Forrester Research, Inc. — Q3 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2023, compared with the same periods in 2022. Forrester earns revenue from research subscriptions and related products, consulting and advisory services, and events.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $113.4 million | $127.7 million | $362.7 million | $400.9 million |
| Operating income | $5.1 million | $8.6 million | $8.2 million | $35.7 million |
| Operating margin | 4.5% | 6.7% | 2.3% | 8.9% |
| Net income | $2.5 million | $5.4 million | $3.7 million | $23.4 million |
| Diluted EPS | $0.13 | $0.28 | $0.19 | $1.22 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $9.8 million | $37.8 million |
Q3 net margin was 2.2%, versus 4.2% a year earlier; nine-month net margin was 1.0%, versus 5.8%. For the nine months, cost of services and fulfillment was $151.9 million (42% of revenue), selling and marketing was $123.1 million (34%), and general and administrative expense was $51.7 million (14%). Restructuring and related costs were $12.1 million.
At September 30, cash and cash equivalents were $101.7 million and marketable investments were $9.8 million. Current assets totaled $184.9 million and current liabilities $215.6 million. Debt was $35.0 million, down from $50.0 million at year-end 2022; the company reported $114.4 million of remaining borrowing capacity and compliance with credit-facility covenants. Total assets were $536.1 million and stockholders’ equity was $232.9 million.
Material changes versus comparable periods
- Revenue fell 11% in Q3 and 10% for the first nine months. Consulting revenue declined 24% and 22%, respectively, primarily due to lower bookings and a policy of generally selling consulting only to contract-value clients. Research revenue decreased 7% and 5%; events revenue rose 41% in Q3 and was essentially flat for the nine months.
- Operating income declined to $5.1 million in Q3 and $8.2 million year to date. Despite lower operating expenses overall, lower revenue and year-to-date restructuring charges weighed on profitability.
- Nine-month operating cash flow decreased $28.0 million year over year. Management cited lower net income, timing of benefit payments, and higher income-tax payments.
- Contract value was $349.4 million, essentially unchanged year over year. Client retention declined to 73% from 75%, wallet retention to 91% from 98%, and client count to 2,538 from 2,875. Approximately 57% of contract value was on the Forrester Decisions platform.
Outlook, management commentary, risks and unusual items
- Management expects the macroeconomic environment and the transition to Forrester Decisions to pressure key metrics through at least the first half of 2024. It expects approximately 80% of contract value to be on Forrester Decisions over the longer term.
- The company anticipates a full-year 2023 effective tax rate of approximately 50%, primarily reflecting tax expense related to share-based award settlements. The filing provides no clear numerical revenue or earnings guidance.
- Management believes cash and operating cash flows will meet working-capital, financing and capital-expenditure needs for the next 12 months and known longer-term requirements. Of $111.5 million in cash, cash equivalents and investments, $73.6 million was held outside the U.S.; management intends to keep those funds permanently reinvested abroad.
- In May 2023, Forrester reduced its workforce by approximately 8% and closed smaller offices. The company recorded $12.1 million of restructuring and related costs in the first nine months, including severance and office-related charges. It also recorded a $4.8 million expense for a wage-related matter following mediation; settlement remained subject to court approval.
- Risks highlighted include weaker customer budgets and uncertain economic conditions, reduced consulting bookings, client retention and wallet-retention declines, competition, reliance on key personnel, international and currency exposure, cybersecurity and privacy risks, and outstanding debt. Management says the likely results of legal proceedings are not expected to materially harm its overall financial position, results or cash flows, although interim-period effects could be material.
Important facts for investors to verify
- Whether subscription research trends, contract value, client retention and wallet retention stabilize as the platform transition progresses.
- Whether consulting bookings and revenue recover, given the macroeconomic environment and the restriction on selling consulting to non-contract-value clients.
- Cash-flow conversion and liquidity, including the effect of deferred revenue, cash held abroad, and ongoing lease obligations.
- Execution and costs of the workforce and office restructuring, as well as the status and final cost of the wage-related settlement.
- The impact of the approximately 50% expected 2023 tax rate and variable-rate debt carrying a 6.666% annualized rate at September 30, 2023.