Forrester Research, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing; selected fourth-quarter results are also summarized below. Forrester provides business and technology research, advisory and consulting services, data products, and events, primarily to large enterprises.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Total revenue | $292.9 million | $283.6 million | +3% |
| Research services revenue | $203.0 million | $191.6 million | +6% |
| Advisory services and other revenue | $89.9 million | $92.0 million | -2% |
| Operating income | $30.7 million | $37.0 million | -17% |
| Operating margin | 10.6% | 13.0% | -2.4 percentage points |
| Net income | $25.6 million | $23.0 million | +11% |
| Diluted EPS | $1.12 | $0.99 | +13% |
| Cash from operating activities | $53.1 million | $55.4 million | -$2.3 million |
| Cash, cash equivalents and marketable investments | $242.7 million | $227.6 million | +$15.1 million |
| Working capital | $155.2 million | $158.1 million | -$2.9 million |
FY 2012 cost of services and fulfillment was 38.0% of revenue, versus 36.5% in 2011; selling and marketing was 34.6%, versus 35.8%. Cash and short-term investments totaled approximately $233.7 million, with a further $9.0 million in long-term auction-rate securities. The company reported no off-balance-sheet financing and said it had no line of credit and did not anticipate needing one. The filing does not identify funded borrowings as a material source of financing.
Fourth-quarter 2012 revenue was $75.1 million, operating income $7.4 million, net income $4.3 million, and diluted EPS $0.19. In fourth-quarter 2011, the corresponding figures were $74.7 million, $13.4 million, $8.9 million, and $0.38.
Material changes versus the prior comparable period
- Revenue growth slowed to 3% from 13% in 2011. Research revenue increased, but advisory and other revenue declined; management attributed pressure to lower advisory productivity, analyst attrition, and smaller events.
- Operating income fell as operating expenses rose faster than revenue, including higher service costs, depreciation, general and administrative costs, and reorganization expenses. Depreciation increased partly due to the new headquarters and website.
- Net income increased despite lower operating income, primarily because the effective tax rate fell to 18.8% from 40.5%. A German tax-audit settlement generated a $5.5 million deferred tax benefit and reduced the reported effective rate by approximately 20 percentage points.
- Year-end agreement value slipped less than 1%, to $220.4 million. Client retention fell to 77% from 80%; enrichment declined to 95% from 101%; dollar retention remained 90%. Clients numbered 2,462, down 1% under the company’s revised counting method.
- Cash from operations decreased modestly. The company spent $29.8 million on share repurchases and paid $12.6 million in regular dividends during 2012.
Outlook, risks and unusual items
- Management expected year-over-year research-services revenue growth to continue slowing in the first half of 2013, reflecting weaker booking growth in the second half of 2012. It attributed booking and enrichment pressure partly to the 2012 sales reorganization and sales-staff attrition.
- Subject to business conditions, management planned to expand the sales force by approximately 10% in 2013. In February 2013, the company announced a reduction of about 30 jobs, or 2.5% of its workforce, and expected $1.5 million to $1.8 million of severance costs in the first quarter.
- The board raised the regular quarterly dividend from $0.14 to $0.15 per share and authorized additional repurchases. The company said it would explore accelerating its repurchase program and believed available liquidity and operating cash flows would meet needs for at least two years. Future dividends and repurchases remain subject to board discretion and business conditions.
- Material control weakness: Management and the independent auditor concluded that internal control over financial reporting was ineffective at year-end because controls over advisory-services and consulting-project revenue did not adequately document monitoring of services performed. The auditor’s financial-statement opinion was unqualified, but its internal-control opinion identified this material weakness. Remediation was underway; completion timing was not assured.
- Investment and reporting item: After its February 2013 earnings release, Forrester recorded an additional $0.75 million investment loss based on updated fund information. FY 2012 net income consequently declined from the previously announced $26.0 million to $25.6 million; fourth-quarter net income declined from $4.7 million to $4.3 million.
- The $9.0 million fair value of auction-rate securities, against $11.0 million par value, remains exposed to prolonged illiquidity after failed auctions since 2008. Valuation depends on Level 3 assumptions; further market deterioration could lead to additional losses or impairment.
- Other significant risks include renewal and retention trends, economic and technology-spending conditions, competition, hiring and retention of analysts and sales staff, international and currency exposure, cybersecurity, and the ability to develop successful offerings. International customers represented about 28% of revenue; Europe was a difficult selling environment.
Important facts for investors to verify
- Whether revenue controls over advisory and consulting engagements are remediated and operating effectively, and whether any further reporting issues emerge.
- Subsequent trends in agreement value, bookings, client retention, dollar retention, and enrichment, especially following the sales-force reorganization and planned expansion.
- Whether operating margins recover as revenue growth slows and staffing, reorganization, and technology costs change.
- The sustainability of earnings after the one-time tax-audit benefit, and any future investment-fund revisions or charges.
- Liquidity and valuation developments for the auction-rate securities, alongside capital returns, lease commitments, and the planned repurchase pace.