This analysis does not look at areas of interest to investors, but seeks to pull out insights that are relevant to clients and prospects of the “Big Two” advisory analyst firms as well as communications and IT vendor analyst relations (AR) teams.
Gartner (NYSE:IT) announced its Q4 and full year 2008 earnings on February 5, 2009.
Update 1: 5:45 am PT – Observations based on earnings press release (see below for highlights from press release)
SageCircle was anticipating that this earnings call would be more interesting than has been the case for most of the CEO Gene Hall era. The key question is what would happen to research contract value, because this is a useful surrogate indicator of analyst influence with end users.
Gartner had a good year-over-year quarter for contract value growth, up 11% to $834.3 Million (8% growth excluding the impact of foreign exchange).
Why is net contract value increase (NCVI, the four most important letters in the alphabet to the Gartner sales team) an important indicator? If contract value goes up it likely means that Gartner is adding new end-user (usually large organization IT managers) clients. More end-user clients translate into more influence as more technology buyers now have access to Gartner advice on IT and telecommunications purchases, whether hardware, software or services.
While Gartner does not break out research contract value data between end users and vendors, SageCircle’s conversations with AR managers indicate that vendors are cutting or keeping flat analyst contract spending. This is very typical in a recession. However, what this means is that any NCVI has to come from faster end-user client growth to offset declines on the vendor side. Again, more end users translates into more influence.
It will be interesting to see whether CEO Hall’s strategy of dramatically increasing the sales force and focusing it on large enterprises ($1bn or more in annual revenues) will pay off in end user NCVI. Since 2004, Gartner has doubled its sales force to approximately 900. While the sales reps hired in 2008 will not be productive yet, the ones hired earlier should be hitting their full potential to drive sales growth.
Because tech buyers become more risk adverse during a recession, they rely more on the advisory analysts when it comes to purchasing decisions. So paradoxically even though technology spending remains flat or goes down during a recession, the influence of Gartner and Forrester can actually go up.
SageCircle Technique:
- AR managers need to work with their sales forces to determine if Gartner’s penetration into their markets is growing, staying the same, or shrinking
- AR managers can develop a more strategic profile in their companies by developing an AR-Sales Partnership program and working to impact revenue growth
- AR managers need to harvest bandwidth and budget for the AR-Sales Partnership program by cutting other activities and redirecting spending
Bottom Line: Vendors and their AR managers cannot assume that during a recession Gartner’s presence in the large enterprise IT manager community will go down. Because Gartner’s client base can change very dramatically depending on market and geography, it is important that vendors gather data from their sales forces to determine how the change will impact Gartner’s influence in their markets.
Question: Have you seen Gartner’s presence in your customer base and overall market grow or shrink during this time of economic challenge?
Highlights from press release:
Fourth Quarter 2008 Results
Contract value, a key leading indicator for Gartner’s Research segment, increased 11% year-over-year to a record level of $834.3 million. Excluding the impact of foreign exchange, contract value increased 8% year-over-year.
Total revenue increased 1% year-over-year to $347.3 million. Excluding the impact of foreign exchange, total revenue grew 6% year-over-year, driven by growth in the Company’s Research and Consulting businesses.
EPS from continuing operations was $0.35 versus $0.36 in fourth quarter 2007, net income was $33.6 million versus $38.8 million in fourth quarter 2007 and Normalized EBITDA was $65.6 million versus $79.1 million in fourth quarter 2007. See “Non-GAAP Financial Measures” for a discussion of Normalized EBITDA.
Full Year 2008 Results
Total revenue grew 9% to $1.279 billion. Excluding the impact of foreign exchange, total revenue increased 8%, driven by growth in the Company’s Research and Consulting businesses. EPS from continuing operations increased 51% to $0.98, net income increased 41% to $103.9 million and Normalized EBITDA increased 12% to $213.5 million.
Gene Hall, Gartner’s chief executive officer, commented, “During 2008 we generated 9% revenue growth, expanded our margins and ended the year with record contract value. Our performance demonstrates the tremendous value that our services contribute to the effective management of IT programs and investments, which remains a critical business function even in the most challenging economic environments.”
Business Segment Highlights
Research
Revenue for fourth quarter 2008 was $190.2 million, up 5% year-over-year as reported and 11% excluding the impact of foreign exchange. Gross contribution margin was 64%.
For full year 2008, revenue was $773.3 million, an increase of 15% year-over-year as reported and 14% excluding the impact of foreign exchange. Gross contribution margin improved approximately 2 percentage points to 66%.
At December 31, 2008, research contract value was a record $834.3 million, up 11% year-over-year as reported and 8% excluding the impact of foreign exchange.
Client and wallet retention rates for fourth quarter 2008 were 82% and 98%, respectively, versus 82% and 101%, respectively, for fourth quarter 2007.
Consulting
Revenue for fourth quarter 2008 was $94.3 million, an increase of 3% year-over-year as reported and 8% excluding the impact of foreign exchange. Gross contribution margin was 39%.
For full year 2008, revenue was $347.4 million, up 7% as reported and 6% excluding the impact of foreign exchange. Gross contribution margin improved 2 percentage points to 41%.
Fourth quarter 2008 utilization was 70% and backlog was $97.2 million at December 31, 2008, down 20% year-over-year. Billable headcount was 499 as of December 31, 2008, up 6% year-over-year.
Events
Revenue for fourth quarter 2008 was $60.9 million, down 12% as reported and 7% excluding the impact of foreign exchange. Gross contribution margin was 46%.
For full year 2008, revenue was $150.1 million, a decrease of 6% as reported and 7% excluding the impact of foreign exchange. Gross contribution margin was 43%.
During fourth quarter 2008, the Company held 17 events with 16,071 attendees versus 12 events with 16,675 attendees during fourth quarter 2007. During full year 2008, the Company held 70 events with 41,352 attendees versus 62 events with 44,216 attendees in 2007.
Cash Flow and Balance Sheet Highlights
Gartner generated cash from operations of $46.9 million during fourth quarter 2008 and $184.4 million during full year 2008. Cash from operations for full year 2008 increased 24% year-over-year. Capital expenditures were $6.1 million for fourth quarter 2008 and $24.3 million for full year 2008.
The Company deployed its cash principally to repurchase its common stock. During fourth quarter 2008, Gartner repurchased 1.3 million shares of its common stock at a total cost of $23.0 million. During full year 2008, it repurchased a total of 9.7 million shares at a total cost of $198.6 million.
As of December 31, 2008, the Company had total debt of $416.3 million and cash of $140.9 million.
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