The stronger US dollar and the sudden decline in the oil & gas sector combined to impact the business performance of both Gartner and Forrester in FY2015, but their respective balance sheets belie the argument that the “traditional” IT analyst firm business model is dead or dying.
For the past couple of years, there has been a debate in the market about the long-term value proposition of the “old school” firms – Gartner, IDC and Forrester, respectively #1, #2 and #3 in the market – as more information becomes available from new players via “freemium” models focused on non-IT buyers. The most extreme end of that argument posits that end-user customers will no longer accept the high-priced, subscription seat model used by Gartner and Forrester.
On the current evidence, that is clearly not true. In Q4, Gartner’s new business increased 9% year-on-year despite an average 3% increase in prices. Since 2010, Gartner has consistently increased the share of revenue from research (subscription) from 67% to 73% in 2015, while Forrester’s research share of revenue has been roughly steady at 67% over the same period.
The results suggest that Gartner continues to deliver generally solid growth rates by sticking to what it does best, while Forrester continues to struggle to reap the benefit of its shift to focus on the age of the customer, rather than traditional IT. Are some of the newer players generating good returns? Of course, but not necessarily at the expense of the older firms.
Certainly, Gartner’s results are a bit of a mixed bag, but there are more positives than negatives. Meanwhile, Forrester’s results don’t necessarily support the positive commentary from its senior executives on the company’s earnings call this week, but they’re not all bad.
As the only two analyst firms to report their results publicly, Gartner and Forrester act as a bellwether for the state of the analyst business. IDC does too, but with little breakdown of its numbers, it’s hard to get deep insight.
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 $US2.163 billion, up 7% over 2014, while Forrester notched up $314 million in revenues, an increase of less than 1%. Interestingly, Gartner came in at the lower end of its year-earlier forecast, while Forrester was well below its unusually bullish forecast.
Gartner posted $176 million in net income, down 4% on 2014, and about 8% as a percentage of revenues, while Forrester recorded a net income of $US12 million, a solid 10% increase on its record low 2014 result, and almost 4% as a percentage of revenues.
Syndicated research still drives the revenue for both these firms. It grew strongly for Gartner in 2015, up 10% to $1.584 billion, and is forecast to grow 13 – 15% this year. For Forrester, research grew just over 1%, to $210 million.
On the earnings call, Forrester’s chairman, George Colony, said that “our customer experience business across all product lines continues to grow at over 20% per year.” Given the overall growth rate, that suggests that this business is still relatively small, which is supported by the fact that CFO Michael Doyle said that the top research role for Forrester was CIOs, with more than 10,000 members, followed by application development & delivery professionals, then analyst relations professionals.
Forrester doesn’t report consulting as a separate line item, combining it under the category “advisory services and events”, but said that “this segment of the business continued to strengthen.” Overall, this line item declined 1% in 2015, but grew 7% in Q4 year-on-year, when event revenue declined 21% with one less event held.
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. Overall, consulting declined 6% in 2015 and was marginally down in Q4 year-on-year, with the firm forecasting 1 – 5% growth in 2016. Like Forrester, Gartner remains bullish about this segment, increasing its managing partner headcount by 18% to 109 last year, as well as adding junior consultants.
Events were again the standout performer for Gartner, increasing just over 11% for both the year and the final quarter, when the flagship Symposium events are held around the world. Despite selling out the Orlando event and not increasing the number of total events, Gartner is forecasting 9 – 15% growth in that business this year, which suggests increased fees for both exhibiting and attending.
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, George Colony said that the segment had begun to grow again in the second half of 2015 with the appointment of a new events chief. Forrester will hold 13 events in 2016, compared with Gartner’s 63.
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 7,600 “associates”, an increase of 1,000 from the previous 12 month period. Of these, more than 1,100 are analysts – up 100. On the earnings call, Gartner CFO, Craig Safian, said that the consulting billable headcount was 606, up 13% on the previous year, while sales headcount grew approximately 15% in line with forecasts.
Forrester ended the year with a total of 1,345 staff – down marginally – including 4% fewer research & consulting for a total of 499, and 3% more sales staff for a total of 524. On the earnings call, Michael Doyle said that 340 of those were quota-bearing.
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 84%, down one point, while Forrester reported a one-point improvement to 77%. In terms of dollars, Gartner’s wallet retention was 105% at the enterprise level compared with Forrester’s 89%, with Gartner down slightly and Forrester up slightly.
For Gartner, research contract value increased 10% to $US1.761 billion (although this was restated on January 1 to $US1.69 billion due to the impact of foreign exchange rates), while Forrester increased 2% to $US237 million. None of these figures suggest that enterprises are walking away from the business model.
The ongoing strength of the US dollar had an impact on the year-end results for both firms, and will continue to do so. Forrester was particularly bearish about ongoing exchange rate impacts but Gartner was more circumspect, despite having a greater exposure to international markets.
Forrester is also more bearish on revenue growth, and less positive than it was a year ago. Current forecasts are for 3 – 5% growth this year – though that may be adjusted – while Gartner has returned to its typical bullish form with a forecast of 10 – 13% in 2016.
This will only increase the delta between the #1 and #3 players in the analyst business. Gartner added almost “half a Forrester” to its bottom line in 2015, and will cross the 50% mark this year even at the lower end of its forecasts.
So the traditional IT analyst firm business model is far from dead.
Gartner remains cashed-up and interested in acquisitions to bolster its offerings to enterprises lower down the value chain, while Forrester could also benefit from some inorganic growth to broaden its offerings and provide some more heft to its market position. However, it’s unlikely that either will be a buyer for IDC, whose parent company IDG is currently looking at options to sell all of its publishing, research & events businesses.
Unlike Gartner & Forrester, IDC draws very little revenue from end-users, but some new money in the marketplace could change that focus, and the balance of power in the analyst business. Or not….
* Thanks to Seeking Alpha for the earnings call transcripts, which compensate for my inadequate note-taking.