Same same, but different: Are Gartner and Forrester really in the same business any more?

The IT analyst business used to be pretty easy to define – we differentiated firms that influenced end-user organisations from those that worked for IT vendors, then segmented them based on technology depth, vertical markets, research offerings, geography etc. From an analyst relations perspective, we could choose how to deal with them, depending on our own objectives.

We’ve always seen analyst firms buying up others to fill out gaps in their offerings and/or broaden their reach. But after Forrester bought Giga Group and Gartner bought Meta Group several years ago, they remained the only two firms of any substance in the segment that my colleagues at Knowledge Capital Group call “Deal Makers & Breakers” – the firms which are most influential over end-user purchasing.

Then came “disruption”

Some analyst firms repositioned themselves to focus on new market opportunities, some stayed the course on their traditional IT markets while also keeping a weather eye out, and of course new players emerged targeting users and/or vendors.

It’s now four years that Forrester chairman & CEO George Colony has been talking about the “Age of the Customer” and repositioning the firm’s research away from the traditional IT organisation towards marketing and line-of-business executives, focusing on customer experience and how to use technology to deliver that.

Forrester was trying to differentiate itself from Gartner and get a head-start in tapping into the new research goldmine. Meanwhile, Gartner pretty much stuck to its guns, continuing to focus on the IT organisation (although it also has digital marketing services).

Regardless of this, Gartner and Forrester are pretty much in the same business. Their service offerings are not dissimilar, their sales models share many of the same characteristics, and their target customers have the same addresses, if not always the same business titles.

But is this really true any more?

For the past five years, I’ve been analysing the financial performances of these two IT research leaders, and a few points have always stuck out:

• Gartner has consistently talked about its business as a business, enumerated sales metrics, how to increase sales productivity and drive out costs, while at the same time forecasting high single-digit or low double-digit revenue growth numbers – and delivered against them

• Forrester has consistently talked about reinventing and realigning its research, reworking its sales model and changing its employee profile, but generally providing low single-digit growth forecasts – and delivered against them

When you listen to the annual earnings calls – or read the transcripts – for these firms, another thing stands out. The way that Gartner talks about business is pretty consistent with its balance sheet and the other numbers it discloses, while Forrester’s soundtrack is a little more aspirational, but not always backed up by the numbers.

In short, there are contradictions in the way that Forrester talks about its business and the way it delivers its numbers. Which is what makes me wonder about whether Forrester and Gartner are really in the same game any more…

In previous years, I’ve broken down and compared their results by attribute, but what I’d like to highlight now is the basic differences and the points that I have trouble correlating. I have a spreadsheet with lots of data comparisons, but I’m assuming that not everyone is as fascinated with this detail as I am, so I’ll keep it high-level. In any case, I’m not a stock market analyst, so the annual comparisons are more relevant from a business perspective than quarterly.

Let’s look at some points of difference:

Growth

• Gartner’s annual revenue in 2016 grew 13% to $US2.445 billion, just a tad under its forecast from 12 months earlier, while Forrester posted a 4% revenue growth, right in the middle of its forecast

• Gartner’s net income grew 11% to $US196 million, while Forrester’s jumped 47% to $US17.7 million, but that is still significantly lower than its most recent high of $US26 million in FY2012

• Gartner’s revenue has grown at a CAGR of 11.1% since 2013 and 11.3% since 2010, while Forrester’s has grown 3.1% since 2013 and a slightly better 4.5% since 2010.

• Gartner has generally forecast higher revenue numbers and hit them, while Forrester has generally been conservative, but has been variable in delivery. If Gartner analysts were as accurate as their finance department, they would be legends….

Business mix

Gartner’s research revenue – coming mostly from the IT space – has continued to grow as a percentage of its total – 75% in 2016, compared with 67% in 2010, while Forrester’s has remained pretty consistent at about 66%.

• Gartner’s research revenue grew just under 16% in 2016, and 14% in Q4, while its five-year CAGR is more than 13%

• Forrester’s research revenue grew just over 2% in 2016, and 1% in Q4, while its five-year CAGR is about 4.5%

While growing its consulting business, Gartner hasn’t achieved the same results as for its syndicated research. Its events business grew by a similar number – just under 7% – but the firm did highlight the fact that some of its Symposium events were selling out, so new events are likely.

