UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-14443
GARTNER, INC.
(Exact name of Registrant as specified in its charter)
Delaware 04-3099750
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
56 Top Gallant Road 06904-2212
P.O. Box 10212 (Zip Code)
Stamford, CT
(Address of principal executive offices)
Registrant's telephone number, including area code: (203) 316-1111
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) YES [X] NO [ ].
The number of shares outstanding of the Registrant's capital stock as of
April 30, 2004 was 103,584,493 shares of Class A Common Stock and 28,175,143
shares of Class B Common Stock.
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at March 31, 2004 and
December 31, 2003 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 26
ITEM 4: CONTROLS AND PROCEDURES 27
PART II OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 28
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 28
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GARTNER, INC.
Condensed Consolidated Balance Sheets
(In thousands)
March 31, December 31,
2004 2003
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 262,742 $ 229,962
Fees receivable, net 235,699 266,122
Deferred commissions 25,210 27,751
Prepaid expenses and other current assets 26,376 25,642
------------- -------------
Total current assets 550,027 549,477
Property, equipment and leasehold improvements, net 61,996 66,541
Goodwill 230,360 230,387
Intangible assets, net 784 985
Other assets 69,185 69,874
------------- -------------
TOTAL ASSETS $ 912,352 $ 917,264
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 150,802 $ 175,609
Deferred revenues 316,837 315,524
------------- -------------
Total current liabilities 467,639 491,133
Other liabilities 51,388 50,385
------------- -------------
TOTAL LIABILITIES 519,027 541,518
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock 72 72
Additional paid-in capital 424,978 408,504
Unearned compensation, net (3,435) (1,846)
Accumulated other comprehensive income, net 4,397 1,530
Accumulated earnings 174,400 173,936
Treasury stock, at cost (207,087) (206,450)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 393,325 375,746
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 912,352 $ 917,264
============= =============
See the accompanying notes to the condensed consolidated financial statements.
3
GARTNER, INC.
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share data)
Three Months Ended
March 31,
2004 2003
------------- -------------
Revenues:
Research $ 122,242 $ 115,724
Consulting 64,626 61,779
Events 18,171 23,509
Other 3,628 3,270
------------- -------------
Total revenues 208,667 204,282
Costs and expenses:
Cost of services and product development 95,476 102,333
Selling, general and administrative 87,634 83,504
Depreciation 7,937 9,825
Amortization of intangibles and goodwill impairments 936 405
Other charges 10,513 5,426
------------- -------------
Total costs and expenses 202,496 201,493
------------- -------------
Operating income 6,171 2,789
Income from investments 20 31
Interest income (expense), net 245 (5,612)
Other (expense) income, net (3,113) 535
------------- -------------
Income (loss) before income taxes 3,323 (2,257)
Provision (benefit) for income taxes 2,859 (745)
------------- -------------
Net income (loss) $ 464 $ (1,512)
============= =============
Income (loss) per common share:
Basic $ 0.00 $ (0.02)
Diluted $ 0.00 $ (0.02)
Weighted average shares outstanding:
Basic 130,311 80,492
Diluted 133,180 80,492
See the accompanying notes to the condensed consolidated financial statements.
4
GARTNER, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Three Months Ended
March 31,
2004 2003
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 464 $ (1,512)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization, including goodwill impairments 8,873 10,230
Non-cash compensation 485 251
Tax benefit associated with employee exercise of stock options 1,494 -
Deferred taxes 542 5
Income from minority-owned investments (20) (31)
Accretion of interest and amortization of debt issue costs 299 5,822
Non-cash charges associated with South America closings 2,943 -
Changes in assets and liabilities:
Fees receivable 30,389 25,934
Deferred commissions 2,609 1,728
Prepaid expenses and other current assets (790) 2,427
Other assets (115) 72
Deferred revenues 2,285 (5,257)
Accounts payable and accrued liabilities (24,763) (5,943)
------------ ------------
CASH PROVIDED BY OPERATING ACTIVITIES 24,695 33,726
------------ ------------
INVESTING ACTIVITIES:
Additions to property, equipment and leasehold improvements (3,005) (3,357)
------------ ------------
CASH USED IN INVESTING ACTIVITIES (3,005) (3,357)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from stock issued for stock plans 16,270 2,021
Purchase of treasury stock (4,000) (6,808)
------------ ------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 12,270 (4,787)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 33,960 25,582
EFFECTS OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS (1,180) 192
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 229,962 109,657
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 262,742 $ 135,431
============ ============
See the accompanying notes to the condensed consolidated financial statements.
5
GARTNER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
These interim condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and should be read
in conjunction with the consolidated financial statements and related notes of
the Company filed in our Annual Report on Form 10-K for the year ended December
31, 2003. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported amounts of operating revenues and expenses. These
estimates are based on management's knowledge and judgments. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation of financial position, results of
operations and cash flows at the dates and for the periods presented have been
included. The results of operations for the three months ended March 31, 2004
may not be indicative of the results of operations for the remainder of 2004.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Note 2 - Comprehensive Income (Loss)
The components of comprehensive income (loss) for the three months ended March
31, 2004 and 2003 are as follows (in thousands):
Three Months Ended
March 31,
2004 2003
----------- ----------
Net income (loss) $ 464 $ (1,512)
Other comprehensive income (loss):
Foreign currency translation adjustments (104) 199
Reclassification adjustment of foreign currency translation adjustments to
net income upon closing of foreign operations 2,943 -
Net unrealized gains on investments, net of tax 28 5
----------- ----------
Other comprehensive income 2,867 204
----------- ----------
Comprehensive income (loss) $ 3,331 $ (1,308)
=========== ==========
The balance of unrealized holding losses on investments, net of tax, at March
31, 2004 was immaterial. During the first quarter of 2004, we reclassified $2.9
million of accumulated translation adjustments associated with certain
operations in South America into net income as a result of our decision to close
those operations. The reclassification adjustment was recorded as a loss within
Other (expense) income, net.
6
Note 3 - Computations of Income (Loss) per Share of Common Stock
The following table sets forth the reconciliation of the basic and diluted
income (loss) per share (in thousands, except per share data):
Three Months Ended
March 31,
2004 2003
----------- ----------
Numerator:
Net income (loss) used for calculating basic income (loss) per share $ 464 $ (1,512)
After-tax interest on convertible long-term debt - -
----------- ----------
Income (loss) used for calculating diluted income (loss) per share $ 464 $ (1,512)
=========== ==========
Denominator:
Weighted average number of common shares used in the calculation of
basic income (loss) per share 130,311 80,492
Common stock equivalents associated with stock compensation plans 2,869 -
Weighted average number of shares associated with convertible
long-term debt - -
----------- ----------
Shares used in the calculation of diluted income (loss) per share 133,180 80,492
=========== ==========
Basic income (loss) per share $ 0.00 $ (0.02)
=========== ==========
Diluted income (loss) per share $ 0.00 $ (0.02)
=========== ==========
For the three months ended March 31, 2004 and 2003, unvested restricted stock
awards were not included in the computation of diluted income (loss) per share
because the effect would have been anti-dilutive. For the three months ended
March 31, 2004 and 2003, options to purchase 11.6 million and 36.5 million
shares, respectively, of Class A Common Stock of the Company were not included
in the computation of diluted income (loss) per share because the effect would
have been anti-dilutive. For the first quarter of 2003, the calculation above
does not add back the after-tax interest on convertible debt to the net loss in
the numerator and does not add the weighted average number of shares associated
with the convertible debt to the denominator because the effect would have been
anti-dilutive for the period. Had the effect of conversion of the debt been
dilutive on an "if converted" method for the first quarter of 2003, $3.2 million
of after-tax interest would have been added to the numerator and 47.6 million
shares would have been added to the denominator of the above calculation. As the
debt was converted into shares of Class A Common Stock during the fourth quarter
of 2003, the shares associated with the debt have been included in basic income
per share during the first quarter of 2004.
