (Decrease)      (Decrease)
                                                 2012              2011              $               %
                                            --------------    --------------    ------------    ------------
Total revenues                              $      369,171    $      329,567    $     39,604              12 %
Costs and expenses:
Cost of services and product development           146,463           133,316         (13,147 )           (10 )
Selling, general and administrative                162,518           141,672         (20,846 )           (15 )
Depreciation                                         5,895             6,271             376               6
Amortization of intangibles                            739             2,527           1,788              71
                                            -- -----------    -- -----------    -- ---------
Operating income                                    53,556            45,781           7,775              17
Interest expense, net                               (2,195 )          (2,784 )           589              21
Other expense, net                                    (978 )            (382 )          (596 )         >(100 )
Provision for income taxes                         (16,162 )         (13,424 )        (2,738 )           (20 )
                                            -- -----------    -- -----------    -- ---------
Net income                                  $       34,221    $       29,191    $      5,030              17 %
                                            -- -----------    -- -----------    -- ---------    -- ---------


Total revenues for the three months ended March 31, 2012 increased $39.6 million, or 12%, compared to the same quarter in 2011. Excluding the unfavorable impact of foreign currency translation, total quarterly revenues increased 13%. Revenues increased by double-digits in our Research and Events segments and increased 6% in Consulting. Please refer to the section of this MD&A below entitled "Segment Results" for a discussion of revenues and results by segment.

Cost of services and product development was 10% higher quarter-over-quarter, or $13.1 million. Excluding the favorable impact of foreign currency translation, the increase was approximately 11%. We had higher payroll and related benefits costs in 2012 due to increased headcount, and to a lesser extent, additional event and travel expenses, primarily due to the 2 additional events held in first quarter 2012 compared to first quarter 2011. Cost of services and product development as a percentage of sales was 40% for both periods.

Selling, general and administrative ("SG&A") was $20.8 million higher in first quarter 2012 compared to first quarter 2011, or 15%. The increase was due to higher payroll costs due to increased headcount, as well as higher sales commissions and other personnel costs. The increased headcount was primarily due to the investment in additional quota-bearing sales associates, which increased 18% quarter-over-quarter.

Depreciation expense decreased 6% quarter-over-quarter due to certain assets becoming fully depreciated during 2011.

Amortization of intangibles was $0.7 million and $2.5 million for the first quarters of 2012 and 2011, respectively. The decline was due to certain intangibles becoming fully amortized.

Operating Income increased $7.8 million, or 17% quarter-over-quarter, to $53.6 million in the three months ended March 31, 2012 compared to $45.8 million in 2011. Operating income as a percentage of revenues increased to 15% in the first quarter of 2012 compared to 14% in 2011, primarily due to a higher gross contribution in our Research segment in the 2012 quarter. Please refer to the section of this MD&A entitled "Segment Results" below for a further discussion of revenues and results by segment.

Interest Expense, Net decreased 21% in the three months ended March 31, 2012 compared to the same period in 2011, primarily due to a lower average amount of debt outstanding, which decreased to $213.0 million in 2012 compared to $228.0 million in the 2011 quarter, as well as a lower average rate on our borrowings.


Other Expense, Net for the three months ended March 31, 2012 was $1.0 million, compared to $0.4 million in the prior year quarter, primarily consisting of foreign currency exchange gains and losses.

Provision For Income Taxes was $16.2 million for the three months ended March 31, 2012 compared to $13.4 million in the prior year quarter. The effective tax rate was 32.1% for the three months ended March 31, 2012 and 31.5% for the same period in 2011. The increase in the effective tax rate was primarily due to the impact of a change in the estimated annual mix of pre-tax income by jurisdiction.

Net Income was $34.2 million and $29.2 million for the three months ended March 31, 2012 and 2011, respectively, an increase of 17%, mostly due to substantially higher operating income, which was partially offset by a higher tax provision. Diluted earnings per share was $0.36, an increase of $0.07 per share compared to 2011, attributable to the higher net income as well as lower weighted average shares outstanding, which declined by 3%.

SEGMENT RESULTS

We evaluate reportable segment performance and allocate resources based on gross contribution margin. Gross contribution is defined as operating income excluding certain Cost of services and product development charges, SG&A expenses, Depreciation, Acquisition and integration charges, and Amortization of intangibles. Gross contribution margin is defined as gross contribution as a percentage of revenues.

The following sections present the results of our three segments:

Research

                              As Of And        As Of And
                               For The          For The
                             Three Months     Three Months
                                Ended            Ended                        Percentage
. . .
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