Forrester doesn’t break down its consulting and events numbers, but includes a single line item called “advisory” which grew just over 7% in 2016, and just under 7% in Q4, and from the soundtrack, it seemed that events was the stronger performer.

Sales

It’s no secret that Gartner invests heavily in its salesforce and in sales training, but it doesn’t tolerate under-performers. It claims to have fine-tuned hiring to minimise wastage, and continues to focus on sales productivity.

• Average spend per account in 2016 increased 10% to $US174,000, while sales productivity increased 7% on a four-quarter rolling average

• Gartner’s salesforce is forecast to increase 13% in 2017

Forrester brought on Michael Morhardt about four years ago as Chief Sales Officer, and has continued to refine its sales model since then, with varying degrees of success. Under the latest structure:

• Forrester has moved to a “premier” account model for its largest customers, with three levels of engagement – a client executive, a solutions partner and a client success manager. It plans to transition to this model by end of the year in the US and Asia/Pacific, with Europe about 75% complete by then

• Other accounts will be managed under a “core” program driven by an inside sales organisation in Nashville, with its 50+ headcount doubling in 2018. It is not clear how that will work for non-US clients

The Outlook

Gartner is once again bullish about the next year, forecasting a revenue growth of 10% to 12%, with the highest forecasts in research. That doesn’t take into account its proposed acquisition of Corporate Executive Board (more on that below) which has the potential to add about $US1 billion to its top line once it’s finalised in April.

Forrester is forecasting a revenue growth of -1% to 2% for 2017, which is its lowest outlook since a similar forecast for 2013.

The Inconsistencies

I hold no torch for Gartner, but it’s hard to poke holes in its numbers and its forecasts. Gartner consistently walks the talk and lives up to its forecasts, so if it says it’s going to do something, then you’re unlikely to see a different outcome.

Likewise, I have nothing against Forrester – I have some great mates who work there and I respect their research. But there some things that just don’t make sense:

• Forrester’s largest research communities in 2016 were CIOs (8,232 members), application development & delivery (5,341) and analyst relations (4,744) – that’s vendor folks like me. Sure, some of these clients might be buying customer-oriented research, but it still looks like a traditional IT audience

• While CSO Michael Morhardt and CFO Mike Doyle talked up the new sales model – and particularly the Nashville beta – their positivity doesn’t gibe with a revenue forecast that is low to negative. Normally, a new inside sales organisation would be expected to ramp quickly, driving up revenue

Inorganic Growth

Gartner has always been acquisitive, adding breadth to its portfolio. In 2015, it acquired Peer Insights, a sort-of-less-nasty TripAdvisor review site for IT user feedback, which extends its ability to get direct insight from users about IT vendor performance. Other acquisitions have extended its capabilities into technical or niche market segments, but the $US3 billion purchase of Corporate Executive Board – a peer networking platform for legal, financial and HR – pushes it out of IT and into the rest of the C-suite. That deal is expected to close in April.

Gartner wants to play across the business, and always has dozens of potential acquisitions on its radar.

Forrester wants to play that game too. On its earnings call, Forrester said that it had appointed Doug Kohen, formerly head of operations & strategy, to lead its acquisitions, with a goal of completing one deal per year.

Meanwhile, International Data Corporation is also cashed-up for acquisitions, with its new Chinese venture capital owners also placing some emphasis on inorganic growth.

So Where To Now?

Plus ca change, plus ces’t la meme chose.

Gartner remains the 800-pound gorilla, but extends its reach into other line of business segments with the CEB acquisition. According to my friends at KCG, Gartner accounted for just under 70% of end-user spending on analyst firm services in 2015, and most of that was in the IT space. With the addition of CEB and other acquisitions, that penetration will no doubt increase.

At the same time, Gartner, IDC and Forrester accounted for 56% of total analyst firm revenues, with hundreds of firms making up the balance.

More acquisitions means more consolidation in the Big Three, but there are only a handful of mid-sized firms, and they’re not all appealing. The most attractive are those outside of IT, who can add breadth to the offerings of these traditionally IT-focused firms.

From an AR perspective, the new Gartner is a lot more complex. AR pros are already wrestling with how Peer Insights will impact existing engagement programs, while at the same time figuring out how to deal with CEB, whose people act more like advisors than analysts. It seems that the bigger Gartner gets, the harder it is to navigate.

