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, Inc. (NYSE:IT) announced its Q2 2009 earnings on August 4, 2009. See the end of the blog post for a summary and link to the press release.
In general, Gartner’s results were much as expected. All statistics are year-over-year and are FX neutral unless noted. Revenues were down 16%. Events took a huge hit (down 61% or $34.2m) due to cancelation of conferences, enterprise travel freezes that cut ticket sales, and vendors cutting sponsorships. Spring Symposium is normally scheduled in Q2 so its cancelation was a major factor in the Events revenue plunge from the prior year. Consulting was down in revenues (21%). However, the Contract Optimization Service continues to be bright spot in the Consulting portfolio. Research revenue was only down 1% and Research contract value decreased 3%.
Cash was down nearly $100m from prior year mainly because Gartner paid down some long term debt. However, it still has $97m in cash and a $250m in available credit, which should give it the necessary resources to maintain its business as well as conduct M&A activity. On the M&A front, CEO Hall maintained the position that M&A opportunities are being constantly evaluated, but unlike Forrester, who mentioned it was actively evaluating potential deals, he provided no color to that remark.
Pricing — There was little discussion or few questions about pricing. As always, CEO Hall mentioned that Gartner is maintaining its pricing discipline. When asked by a financial analyst about price increases, Hall said that the 2009 price increase – yes Gartner did a price increase in a recession – was at the lower end of the range for price increases and that clients were fine with it. He indicated this lack of push back was due to Gartner doing a good job of communicating the value of the Gartner service so that cost is less of an issue. This is consistent with what we hear from our clients who tell us Gartner is not giving ground on pricing, even during a recession.
Client Retention and New Clients — In Q2 client retention was 77%, continuing the typical decrease in clients during a recession. Gartner’s primary sources of non-renewals are technology vendors with the battered and consolidating financial industries also seeing fewer renewals. Forrester in its earnings call last week said non-renewals were mostly small vendors. Wallet retention was 86% reflecting spending decreases by vendors and end users who were keeping spending flat.
Gartner picked up 305 enterprise clients during the quarter. This is a very relevant number for both IT manager clients and vendors. Enterprise client inquiry is an important source of data points for analysts, and contributes to the quality of their research. Hearing what other enterprises are doing with spending, strategies, and so on is a popular topic of conversation between analysts and IT manager clients. More clients mean more inquiries, leading to more interesting and relevant data points. For vendor AR teams the number of enterprise clients and growth in research contract value is important because syndicated research contracts and total clients are simple indicators of potential changes in a firm’s influence with technology buyers. The more enterprise syndicated research clients there are, the more opportunities there are for Gartner analysts to influence vendor deals.
Increase in Client Usage of Services – Gartner provided very interesting data points about client usage. First, client inquiry is up 28% in the first half versus 2008. While a detailed breakdown between end users and vendors was not given, we assume most of the increase is by end users based on the context of the comment and the fact that even in the best of times vendors do a poor job utilizing inquiry. Next, CIOs increased their inquiry usage by 40%. This is not surprising because tough economic conditions generate more conversations between analysts and IT executives, but also because Gartner has been pushing clients to fully utilize purchased services to enhance contract renewals.
The final usage factoid was CIO registration for Fall Symposium is at 600, up 60% over 2008, which is unusual this early in the cycle. Part of this could be CIOs wanting some face time to discuss tough strategic IT issues or it could be migration of CIOs who would have attended the canceled Spring Symposium. CIOs typically comprise 10% to 15% of Symposium attendees.
Sales Force — The total quota bearing personnel at the end of Q2 was 933, up three during the quarter. The goal is to keep headcount and territories approximately flat for the year. This is a critical insight because it would be easy to reduce costs by not filling openings as sales reps leave the company. It was also mentioned several times that a lot of focus today is making the existing sales force more productive and they are seeing progress. That Gartner is continuing to invest in its sales force is an important point because that means Gartner will be well positioned to increase enterprise clients once the economy recovers and budgets loosen… increasing its influence.
