Underlining the inherent stability of the analyst business, Gartner and Forrester have again delivered pretty healthy balance sheets for the 2014 financial year, but there is a sharp contrast in the way that the two leading buy-side firms finished the year and view the future.
Now much more than six times larger than its most similar rival, Gartner cracked the $US2 billion revenue barrier & exceeded its growth forecast of 12 months ago, coming in 13% up on its 2013 revenue. Meanwhile, Forrester hit the top end of its 12-month forecast, with a 5% growth over 2013.
Both firms saw their Q4 revenues grow at similar rates to their annual performance, but net income figures were more dynamic. Gartner’s net income grew just 0.5% for the year, and declined 4% in Q4, year-on-year, while Forrester’s net income plunged almost 17% for the year, but rebounded 67% in Q4, year-on-year. That’s totally different to Forrester’s profit performance in the previous couple of years, when Q4 declines have been of the order of -50%.
Gartner has also started to moderate its future guidance, giving equity analysts an outlook of 6 to 9% revenue growth, while previously-conservative Forrester has upped the ante, forecasting 4 to 7% revenue growth in 2015. Most interestingly, Forrester CFO Michael Doyle stepped beyond normal protocol on the earnings call, flagging a revenue growth of 10 to 11% in 2016, although cautioning that it was preliminary. But this was an unusually bullish call from Forrester.
As always, analysing the financial performance of these two public firms provides some interesting insights. We’ll break down their businesses in a similar format to that we used last year and previously.
Top line, bottom line
- Gartner closed the year with revenues of $US2.021 billion, up 13% over 2013, while Forrester notched up $312 million in revenues, an increase of 5%.
- Gartner posted $184 million in net income, marginally up on 2013, and about 9% as a percentage of revenues, while Forrester recorded a net income of just $US10.9 million, a sharp 17% decrease on its 2013 result, and just over 3% as a percentage of revenues. Neither of these firms is as profitable as they used to be.
Syndicated research still drives the revenue for both these firms. It grew strongly for Gartner in 2014, accounting for 72% of revenues – a touch up on previous years – and is forecast to grow about 11% this year. For Forrester, research grew only 2%, accounting for two-thirds of total revenues.
Both firms believe there is significant opportunity in delivering research into new accounts with new services, though it’s fair to say that Forrester was more specific about focusing on the opportunities in business technology (BT) – roughly speaking, the line-of-business applications enabled by cloud, mobile, social etc – than in information technology (IT). But both areas are big areas of focus for both firms.
Forrester doesn’t report consulting as a separate line item, combining it under the category “advisory services and events”, but it has been an area of strategic focus. In 2014, it moved to liberate its research analysts from consulting apart from short-term advisory & presentations, instead hiring dedicated consultants to undertake longer term projects. This is still a work in progress, with the firm aiming to balance the two 50/50. Overall, this line item grew 10% in 2014, suggesting a good result for consulting.
Gartner separates its consulting business in the balance sheet, though there’s not much insight into how much of that comes from users vs vendors. The most dynamic element is what Gartner calls “contract optimisation” – which is essentially helping end-user clients drive down technology acquisition costs – but it seems to have that reasonably under control. Overall, consulting grew 11% in 2014, but the outlook is for flat to slightly negative growth this year.
Events continue to be the standout performer for Gartner, increasing just over 14% for the year and 20% in the final quarter, when the flagship Symposium events are held around the world. Gartner conducted 64 events in 2014, and plans to increase that by one this year.
For Forrester, events are a much smaller business than for Gartner, and it doesn’t break it out as a separate line item in the balance sheet. However, it noted that Q4 events revenues declined 14% due to weak sponsorship support rather than poor attendances. Forrester has hired a new sales leader for this part of the business and hopes to return to growth in 2015.
Gartner doesn’t provide a detailed breakdown of its staffing in its earnings statement, but its latest corporate profile – updated on September 30 – states total employment of 6,600 “associates”, of whom more than 1,000 are analysts. Sales headcount grew just over 14% in 2014 and is expected to continue growing in the 15 to 20% range. The company also noted that it now employed 92 managing partners in the consulting business, up 15%.
Forrester ended the year with a total of 1,351 staff – up 5% – including 518 research & consulting staff and 510 sales reps. The firm this week announced that it intends to reduce its headcount by 50, of whom only two are analysts. While this represents 4% of its total headcount, it plans to increase headcount 7% this year – the layoffs are aimed mainly at rebalancing its skills mix in the consulting organisation.
Client retention & contract value
Gartner & Forrester use slightly different terminology to describe their key metrics, but they both use rolling four-quarter averages to eliminate seasonality. Gartner said its client retention rate was 86%, up two points, while Forrester reported a three-point improvement to 76%. In terms of dollars, Gartner’s wallet retention was 106% at the enterprise level compared with Forrester’s 88%, both firms improving by two points.
For Gartner, research contract value increased 13% to $US1.603 billion (although this was restated on January 1 to $US1.55 billion due to the impact of foreign exchange rates), while Forrester increased 7% to $US231.7 million.
The strengthening US dollar had an impact on the year-end results for both firms, and will continue to do so. Gartner writes about 40% of its business in other currencies, so this reduced overall profitability and increased the effective tax rate, while Forrester is less exposed with only 26% of its business written outside the US, but nevertheless reported an impact on Q4 revenues, and expects this to continue.
As noted above, Forrester has emerged as relatively more bullish this year, with its upper guidance at 7%, compared with low single digits in previous years, and flagging double-digit growth in 2016. For the first time in recent years, Gartner’s upper guidance has dropped from double digits to 9% – still greater than Forrester, but comparatively conservative.
Since 2009, Gartner has grown at a compound annual growth rate of 12%, twice that of Forrester, and the delta between the two has widened in recent years, both in terms of revenue and net income, so it is interesting to see their outlooks become more similar.
While Forrester acknowledges that it still needs to fine-tune its consulting organisation, the bullishness reflects a confidence that it has put all of its operational problems behind it, and that the changes it has made to both sales & research over the past couple of years are starting to pay dividends, which will accelerate over the next couple of years.
For Gartner, a hint of conservatism in no way suggests that it plans to take its foot off the gas. The single-digit guidance probably has more to do with currency volatility than anything else, and the firm stated that it intends to continue investing in both research and sales headcount, as well as look for strategic acquisitions.
So it’s time to buckle up – it’s full steam ahead for the technology research business in 2015.
* Thanks to Seeking Alpha for the earnings call transcripts, which compensate for my inadequate note-taking.