Forrester Research, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Forrester provides business and technology research subscriptions, data products, consulting and advisory services, and events.
Key financial metrics
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Revenue | $297.7 million | $293.0 million | +2% |
| Research services revenue | $202.8 million | $203.1 million | Essentially flat |
| Advisory services and other revenue | $94.8 million | $89.9 million | +5% |
| Operating income / margin | $21.8 million / 7.3% | $30.8 million / 10.5% | Down $8.9 million |
| Net income / diluted EPS | $13.0 million / $0.61 | $26.3 million / $1.15 | Net income down about 50% |
| Operating cash flow | $30.7 million | $53.1 million | Down $22.4 million |
| Cash, cash equivalents and marketable investments | $155.1 million | $242.7 million | Down $87.5 million |
| Working capital | $79.0 million | $155.3 million | Down $76.3 million |
| Deferred revenue | $152.9 million | $150.5 million | +2% |
Operating expenses rose faster than revenue: cost of services and fulfillment increased 5% to $117.1 million, selling and marketing increased 6% to $107.1 million, and general and administrative expenses increased 4% to $38.3 million. The effective tax rate was 34.9%, versus 18.2% in 2012, which benefited from a German tax-audit settlement. For 2013, other income and investment losses combined were a net expense of $1.8 million.
Liquidity and debt: Year-end cash was $74.1 million and marketable investments were $81.0 million. The filing reports no credit line and no off-balance-sheet financing arrangements; it does not identify outstanding borrowings. Management said available cash, investments, and operating cash flows were expected to cover working-capital, financing, and capital-expenditure needs for at least two years. 2013 investing cash flow was positive $57.6 million, primarily reflecting net maturities of investments; financing cash flow was negative $113.4 million, mainly due to share repurchases and dividends.
Material changes versus the prior year
- Revenue growth was modest and came from advisory and consulting services; research revenue was essentially flat. Data-subscription revenue fell about $2.4 million, partly due to phasing out the standalone Technology Marketing Navigator product.
- Client retention declined from 77% to 73%, dollar retention from 90% to 86%, and agreement value from $220.4 million to $216.5 million. Enrichment improved from 95% to 97%; client count was 2,471 versus 2,462.
- Management attributed weaker retention and bookings trends to the sales reorganization, high sales-staff attrition, difficult European selling conditions, and weaker demand for data subscriptions. International revenue declined 4% to $78.7 million and represented 26% of total revenue, compared with 28% in 2012.
- Operating margin contracted as compensation and other costs increased amid low growth and investments in consulting and sales staff. Net income also reflected the $1.9 million realized loss on sale of auction-rate securities and losses from investment funds.
- Cash and investments fell substantially, in part because the company spent $118.2 million on share repurchases, including its modified Dutch auction tender offer, and paid $12.4 million in dividends.
Outlook, risks, contingencies and unusual items
- Management anticipated a small further contraction in operating margin in 2014, continued investment in consulting and product-specialist headcount, and a 5%–7% expansion of the quota-carrying sales force, subject to business conditions.
- The board increased the regular quarterly dividend to $0.16 per share in February 2014. The company intended to continue quarterly dividends and repurchases, but future dividends remain at the board’s discretion and repurchases depend on market conditions.
- Key risks include membership renewals and retention, economic and technology-spending conditions, international operations and foreign exchange, competition, timely development of new offerings, recruiting and retaining qualified staff, cybersecurity, and quarterly earnings volatility.
- The company incurred $1.9 million of 2013 severance and related reorganization costs for eliminating 31 jobs. It had $108.993 million of future operating-lease commitments and $5.104 million of purchase commitments at year-end; no material legal proceedings were reported.
- In October 2013, Forrester sold its auction-rate securities portfolio for $9.1 million net proceeds, recording a $1.9 million loss. The filing also reports $5.7 million of non-marketable investments and related valuation uncertainty.
- The company revised prior-period statements for errors involving investment results, revenue/deferred revenue, and taxes, concluding the errors were immaterial and that amended prior filings were not required. It also reported that previously identified material weaknesses in revenue controls were remediated in Q4 2013. Management and the auditor concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Whether retention, agreement value, and contract bookings stabilize after the 2013 declines, and whether deferred revenue growth converts into reported revenue.
- Whether the planned sales and consulting hires improve bookings and productivity enough to offset higher costs and margin pressure.
- Whether weak European demand and lower data-subscription sales persist, and how the new product and organizational structure performs.
- The quality and sustainability of operating cash flow after the sharp year-over-year decline, alongside continued repurchases, dividends, and lease commitments.
- Whether the remediated revenue controls remain effective and whether future tax-audit outcomes or investment valuations create further unusual charges.