- Because of its emphasis on maintaining pricing discipline – backed in part by its market dominance and large sales force – clients should not put significant energy into trying to obtain discounts from Gartner. Rather, clients and prospects should manage Gartner expenditures by focusing on reducing unused services.
- AR teams should use Gartner’s growth in enterprise clients as an education tool with stakeholders and executive sponsors. Rather than experiencing shrinking influence in this recession, Gartner has increased influence because of the business value it offers to enterprise clients and its ability to leverage the largest sales force in the analyst industry.
Bottom Line: Gartner is performing well in the current economic environment, losing revenues where expected but maintaining modest growth in the all-important Research contract value area and number of enterprise clients. Vendors need to take into account that advising enterprise IT managers about how to reduces expenses – which is why Gartner contracts are often considered “self funded” – can have an impact on current and future sales deals. Vendors should train their sales teams on the potential influence of Gartner analysts and how to deal with that influence.
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:
STAMFORD, Conn.–(BUSINESS WIRE)–Gartner, Inc. (NYSE: IT – News), the leading provider of research and analysis on the global information technology industry, today reported results for second quarter 2009. In addition, the Company reiterated its financial outlook for full year 2009.
EPS from continuing operations were $0.18, net income was $17.2 million, and Normalized EBITDA was $44.0 million. See “Non-GAAP Financial Measures” for a discussion of Normalized EBITDA.
Total revenue for second quarter 2009 was $270.0 million. Excluding the impact of foreign exchange, total revenue decreased 16% year-over-year, principally due to lower revenues from the Company’s Events and Consulting segments. Revenue from the Company’s Research segment declined 1% year-over-year, excluding the impact of foreign exchange.
Gene Hall, Gartner’s chief executive officer, commented, “During the second quarter of 2009, our businesses performed in-line with our expectations. More importantly, many of our key metrics showed sequential improvement. As compared to the first quarter, we increased new business in Research, added significantly more new client enterprises, improved sales force productivity and saw improvement in the trends that drive wallet retention. These results reflect a stabilizing of the sales environment, the success of our initiatives to improve operational effectiveness and the tremendous value that we provide to IT professionals. Based on these trends, we expect contract value to grow sequentially in the second half of the year, primarily in the fourth quarter, and we expect to quickly resume revenue and earnings growth once global economic activity returns to more normal levels.”
Business Segment Highlights
Revenue for second quarter 2009 was $183.9 million, down 1% year-over-year excluding the impact of foreign exchange. Gross contribution margin improved approximately 2 percentage points year-over-year to 65%.
Contract value was $736.0 million at June 30, 2009. Excluding the impact of foreign exchange, contract value decreased 3% year-over year.
Client and wallet retention rates for second quarter 2009 were 77% and 86%. Wallet retention excludes the impact of foreign exchange.
As previously communicated, the Company entered 2009 and the second quarter with lower Consulting backlog. As a result, revenue for second quarter 2009 was $69.3 million, down 21% year-over-year excluding the impact of foreign exchange. Gross contribution margin was 40%.
Second quarter 2009 utilization was 68% and billable headcount was 459. Backlog was $81.7 million at June 30, 2009.
As part of its previously announced plan to reduce the number of events in 2009 versus 2008, the Company held only 14 events in second quarter 2009 versus 25 in second quarter 2008. This included the elimination of two large Spring Symposium events. These changes negatively impacted year-over-year revenue comparisons for the quarter.
Revenue for the quarter was $16.7 million, down 61% year-over-year excluding the impact of foreign exchange. The 14 events held attracted 5,108 attendees. Gross contribution margin was 33%.
Cash Flow and Balance Sheet Highlights
Gartner generated cash from operations of $47.7 million during second quarter 2009. Capital expenditures were $3.9 million.
During the first half of 2009, the Company deployed its cash principally to repay almost $100 million in debt. As of June 30, 2009, the Company had total debt of $316.5 million and cash of $97.0 million.
Financial Outlook for 2009
Based on its first half 2009 results and current business trends, Gartner reiterated its financial outlook for full year 2009.