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>>> Gartner: Research Powerhouse Continues to Roar


Guru Focus

by Ben Alaimo

September 8, 2023


https://finance.yahoo.com/news/gartner-research-powerhouse-continues-roar-171406053.html


Gartner Inc. (NYSE:IT) is one of the worlds most renowned research and advisory companies. It is most famous for its Magic Quadrant, in which Gartner assesses companies in order to identify leaders across a variety of industries, from supply chain management software to artificial intelligence.

The company reported strong financial results for the second quarter in August, beating both revenue and earnings forecasts.

What makes Gartner special?

Gartner has a strong brand and sits at a key point in the market. The business gives buyers an independent review point which can help them pick software and choose business partners.

The company is a thought leader across a variety of topics and provides independent research reports to business customers.

Gartner is known for its range of conferences, which sponsor various industry sectors. This acts as a great top of the funnel process to entice new customers and offer more value to existing customers.

The business also operates a strong consulting service covering a variety of areas, from digital transformation to technology strategy evaluation, IT cost optimization and Big Data.

Solid financials

Gartner reported solid financial results for the second quarter. Its revenue was $1.5 billion, which beat analyst forecasts by $1.5 billion and rose by 9.2% year over year.

The top line also beat analyst forecasts by $23.65 million, driven by strong Research revenue, which increased by 6% year over year or 7% on a constant currency basis. This segment is also its largest and most profitable with a 73% contribution margin, higher than the company's average of 68%.

This was further benefited by a range of growing topics, such as artificial Intelligence, cybersecurity, data analytics and even remote work.

Gartner's overall contract value rose by 9% year over year to $4.6 billion. This was driven by double-digit growth of enterprise leaders such as chief financial officer and chief information security officer customers. Tech vendor contract value was a little slower with single-digit growth, which was lower than the mid-teens growth reported in the prior year.

Overall contract value growth was diverse across industries. This was led by strong growth in the transportation sector, followed by retail and the public sector.

Breaking down by segment, global technology sales reached $3.5 billion, up 7% year over year.

GTS wallet retention was a solid 102%, which was down slightly from the 107% in the prior year. However, this is still solid as it means customers are sticking with Gartner specifically.

Moving on to global business sales, its contract value was $1 billion, which rose by 15% year over year. This was led by the supply chain industry. Upon the reopening of the economy in 2021, many companies suffered with supply chain disruption and thus, this has made it a critical issue for businesses to address.

Human resources was also a strong area of growth. This was driven by the rise of remote working, which has created an entirely new setup that is required for organizations.

Overall GBS retention was a solid 109%. Again, this was down from the 115% in the prior year, but still positive overall.

Consulting revenue continues with strong growth as it rose by 5% year over year to $126 million, at a 37% contribution margin.

There was a solid backlog reported for this segment, with $172 million in revenue up 17% year over year.

Conferences have had a resurgence now that in-person events are back in vogue. In the second quarter, Gartner reported $169 million in revenue, which beat internal expectations. This was driven by a roadshow of 17 conferences during the quarter. The contribution margin for this product type was also stable at 58%,

Finally, contract optimization, a small business segment, reported $22 million in revenue.

Profitability and balance sheet

Moving on to profitability, Gartner reported operating income of $299 million, which declined by 3.87% year over year. This was driven by a 12.95% increase in selling, general and administrative expenses to $670 million.

GBS quota-bearing headcount was up 15% year over year, while the overall company headcount rose to 20,104 associates, up 12%. In consultancies, the people are the product and thus, it can be more challenging to cut costs in this area.

Valuation

Gartner trades with a price-sales ratio of 4.85, which is higher than its five-year average, but lower than its ratio over 6 in 2021.

Based on historical ratios, past financial performance and analysts' future earnings projections, the GF Value Line also indicates a fair value of $345 per share. Thus, the stock is fairly valued at the time of writing.

Final thoughts

Gartner is a leading consultancy company that has a unique place in the market. Vendors rely on the company to assess the quality of their product relative to competitors. This effectively gives it a stranglehold on this market and a competitive advantage. Its competitors do offer similar services, but Gartner has the highest focus on enterprises (the most lucrative customer base).

This article first appeared on GuruFocus.

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