Forrester, meanwhile, seems to be under attack from some of the ATGs (Alternatives to Garter) which have narrower focus, particularly around digital marketing. These firms are driving revenue out of lines of business rather than IT and generally have been established by Gartner and Forrester alumni – Constellation Research and Altimeter are probably the most visible examples, but there are others, and while generally smaller, they are becoming more important.

In the medium to long term, the analyst firms we know and love won’t look anything like those we deal with today. That will change how customers buy from them, how they influence customers, and how vendors try to influence the analysts.

But in the short term, the analyst business remains pretty much the same. And for AR folks, the strategy remains the same – focus on the analysts who really influence your customers and prospects, but keep one eye open for influencers who have – and will – come out of left field. It’s probably also worthwhile giving serious consideration to the length of future analyst firm contract commitments.

As always, I’d love to hear your thoughts.

Cheers,

Dave

• Thanks to Seeking Alpha for the earnings call transcripts, which compensate for my inadequate note-taking, and also to my mate Bill Hopkins at KCG, who did a stellar job of peer reviewing my draft.

Big bucks splashed on buyouts, but analyst business foundations remain firm

Consolidation has been a reality in the technology research business for the five-plus decades of its existence, but the billions of dollars splashed out last month in deals involving the two largest players – Gartner and International Data Corporation – have thrown a spotlight on the future of the business.

Neither deal was particularly surprising.

Gartner has always been acquisitive, and peer networking company, Corporate Executive Board (CEB) had long been rumoured as a potential target. The $US2.6 billion in cash and stock (plus $US700 million in debt) which Gartner offered in early January was, however, enough to make many folks in the technology business sit up and take notice.

Meanwhile, International Data Group – parent company of IDC – had been on the market for several months after the McGovern family decided to exit the tech publishing and research businesses to invest in their late father Pat’s deep interest in brain research.

Terms of the deal weren’t disclosed, but it is believed that the combined bid from two Chinese venture capitalists – China Oceanwide Holdings Group and IDG Capital – amounted to something under $US1 billion. Apparently both firms lodged unsuccessful offers last year, and were encouraged to pool their resources, putting together a winning bid in mid-January.

What makes these deals most interesting is what happens from here.

Gartner and CEB

Gartner has made many acquisitions in the last several years, including well-known tech research firms such as Dataquest, Meta Group and Ideas International. It is extremely good at assimilating acquired firms and in most cases has been successful at rebranding services under the Gartner name, with the original brands vanishing.

However, CEB is not a tech research firm whose services will fit neatly into Gartner’s portfolio. Rather, it is a talent management, peer networking and insights company, with a strong presence in human resources, sales, legal and finance. It is quite likely that Gartner will think long and hard about rebranding CEB as the Gartner name will be less well-known in these segments.

Adding close to $US1 billion to Gartner’s revenues of $US2.4 billion and about 4,600 staff to Gartner’s headcount of about 9,000, this deal is also significantly larger than anything that Gartner has consumed before.

However, Gartner CEO Gene Hall made it clear on last week’s earnings call that the firm will be using all the skills and tools it has developed over several years to drive out costs from CEB, and drive up sales engagement and client retention.

The good news for Gartner is that there is no real conflict in the offerings from the two firms, which means no confusion about subscription renewals moving forward. Longer term, the gains will come from consolidating back office functions and real estate, streamlining CEB sales & retention processes, adding functionality to CEB services (think advisory…), broadening the services portfolio for both sales teams, and building new services for new markets.

Hall confirmed last week that the deal has received US anti-trust approval, so there is little likelihood of it not proceeding, and Gartner teams are already hard at work aiming to close the deal in April.

Combined revenues will start to approach $US4 billion this year, allowing Gartner to further dwarf its dwindling group of competitors of any size and substance. But realistically, it will take 12 to 18 months to properly assess the impact of this acquisition on the technology research business.

IDC and the China connection

The founder of IDG, Pat McGovern, had a lifelong interest in China and was the first western publisher to establish a joint venture there as relations thawed in the 1980s, so it is perhaps appropriate that Chinese venture capitalists are the new owners. Indeed, the minority partner – IDG Capital – traces its roots back to McGovern’s first investment activities in China, when he partnered with Hugo Shong, now head of IDG Capital.

With the deal receiving US foreign investment approval before it was announced, this is a done deal, and mostly it represents upside for IDC, which is generally considered the more valuable property as the tech publishing business has struggled in recent years.

