Baron Insight on Gartner Inc. (IT)
One company that we believe epitomizes what we look for in an information services investment is Gartner. Gartner is the leading independent provider of research and analysis on the information technology industry. IT is becoming increasingly strategic to businesses, as companies of all sizes look to deal with the challenges and opportunities presented by growth of social technology, mobile handsets, cloud computing, and a tidal wave of "big data".
Gartner's research business employs a team of 810 analysts who track, evaluate and quantify technological developments. Analysts come to Gartner after a minimum of 10 years of experience in their field, so they have deep industry expertise, real world experience, and a wide range of industry contacts.
We believe Gartner has a vast untapped market opportunity. With 2011 research revenue of $1 billion, the company is serving just over 2% of its addressable market. The company has just 1,200 salespeople, and currently covers just 31% of the 108,000 companies that it will ultimately be able to target. Of the potential clients that Gartner's sales force actively covers, less than 25% are currently clients. The Gartner brand is highly valued in the IT community, and quickly becomes a critical part of a user's daily workflow. Every year, Gartner's clients view 5.5 million research documents, conduct 290,000 calls or meetings with analysts, tap into a terabyte of continuously updated market data, and have 2,300 contracts reviewed. This leads to close to 100% of clients renewing their contracts with Gartner each and every year. Given its high value and low churn, Gartner is also able to raise prices, generally at a 3 to 6% annual rate.
Gartner also demonstrates the operating leverage inherent in information services models. Margins are currently running around 19%, up from 12% just 7 years ago, and we still see a long runway for expansion. Finally, Gartner has generated a tremendous amount of cash. In 2011 alone, the company generated over $200 million of free cash flow, which it primarily uses to repurchase stock.