Gartner Q2 FY08 earnings call – Typical “boring” quarter with strong research contract value increase

This analysis does not look at areas of interest to investors, but seeks to pull out insights that are relevant to clients and prospects as well as communications and IT vendor analyst relations (AR) teams. 

Gartner (NYSE:IT) under CEO Gene Hall has been very consistent in its stated strategy and execution, which is why I use the word boring in air quotes when I talk about Gartner’s financials. However, from the points-of-view of buyers of Gartner’s services and analyst relations professionals deciding where to focus resources the results are anything but boring.

For the buyers of services, whether end users or vendors, Gartner continues to focus on increasing its average sales price. This is being accomplished through controlling discounts, continuing annual price increases and migrating clients from legacy products to Roles at a 2x price point.

For vendor AR teams, Gartner continues to expand its end user client base, both by adding new client companies and adding more seat holders within existing client companies. Research contract value – an indicator of influence – grew for the 6th straight quarter (16% year-over-year to $794.2 million) setting yet a new record. More Advisory/Role seat holders translates into more influence on vendors’ sales deals. Also, more new clients means more problems for vendor sales teams because the new clients will not be as sophisticated in their usage of the research leading to misinterpretations.

The one disappointing aspect of the quarterfor Gartner was the continuing underperformance of the World Wide Events business. This was due in part to execution, which is why the previous long time head of Events was asked to “spend more time with his family.” However, part of the issue is simply the economic slowdown in the US. What are some of the first things that are cut in a slowdown? Travel and sponsorships. So it is not surprising that Events is flat.

Implications:

• It’s going to cost more money to access Gartner analysts. Buyers will have to increase their Gartner budgets, decrease the number of seats to keep spending flat or seek alternative suppliers
• Gartner’s influence on vendor deals to large enterprises will increase. Vendors will be tempted to focus more on Gartner, which could be counter productive

Notes from the conference call:

• For six consecutive quarters, we have grown research contract value in the high teens and generated wallet retention in excess of 100%
• Approximately 70% of our year-over-year contract value growth in the second quarter was from client enterprises that we did not do business with a year before
• Also, while price increases continue to be a contributor to growth, an increasing majority of our growth is coming from new subscription volume which accounted for about 76% of our year-over-year contract value growth. The fact that our growth from new client enterprises and subscription volume is increasing, demonstrates that our strategy to penetrate the vast market opportunity for IT research is working
• Solid growth in our core consulting business, coupled with unusually strong demand for our contract optimization and benchmarking services
• We’re seeing some vendors be more thoughtful in terms of the number of events at which they exhibit and attendees registering closer to the date of the events
• We’re also driving growth by further penetrating our existing clients with additional research subscriptions and upgrading them to our role-based products
• (Events) attendance was 19,129 for the first six months of this year, compared to 20,234 in the comparable period last year
• At the end of the first half we had 837 quota-bearing salespeople
• Bulk of our investments are going into the sales organization
• (On when hiring new sales reps will start) we’re adding them now
• We’re expecting to have an annual increase the usual time this fall
• The overall pricing increases that we’re doing as a business are between 3% and 7% per year

Press release summary: (click to read) Contract value, a key leading indicator for Gartner’s Research segment, increased 16% year-over-year to a record level of $794.2 million, reflecting the successful execution of the Company’s strategy to accelerate the growth of its Research business. Total revenue for second quarter 2008 grew 17% year-over-year to $343.9 million, driven by double-digit growth in each of Gartner’s three business segments. Excluding the impact of foreign exchange, research contract value and total revenue each increased 13% year-over-year. Research – Client and wallet retention rates for second quarter 2008 were 81% and 101%, respectively. Consulting – Revenue for second quarter 2008 increased 13% year-over-year to $94.6 million. Billable headcount was 478 as of June 30, 2008, versus 487 last year, reflecting the exiting of consulting operations in Asia Pacific during 2007. Events – Revenue for second quarter 2008 increased 20% to $51.0 million. The Company held 25 events with 13,873 attendees, as compared to 20 events with 12,842 attendees in second quarter 2007. As previously announced, four large events that were held in first quarter 2007 were shifted into second quarter 2008, which positively impacted revenue in the second quarter. During second quarter 2008, Gartner generated cash provided by operating activities of $67.6 million, up 54% versus last year

Bottom Line: Gartner continues to execute well, even during a time of economic uncertainty in the US economy. Because Gartner has decided to loosen the purse strings and start hiring more sales reps, it will continue to expand its end-user client base. Vendors should take away that Gartner’s advice is still valued by IT decision makers which means that increasing AR investment now can have a tangible ROI in terms of increased leads and revenue.

Question: Clients – It was mentioned that there has been no pushback on pricing increase, do you feel that pricing is fair and delivers business value? Vendors – Have your sales reps seen an increase or decrease in the number of deals where Gartner analysts are playing an advisory role? Enterprise IT managers – Are you using Gartner more or less when it comes to product and vendor selection?

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