Note 4 - Accounting for Stock-Based Compensation
The Company has several stock-based compensation plans. The Company applies APB
Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") in
accounting for its employee stock options and purchase rights and applies
Statement of Financial Accounting Standards No. 123 "Accounting for Stock Issued
to Employees" ("SFAS 123") for disclosure purposes only. Under APB 25, the
intrinsic value method is used to account for stock-based employee compensation
plans. The SFAS 123 disclosures include pro forma net loss and loss per share as
if the fair value-based method of accounting had been used.
7
If compensation for employee options had been determined based on SFAS 123, the
Company's pro forma net loss, and pro forma loss per share would have been as
follows (in thousands, except per share data):
Three Months Ended
March 31,
2004 2003
----------- ----------
Net income (loss) as reported $ 464 $ (1,512)
Add: Stock-based compensation expense, net of tax, already included in
net income (loss) as reported 315 163
Deduct: Pro forma employee compensation cost, net of tax, related to
stock options, restricted stock and share purchase plan, net of tax (2,490) (5,697)
----------- ----------
Pro forma net loss $ (1,711) $ (7,046)
=========== ==========
Basic and diluted income (loss) per share:
As reported $ 0.00 $ (0.02)
Pro forma $ (0.01) $ (0.09)
The fair value of the Company's stock plans was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
Three Months Ended
March 31,
2004 2003
----------- ----------
Expected Dividend yield 0% 0%
Expected stock price volatility 42% 45%
Risk-free interest rate 2.3% 2.0%
Expected life in years 3.8 3.4
Note 5 - Segment Information
The Company manages its business in three reportable segments organized on the
basis of differences in its products and services: Research, Consulting, and
Events. Research consists primarily of subscription-based research products.
Consulting consists primarily of consulting and measurement engagements. Events
consists of various symposia, expositions and conferences.
The Company evaluates reportable segment performance and allocates resources
based on gross contribution margin. Gross contribution, as presented below, is
the profit or loss from operations before interest income and expense, certain
selling, general and administrative costs, amortization, income taxes, other
expenses, and foreign exchange gains and losses. The accounting policies used by
the reportable segments are the same as those used by the Company.
The Company does not identify or allocate assets, including capital
expenditures, by operating segment. Accordingly, assets are not reported by
segment because the information is not available and is not reviewed in the
evaluation of segment performance.
8
The following tables present information about reportable segments (in
thousands). The "Other" column consists primarily of software sales and certain
other revenues and related expenses that do not meet the segment reporting
quantitative thresholds. There are no inter-segment revenues.
Research Consulting Events Other Consolidated
---------- ---------- ----------- ----------- ------------
THREE MONTHS ENDED
MARCH 31, 2004:
Revenues $ 122,242 $ 64,626 $ 18,171 $ 3,628 $ 208,667
Gross contribution 79,027 25,244 7,107 3,157 114,535
Corporate and other expenses (108,364)
------------
Operating income $ 6,171
============
THREE MONTHS ENDED
MARCH 31, 2003:
Revenues $ 115,724 $ 61,779 $ 23,509 $ 3,270 $ 204,282
Gross contribution 73,650 20,885 8,400 2,368 105,303
Corporate and other expenses (102,514)
------------
Operating income $ 2,789
============
Note 6 - Goodwill and Intangible Assets
The changes in the carrying amount of goodwill, by reporting segment, for the
first quarter of 2004 are as follows:
Balance Currency Balance
December 31, Translation March 31,
2003 Impairments Adjustments 2004
------------ ----------- ----------- -----------
Research $ 128,896 $ - $ 222 $ 129,118
Consulting 68,803 (739) 491 68,555
Events 30,606 - - 30,606
Other 2,082 - (1) 2,081
------------ ----------- ----------- -----------
Total goodwill $ 230,387 $ (739) $ 712 $ 230,360
============ =========== =========== ===========
During the first quarter of 2004, we recorded an impairment loss for goodwill
recorded for certain operations in South America as a result of our decision to
close those operations.
9
The following table presents the Company's intangible assets subject to
amortization (in thousands):
March 31, December 31,
2004 2003
----------- ------------
Non-compete agreements:
Gross cost $ 13,193 $ 13,257
Accumulated amortization (12,701) (12,599)
----------- ------------
Non-compete agreements, net 492 658
Trademarks and tradenames:
Gross cost 1,808 1,811
Accumulated amortization (1,516) (1,484)
----------- ------------
Trademarks and tradenames, net 292 327
----------- ------------
Intangible assets, net $ 784 $ 985
=========== ============
Aggregate amortization expense for the three month period ended March 31, 2004
and 2003 was $0.2 million and $0.4 million, respectively. The estimated future
amortization expense of purchased intangibles is as follows (in thousands):
2004 (remaining nine months) $ 466
2005 242
2006 64
2007 11
2008 1
---------
$ 784
=========
Note 7 - Other Charges
During the first quarter of 2004, we recorded other charges of $10.5 million,
$10.4 million was associated with the realignment of our workforce and $0.1
million was associated with costs to close certain operations in South America.
The workforce realignment portion of the charge is for costs for employee
termination severance payments and related benefits. This workforce realignment
was a continuation of the action plan initiated during the fourth quarter of
2003 and has resulted in the termination of 132 employees during the first
quarter of 2004.
During the first quarter of 2003, we recorded other charges of $5.4 million
associated with workforce reductions. The charge related to costs associated
with employee termination severance payments and related benefits. This
workforce reduction has resulted in the termination of 92 employees during the
three months ended March 31, 2003.
10
The following table summarizes the activity related to the liability for the
restructuring programs recorded as other charges (in thousands):
Workforce Excess
Reduction Facilities
Costs Costs Other Total
--------- ---------- ----- ---------
Accrued liability at December 31, 2002 11,723 15,936 - 27,659
Charges during first quarter of 2003 5,426 - - 5,426
Payments (7,044) (1,767) - (8,811)
--------- ---------- ----- ---------
Accrued liability at March 31, 2003 10,105 14,169 - 24,274
Charges during remainder of 2003 14,574 9,716 - 24,290
Non-cash charges (123) - - (123)
Payments (11,740) (4,726) - (16,466)
--------- ---------- ----- ---------
Accrued liability at December 31, 2003 12,816 19,159 - 31,975
Charges during first quarter of 2004 10,410 - 103 10,513
Non-cash charges (142) - (35) (177)
Payments (8,853) (1,121) (31) (10,005)
--------- ---------- ----- ---------
Accrued liability at March 31, 2004 $ 14,231 $ 18,038 $ 37 $ 32,306
========= ========== ===== =========
The non-cash charges for workforce reductions result from the establishment of a
new measurement date for certain equity compensation arrangements upon the
modification of the terms of the related agreement. The accrued severance of
$14.2 million at March 31, 2004 is expected to be paid by December 31, 2004. We
will fund these costs from existing cash.