First and foremost, the announcement provides certainty for IDC. Ever since word leaked last year that it was on the market, there has been a degree of discomfort in IDC and among its primarily tech vendor clients. It is doubtful that that had any material impact on IDC’s sales, but it could have if the process dragged out much longer. The new owners also confirmed that long-time CEO Kirk Campbell would remain in charge, suggesting that other management changes are also unlikely.

Second, it positions IDC as an acquirer for the first time in many years. IDC has focused on organic growth and hasn’t made a significant acquisition since bringing in Meridian as the basis of Financial Insights over a decade ago.

The new owners have pledged funding for acquisitions, and IDC executives are actively exploring opportunities, many of which are no doubt also on Gartner’s radar – that firm has dozens of opportunities in view at any one time, and will sometimes wait years until the timing and pricing are right.

Short term, the buyout will have no impact on IDC’s portfolio or its sales activities, although it is likely to increase focus on driving up sales. The new owners are venture capitalists, and will be looking for a return on their investment.

The deal has attracted some criticism and negative commentary. Oceanwide is an investor in Chinese computer manufacturer, Lenovo, leading to suggestions of conflict of interest. Most astute observers think that is drawing a long bow – IDC would place its professional and financial credibility at extreme risk if it was even rumoured to be influenced by such a relationship. Indeed, Silverlake Partners, a US venture capital firm funded by Microsoft’s Bill Gates and Oracle’s Larry Ellison – among others – was once a significant shareholder in Gartner, but that didn’t stop them becoming involved in many battles over market data and opinion.

There is also a somewhat bizarre attack ad from Canalys, a UK-based firm which competes with IDC in the market share space for volume products such as notebooks and smartphones. The ad raises questions about trust and security of data shared with IDC by IT vendors, which is somewhat ironic considering Canalys has a largish research operation in Shanghai, which is generally considered to be the base for much of China’s hacking and cyber espionage activities.

Like the Gartner/CEB deal, the impacts of the IDC buyout are unlikely to become clear for at least 12 to 18 months, and while IDC remains the second-largest player in the tech research business, the change is not going to shake the foundations of the industry. Any changes are likely to be evolutionary rather than revolutionary, which has pretty much how things have been at IDC for some years.

Cheers,

Dave

 

Gartner & Forrester results show there’s life in the “old” business model yet

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.

Research

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.

Consulting

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

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.

Headcount

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.

Outlook

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….

Cheers,

Dave

* Thanks to Seeking Alpha for the earnings call transcripts, which compensate for my inadequate note-taking.

 

 

Gartner nails its numbers yet again, but Forrester ups the ante on future growth

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.

Research

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.

Consulting

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

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.

 Headcount

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.

Outlook

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.

Cheers,

Dave

* Thanks to Seeking Alpha for the earnings call transcripts, which compensate for my inadequate note-taking.

Gartner just bets bigger & draws further from the pack – analysing Gartner’s & Forrester’s 2013 financial results

Everyone knows that Gartner is the big gorilla of the technology research & advisory business. It’s not just that it now generates six times the annual revenues of its nearest competitor, Forrester Research, but how it plays the game. Gartner bets big, & expects to win big.

Gartner & Forrester have both reported their 2013 financial results in the past few days, and the CEOs of both firms came across on the earnings calls as happy with their numbers. They pretty much hit the revenue & income targets they forecast 12 months ago, and were comfortable about hitting similar targets in the coming year.

The difference is in where the bar is set.

•  For the year ended December 31, 2013, Gartner generated total revenues of $US1.784 billion, a 10 per cent increase on 2012, and at the lower end of 10 to 13 per cent growth forecast it announced 12 months ago. This year, its revenue growth guidance is 9 to 12 per cent.
•  Forrester reported full year revenues of $US297.7 million, a 2 per cent increase on 2012, and at the upper end of the -1 to 2 per cent growth it forecast a year ago. This year, its revenue growth guidance is of the order of 2 to 5 per cent.

 Same same, but different

Issues of scale and nuanced discussions about the difference in the research portfolios aside, these two firms effectively sell the same products into the same markets, yet one expects – and gets – double-digit growth, while the other sees single-digit growth as a reasonable outcome.

For all the similarities between Gartner & Forrester, there are also plenty of subtle and not-so-subtle differences – in their research agendas, the type of analysts they employ, their sales approaches and so on. Perhaps they can provide some insight into the difference in performance between these two firms?

