Gartner
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SYNOPSIS)* Randy Befumo (MF Templar) GARTNER GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GART)") else Response.Write("(NASDAQ: GART)") end if %> ALEXANDRIA, Va., July 18, 1996/FOOLWIRE/ --- GARTNER GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GART)") else Response.Write("(NASDAQ:GART)") end if %> today announced record revenue and earnings results for the third fiscal quarter ended June 30, 1996.
REVENUE GROWTH AND MIX
Contract value increased to $334.5 million, up 33% from the $251.9 million at the end of 1995's third quarter. Continuos services revenue for the third quarter increased by 29% to $77.5 million from $50.2 million recorded last year. This reflects continued market acceptance of new services introduced in 1996. Subscription revenues comprised about 80% of their total revenues. For the nine month period, continuous service revenues were up 33% to $224.5 million and represented 79% of revenues for the year.
Other revenues of $19.9 million reflected an increase of $3.8 million, or 23% versus the same quarter a year ago. Significant increases of conference revenue, consulting revenue and revenue from the sale of computer based training products were primarily responsible for the increase in non-continuous service revenue. For the first nine months, revenues from sources other than subscription-based products were $60.2 million, up 37% from the same period last year.
Their contract value growth of 33% continues to be ahead of their 25% to 30% range. The growth of the company of the quarter and first nine months continues to be balanced across all product lines. Real Decisions continues to grow at a faster pace than the other product lines. The DataQuest integration is ahead of schedule. Their new product acceptance is ahead of schedule, especially products like INet, their Internet product.
As we analyze the third quarter year-to-date, the same pattern has continued here. Our $20 million increase on a year-to-year basis, about $7 million is coming from new geographies, new business and new clients as well as new tier three penetration into existing clients. All electronic distribution to our clients has reached a $100 million. If you look at it from traditional from electronic side, the electronic side is really leading the way as far as penetration.
COST OF SERVICES
Cost of services and product development increased 28% from last year. This was caused by growth of cost to support the company's expanding client base. Also impacting the increase were expenses occurring in the third quarter with no comparable expenses for RCI, the company's computer-based training subsidiary. In addition, heavier than normal conference activity carrying a higher proportion of direct expenses, contributed to the cost growth. For the first nine months, costs of services and product development, which represent 38.7% of revenues, increased 35%. Nine months of training business are reflected in this year's cost with no similar costs in 1995.
For the first nine months, revenue continues to be ahead of the 25% to 30% mark with revenues growth 34% year-over-year, reaching close to $290 million. Operating income is up 60% from a year ago at close to $36 million. The company also has had earnings per share of $0.36 EPS versus $0.24 EPS a year ago in 1995. The financial controls and financial management of the company continue to deliver these numbers. Integration is going on faster than they expected and revenue acceleration allows them to continue to produce better earnings than they expected.
International revenues are around 32% to 34% and they have about 150 of their 400 sales people are overseas. The see 40% of the direct sales force remaining outside of the U.S., but next year almost all of the telemarketing people will be focused on the domestic business.
SALES & MARKETING
Sales and marketing expenses increased 15% in the quarter. This cost reflects the company's worldwide expansion of the companies tier two and tier three distribution strategy. However, leveraged gains for product expansion and in the introduction of DataQuest products in the distribution system favorably impacted cost performance versus last year. As a percent of revenues, these costs were down 2.6%, 24.2% of revenues versus 26.8% last year. As compared to last year, nine months sales and marketing expenses of $71.6 million were up 23%. Year-to-date sales and marketing as a percent of revenues declined 2.2% to 25.2%.
The strategy has been as part of all of these acquisitions to leverage premiere research and the best sales force in the business. This has all been premised on the ability to integrate and sell through one cohesive sales force. They have shifted to be a tier two and tier three salesforce as well as a tier one sales force. They will also add a telemarketing group of about 60 people as part of this salesforce in the future. They believe they will continue to find the same leverage as they have seen in the past with sales and marketing.
