Forrester Research, Inc. — FY2018 Form 10-K
Reporting period: Year ended December 31, 2018. Forrester is a global research, data and advisory-services firm. The 2018 results do not include SiriusDecisions, acquired January 3, 2019.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $357.6 million | $337.7 million |
| Research-services revenue | $228.4 million | $216.5 million |
| Advisory services and events revenue | $129.2 million | $121.2 million |
| Operating income / margin | $22.4 million / 6.3% | $27.5 million / 8.2% |
| Net income / net margin | $15.4 million / 4.3% | $15.1 million / 4.5% |
| Diluted EPS | $0.84 | $0.83 |
| Cash from operations | $38.4 million | $37.5 million |
Revenue grew 6%; research and advisory/events revenue increased 6% and 7%, respectively. Operating income fell 19%, as operating expenses grew faster than revenue, including $3.8 million of acquisition and integration costs. Operating expenses were 93.7% of revenue versus 91.8% in 2017. The effective tax rate declined to 34.6% from 44.7%, principally reflecting the lower U.S. corporate tax rate under the 2017 Tax Cuts and Jobs Act.
Liquidity, capital and operating indicators
- Year-end cash and cash equivalents were $140.3 million; marketable investments were zero after liquidation of the portfolio in December. Working capital was $46.1 million. Deferred revenue was $135.3 million, down 7% year over year, partly because of the adoption of ASC 606.
- Cash provided by investing activities was $40.1 million, largely reflecting investment maturities and sales; cash used in financing was $14.0 million, including $14.5 million in dividends and $9.9 million in share repurchases, partly offset by employee-plan proceeds.
- Agreement value rose 10% to $266.3 million (8% excluding foreign-exchange effects). Client retention declined to 74% from 76%; dollar retention was 88% in both years; enrichment rose to 101% from 96%. Client count decreased 2% to 2,353.
- At December 31, 2018, the balance sheet reported total liabilities of $201.9 million and total assets of $353.5 million. These year-end figures precede the SiriusDecisions acquisition and related borrowing.
Material changes, outlook and risks
On January 3, 2019, Forrester acquired SiriusDecisions for $245.0 million, subject to purchase-price adjustments; net cash paid was $240.1 million. To fund part of the transaction, it borrowed $125 million under a term facility and $50 million under a $75 million revolving facility. The facilities mature in 2024, bear variable interest, and include leverage and fixed-charge coverage covenants. Management expected covenant compliance at the first reporting date. The filing does not provide a completed purchase-price allocation or pro forma combined financial results.
Forrester suspended its quarterly dividend program beginning in 2019 and planned to substantially reduce or eliminate share repurchases. Management expected to use excess cash flow to reduce revolver borrowings, make scheduled term-loan principal payments, and pay approximately $3.1 million of deferred FeedbackNow acquisition consideration. It planned to increase sales headcount approximately 3%–5% in 2019, excluding SiriusDecisions. Management stated existing cash and operating cash flows were expected to meet working-capital and capital-expenditure needs for the next 12 months.
Key risks include renewal and demand trends, competition and pricing pressure, integration and realization of acquisition benefits, debt service and covenant compliance, economic conditions and technology spending, international and currency exposures, privacy regulation including GDPR, cybersecurity, and retention of qualified staff. The filing also identifies Brexit, tax uncertainty, and the CEO’s approximately 42% ownership as risks.
Unusual accounting and other items: ASC 606 adoption increased FY2018 revenue by $1.6 million and net income by $1.4 million ($0.08 per diluted share); it reduced year-end deferred revenue by $14.0 million versus the prior guidance. In Q2 2018, the company recorded a $1.0 million out-of-period revenue correction, including $0.2 million attributable to 2017; management concluded the error was not material to the periods presented. The auditor reported effective internal control over financial reporting and issued an unqualified opinion. No material legal proceedings were reported.
Important facts for investors to verify
- Post-acquisition SiriusDecisions revenue contribution, integration costs, synergies and pro forma results.
- Debt balances, variable interest expense, covenant headroom and progress in repaying the revolver.
- Whether agreement-value growth translates into revenue and improved client retention, given the decline in client retention and flat dollar retention.
- Underlying operating-margin trajectory excluding acquisition costs, and the impact of ASC 606 when comparing periods.
- Execution of the stated 2019 cash-use and sales-headcount plans, alongside the dividend suspension and reduced repurchases.