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Patrick Cushing

IT AT A GLANCE

P/E ► 17.6 AVG EV/EBITDA ► 10.1 AVG ROA ► 10.6% AVG ROE ► 362.7% VERY HIGH Debt to Equity ► 25.9 VERY HIGH Current Ratio ► 0.659 LOW Interest Coverage Ratio ► 7.45 AVG

 

 

 

 

 

 

Gartner Inc. (NYSE: IT) is the world's largest information technology research shop, by dollars of research sold.^[1] The company's research is used by its client companies' chief information officers (CIOs) and senior staff to keep abreast of technology trends, industry benchmarking, and best practices. Gartner sells its research and consulting services, and hosts industry events, for clients in 75 countries that include 400 of the companies in the Fortune 500. The company earns the majority of its revenues selling research reports (57% of the company's total revenue for 2007). ^[2]

In 2007, Gartner's research revenue grew 18% (total revenue grew 12%) as the company increased the size of its sales force 22%, and managed to get clients to upgrade their subscriptions pricier, more specialized research such as "Gartner for Executives" and "Gartner for CIOs" from research focused on general industry topics. ^[3]

Three firms - Gartner, Forrester, and IDC - collectively account for 60% of the IT research market. ^[1] Gartner maintains a commanding 40% market share in the IT research industry. Its biggest competitor is Forrester Research (FORR). ^[4]

Company Overview

Gartner's research segment is the foundation of Gartner's business. It generates the highest revenues for the company and the intellectual capital generated by the research segment is used by both its consulting and events sectors. From FY04 to FY07, Gartner increased its research revenue by 40% and increased total revenues by 33%. Over the same time, Gartner more than tripled its operating income from $42.6 million in 2004 to $133.1 million in 2007. ^[5]

Gartner sells its services to executives in charge of making strategic IT decisions such as CIOs, other IT leaders, and IT investment professionals, and Gartner markets its products directly at these specific roles. Other than the United States, no individual country accounts for 10% or more of Gartner's revenues, and no single client accounts for 10% or more of Gartner's total revenue. ^[6] The company's research covers the Internet, computer hardware, software, telecommunications, and related technology industries. For examples of the various topics covered by Gartner Research, see the following articles - Blades Server Analysis, iPhone for Business Review, and Cloud Computing Review.

Gartner's revenue breakdown by geography from 2005 to 2007^[3]

Business and Financial Metrics

Gartner's focus on its research business growth has helped generate total revenue growth of 12%, earnings per share growth of 36%, and a 40% increase in cash flow from operations for 2007 compared to 2006.^[7] Gartner's research revenue was up 18% in 2007 with growth across both business segments and geographic regions.

Gartner's total revenue, net income, and profit margin from 2003 to 2007^[5]

Gartner's growth can be assessed using several key metrics:

• Contract Value - Contract value is the annualized value of all Gartner's subscription based products, recognized at a certain point in time without regard for the length of the contract.
• Client Retention Rate - Client retention rate measures client renewal of Gartner's products as a measure of client satisfaction. Client retention is calculated on a percentage basis by dividing Gartner's returning clients from a year ago, by all clients from a year ago.
• Wallet Retention Rate - Wallet retention rate measures the amount of contract value retained with clients over the past year. Wallet retention is calculated by dividing the contract value of Gartner's returning clients from a year ago, by the total contract value from a year ago. A higher wallet retention rate than client retention rate implies either the retention of higher-spending clients, increased spending by retained clients, or both.

Gartner's research contract value was $752.5 million at December 31, 2007, an increase of 18% from the same time in 2006. Both Gartner's research client retention rate and wallet retention rate are at 82% and 101%, respectively, which exhibits Gartner's focus on increasing higher value sales with its role-based research products.^[7]

On April 1, 2005, Gartner officially acquired one of its competitors, META Group, for $162 million in cash. The META integration also cost Gartner $15 million in other integration charges in 2005, and $1.5 million in 2006. The company did not incur further charges for the META integration in 2007. ^[5]

After a net income loss in 2005 of $2.4 million with a -.25% profit margin, Gartner has increased its net income and profit margin to $58.2 million and 5.49% in 2006 and $73.6 million and 6.19% for 2007. ^[5]

Business Segments

Gartner's revenue by segment in 2007^[3]

• Research (57% of Revenue) - Gartner's 650 analysts ^[8] create IT industry briefings. Gartner's research revenue is largely subscription based, often for multi-year subscriptions. In 2007, Research revenue reached $673.3 million, which was an 18% or $102.1 million increase from 2006. Contract value, which represents the value attributable to all subscription-related research products, increased 18% to $725.5 million in 2007, up from $640.3 for 2006. The research client retention rate for 2007 was 82% while wallet retention reached 101%. ^[7]

• Consulting (28% of Revenue) - Consulting revenue for 2007 reached $325.0 million, an increase of 6% or $19.8 million. A combination of both optimized contracts and better utilization rates drove the segment's revenue growth, as average annualized revenue per billable headcount was up 5%, and consultant utilization rates was 69% in 2007 as compared to 64% in 2006. Consulting backlog, which represents future revenues to be recognized from in-process contracts, increased 11% to $121.4 million in 2007. ^[7]

• Events (15% of Revenue) - Gartner held 78 events in 2007, compared to 74 events in 2006. Gartner events showcase industry trends, vendors, and best practices at various symposia, conferences, and exhibitions. Gartner's most notable event circuit is their SymoposiumITxpo series. Events revenue in 2007 reached $180.8 million, an increase of 7% or $11.4 million. Gartner increased the number of events, attendee volume, and tickets prices in 2007. ^[7]

Key Trends and Forces

Gartner's business segment revenue from 1998-2007. ^[9][5]

Forrester Research's business segment revenue from 1998-2007. ^{[10] [11]}

Research revenue is insulated from immediate IT industry fluctuations

IT research revenues are tied to, but not immediately impacted by, the strength of the IT industry. From 1995 to 2000, the IT industry experienced extremely high growth with the NASDAQ Composite index rising to record highs and the founding of a group of companies known as dot-coms. By 2001, the NASDAQ Composite plummeted in value and many of these companies failed.^[12] Because research contracts are typically multi-year and paid in advance, both Gartner and its main competitor, Forrester Research, did not feel the effects of the dot-com bubble on their research revenues until 2002 and 2003.