They will continue to expand tier two, tier three and tier four (telemarketing) and enhance the relationship of "one client, one salesperson." They continue to add sales people on the street. The leverage is coming from technology in the hands of the sales people, giving them tremendous leverage on the support side of the sales of the operation. Today they have about 400 people in the field. They would expect about 550 people next year, including the telemarketing people.
GENERAL & ADMINISTRATIVE
General and administrative expenses were $10.5 million, only up 6% from last year. As a percent of revenues, G&A improved 2.2% from 13% last year down to 10.8% this quarter. For the nine months, G&A expenses increased 18% but went down 1.5% to only 11.2% of sales. Both the current quarter and nine months reflect reductions in corporate overhead related to integration of DataQuest coupled with controlled expense costs. There were no significant one-time transaction costs recorded in the third quarter regarding the acquisition of DataQuest. Costs for the nine months were $1.7 million.
EARNINGS
Operating contribution for the third quarter increased 60% to $22.1 million from $13.9 million last year. This increase reflected strong revenue growth of 27% coupled with controlled growth of total operation cost of 20%. Operating contribution for the third quarter was 22.7% versus 18.1% in the third quarter of last year, an increase of 4.6%. Operating contribution of $62.8 million for the first nine months reflects a 53% increase over last year. Margin as a percent of net revenues increased 2.8% to 22.1%. Amortization expense for the quarter was $910,000, flat versus last year. Nine months amortization of $2.6 was slightly lower than last year by 7%.
Operating income of $21.2 million for the quarter reflected a $9.1 million or 63% increase over the same period last year. Operating income was up 57% to $60.2 million for the nine months. Net interest income was $939,000 for the quarter, compared to $668,000 last year. This reflects interest accumulating on the company's cash and marketable securities balance. Interest income was $2.6 million net of interest expense versus $1.4 million last year through the nine months. Income before taxes for the quarter increased by 63% to $22.1 million while the effective tax rate for the third quarter and the nine months was 69% from last year. For the first nine months, net income of $35.8 million was up 60% over last year. Earnings per share for the quarter were $0.13, up 63% from the $0.08 recorded last year.
ACQUISITIONS
Next Monday, they are announcing some new electronic services. The first one is the anticipated Advantage on the Internet. Some enhancements to the previous Advantage offering will come about. Content providers are almost 50% more than they previous offering on AT&T's Interchange. Clients will be able to receive their subscribed services as well as new research. Advantage will not only have more content providers but it will allow subscribers to get new information and play into the delivery of information to intranets. In addition to this, they will be announcing some intranet HTML products to their clients. GartnerWeb and @Expo as well as DataQuest Interactive will all be announced next week. This will complete their interactive and electronic product announcements for the year.
Gartner Group is also acquiring Charles J. Singer & Co. After looking very hard, they decided that they would be able to enhance their healthcare information technology business by buying this company. This will be a purchase deal and they paid about $4 million for the firm, or about one time the value of its contracts. It is a highly leveraged situation in that (a) they have been in the business, (b) it is obviously information technology, (c) it is obviously offered to information technology professionals in that field and (d) although it will have no impact in 1996, it will be accretive in 1997. They offer several new services through the Gartner sales force buttressed by Gartner research.
The acquisition of J3 Learning is expected to close on July 31st. Even with the delay of closing of the J3 Learning acquisition, they are only expecting to have dilution of one to two cents. The one-time write off of in process R&D will reduce fourth quarter earnings by $0.32 EPS. Moving into the fourth quarter they expect the training business to be earning neutral as they position themselves to take advantage of the market opportunity.
LOOKING FORWARD
They have seen an efficiency gain in the sales force of 10% to 15% a year in the way that they have brought the renewal of existing contracts as well as bringing in new contracts. The telemarketing front is a new emphasis. They have some plans that they think will be at a lower cost of sales than the existing sales force that will add new business into the pipeline. They beleive they are beating their stated numbers because they are getting more efficiency in the sales force than they are projecting. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. | |
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