Note 8 - Stock Programs
Stock Repurchase Program
On July 17, 2001, our Board of Directors approved the repurchase of up to $75
million of Class A and Class B Common Stock. On July 25, 2002, our Board of
Directors increased the authorized stock repurchase program from the previously
approved $75 million to up to $125 million of our Class A and Class B Common
Stock. On July 24, 2003, our Board of Directors authorized an additional
increase of $75 million in the stock repurchase program bringing the total
authorization to date to $200 million. During the first quarter of 2004, we
repurchased 292,925 shares of our Class A Common Stock and 57,900 shares of our
Class B Common Stock at an aggregate cost of $4.0 million under this program. On
a cumulative basis at March 31, 2004, we have purchased $131.1 million of our
stock under this stock repurchase program.
Restricted Stock Award
During the first quarter of 2004, we granted 175,000 shares of restricted stock
on which the restriction may lapse after a three-year period based upon revenue
and earnings metrics.
Note 9 - Contingencies
We are involved in legal proceedings and litigation arising in the ordinary
course of business. We believe the outcome of all current proceedings, claims
and litigation will not have a material effect on our financial position or
results of operations when resolved in a future period.
We have various agreements in which we may be obligated to indemnify the other
party with respect to certain matters. Generally, these indemnification clauses
are included in contracts arising in the normal
11
course of business under which we customarily agree to hold the other party
harmless against losses arising from a breach of representations related to such
matters as title to assets sold and licensed or certain intellectual property
rights. It is not possible to predict the maximum potential amount of future
payments under these indemnification agreements due to the conditional nature of
our obligations and the unique facts of each particular agreement. Historically,
payments made by us under these agreements have not been material. As of March
31, 2004, we are not aware of any indemnification agreements that would require
material payments.
Note 10 - Subsequent Event
On April 29, 2004, Michael Fleisher, our Chairman and CEO, announced his
intention to leave Gartner sometime prior to the end of 2004. In conjunction
with his departure, Mr. Fleisher has entered into an amendment to his employment
agreement pursuant to which he has agreed that he will continue to serve in the
capacity of Chief Executive Officer for up to six months. In satisfaction of
existing obligations under his employment agreement and in consideration of his
assistance in this six-month transition period, our Board of Directors has
agreed that Mr. Fleisher will receive: (a) payments totaling $4.3 million, which
includes his 2003 bonus and compensation in respect of the transition period;
(b) at our cost, group health benefits pursuant to our standard programs for
himself, his spouse and any children for two years or until he obtains other
employment, if that occurs sooner; and (c) reasonable office support for one
year, or until he obtains other employment, if that occurs sooner. The majority
of these costs are expected to be recognized as an expense during the second
quarter of 2004.
In addition, in accordance with his previously existing employment agreement
with regards to equity arrangements, Mr. Fleisher will receive (a) acceleration
in full of vesting of all equity arrangements subject to vesting and granted
prior to October 1, 2002; (b) continued vesting until October 29, 2006 of all
outstanding equity awards granted on or after October 1, 2002; and (c) the
ability to exercise all equity arrangements granted after October 1, 2001 until
October 29, 2007 and all equity arrangements granted on or prior to October 1,
2001 until October 29, 2005.
12
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 first
quarter 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, 2003. Historical results and
percentage relationships are not necessarily indicative of operating results for
future periods.
References to "the Company," "we," "our," and "us" are to Gartner, Inc. and its
subsidiaries.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report contains
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," "expects," "should," "believes," "plans," "anticipates," "estimates,"
"predicts," "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 report and in our Annual Report on
Form 10-K for the year ended December 31, 2003. 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 also should review
carefully any risk factors described in other reports filed by us with the
Securities and Exchange Commission.
OVERVIEW
With the convergence of IT and business, technology has become increasingly more
important - not just to technology professionals, but also to business
executives. We are an independent and objective research and advisory firm that
helps IT and business executives use technology to build, guide and grow their
enterprises.
We employ a diversified business model that leverages the breadth and depth of
our research intellectual capital while enabling us to maintain and grow our
market-leading position and brand franchise. Our strategy is to align our
resources and our infrastructure to leverage that intellectual capital into
additional revenue streams through effective packaging, campaigning and
cross-selling of our products and services. Our diversified business model
provides multiple entry points and synergies that facilitate increased client
spending on our research, consulting and events. A key strategy is to increase
business volume with our most valuable clients, identifying relationships with
the greatest sales potential and expanding those relationships by offering
strategically relevant research and analysis.
We intend to maintain a balance between (1) pursuing opportunities and applying
resources with a strict focus on growing our businesses and (2) generating
profitability through a streamlined cost structure.
We have been organized into three business segments: research, consulting and
events.
13
- - RESEARCH products and services highlight industry developments, review new
products and technologies, provide quantitative market research, and
analyze industry trends within a particular technology or market sector.
- - CONSULTING consists primarily of consulting, measurement engagements and
strategic advisory services (paid one-day analyst engagements) ("SAS"),
which provide assessments of cost, performance, efficiency and quality
focused on the IT industry.
- - EVENTS consists of various symposia, conferences and exhibitions focused
on the IT industry.
We have recently begun to undertake a plan to ensure that our business units are
closely aligned with client need and market opportunity. As part of that
process, we have begun to reorganize our business in to three distinct business
units:
- - GARTNER INTELLIGENCE will deliver content and advice to IT professionals,
technology vendors and investors through vehicles such as Research, Events
and SAS.
- - GARTNER EXECUTIVE PROGRAMS will offer membership and peer-networking
services for chief information officers (CIOs) and other key executives,
through offerings such as the highly successful EXP membership program.
- - GARTNER CONSULTING will focus on customized engagements that allow CIOs
and their counterparts to apply Gartner's knowledge to their specific
business situations, with an emphasis on areas such as outsourcing and IT
management.
Organizing our business units around distinct client segments will allow us to
make our existing products more relevant, accelerate the development of new
products that provide solutions for specific client needs, and increase the
Gartner value proposition overall.
As part of implementing this plan, we continue to analyze whether or not it
impacts how we report on our business segments. We will continue to report our
segment information as we have historically until we complete the alignment of
our financial reporting to this new structure and can then analyze what impact,
if any, this alignment will have.
We believe the following business measurements are important performance
indicators for our business segments.
REVENUE CATEGORY 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. When wallet
retention exceeds client retention, it is an indication
of retention of higher-spending clients.
14
Consulting CONSULTING BACKLOG represents future revenue to be
derived from in-process consulting, measurement and SAS
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.
Events NUMBER OF EVENTS represents the total number of hosted
events completed during the period.
EXECUTIVE SUMMARY OF OPERATIONS AND FINANCIAL POSITION
Technology spending has decreased steadily over the past few years. As a result,
sales of our IT related research have declined as well. During this period, we
have been focused on stabilizing and then growing revenue in our core Research
business. This continued focus began to yield the desired outcome during the
latter half of Calendar 2003. We ended the latter half of 2003 with two
consecutive quarters of sequential increases in contract value after seven
consecutive quarters of sequentially decreasing contract value. Contract value
increased sequentially again in the first quarter of 2004, the third consecutive
sequential increase, and increased on a year over year comparison. Our research
client retention rates maintained a strong rate of 77%, after steadily
increasing to 78% at December 31, 2003 from 74% at December 31, 2002. We believe
the technology market is showing signs of a recovery, and we believe the
realignment of our business units discussed previously will help us grow during
this expected recovery.