When the IT industry downturn finally caught up to the IT research industry, Gartner was less effected than its closest competitor, Forrester Research. From 2002-2003, Gartner's research revenue dropped approximately 13% from a high of $535 million in 2001 to a low of $467 million in 2003. Their closest competitor, Forrester Research, was more dramatically affected by the decline in the IT industry and saw their research revenues decline 25% from a high of $123 million in 2002 to a low of $92 million in 2003.

Part of the insulation also stems from that fact that IT research typically constitutes a low cost relative to a clien'ts overall IT budget - the average enterprise client spends $70,000 on research versus total enterprise IT budgets in multi-millions of dollars. ^[13] Companies generally continue to need strategic IT information regardless of the economic climate.

A declining dollar has helped generate greater than 10% revenue growth outside the U.S. since 2005

Since 2005, locations outside the U.S. have generated revenue growth of 10% or better, which coincided with a 5 year decline in the value of the dollar against the euro.^[14]

In 2004, Gartner's U.S. and Canada; Europe, Middle East and Africa; and Other International locations grew revenues at 4.24%, 4.06% and 1.35%, respectively. ^[15][16] Since then, the United States and Canada have generated 8.44%, 3.22%, and 7.43% revenue growth for 2005, 2006, and 2007, respectively.^[15][16] Gartner's Europe, Middle East and Africa locations have generated 11.38%, 12.15%, and 16.39% revenue growth over a similar time period, and Gartner's Other International locations have done similarly with 12.13%, 10.94%, and 11.65% revenue growth for 2005, 2006, and 2007, respectively.^[15][16]

Gartner has a global presence with operations in 75 countries and 43% of total revenues come from outside the U.S. in 2007.^[17] From 2006 to 2007, total revenues increased 12% to $1,189.2 million; however, excluding favorable foreign currency effects, revenues would have increased only 9% over 2006 levels. ^[18]

Competitors

Gartner, Forrester Research, and IDC account for 60% of the total IT research market with Gartner maintaining a dominant 40% share and Forrester and IDC both maintaining 10% market share.^[1] Gartner's most direct competitor is Forrester Research (FORR) as it competes across Gartner's industry verticals. Other private firms such as IDC, AMR, and the Yankee Group compete against Gartner for specific industry IT research. IDC is similar in market share to Forrester but mainly focuses on IT vendor data rather than covering the entire IT industry.

IT Research Market Share ^[1]

• Forrester Research (FORR) - Forrester competes directly with all three of Gartner's business segments and with much the same strategy as Gartner. In 2007, Forrester generated $212.1 million in total revenue with its 336 analysts.^{[19] [10]}
• IDC - IDC is a provider of market research data and advisory services for the technology industry. IDC is a subsidiary of International Data Group (IDG), a technology media, research, and event company.
• AMR - AMR Research offers analytical research reports covering a range of information technology topics such as customer relationship management (CRM), supply chain management software (SCM), and other enterprise applications.
• Yankee Group - The Yankee Group provides market research and analytical reports for technology business research leaders. The company also monitors consumer electronics trends.

References

1. ↑ ^{1.0 1.1 1.2 1.3} Boenning & Scattergood April 29, 2008 report on Forrester Research
2. ↑ IT, 2007, 10-K, Item 5, Page 11
3. ↑ ^{3.0 3.1 3.2} IT, 2007, 10-K, Item 7, Page 16
4. ↑ "Boenning & Scattergood Announces Investment Opinion on Forrester Research Inc. and Gartner, Inc", BNET, April 29, 2008
5. ↑ ^{5.0 5.1 5.2 5.3 5.4 5.5} IT, 2007, 10-K, Item 6, Page 12
6. ↑ IT, 2007, 10-K, Notes to Consolidated Financial Statements, Page 53
7. ↑ ^{7.0 7.1 7.2 7.3 7.4 7.5} IT, 2007, 10-K, Item 7, Page 14
8. ↑ IT, 2007, 10-K, Item 1, Page 3
9. ↑ IT, 2002, 10-K, Item 6, Page 6
10. ↑ ^{10.0 10.1} FORR, 2007, 10-K, Item 6, Page 14
11. ↑ FORR, 2002, 10-K, Item 6, Page 16
12. ↑ Wikipedia's Dot-com bubble Page
13. ↑ Boenning & Scattergood April 29, 2008 report on Gartner
14. ↑ Google Finance USD to EUR chart
15. ↑ ^{15.0 15.1 15.2} IT, 2007, 10-K, Page 54
16. ↑ ^{16.0 16.1 16.2} IT, 2005, 10-K, Page 65
17. ↑ IT, 2007, 10-K, Item 5, Page 11
18. ↑ IT, 2007, 10-K, Item 7, Page 17
19. ↑ FORR, 2007, 10-K, Page 8