Forrester Research, Inc. — Q1 2018 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2018, compared with Q1 2017. Forrester sells research subscriptions, advisory and consulting services, and event-related products. Financial amounts below are in U.S. dollars; statements are unaudited.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $77.7 million | $77.2 million; up 1% reported, down 1% after foreign-exchange effects |
| Research services revenue | $51.7 million | $51.7 million; essentially flat reported |
| Advisory services and events revenue | $26.0 million | $25.5 million; up 2% |
| Operating income (loss) | $(2.3) million | $3.1 million |
| Operating margin | (2.9)% | 4.1% |
| Net income (loss) | $(1.7) million | $3.0 million |
| Diluted EPS | $(0.10) | $0.16 |
| Operating cash flow | $7.8 million | $19.5 million |
| Cash and cash equivalents | $82.1 million | $79.8 million at Dec. 31, 2017 |
| Marketable investments | $54.3 million | $54.3 million at Dec. 31, 2017 |
| Deferred revenue | $155.4 million | $145.2 million at Dec. 31, 2017; $156.3 million at Mar. 31, 2017 |
Operating expenses rose 8% to $80.0 million, exceeding revenue growth. Cost of services and fulfillment increased 9% to $34.1 million; selling and marketing rose 8% to $33.0 million; general and administrative expenses rose 6% to $10.7 million. Cost of services was 43.9% of revenue versus 40.7% a year earlier. No separate gross-margin figure is presented.
Operating cash flow fell $11.7 million year over year, which management attributed mainly to working-capital movements, including incentive-compensation payments and higher prepaid expenses, and lower net income. Investing activities used $1.4 million; financing activities used $5.5 million, including $4.4 million of repurchases and $3.6 million of dividends. The quarterly dividend was $0.20 per share. The company reported no line of credit and no material change in contractual obligations; the balance sheet lists no debt. Management said cash, investments, and operating cash flows should cover working capital and capital needs for the next 12 months. Cash and investments included $68.8 million held outside the U.S.; management intends to reinvest those funds abroad.
Material changes and accounting comparability
- Forrester adopted ASC 606 on January 1, 2018 using the modified retrospective method. The 2018 results reflect the new standard, while 2017 comparatives remain under prior guidance.
- ASC 606 reduced reported Q1 2018 revenue by $2.3 million and increased net loss by $1.5 million, or $0.09 per share, versus what prior guidance would have shown. Management expects the revenue timing effect to affect primarily 2018 quarterly results, not materially affect full-year 2018 results.
- On adoption, retained earnings increased by $3.8 million. At March 31, 2018, deferred revenue was $11.2 million lower than it would have been under prior guidance. Management said the new standard reduced deferred revenue by 7% versus the prior-year balance; excluding the standard’s effect and foreign exchange, deferred revenue would have increased about 5%.
- Agreement value increased 4% year over year to $246.4 million. Client retention was 75% (up 1 percentage point), dollar retention 88% (up 1 point), and enrichment 98% (up 4 points); clients declined 3% to 2,349.
- The Research segment reported revenue of $11.6 million, up 11%, and a contribution loss of $1.1 million versus a $1.7 million loss. Product segment revenue was $53.7 million, down 1%; Project Consulting revenue was $12.4 million, essentially flat.
Outlook, risks, and unusual items
- Management expects its 2018 effective tax rate to be approximately 31% and sales headcount growth to be flat to low single digits, subject to business conditions. It expected operating cash flow to improve in the following three months, partly because Q1 invoicing delays related to ASC 606 system changes left accounts receivable about $7 million above the prior-year level.
- Approximately $254 million of revenue is expected to be recognized over the next 12 to 24 months from remaining performance obligations. This is not presented as revenue guidance.
- Management identifies risks including membership retention and enrichment, consulting-project demand, hiring and retaining professional staff, international operations, technology spending, cybersecurity and network disruptions, competition, privacy compliance, quarterly variability, taxation, and internal-control weaknesses.
- ASC 606 requires estimates of prepaid customer rights expected to expire unused, which affect revenue timing. The company also noted that adoption of the lease standard in 2019 is expected to materially affect its financial position as leases are recognized on the balance sheet.
- The company repurchased approximately 106,000 shares for $4.4 million in Q1 and had $65.7 million remaining under its repurchase authorization. A $0.20-per-share dividend was declared in April for payment in June.
Important facts for investors to verify
- Assess reported growth and margins using the ASC 606 transition disclosure, including its impact on revenue, deferred revenue, and year-over-year comparability.
- Monitor whether higher service-delivery and selling costs translate into improved revenue growth and operating profitability.
- Track retention, enrichment, client counts, agreement value, and deferred revenue for evidence of subscription-business momentum.
- Review operating cash flow and working-capital trends, especially the timing of invoicing, accrued expenses, and prepaid costs.
- Evaluate the company’s capital returns against cash generation, and consider the location of cash and investments and the expected balance-sheet impact of lease accounting.