Our Consulting business ended the 2003 year with a positive trend. We ended
Calendar 2003 with two consecutive quarters of sequential increases in backlog
after five consecutive quarters of sequential decreases. As we noted in our
Annual Report on Form 10-K, we have been exiting certain less profitable
consulting practices and geographies as part of the realignment previously
discussed. Due to this plan of exiting certain practices and geographies,
consulting backlog decreased to $92 million at March 31, 2004 from $100 million
at December 31, 2003. We also mentioned in our Annual Report on Form 10-K that
we expect this realignment to address our sub-optimal utilization rates and our
lack of scale in some regions. During the first quarter of 2004, our consultant
utilization rates increased to approximately 62% as compared to approximately
58% during the first quarter of 2003.
Our Events business continues to deliver strong results, particularly in an
environment where few competitors have survived. Our emphasis on managing the
Events portfolio to retain our long-time successful events and introduce
promising new events has resulted in improved revenue performance. During the
first quarter of 2004, revenues from events that existed in the same quarter
last year increased approximately 13%. Revenues recognized during the first
quarter of 2004 were lower than the prior year quarter due to significantly
lower number of events being held primarily due to the timing of our Events
calendar.
During the fourth quarter of Calendar 2003, we made an important change to our
capital structure. Our 6% convertible notes were converted into Class A Common
Stock. This eliminated all of our outstanding debt, and the related interest
expense. We ended the first quarter of 2004 with $393 million of stockholders'
equity. In addition, our cash increased from $230 million at December 31, 2003
to $263 million at March 31, 2004, while repurchasing $4 million of our common
stock. We believe that we have strong financial resources to support additional
investments in growth.
15
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires the application of appropriate
accounting policies. The policies discussed below are considered by management
to be critical to an understanding of Gartner's financial statements because
their application requires the most significant management judgments. Specific
risks for these critical accounting policies are described below.
REVENUE RECOGNITION - We recognize revenue in accordance with SEC Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements, and SAB No. 104, Revenue Recognition. Revenue by significant source
is accounted for as follows:
- - Research revenues are derived from subscription contracts for research
products. Revenues from research products are deferred and recognized
ratably over the applicable contract term;
- - Consulting revenues are based primarily on fixed fees or time and
materials for discrete projects. Revenues for such projects are recognized
as work is delivered and/or services are provided and are evaluated on a
contract by contract basis;
- - Events revenues are deferred and recognized upon the completion of the
related symposium, conference or exhibition; and
- - Other revenues, principally software licensing fees, are recognized when a
signed non-cancelable software license exists, delivery has occurred,
collection is probable, and the fees are fixed or determinable. Revenue
from software maintenance is deferred and recognized ratably over the term
of the maintenance agreement, which is typically twelve months.
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 have a
30-day cancellation clause, but have not produced material cancellations to
date. 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. For those government contracts that permit
termination, the Company bills the client the full amount billable under the
contract but only records a receivable equal to the earned portion of the
contract. In addition, the Company only records deferred revenue on these
government contracts when cash is received. Deferred revenues attributable to
government contracts were $34.0 million and $38.6 million at March 31, 2004 and
December 31, 2003, respectively. In addition, at March 31, 2004 and December 31,
2003, the Company had not recognized uncollected receivables or deferred
revenues, relating to government contracts that permit termination, of $5.8
million and $6.6 million, respectively.
UNCOLLECTIBLE FEES RECEIVABLE - Provisions for bad debts are recognized as
incurred. The measurement of likely and probable losses and the allowance for
uncollectible fees receivable 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 material 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. Total trade receivables at March 31, 2004 were $244.7 million, offset
by an allowance for losses of approximately $9.0 million. Total trade
receivables at December 31, 2003 were $275.1 million, offset by an allowance for
losses of approximately $9.0 million.
16
IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS - The evaluation of goodwill
is performed in accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets." Among other requirements, this standard eliminated goodwill
amortization upon adoption and required an initial assessment for goodwill
impairment within six months of adoption and at least annually thereafter. The
evaluation of other intangible assets is performed on a periodic basis. These
assessments require us to estimate the fair value of our reporting units based
on estimates of future business operations and market and economic conditions in
developing long-term forecasts. If we determine the fair values are less than
the carrying amount of goodwill recorded on our Consolidated Balance Sheets, we
must recognize an impairment charge, for the associated goodwill of that
reporting unit, to earnings in our financial statements. Goodwill is evaluated
for impairment at least annually, or whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors we consider
important that could trigger a review for impairment include 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, and significant negative
industry or economic trends.
Due to the numerous variables associated with our judgments and assumptions
relating to the valuation of the reporting units and the effects of changes in
circumstances affecting these valuations, both the precision and reliability of
the resulting estimates are subject to uncertainty, and as additional
information becomes known, we may change our estimates. During the first quarter
of 2004, we recorded an impairment charge of $0.7 million relating to goodwill
associated with certain operations in South America that we decided to close.
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 exposure 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 sheet. We record
a valuation allowance to reduce our deferred tax assets when future realization
is in question. We consider 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 would be able to realize our
deferred tax assets in the future in excess of our net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, should we determine that we would not be able
to realize all or part of our net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to income in the period
such determination was made.
CONTINGENCIES AND OTHER LOSS RESERVES AND ACCRUALS - We establish reserves for
severance costs, lease costs associated with excess facilities, contract
terminations and asset impairments as a result of actions we undertake to
streamline our organization, reposition certain businesses and reduce ongoing
costs. 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. To the extent actual costs differ from those estimates, reserve
levels may need to be adjusted. 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. Additionally, we record accruals for estimated discretionary
incentive compensation costs during the year. Amounts accrued at the end of each
reporting period are based on our estimates and may require adjustments as the
ultimate amount paid associated with these incentives are sometimes not known
until after year-end.
IMPAIRMENT OF INVESTMENT SECURITIES - A charge to earnings is made when a market
decline below cost is other than temporary. Management regularly reviews each
investment security for impairment based on criteria that include: the length of
time and the extent to which market value has been less than cost, the
17
financial condition and near-term prospects of the issuer, the valuation of
comparable companies, and our intent and ability to retain the investment for a
period of time sufficient to allow for any anticipated recovery in market value.
Future adverse changes in market conditions or poor operating results of
underlying investments could result in losses or an inability to recover the
carrying value of the investments that may not be reflected in an investment's
current carrying value, thereby possibly requiring an impairment charge in the
future. Total investments in equity securities were $10.6 million and $10.9
million at March 31, 2004 and December 31, 2003, respectively.
RESULTS OF OPERATIONS
OVERALL RESULTS
TOTAL REVENUES increased 2% in the first quarter of 2004 to $208.7 million
compared to $204.3 million for the first quarter of 2003. The increase in total
revenues resulted from increased Research revenues and the positive effects of
foreign currency translation, partially offset by the timing of events as many
events held in the first quarter of 2003 are planned for the second quarter of
2004, including the attendee portion of our Spring Symposium in North America,
which was completed in the second quarter of 2004. If we were to exclude the
events from the first quarter of 2003 that are planned for later quarters of
2004, total revenues would have increased approximately 6%. The effects of
foreign currency translation had approximately a 5% positive effect on revenues.
