Forrester Research, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Comparisons are with Q1 2015 unless otherwise stated. Amounts below are in millions except per-share data and percentages.
Business context and financial results
Forrester sells research, data and membership products, advisory and consulting services, and events. Research memberships are typically annual and paid in advance, with revenue recognized over the contract term.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $77.4 | $75.2 | +3% reported; +4% constant currency |
| Research services revenue | $53.2 | $51.9 | +3% |
| Advisory services and events revenue | $24.2 | $23.3 | +4% |
| Operating income (loss) | $2.7 | $(0.7) | Returned to profit |
| Operating margin | 3.5% | (1.0%) | Improved |
| Net income (loss) | $1.3 | $(0.2) | Returned to profit |
| Diluted EPS | $0.07 | $(0.01) | — |
| Operating cash flow | $21.5 | $16.3 | +$5.3 |
Net margin was 1.7%, versus (0.3%) a year earlier. Operating expenses totaled $74.7 million, down from $75.9 million, principally reflecting lower reorganization costs. The effective tax rate was approximately 46%; management cautioned that the quarter’s low pretax income makes this rate unrepresentative.
Liquidity, balance sheet and capital allocation
- At March 31, cash and cash equivalents were $78.7 million and marketable investments were $41.4 million, totaling $120.0 million. Current assets were $201.4 million and current liabilities were $183.5 million.
- Total liabilities were $192.7 million; the filing does not separately identify borrowings. The company said it had no line of credit and did not expect to need one except potentially for a significant acquisition.
- Operating cash flow rose to $21.5 million, supported by net income and working-capital movements, including collections and deferred revenue. Investing activities provided $5.3 million, largely from net investment maturities and sales; capital expenditures were $1.1 million.
- Financing activities used $2.0 million, including $3.2 million of dividends. No shares were repurchased in the quarter. Remaining repurchase authorization was approximately $36.9 million.
- Cash and investments included $44.6 million held outside the U.S.; management intends to permanently reinvest these funds abroad and noted U.S. tax may arise if repatriated.
Material changes and operating indicators
- Deferred revenue increased 3% year over year to $154.8 million; agreement value increased 3% reported and 5% constant currency to $240.5 million. Management said bookings exceeded revenue growth on a trailing-twelve-month constant-currency basis.
- Client retention declined to 77% from 79%, and dollar retention to 88% from 90%; enrichment remained 97%. Clients increased 1% to 2,477.
- Research-product growth was partly offset by essentially flat Data revenue and declining Connect revenue. Advisory and consulting revenue increased. No events were held in Q1 2016 versus two in Q1 2015, reducing event revenue; management attributed this to event timing.
- Operating expenses included $1.0 million of severance from a workforce reduction of approximately 2%; the company expected another $0.1 million in Q2, with all plan costs expected to be paid in 2016. Q1 2015 included $3.4 million of reorganization costs.
Outlook, risks and unusual items
- Management anticipated an approximately 40% full-year 2016 effective tax rate and said current cash, investments and operating cash flow should meet working-capital and capital needs for the next 12 months.
- Subject to business conditions, management intended to expand the quota-carrying sales force by approximately 1%–3% in 2016, anticipating productivity improvements. The filing provides no specific revenue or EPS guidance.
- Key risks cited include membership renewal and enrichment, demand for consulting, technology spending, international operations and currency, competition, recruiting and retaining qualified staff, security and network disruptions, privacy compliance, and quarterly variability.
- Post-release adjustment: The 10-Q reported results $450,000 lower in operating expenses than the April 27 earnings release after updated information about 2015 costs at the Cambridge facility. The adjustment raised operating income to $2.712 million, net income to $1.289 million, and EPS from $0.06 to $0.07; management reported the same effect on pro forma results.
- The company said adoption of the new lease accounting standard, effective for it January 1, 2019, is expected to materially affect its financial position; its impact was still under evaluation.
Important facts for investors to verify
- Whether retention and dollar-retention trends stabilize, and whether agreement value and deferred-revenue growth convert into recognized revenue.
- Whether planned sales-force expansion yields the anticipated productivity and growth, particularly given weakness in Connect and flat Data revenue.
- The timing of events and the resulting effect on quarterly revenue comparability.
- The final reorganization cost and cash payments, and the basis and controls around the $450,000 post-release expense adjustment.
- Cash availability and potential tax consequences if offshore funds are needed in the U.S.; also monitor the expected lease-standard balance-sheet impact.