Analyst Gartner Aims To Convert Mistake Into Future Success
Gartner Inc. makes money by analyzing technology companies and trends. If Gartner were to analyze Gartner , it would probably say its prospects appear promising.
The research and consulting company could be days away from shaking off a nasty vestige of the stock-market bubble -- a move that could transform its balance sheet and set it up for deals.
If Gartner's shares hold steady or rise through early next week, the company will be able to pay off an onerous convertible bond it sold at the height of the boom. That event would leave the company, which has consistently bought back its shares, with a big cash stake. The combination of a potential share buyback, a rebound in technology spending and Gartner's strong operating leverage could light a fire under the company's profits -- and its share price.
The potential bond payoff "really changes the capital structure overnight and attracts a whole new group of investors," says Jeff Ubben, managing partner at ValueAct Capital Partners LP, a San Francisco investment partnership.
The roots of the bond deal trace back to the spring of 2000, when Gartner sold a $300 million convertible bond to Silver Lake Partners LP, a big private equity firm specializing in technology.
Not only did the deal put a lead weight on the company's balance sheet just as the technology business turned south, but Gartner also protected Silver Lake by agreeing to give it more shares if Gartner's stock fell more than about 10% below a specified price within a year.
The stock, like the rest of the technology business, tanked, falling 44% in that year alone. That meant that instead of getting the 19 million shares it initially was promised, Silver Lake ended up with 43 million, slashing Gartner's earnings per share because the company's total profits had to be spread across a much bigger base. With accrued interest, that number is 49 million shares, out of 128 million shares outstanding at the end of the second quarter.
The dilution infuriated investors, and Gartner's share price struggled for three years after the deal. A string of quarterly losses didn't help either, as Gartner's fast-growth strategy backfired, forcing the company to cuts costs.
"People would look at their balance sheet and throw up and people would look at their share count and throw up, so you had a double negative," says Mr. Ubben, who owns nearly 16% of the shares outstanding, according to FactSet Research Systems Inc., making his firm, for the moment, Gartner's largest shareholder.
But now, Gartner may be days away from putting its bond blunder behind it. Another provision in the deal allows Gartner to pay off the bond with cash or stock if the company's closing share price averages more than $11.18 for 20 consecutive days. As of Thursday, the count stood at 17 days, meaning that if the stock holds its ground, the company will gain the right to pay off the bond early next week. In 4 p.m. trading on the New York Stock Exchange Thursday, Gartner shares were up 14 cents to $11.50.
The bond payoff will almost definitely come in the form of stock, which would be about $553 million at today's price to Silver Lake. Silver Lake, which has two seats on Gartner's board, wouldn't comment.
For Gartner , the implications of putting the bond deal behind it could be major. First, the company's debt will be gone. And even though the company will have to issue 49 million shares, those shares already are included in Gartner's calculation of its fully diluted earnings per share. So existing shareholders won't be diluted and earnings won't be affected.
In addition, because of the accounting treatment of the bond payoff, Gartner's shareholders' equity will go from negative to positive. Gartner no longer will have to cover the bond's 6% annual interest payment, which it has been paying in shares.
Finally, without any debt on its balance sheet, the company can use $167 million in cash it has on hand to boost its already solid stock buyback program. (Gartner , which has a market capitalization of about $900 million, bought back $107 million worth of its own shares in the two years ending June 30, and the company has board approval to buy back another $93 million in shares.)
All of this would be pointless if Gartner also wasn't turning its business around after the pounding it took during the bear market.
The company is best known for its technology research, which among other things, rates technology companies on dozens of criteria so potential customers will know if a company has a reputation for bad service or is flirting with bankruptcy. That segment produced 55% of Gartner's revenue in the most recent quarter, with the remainder coming from its consulting and trade show businesses.
By some estimates, 80% to 90% of each incremental dollar of research revenue can fall to the bottom line, because it doesn't take much extra cost to print another research report or modify existing work to suit a client's needs.
Besides leverage, the Gartner model generates lots of cash; in the past 12 months, Gartner has generated $90 million in free cash flow, meaning its share buybacks can continue on pace.
While the research business has been down recently amid a general malaise in technology, customers still like Gartner. Three-quarters of them renewed their subscriptions last quarter.
William Blair analyst Laura Lederman calls Gartner's research "the gold standard" and says that rather than cut Gartner , customers cut other researchers and consolidate with Gartner , which has about 650 analysts.
In the second quarter, which ended June 30, overall revenue was down 2% from the first quarter, and contract value was down 1%, improvements over the past few quarters. Since contracts typically run 12 months and revenue is recognized throughout the subscription period, contract value provides a crucial look into the future. While the company said it doesn't expect contract value to grow in the third quarter, the broad rebound in tech spending could give that a boost in the third, and more likely, in the fourth quarter.
A rise in contract value will show up in earnings next year and the rise could be significant. Gartner is covered by three analysts, all from smaller firms, and this year they expect revenue to be down about 5%, but earnings per share to fall 25%. Next year, with just a 3% boost in revenue, the one analyst who has an earnings estimate for 2004 expects earnings to rise more than 40%.
That 40% rise doesn't include the potential impact of a share buyback that could eat up a fifth of Gartner's shares. Combine those two and the math is compelling.