Please refer to the section of this MD&A entitled "Segment Results" for a
further discussion of revenues by segment.
COST OF SERVICES AND PRODUCT DEVELOPMENT decreased $6.9 million, or 7%, to $95.5
million in the first quarter of 2004 from $102.3 million in the first quarter of
2003. Excluding the effects of foreign currency translation, cost of services
and product development would have decreased by approximately 12%. The decrease
in cost of services and product development resulted primarily from lower
headcount as a result of the realignment of our workforce. Additionally, during
the first quarter of 2004, cost of services and product development benefited by
the reversal of $1.8 million of prior years' discretionary incentive
compensation programs. As a percentage of sales, cost of services and product
development decreased to 46% during the first quarter of 2004 from 50% during
the first quarter of 2003 as a result of higher Events margins and Consulting
margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $4.1 million, or 5%, to
$87.6 million in the first quarter of 2004 from $83.5 million in the first
quarter of 2003 primarily due to the effects of foreign currency translation.
Excluding the effects of foreign currency translation, SG&A expenses would have
been consistent with the prior year period. During the first quarter of 2004,
SG&A expenses benefited by the reversal of $0.7 million of prior years'
discretionary incentive compensation programs.
DEPRECIATION EXPENSE for the first quarter of 2004 decreased 19% to $7.9
million, compared to $9.8 million for the first quarter 2003. The decrease was
due to a reduction in capital spending during 2002 and 2003 relative to the
capital spending in 2000 and 2001, which has led to a decrease in depreciation
expense.
AMORTIZATION OF INTANGIBLES AND GOODWILL IMPAIRMENTS of $0.9 million for the
first quarter of 2004 increased from $0.4 million for the same period in 2003
due to the impairment of goodwill of $0.7 million associated with certain
operations in South America as a result of our decision to close those
operations. Excluding the impairment, the decrease in the amortization of
intangible assets is due to certain intangible assets having been fully
amortized since the first quarter of 2003.
18
OTHER CHARGES of $10.5 million during the first quarter of 2004 were primarily
associated with a realignment of our workforce. This workforce realignment was a
continuation of the action plan initiated during the fourth quarter of 2003 and
has resulted in the termination of 132 employees, or approximately 4% of our
workforce, bringing the total terminations to 262 employees associated with the
action plan announced in December 2003. Other charges of $5.4 million during the
first quarter of 2003 were for costs for employee termination severance and
benefits associated with workforce reductions. This workforce reduction resulted
in the termination of 92 employees, or approximately 2% of the Company's
workforce at the time.
INTEREST INCOME (EXPENSE), NET was income of $0.2 million during the first
quarter of 2004 as compared to expense of $5.6 million in the first quarter of
2003. The conversion of our outstanding convertible debt to equity during the
fourth quarter of 2003 has substantially eliminated our interest expense.
OTHER (EXPENSE) INCOME, NET for the first quarter of 2004 includes the non-cash
write-off of $2.9 million of our accumulated foreign currency translation
adjustments associated with certain of our operations in South America that we
have decided to close. As a result of the decision to close the operations, we
were required to reclassify these currency adjustments that have been
accumulated within equity, in accordance with Statement of Financial Accounting
Standards No. 52 "Foreign Currency Translation," to earnings. Other (expense)
income, net for the first quarter of 2003 consists primarily of net foreign
currency exchange gains.
PROVISION (BENEFIT) FOR INCOME TAXES was $2.9 million in the first quarter of
2004 compared to ($0.7) million in the first quarter of 2003. The effective tax
rate was 86% for the first quarter of 2004 and 33% for the first quarter of
2003. The effective tax rate was higher in 2004 due to certain expenses, the
goodwill impairment and the non-cash write-off of our accumulated foreign
currency translation adjustments associated with certain of our operations in
South America discussed previously, receiving no tax benefit. Additionally, the
benefit received on the workforce reduction charge during 2004 was lower than
the annualized effective tax rate due to the lower tax rates in the
jurisdictions where these reductions occurred. Excluding these items, the
effective tax rate in 2004 was 33%.
SEGMENT RESULTS
We evaluate reportable segment performance and allocate resources based on gross
contribution margin. Gross contribution is defined as operating income excluding
certain selling, general and administrative expenses, depreciation, amortization
of intangibles and other charges. Gross contribution margin is defined as gross
contribution as a percentage of revenues.
Research
Research revenues increased 6% to $122.2 million for the first quarter of 2004,
compared to $115.7 million for the first quarter of 2003. The increase was due
to strong sales performance in the latter half of 2003 resulting in slightly
higher subscription revenues in the first quarter of 2004, as well as the
positive effects of foreign currency translation.
Research gross contribution of $79.0 million for the first quarter of 2004
increased 7% from $73.7 million for the first quarter of 2003. Gross
contribution margin for the first quarter of 2004 increased to 65% from 64% in
the prior year period. The increase in gross contribution and gross contribution
margin is a result of lower headcount as a result of our workforce realignment,
along with the growth in revenues.
19
Research contract value increased 4% to $492.9 million at March 31, 2004 from
$474.4 million at March 31, 2003 primarily due to the effects of foreign
currency. Client retention rates increased three percentage points to 77% at
March 31, 2004 from 74% at March 31, 2003, and wallet retention rates increased
to 92% during the first quarter of 2004 from 83% during the first quarter of
2003. The stabilization of contract value and the increase in client and wallet
retention rates reflect the beginning stages of what we believe to be an upturn
in demand in the technology market.
Consulting
Consulting revenues increased 5% to $64.6 million for the first quarter of 2004
compared to $61.8 million for the first quarter of 2003. Excluding the effects
of foreign currency translation, Consulting revenues would have decreased by
approximately 1%. Consulting revenues has remained relatively stable with the
prior year period despite the realignment of our business to exit certain less
profitable consulting practices and geographies, which has reduced our billable
headcount.
Consulting gross contribution of $25.2 million for the first quarter of 2004
increased 21% from $20.9 million for the first quarter of 2003. Gross
contribution margin for the first quarter of 2004 increased five percentage
points to 39% from 34% in the prior year period. The increase in gross
contribution margin was driven by higher consultant utilization rates, as we
realigned our workforce and reduced headcount.
Consulting backlog, which represents future revenues to be recognized from
in-process consulting, measurement and SAS, decreased 7% to $91.6 million at
March 31, 2004, compared to $98.3 million at March 31, 2003. Consulting backlog
decreased primarily due our decision to exit certain less profitable consulting
practices and geographies along with our higher utilization rates of consultants
that has resulted in a higher conversion of backlog into revenues during the
first quarter of 2004.
Events
Events revenues decreased 23% to $18.2 million for the first quarter of 2004,
compared to $23.5 million for the first quarter of 2003. The decrease was
primarily due to the timing of events, including the attendee portion of our
North American Spring Symposium and certain Theme and Vision events, which were
completed in the first quarter of 2003 as compared to the second quarter of
2004. In comparing our Events revenues excluding the events from the first
quarter of 2003 that are planned for later quarters in 2004, Events revenues
would have increased by approximately 7%.
