Often, investors go for companies that carry a big name tag against them. And usually these growth stocks can be some of the most thrilling picks in the market, as these high-flyers capture investors' attention, and a lot of times produce big profits as well. However, they can also lead on the downside when the growth story is over. Therefore, it is important to find companies which are still seeing strong growth prospects in their operations.
One such company is Gartner Inc. (NYSE:IT), whose share value has gone up 23% in a year. The company provides research and advisory services to clients, which helps them in making better day to day decisions. Gartner reported a successful quarter this month and in this article, I will highlight some important points from the result to let investors know how strong the company is going. Later, I will move towards discussing the future potential of this fast-growing research firm.
Source: Earnings Release
Gartner's top line during the latest period was outstanding. The company achieved 17% growth in revenue with the final figure coming at $519.8 million in comparison to the second quarter of 2013. Gartner's largest and most profitable segment, "Research" saw its contract value (subscription-related research products that recognize revenue on a rateable basis) grow 11%. This wasn't new as Gartner has produced double-digit contract value growth in every region and industry segment for the past two years.
This is a number which is very hard to maintain. The growing contract value is supported by services which satisfy customers completely. Gartner's customer retention rate has hence improved by 100 bps to 84%, with the same increment coming for wallet retention rate. Wallet retention measures the amount of contract value the company has retained with clients over a twelve-month period. This rate, which presently stands at 105%, is higher than the customer retention rate. The implication is that Gartner is retaining higher-spending clients within its portfolio.
Moving forward, consulting too saw growth with revenue increasing by 9%. The company's backlog was up 11%, allowing it to have a safer revenue stream for the near future. Events posted a 39% increase in revenue with same-event revenue hiking 21% on a year-over-year basis.
Cost of services and product development increased a lesser 14% as a result of higher payroll and related benefits coming from increased headcount and merit salary increases. The company also experienced higher ($6 million) conference expenses due to a greater number of events held. Nonetheless, costs as a percentage of revenue fell by 100 bps to 39% compared to the same quarter a year ago.
Selling, general and administrative expenses rose a little higher (18%) above revenue but failed to bring any material impact to bottom-line. The net result was diluted earnings per share increasing 18% to 58 cents during the last quarter.
The operational performance highlights the internal strength of the organization. Cost and revenue, both have improved not only in this quarter but in the past as well. Moving onto the future, I believe this trend should continue. This is because Gartner's business model is such that every company in the world, be it profit or not-for-profit, public or private, can become a potential client. This allows Gartner to possess a vast untapped market opportunity for its services.
My statement comes from the fact that technology is transforming the world and driving change in every industry on a scale rarely seen. Businesses that are embracing modern IT are creating a new enterprise operating model that supports emerging business models and revenue options. For these models to emerge, understanding the market and trends are a valuable resource. This is where Gartner steps in. For example, a few years ago, nobody would've believed in the concept of what Netflix (NASDAQ:NFLX) presently does. The idea of movie streaming is taking over and many multimedia companies are now investing resources to support the future trend of watching content through the internet on tablets and smart phones.
Of course, this is just one example. Gartner allows every firm to grasp specific industry knowledge and trends to identify opportunities which may be missed otherwise. The company's existence of more than three decades just adds more credibility to its ability of handling projects with wide experience in hand.
Moving to the bottom line, since Gartner provides services, its major cost comes from hiring and awarding its employees. The company has seen strong demand for its consulting services and the present strategy of investing in managing partners is a good one since it allows Gartner to capture that demand. The company now has 87 managing partners, an increase of 7% from last year. The revenue per billable headcount last quarter stood at $454,000. Since not all employees are paid a six figure salary, I believe that the present revenue generating figure is plenty to support future hiring if needed. This should keep cost pressure under control.
Gartner's latest normalized EPS guidance of $2.18 to $2.35 per share is 3 cents higher than the EPS guidance it gave investors in May. The company saw EPS growth of 10.7% last year, and is looking great for this year too. In fact, the current growth estimate for this year calls for an EPS growth of 14.2%. Furthermore, the long-term growth rate is currently an impressive 18.3%, suggesting pretty good prospects for the longer haul.
With debt level still below the industry, the company has managed to deliver return of equity of 72% in its recent past while peers have stood at a far lesser 34%. This outlines the competitive advantage Gartner possesses. If things continue this way, which I am sure they will, owing to the prospects of the IT industry, the company should be a top performer in the future. I therefore give a strong buy rating to Gartner.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.