In 2012, the difference between these companies was much about sales execution, which was covered in detail in our blog post A tale of two sales teams – an analysis of Gartner’s & Forrester’s 2012 financials. This post is our most-read article of all time, by a significant margin, and continues to attract hits 12 months on.

The 2013 results are a little more complex, but I’m going to break them down in a similar way as 2012 to provide some insights into how these two firms approach a multi-billion dollar market which both of them continue to claim is under-penetrated.

Top line, bottom line

•  As noted above, Gartner finished fiscal 2013 with total revenues of $US1.784 billion, an increase of 10 per cent over 2012, while Forrester reported revenues of $US297.7 million, an increase of just 2 per cent
•  Gartner posted a net income of $US182.8 million, an increase of 10 per cent over 2012 & 10.3 per cent as a percentage of revenues, while Forrester reported a net income of $US12.8 million, a 51 per cent decrease on its 2012 result, & just 4.3 per cent as a percentage of revenues

Gartner’s Q4 revenue growth was similar at 10 per cent, while Forrester’s was a little stronger at 3 per cent. Gartner’s Q4 income growth was weaker at 4 per cent, but so was Forrester’s – declining 56 per cent. Gartner CFO Chris Lafond highlighted investment in the salesforce as impacting Q4 income, and while Forrester didn’t discuss this issue specifically, it pointed to investment in its consulting headcount & weaker conditions in Europe as affecting its overall bottom line.

 Research

Syndicated research services continue to account for the bulk of revenue for both firms – 71 per cent for Gartner, and 68 per cent for Forrester. But while Gartner’s research revenues grew 12 per cent for the year, Forrester’s were flat, and declined 1 per cent in Q4. Gartner’s guidance for 2014 research revenues is 11 to 13 per cent, and while Forrester didn’t provide a specific forecast for research, it did suggest that growth would come from other areas.

As we saw last year, Gartner didn’t spend a lot of time talking about research, apart from the numbers, while Forrester chairman & CEO George Colony introduced the earnings call with a discussion about the firm’s research focus in the “Age of the Customer”, as well as highlighting the increase in delivery of playbooks – now totalling 64 & double the previous year.

 Consulting

Forrester includes consulting in “Advisory & Other” which also includes events, while Gartner breaks it out as a separate line item. From a growth perspective, Forrester appears to have done better here than Gartner, with a 5 per cent increase in advisory, compared with 3 per cent growth in consulting for Gartner.

Consulting has become a key focus for Forrester – it increased the number of consultants to 60 at the end of 2013, and plans to almost double that to 114 by end 2014. That’s still a lot fewer than Gartner’s 480+ consultants, but a serious statement of intent. The aim is to move Forrester analysts out of project consulting to focus more on research & advisory, and consulting was flagged as one of the areas of strongest growth in 2014.

Gartner also seems to have fixed a few issues in its consulting business, which delivered disappointing results in 2012. While 2013 & forecast growth is modest, Gartner highlighted a backlog of $US106 million at the end of Q4.

Events

With a 15 per cent growth to just under $US200 million in revenues, events are the gift that keeps on giving for Gartner. That growth was achieved by adding just three events to the calendar, bringing the worldwide total to 64 events. Attendee revenues increased 11 per cent and exhibitor revenues increased 17 per cent for the year, suggesting that Gartner has struck a good balance between the needs of its delegates and sponsors.

Forrester doesn’t break out its events revenue, but indicated that it was pretty comfortable with its 2013 commitment level, focusing on “fewer, bigger, better” events focused around its most important five to seven roles.

Headcount

Gartner didn’t break down its headcount figures in its earnings statement, but CEO Gene Hall pointed to a 16 per cent increase in sales headcount at the end of 2013, and said that the long-term sales headcount growth target was 15 to 20 per cent a year.

For Forrester, total headcount grew 4 per cent, with research (including consulting) increasing 10 per cent to 475 and sales growing 5 per cent to 485, and with Forrester also highlighting that salesforce attrition was at its lowest in eight quarters. Once again, Gartner’s greater focus on the salesforce is obvious, and while it continued to fill research roles through 2013, it is unlikely that research headcount grew at the same pace as its sales team.