Gross contribution of $7.1 million for the first quarter of 2004 decreased from
$8.4 million for the first quarter of 2003. Gross contribution margin for the
first quarter of 2004 of 39% increased from 36% for the first quarter of 2003.
The increase in gross contribution margin was due primarily to the timing of our
Events calendar as our traditionally higher margin events took place during the
first quarter of 2004.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities totaled $24.7 million for the three months
ended March 31, 2004 compared to $33.7 million for the three months ended March
31, 2003. The net decrease in cash flow from operating activities of $9.0
million was due primarily to payments of our 2003 bonuses during the first
quarter of 2004. No bonuses were paid during the first quarter of 2003 as they
had previously been paid during the quarter ended December 31, but are now being
paid during the March 31 quarter as a result of our change in fiscal year that
became effective January 1, 2003. Partially offsetting the decrease in operating
cash flows from bonus payments were higher collections of fees receivables in
the first quarter of 2004 compared with the first quarter of 2003.
20
Cash used in investing activities, consisting of capital expenditures in the
first quarter of both years, was relatively consistent in both periods.
Cash provided by financing activities totaled $12.3 million for the three months
ended March 31, 2004, compared to cash used in financing activities of $4.8
million for the three months ended March 31, 2003. We purchased $4.0 million of
common stock for treasury during the first quarter of 2004 as compared to $6.8
million during the same period in the prior year. We received proceeds from
stock issued for stock plans of $16.3 million during the first quarter of 2004
as compared to $2.0 million during the same period in the prior year as a result
of our higher stock price during the first quarter of 2004 as compared to 2003,
which resulted in more stock option exercises by employees.
OBLIGATIONS AND COMMITMENTS
We have a $200.0 million unsecured senior revolving credit facility led by
JPMorgan Chase Bank. At March 31, 2004, there were no amounts outstanding under
the facility. We are subject to certain customary affirmative, negative and
financial covenants under this credit facility, and continued compliance with
these covenants preclude us from borrowing the maximum amount of the credit
facility from time to time. These covenants are primarily based on financial
results and other measures such as contract value. As a result of these
covenants, our borrowing availability at March 31, 2004 was $179.4 million. This
amount is available to us for borrowing until July 2004 when this credit
facility expires. We expect to obtain a revolving credit facility to replace the
current facility upon expiration.
We believe that our current cash balances, together with cash anticipated to be
provided by operating activities, will be sufficient for our expected short-term
and foreseeable long-term cash needs in the ordinary course of business. If we
were to require substantial amounts of additional capital to pursue business
opportunities that may arise involving substantial investments of additional
capital, there can be no assurances that such capital will be available to us or
will be available on commercially reasonable terms.
Stock Repurchase Program
On July 17, 2001, our Board of Directors approved the repurchase of up to $75.0
million of Class A and Class B Common Stock. On July 25, 2002, our Board of
Directors increased the authorized stock repurchase program from the previously
approved $75 million to up to $125 million of its Class A and Class B Common
Stock. On July 24, 2003, the Company's Board of Directors authorized an
additional increase of $75 million in the stock repurchase program bringing the
total authorization to date to $200 million. During the three months ended March
31, 2004, we repurchased 292,925 shares of our Class A Common Stock and 57,900
shares of our Class B Common Stock at an aggregate cost of $4.0 million under
this program. On a cumulative basis at March 31, 2004, we have purchased $131.1
million of our stock under this stock repurchase program. We expect to make
repurchases from time to time over the next two years through open market
purchases, block trades or otherwise. Repurchases are subject to the
availability of the stock, prevailing market conditions, the trading price of
the stock, and our financial performance. Repurchases will be funded from cash
flow from operations and possible borrowings under our existing credit facility.
BUSINESS AND TRENDS
Our quarterly and annual revenue and operating income fluctuate as a result of
many factors, including the timing of the execution of research contracts, the
extent of completion of consulting engagements, the timing of Symposia and other
events, all of which occur to a greater extent in the fourth quarter, as well as
21
the amount of new business generated, the mix of domestic and international
business, changes in market demand for our products and services, the timing of
the development, introduction and marketing of new products and services, and
competition in the industry. The potential fluctuations in our operating income
could cause period-to-period comparisons of operating results not to be
meaningful and could provide an unreliable indication of future operating
results.
Over the past few years we have seen a decrease in overall technology spending
due to the economic environment. In response to the decrease in technology
spending we have attempted to constrain spending and have implemented cost
reduction programs to reduce workforce and facilities costs. The timing of the
cost reductions does not necessarily coincide with the timing of decreases in
revenues, but is anticipated to provide future benefit in the form of lower
expenses. While we have reduced certain costs, we also plan to maintain a level
of spending sufficient for us to be in a strong position to grow as economic
conditions continue to improve.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE.
We operate in a very competitive and rapidly changing environment that involves
numerous risks and uncertainties, some of which are beyond our control. In
addition, we and our clients are affected by the economy. The following section
discusses many, but not all, of these risks and uncertainties.
Economic Conditions. Our revenues and results of operations are influenced by
economic conditions in general and more particularly by business conditions in
the IT industry. A general economic downturn or recession, anywhere in the
world, could negatively affect demand for our products and services and may
substantially reduce existing and potential client information
technology-related budgets. The recent economic downturn in the United States
and globally has led to constrained IT spending, which has impacted our business
and may materially and adversely affect our business, financial condition and
results of operations, including the ability to: maintain client retention,
wallet retention and consulting utilization rates, and achieve contract value
and consulting backlog. To the extent our clients are in the IT industry, the
severe decline in that sector has also had a significant impact on IT spending.
Acts of Terrorism or War. Acts of terrorism, acts of war and other unforeseen
events, may cause damage or disruption to our properties, business, employees,
suppliers, distributors and clients, which could have an adverse effect on our
business, financial condition and operating results. Such events may also result
in an economic slowdown in the United States or elsewhere, which could adversely
affect our business, financial condition and operating results.
Competitive Environment. We face direct competition from a significant number of
independent providers of information products and services, including
information that can be found on the Internet free of charge. We also compete
indirectly against consulting firms and other information providers, including
electronic and print media companies, some of which may have greater financial,
information gathering and marketing resources than we do. These indirect
competitors could choose to compete directly with us in the future. In addition,
limited barriers to entry exist in the markets in which we do business. As a
result, additional new competitors may emerge and existing competitors may start
to provide additional or complementary services. Additionally, technological
advances may provide increased competition from a variety of sources. However,
we believe the breadth and depth of our research assets position us well versus
our competition. Increased competition may result in loss of market share,
diminished value in our products and services, reduced pricing and increased
marketing expenditures. We may not be successful if we cannot compete
effectively on quality of research and analysis, timely delivery of information,
customer service, the ability to offer products to meet changing market needs
for information and analysis, or price.
22
Renewal of Research Business by Existing Clients. Some of our success depends on
renewals of our subscription-based research products and services, which
constituted 59% of our revenues for the first quarter of 2004 and 57% for the
first quarter of 2003. These research subscription agreements have terms that
generally range from twelve to thirty months. Our ability to maintain contract
renewals is subject to numerous factors, including those described in this
Quarterly Report. Additionally, as we implement our strategy to realign our
business to client needs, we may shift the type and pricing of our products
which may impact client renewal rates. While client retention rates were 77% at
March 31, 2004 and 74% at March 31, 2003, there can be no guarantee that we will
continue to have this level of client renewals. Any material decline in renewal
rates could have an adverse impact on our revenues and our financial condition.