Gartner苦尽甘来
Gartner Inc.的主要业务是分析科技公司及其发展趋势。如果让Gartner分析它自己，它可能会说，这个公司看来大有发展前途。
几天后，这个研究和咨询公司可能就可以彻底摆脱股市泡沫的阴影，扭转财务状况，重获新生了。
如果Gartner股票从现在到下周初之前持平或上扬，公司就能够赎回在股市泡沫的高峰时期卖出的大量可转换债券。此举将使公司可使用的现金数量大幅增加。该公司一直都在进行股票回购。由于有这项股票回购，加上技术产品支出出现反弹，以及良好的营运形势，Gartner的利润和股价都有可能因此受到提振。
旧金山投资公司ValueAct Capital Partners LP的执行合伙人杰夫?乌本(Jeff Ubben)称，将要进行的债券回购将真正地在一夜之间改变公司的资本结构，吸引一群新的投资者。
Gartner这批债券的历史要追溯到2000年的春天，当时公司向Silver Lake Partners LP出售了3亿美元的可转换债券，后者是一家专门投资技术行业的大型私人投资公司。
这笔交易的订立恰逢科技行业转向疲软之时，令公司财务状况雪上加霜；而且Gartner还同意，如果Gartner的股票价格在一年内相对于某一价位的跌幅超过10%，公司将给予Silver Lake更多的股票，以此保护后者的利益。
然而不幸的是，Gartner和其他科技类股一样，仅在当年一年就下跌了44%，这意味著Silver Lake得到的股票数量不是公司最初承诺的1,900万股，而是4,300万股。由于股本增大，利润被稀释，Gartner的每股收益受到极大的影响。截至第二季度，加上应付利息，Silver Lake得到的股票数量达到4,900万股，而公司已发行的股票数量为1.28亿股。
这样的稀释结果激怒了投资者，在交易完成后的3年时间里，Gartner的股票一直在苦苦挣扎。由于Gartner高速增长的战略取得适得其反的效果，公司出现一连串的季度亏损，迫使公司不得不削减成本。
乌本称，人们考虑到公司的财务状况时会抛售该股，看到公司的股票数量时也会抛售该股，因此公司面临著双重压力。据FactSet Research Systems Inc.称，乌本拥有该公司16%的股票，他的公司目前是Gartner的第一大股东。
不过现在Gartner离抛下这个大包袱的日子不远了。根据协议的另一个条款，如果Gartner股票连续20天的收盘平均价格超过11.175美元，公司就可以用现金或股票赎回这些债券。而昨天是Gartner股价达到这一标准的第17天，这意味著，如果Gartner的股价水平能够保持下去，公司将在下周初获得赎回的权利。昨天下午4点，Gartner在纽约证交所上市股票涨14美分，至11.50美元。
Gartner赎回债券几乎肯定会采取支付股票的方式。根据今日的价格，Silver Lake将获得5.53亿美元的Gartner股票。Silver Lake没有就此置评，该公司在Gartner的董事会拥有两个席位。
对于Gartner而言，放下这个债券协议的包袱可能将是非常重要的。首先，这能消除公司的债务，即使公司不得不再发行4,900万股，这些股票也已经被计算到Gartner完全稀释后的每股收益中，因此现有股东的权益不会被稀释，公司收益也不会受到影响。
其次，由于对债券赎回进行的会计处理，Gartner股东的□值将由负转正。公司也不再需要支付每年6%的债券利息，而此前公司一直是以股票的形式支付的。
最后，把债务从公司的资产负债表中去除后，公司将能使用手中1.67亿美元的资金推动业已稳固的股票回购计划。（Gartner的市值为9亿美元，在截至6月30日的两年时间里，公司共回购了价值1.07亿美元的股票，公司董事会已同意再回购9,300万美元的股票。）
其实，Gartner在市场低迷时期受到重创，如果此后公司业务没有出现好转的话，上述几点也就没有任何意义。
公司最为著名的业务是科技行业研究，其中包括按照一系列标准对科技公司进行评级，使得客户能够了解一家公司的情况：它是否因服务不佳而臭名昭著，或是已濒临破产。最近一个季度，这项业务的收入占到Gartner总收入的55%，其他收入来源包括咨询和会展业务。
根据某些估计，研究工作的收入每增加1美元，其中的80%至90%都将转化为利润，原因是：研究业务除了研究报告复印成本，或修改现有报告以满足客户需要发生一些成本外，没有太多其他成本。
除了杠杆效应外，Gartner的模式还能收入大量的现金，在过去的12个月，Gartner已获得了9,000万美元的自由现金流，这意味著公司的股票回购计划将能按部就班地进行。
虽然近期科技行业的普遍不景气对公司的研究业务造成了一定的影响，但客户们仍然青睐Gartner。上个季度，公司3/4的客户延长了他们与公司的合同期限。
William Blair的分析师劳拉?莱德曼(Laura Lederman)将Gartner的研究称为“一流水准”，称客户们纷纷弃用其他研究机构，转而投向Gartner。Gartner有约650名分析师。
截至6月30日的第二财政季度，公司的总收入较第一财政季度减少2%，合同金额减少1%，但都高于此前的几个季度。由于合同的有效期通常为12个月，公司的收入就是在这一期间确认，因此合同金额对于判断公司未来走势至关重要。虽然公司称，预计第三财政季度合同金额不会增加，但科技支出的全面反弹可能会使公司第三财政季度业绩有所增长，而第四财政季度出现增长的可能性则更大。
合同金额的增加将会在第二年的利润中表现出来，利润的增长可能将十分显著。研究Gartner的3位分析师都来自较小的公司，他们预计公司今年收入将下降约5%，但每股收益将减少25%。明年，随著公司收入增长3%，其中一位分析师预计公司收益的增幅将超过40%。
这40%的增幅中并未将股票回购的因素考虑在内。回购数量可能将占Gartner股票数量的1/5，如果把这两个因素结合起来，那么结果将是惊人的。