Client retention & contract value

Client retention is a critical metric for analyst firms – as it is for many sales organisations – because it’s generally easier to renew & increase an existing contract than to sign a new client. Generally, these are calculated on 12-month rolling averages, and we’re assuming that Gartner & Forrester use similar approaches, despite slightly different terminology.

Gartner reported a 82 per cent retention rate in terms of total client numbers, compared with 73 per cent for Forrester, while Gartner claimed a 98 per cent wallet retention rate, compared with 86 per cent in dollars for Forrester.

For Gartner, year-on-year contract value grew 12 per cent to $1.423 billion, while Forrester’s agreement value declined 2 per cent to $US216.5 million.

Outlook & areas of concern

Both Gartner & Forrester appeared reasonably bullish about 2014, despite the different target growth rates. For Forrester, 2013 was impacted by weakness in Europe due to economic issues & client restructuring, while Gartner highlighted the US federal government and government in some parts of Europe as areas of softness last year. While no major improvement in government spending is expected this year, neither firm flagged it as likely to have any deeper impact in 2014.

Forrester went into 2013 on the back of a weak year characterised by poor sales execution, and set itself some modest goals as it set about correcting those problems. Delivering against its guidance, it has proven that it can execute against a plan, so can be expected to do that again in 2014 if it continues to focus its efforts on the areas which will grow its top & bottom lines.

Gartner went into 2013 on the back of a strong year, with all its ducks in a row. It’s in pretty much the same position as we go into 2014, and has a pretty strong track record of executing against its plans.

In 2010, Gartner was just over five times bigger than Forrester, but based on 2013 revenues, Gartner is now six times the size of its closest competitor. With a significant margin between the growth forecasts of these two firms and barring any major changes in the market, we can expect this delta to increase this year, and probably beyond that.

So long as Gartner bets big in terms of investment in its sales & research headcount and the growth targets it sets itself, as well as playing those cards sagely, it will continue to outperform not only Forrester, but many of the smaller firms which follow it in the revenue rankings. This might be good for Gartner, but whether it’s good for the technology research & advisory business overall is open to debate.

What do you think?

Cheers,

Dave

A tale of two sales teams – an analysis of Gartner’s & Forrester’s 2012 financials

If you ever wanted evidence that success in the analyst business is about more than good research, then the latest financial results from Gartner and Forrester tell the story – it’s as much about sales performance as anything else.

In its earnings call on Wednesday (US time) Forrester chairman & CEO, George Colony, CFO Michael Doyle & recently-appointed chief sales officer, Mike Morhardt, all pinned the blame for weak 2012 results on a complex sales compensation plan implemented in early 2012, which subsequently accelerated salesforce attrition & impacted bookings growth.

A week ago, Gartner reported much stronger growth for the fiscal year, and attributed its performance, in part, to a continued focus on improving sales productivity. Increasing its sales headcount by 12 per cent over the year probably didn’t hurt, either.

Looking at the numbers and listening to the earnings calls, Gartner appears to be at the top of its game & would seem to have no intention of backing off, while Forrester is more in recovery mode from a tough year, with its outlook still a little tentative. So let’s take a look at the breakdown and see what it can tell us about the prospects for both firms.

Top line, bottom line

• Gartner finished fiscal 2012 with total revenues of $US1.616 billion, an increase of 10 per cent over 2011, while Forrester reported revenues of $US293 million, an increase of just 3 per cent
• Gartner posted a net income of $US166 million, an increase of 21 per cent over 2011 & 10.3 per cent as a percentage of revenues, while Forrester recorded net income of $US26 million, a growth of 13 per cent & 8.9 per cent as a percentage of sales

While the deltas between those sets of figures are telling, they’re not too bad when compared to the Q4 numbers. Forrester’s revenues grew less than 1 per cent from Q4 2011 and net income declined 47 per cent, while Gartner reported revenue growth of 11 per cent and net income growth of 31 per cent.

It’s not unusual to have a strong Q4 – most sales teams are driven to close deals at the eleventh hour – so the fact that Forrester didn’t push more over the line is interesting. Gartner CEO Gene Hall spoke of double-digit growth in earnings, revenues & cashflow in Q4, plus double-digit growth in research in all of its major geographies. There was no such enthusiasm on the Forrester call.

Research

Syndicated research services account for about the same percentage of revenue for both firms – 70 per cent in the case of Gartner, 69 per cent for Forrester. But while research revenues grew 12 per cent year-on-year for Gartner, Forrester’s grew at only 6 per cent. The delta was even greater in Q4 – Gartner’s research revenues increased almost 13 per cent, Forrester’s less than 3 per cent.