Non-Recurring Consulting Engagements. Consulting segment revenues constituted
31% of our revenues for the first quarter of 2004 and 30% for the first quarter
of 2003. These consulting engagements typically are project-based and
non-recurring. Our ability to replace consulting engagements is subject to
numerous factors, including those described in this Quarterly Report. Any
material decline in our ability to replace consulting arrangements could have an
adverse impact on our revenues and our financial condition.
Restructuring, Reorganization and Management Team. Our future success depends,
in significant part, upon the continued service and performance of our senior
management and other key personnel. We have recently reorganized our business
around specific client needs. As part of this reorganization, a number of key
management positions have been filled by the promotion of current employees or
the hiring of new employees. As part of this reorganization, we have
restructured our workforce in order to streamline operations and strengthen key
consulting practices. If the reorganization and restructuring of our business do
not lead to the results we expect, our ability to effectively deliver our
products, manage our company and carry out our business plan may be impaired. On
April 29, 2004, our Chairman and Chief Executive Officer, Michael D. Fleisher
announced his intention to leave Gartner sometime prior to the end of the year.
Accordingly, our Board has formed a search committee, which is looking at both
internal and external candidates. Our business may suffer if we encounter delays
in hiring a new Chief Executive Officer. In addition, there may be only a
limited number of persons with the requisite skills to serve as our Chief
Executive Officer and it may become increasingly difficult to hire such a
person. If we are unable to hire a Chief Executive Officer, or if we cannot
successfully integrate a new Chief Executive Officer into our senior management
team, then our ability to effectively deliver our products, manage our company
and carry out our business plan may be impaired.
Hiring and Retention of Employees. Our success depends heavily upon the quality
of our senior management, research analysts, consultants, sales and other key
personnel. We face competition for the limited pool of these qualified
professionals from, among others, technology companies, market research firms,
consulting firms, financial services companies and electronic and print media
companies, some of which have a greater ability to attract and compensate these
professionals. Some of the personnel that we attempt to hire are subject to
non-compete agreements that could impede our short-term recruitment efforts. Any
failure to retain key personnel or hire and train additional qualified personnel
as required to support the evolving needs of clients or growth in our business,
could adversely affect the quality of our products and services, and therefore,
our future business and operating results.
Maintenance of Existing Products and Services. We operate in a rapidly evolving
market, and our success depends upon our ability to deliver high quality and
timely research and analysis to our clients. Any failure to continue to provide
credible and reliable information that is useful to our clients could have a
material adverse effect on future business and operating results. Further, if
our predictions prove to be wrong or are not substantiated by appropriate
research, our reputation may suffer and demand for our
23
products and services may decline. In addition, we must continue to improve our
methods for delivering our products and services in a cost-effective manner.
Failure to increase and improve our electronic delivery capabilities could
adversely affect our future business and operating results.
Introduction of New Products and Services. The market for our products and
services is characterized by rapidly changing needs for information and
analysis. To maintain our competitive position, we must continue to enhance and
improve our products and services, develop or acquire new products and services
in a timely manner, and appropriately position and price new products and
services relative to the marketplace and our costs of producing them. Any
failure to achieve successful client acceptance of new products and services
could have a material adverse effect on our business, results of operations or
financial position.
International Operations. A substantial portion of our revenues is derived from
sales outside of North America. As a result, our operating results are subject
to the risks inherent in international business activities, including general
political and economic conditions in each country, changes in market demand as a
result of exchange rate fluctuations and tariffs and other trade barriers,
challenges in staffing and managing foreign operations, changes in regulatory
requirements, compliance with numerous foreign laws and regulations, different
or overlapping tax structures, higher levels of United States taxation on
foreign income, and the difficulty of enforcing client agreements, collecting
accounts receivable and protecting intellectual property rights in international
jurisdictions. We rely on local distributors or sales agents in some
international locations. If any of these arrangements are terminated by our
agent or us, we may not be able to replace the arrangement on beneficial terms
or on a timely basis, or clients of the local distributor or sales agent may not
want to continue to do business with us or our new agent.
Branding. We believe that our "Gartner" brand is critical to our efforts to
attract and retain clients and that the importance of brand recognition will
increase as competition increases. We may expand our marketing activities to
promote and strengthen the Gartner brand and may need to increase our marketing
budget, hire additional marketing and public relations personnel, expend
additional sums to protect the brand and otherwise increase expenditures to
create and maintain client brand loyalty. If we fail to effectively promote and
maintain the Gartner brand, or incur excessive expenses in doing so, our future
business and operating results could be materially and adversely impacted.
Organizational and Product Integration Related to Acquisitions. We have made and
may continue to make acquisitions of, or significant investments in, businesses
that offer complementary products and services. The risks involved in each
acquisition or investment include the possibility of paying more than the value
we derive from the acquisition, dilution of the interests of our current
stockholders or decreased working capital, increased indebtedness, the
assumption of undisclosed liabilities and unknown and unforeseen risks, the
ability to integrate successfully the operations and personnel of the acquired
business, the ability to retain key personnel of the acquired company, the time
to train the sales force to market and sell the products of the acquired
company, the potential disruption of our ongoing business and the distraction of
management from our business. The realization of any of these risks could
adversely affect our business.
Enforcement of Our Intellectual Property Rights. We rely on a combination of
copyright, patent, trademark, trade secret, confidentiality, non-compete and
other contractual provisions to protect our intellectual property rights.
Despite our efforts to protect our intellectual property rights, unauthorized
third parties may obtain and use technology or other information that we regard
as proprietary. Our intellectual property rights may not survive a legal
challenge to their validity or provide significant protection for us. The laws
of certain countries do not protect our proprietary rights to the same extent as
the laws of the United States. Accordingly, we may not be able to protect our
intellectual property against
24
unauthorized third-party copying or use, which could adversely affect our
competitive position. Our employees are subject to non-compete agreements. When
the non-competition period expires, former employees may compete against us. If
a former employee chooses to compete against us prior to the expiration of the
non-competition period, there is no assurance that we will be successful in our
efforts to enforce the non-compete provision.
Possibility of Infringement Claims. Third parties may assert infringement claims
against us. Regardless of the merits, responding to any such claim could be time
consuming, result in costly litigation and require us to enter into royalty and
licensing agreements which may not be offered or available on reasonable terms.
If a successful claim is made against us and we fail to develop or license a
substitute technology, our business, results of operations or financial position
could be materially adversely affected.
Potential Fluctuations in Operating Results. Our quarterly and annual operating
income may fluctuate in the future as a result of many factors, including the
timing of the execution of research contracts, which typically occurs in the
fourth calendar quarter, the extent of completion of consulting engagements, the
timing of symposia and other events, which also occur to a greater extent in the
fourth calendar quarter, the amount of new business generated, the mix of
domestic and international business, changes in market demand for our products
and services, the timing of the development, introduction and marketing of new
products and services, and competition in the industry. An inability to generate
sufficient earnings and cash flow, and achieve our forecasts, may impact our
operating and other activities. The potential fluctuations in our operating
income could cause period-to-period comparisons of operating results not to be
meaningful and may provide an unreliable indication of future operating results.
