Forrester Research, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Forrester provides research subscriptions and products, advisory and consulting services, and events. Comparisons are with Q1 2013 unless noted.
Financial performance and liquidity
- Revenue: $73.1 million, up 2%. Research services contributed $50.8 million (+1%); advisory services and events contributed $22.3 million (+6%).
- Profitability: Operating income fell to $20,000 from $3.3 million; operating margin was approximately 0.03%, versus 4.6%. Net loss was $66,000, compared with net income of $2.2 million; diluted EPS was reported as zero, versus $0.10.
- Costs: Cost of services and fulfillment rose 9% to $29.5 million, and selling and marketing rose 10% to $29.9 million. These expenses increased faster than revenue, pressuring operating results. General and administrative expense was essentially unchanged at $9.5 million.
- Cash flow: Operating cash flow was $33.0 million, down from $35.5 million. Investing activities provided $4.6 million; financing activities used $31.3 million, including $29.7 million of share repurchases and $3.1 million of dividends. Cash increased $6.4 million to $80.5 million.
- Liquidity and debt: Cash and cash equivalents were $80.5 million and marketable investments were $76.7 million at quarter-end. Current assets were $242.7 million versus current liabilities of $189.6 million. The company reported no line of credit and said it expected cash, investments, and operating cash flow to meet needs for at least two years. No material changes to contractual obligations were reported.
- Other balance-sheet items: Deferred revenue was $159.8 million, up 5% year over year; total liabilities were $199.0 million. The filing reports no off-balance-sheet financing arrangements.
Changes versus the prior period
- Revenue growth was modest: research services rose 1%, while advisory services and events grew 6%. Data-subscription revenue declined about $1.1 million, primarily as Tech Marketing Navigator was phased out.
- Operating expenses grew faster than revenue, reflecting higher compensation, increased consulting and sales staffing, and annual merit increases. Sales and marketing costs also included a larger sales kickoff and termination of an international sales representative contract.
- Client retention declined to 74% from 77%, and dollar retention to 87% from 90%; enrichment improved to 97% from 95%. Client count increased 1% to 2,461. Agreement value was $223.3 million, up 2%.
- Q1 2014 included $0.8 million of reorganization costs, versus $1.6 million in Q1 2013. Project Consulting revenue increased 39% as the company built a dedicated consulting organization; Research segment revenue declined 6%, partly reflecting the transfer of consulting work.
- Forrester repurchased approximately 813,000 shares for $29.7 million, compared with no repurchases in Q1 2013. Weighted-average shares declined to 19.6 million from 22.3 million.
Outlook, commentary, risks, and unusual items
- Management planned to expand its quota-carrying sales force by approximately 5%–7% in 2014, subject to business conditions, and expected continued share repurchases as market conditions warranted. The board authorized an additional $25 million of repurchases in April 2014.
- The company expected $0.8 million–$1.1 million of additional severance costs in Q2 2014 related to the Q1 workforce action; accrued and additional costs were expected to be paid by year-end. Management anticipated completing the transfer of project consulting delivery from Research to the dedicated consulting organization by the end of 2014, with essentially all project consulting delivered by that organization in 2015.
- Key stated risks include membership renewal and enrichment, technology spending, international operations, product development, competition, recruiting and retaining staff, cybersecurity and network disruptions, and quarterly result variability. Management cautioned that forward-looking statements involve risks and that interim results may not indicate full-year results.
- Unusual accounting items: Q1 2014 included $0.5 million of out-of-period corrections, including $0.4 million related to depreciation. The company also revised Q1 2013 for identified immaterial prior-period errors, reducing reported net income by $172,000 to $2.169 million; the revisions did not change reported operating cash flow.
- Management concluded disclosure controls were effective as of March 31, 2014 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the decline in client and dollar retention stabilizes, and how the company’s bookings and deferred revenue trends develop.
- Whether advisory and consulting growth can offset the data-subscription decline, and whether consulting expansion improves contribution as staffing costs rise.
- How sales-force expansion and higher operating costs affect margins and cash generation over the rest of 2014.
- Actual severance costs and timing, and the progress and economics of the consulting-organization transition.
- Repurchase and dividend activity, including the effect of buybacks on liquidity and per-share results.
- The implications of the out-of-period depreciation correction and prior-period revisions; consult the full filing and 2013 Form 10-K for detail.