Outside of the numbers, Gartner didn’t talk about its research business much at all. By contrast, Colony spent a good chunk of his introductory remarks talking about research products & methodologies, most notable of which was his discussion of playbooks, which Forrester introduced in 2012 to guide customer roles through every stage of a strategy, from development to execution. While the broader analyst & AR community seems a little uncertain that the playbooks are a true differentiator for Forrester, Colony confidently stated that the firm would double the number of playbooks from 39 in 2013, with all of them being constantly refreshed.

Events

There is no doubt that events have become a nice cash cow and a great growth business for Gartner over the past few years. Events revenue grew 17 per cent in 2012 and 21 per cent in Q4, and now account for 11 per cent of revenues, up from 10 per cent a year earlier. In 2012, Gartner ran 62 events worldwide, and plans to increase that by a handful this year – why wouldn’t you, when attendee numbers grew 8 per cent, exhibitors increased 20 per cent, and the business provides a 46 per cent gross contribution!

Forrester doesn’t break out events revenues in its balance sheet, but seems less bullish about this segment than Gartner. Forrester had been steadily increasing the number of events it hosted, but plans to reduce the total to 19 in 2013 – “fewer, bigger & better events” with improved customer experience.

Consulting

This was a weak segment for both firms. Gartner’s consulting revenues declined 1 per cent for the year and 8 per cent in Q4, which Gartner CFO Chris Lafond said was “below expectations” and was a result of contract optimisation. Despite this, Gartner had increased billable headcount by 5 per cent by the end of the year.

Forrester’s consulting revenues are included in “advisory services and other” which presumably includes events revenues. This line item declined 2 per cent for the year and 4 per cent in Q4, with CFO Michael Doyle saying that consulting delivery had been impacted by analyst attrition, although bookings had grown.

Headcount

Gartner didn’t mention total or research headcounts on its earnings call (and hasn’t yet updated its factsheet), but there is little doubt that both of those increased in 2012. There has been a constant stream of research headcount requisitions posted (and filled) over the past several months, and there have been few departures. Gartner said that it added 149 sales positions, bringing the total 1,417, and billable consulting headcount increased to 503.

Forrester said on its earnings call that sales attrition slowed after modifying the compensation plan mid-year, and that it finished the year with 274 quota-carrying salespeople, 239 of whom were “fully-ramped”, after increasing recruitment. Its press statement cited a total salesforce of 462, up 5.5 per cent for the year, while of more concern was the fact that analyst headcount declined 4 per cent to 432. Forrester also stated that it would eliminate approximately 30 jobs “to streamline its operations” but gave no detail about where those cuts would be.

Outlook

Gartner is bullish about 2013, saying it is “well-positioned for another year of strong growth” and providing formal guidance of 10 to 13 per cent growth in total revenues, with research strongest at 13 to 14 per cent. Forrester’s guidance range for the full year is -1 per cent to +2 per cent, with executives saying it was hoped that recent & ongoing changes to the sales structure would lead to a modest increase in sales productivity.

What next?

Gartner seems to have all the levers for its business in the right places, but no doubt will continue to fine-tune. This is a company which has comfortably increased its prices by between 3 and 6 per cent per annum since 2005, has a quarterly client retention rate of 83 per cent (from more than 13,300 clients) and attracts more than 6,000 CIOs to its events annually. The juggernaut rolls on…

Forrester certainly doesn’t look as comfortable, but it’s not out of the game by a long shot. Less than one-fifth the size of Gartner, the third-largest IT analyst firm now has 2,462 clients, having consolidated its accounts for a single client view, and its client retention rate is just a little lower at 77 per cent. If it adjusts its levers correctly this year, it will stay on track and return to growth.

Both of these firms know that clients will continue to buy information and advisory services from them, whether the economy is good or bad – what differs is what they buy in up and down markets, and how much they pay. Both of these firms still think there’s plenty of upside – this is what they had to say about long term prospects:

“Our level of penetration is very low in all of [our geographic markets], even the US.” Gene Hall, Gartner CEO

“This is a target-rich environment, the market opportunity is as big as ever.” Mike Morhardt, Forrester CSO

Sounds like a good business to be in… what do you think?

cheers,

Dave