Significant Stockholder. Silver Lake Partners, L.P. ("SLP") and its affiliates
own approximately 45.4% of our outstanding Class A Common Stock and
approximately 35.7% on a combined basis with our outstanding Class B Common
Stock as of March 31, 2004. Currently, the owners of our Class A Common Stock
are only entitled to vote for two of the ten members of our Board of Directors
and vote together with the holders of the Class B Common Stock as a single class
on all other matters coming before the stockholders. SLP is restricted from
purchasing additional stock without our consent pursuant to the terms of a
Securityholders' Agreement. This Securityholders' Agreement also provides that
we cannot take certain actions, including acquisitions and sales of stock and/or
assets without SLP's consent. While SLP does not hold a majority of our
outstanding shares, it may be able to exercise significant influence over
matters requiring stockholder approval, including the election of directors and
the approval of mergers, consolidations and sales of our assets. SLP's interests
may differ from the interests of other stockholders.
Anti-takeover Protections. Provisions of our certificate of incorporation and
bylaws and Delaware law may make it difficult for any party to acquire control
of us in a transaction not approved by the requisite number of directors. These
provisions include:
- The presence of a classified board of directors;
- The existence of two classes of common stock with our Class B Common
Stock having the ability to elect 80% of our Board of Directors;
- The ability of the Board of Directors to issue and determine the
terms of preferred stock;
- Advance notice requirements for inclusion of stockholder proposals
at stockholder meetings; and
- The anti-takeover provisions of Delaware law.
These provisions could delay or prevent a change of control or change in
management that might provide stockholders with a premium to the market price of
their Common Stock.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
As of March 31, 2004, we have limited exposure to market risk for changes in
interest rates since our long-term debt was converted to equity during the
fourth quarter of 2003. Additionally, we have no borrowings under our $200.0
million unsecured senior revolving credit facility. Under the revolving credit
facility, the interest rate on borrowings is LIBOR plus an additional 100 to 200
basis points based on our debt-to-EBITDA ratio. We believe that an increase or
decrease of 10% in the effective interest rate on available borrowings from our
senior revolving credit facility, if fully utilized, would not have a material
effect on our future results of operations. Each 25 basis point increase or
decrease in interest rates would have an approximate $0.5 million annual effect
under the revolving credit facility if fully utilized.
Investment Risk
We are exposed to market risk as it relates to changes in the market value of
our equity investments. We invest in equity securities of public and private
companies directly and through SI I, a wholly-owned affiliate, and SI II, of
which we own 34%. SI I and SI II are engaged in making venture capital
investments in early to mid-stage IT-based or Internet-enabled companies. As of
March 31, 2004, we had investments in equity securities totaling $10.6 million.
Unrealized gains and losses were insignificant. These investments are inherently
risky as the businesses are typically in early development stages and may never
develop. Further, certain of these investments are in publicly traded companies
whose shares are subject to significant market price volatility. Adverse changes
in market conditions and poor operating results of the underlying investments
may result in us incurring additional losses or an inability to recover the
original carrying value of our investments. If there were a 100% adverse change
in the value of our equity portfolio as of March 31, 2004, this would result in
a non-cash impairment charge of $10.6 million. Additionally, we have a
commitment to fund an additional $4.0 million of investments with SI II.
Foreign Currency Exchange Risk
We face two risks related to foreign currency exchange: translation risk and
transaction risk. Amounts invested in our foreign operations are translated into
U.S. dollars at the exchange rates in effect at the balance sheet date. The
resulting translation adjustments are recorded as a component of accumulated
other comprehensive income (loss), net in the stockholders' equity section of
the Consolidated Balance Sheets. Our foreign subsidiaries generally collect
revenues and pay expenses in currencies other than the United States dollar.
Since the functional currencies of our foreign operations are generally
denominated in the local currency of our subsidiaries, the foreign currency
translation adjustments are reflected as a component of stockholders' equity and
do not impact operating results. Revenues and expenses in foreign currencies
translate into higher or lower revenues and expenses in U.S. dollars as the U.S.
dollar weakens or strengthens against other currencies. Therefore, changes in
exchange rates may affect our consolidated revenues and expenses (as expressed
in U.S. dollars) from foreign operations. Currency transaction gains or losses
arising from transactions in currencies other than the functional currency are
included in results of operations
From time to time we enter into foreign currency forward contracts or other
derivative financial instruments to hedge the effects of adverse fluctuations in
foreign currency exchange rates. At March 31, 2004, we had one foreign currency
forward contract outstanding. Foreign currency forward contracts are reflected
at fair value with gains and losses recorded currently in earnings.
26
The following table presents information about our foreign currency forward
contract outstanding as of March 31, 2004, expressed in U.S. dollar equivalents.
Forward
Currency Contract Exchange Unrealized
Purchased Currency Sold Amount Rate Loss Expiration Date
- --------- ------------- -------- -------- ---------- ---------------
Euros U.S. Dollars $ 3,300 1.2391 $ 15 April 23, 2004
ITEM 4. CONTROLS AND PROCEDURES
We have established disclosure controls and procedures that are designed to
ensure that the information we are required to disclose in our reports filed
under the Securities Exchange Act of 1934, as amended (the "Act"), is recorded,
processed, summarized and reported in a timely manner. Specifically, these
controls and procedures ensure that the information is accumulated and
communicated to our executive management team, including our chief executive
officer and our chief financial officer, to allow timely decisions regarding
required disclosure.
Management conducted an evaluation, as of March 31, 2004, of the effectiveness
and design of our disclosure controls and procedures, under the supervision and
with the participation of our chief executive officer and chief financial
officer. Based upon that evaluation, our chief executive officer and chief
financial officer have concluded that the Company's disclosure controls and
procedures are effective in alerting them in a timely manner to material Company
information required to be disclosed by us in reports filed under the Act.
In addition, there have been no significant changes in the Company's internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
27
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(e) Below is a summary of stock repurchases for the quarter ended March 31,
2004. See Note 8 of our Notes to Condensed Consolidated Financial
Statements for information regarding our stock repurchase program.
Maximum
Class A Common Stock Class B Common Stock Shares Value of Shares
-------------------------- -------------------------- Purchased that may yet
Total Average Total Average Under be Purchased
Shares Price Paid Shares Price Paid Announced Under Plan
Purchased per Share Purchased per Share Plan (in thousands)
--------- ---------- --------- ---------- --------- ---------------
January 2004 292,925 $ 11.45 57,900 $ 11.15 350,825
February 2004 - - - - -
March 2004 - - - - -
--------- ---------- --------- ---------- --------- ---------------
Total quarter 292,925 $ 11.45 57,900 $ 11.15 350,825 $ 68,868
========= ========== ========= ========== ========= ===============
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
3.2 Amended Bylaws, as amended through February 3, 2004.
4.4e Amendment No. 6 to the Amended and Restated Credit Agreement dated
as of March 31, 2004
10.11a Amendment to Employment Agreement between Michael D. Fleisher and
the Company dated as of April 29, 2004
31.1 Certification of chief executive officer under Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of chief financial officer under Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification under Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K dated February 5, 2004 to furnish
the Company's press release issued February 5, 2004, with respect to financial
results for Gartner, Inc. for the quarter and year ended December 31, 2003.
Items 1, 3, 4, and 5 of Part II are not applicable and have been omitted.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Gartner, Inc.
Date May 4, 2004 /s/ Christopher Lafond
--------------------------
Christopher Lafond
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
29