Forrester Research, Inc. — Q3 2012 Form 10-Q
Business context and period: Forrester provides research memberships, advisory and consulting services, and events. This unaudited report covers the three and nine months ended September 30, 2012, compared with the same 2011 periods. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $68.5 | $69.8 | $217.9 | $209.0 |
| Operating income | $7.2 | $9.7 | $23.3 | $23.6 |
| Operating margin | 10.5% | 14.0% | 10.7% | 11.3% |
| Net income | $10.4 | $5.7 | $21.3 | $14.1 |
| Diluted EPS | $0.45 | $0.25 | $0.93 | $0.61 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $43.2 | $46.5 |
- Q3 research revenue rose 2% to $50.3 million, while advisory services and other revenue fell 11% to $18.2 million. Nine-month revenue increased 4%, led by 7% growth in research services; advisory and other revenue declined 2%.
- Q3 cost of services and fulfillment increased 3% to $25.7 million and rose to 37.6% of revenue from 35.9%. Selling and marketing expense declined 2% to $24.3 million; general and administrative expense rose 6% to $8.4 million.
- Nine-month operating cash flow was $43.2 million. Investing activities used $16.0 million and financing activities used $27.6 million, including $26.2 million of share repurchases and $9.5 million of dividends.
- At September 30, cash and cash equivalents were $80.9 million and marketable investments were $157.5 million. Current assets were $302.0 million and current liabilities $151.1 million. No debt balance is presented in the supplied financial statements; the company said it had no credit line and did not anticipate needing one.
- Deferred revenue was $124.9 million, up 6% year over year; agreement value was $221.6 million, up 5%. Client retention was 78% versus 81%, dollar retention remained 91%, enrichment fell to 96% from 104%, and reported clients numbered 2,498 versus 2,508.
Material changes and segment results
- Q3 total revenue declined 2% year over year, and operating income fell 26%. For the first nine months, revenue grew 4% while operating income was nearly flat. Revenue growth slowed through the first three quarters of 2012, according to management.
- Q3 Business Technology revenue declined 2%; Marketing and Strategy revenue grew 2%. Events revenue fell 78%, principally because events were smaller in scope and generated less ticket revenue. Nine-month revenue grew 5% in each of the two client groups, while Events revenue declined 7%.
- Q3 net income rose despite lower operating income, principally because income tax expense was replaced by a $2.7 million tax benefit. The nine-month effective tax rate was 12.8%, versus 42.4% in 2011.
- Cash and cash equivalents were broadly unchanged from year-end 2011, while total assets declined to $464.7 million from $487.6 million. Treasury stock at cost increased to $207.2 million from $181.0 million, reflecting repurchases.
Outlook, commentary, risks, and unusual items
- Management projected Q4 2012 revenue to range from a 4% decline to 2% growth year over year. It planned, subject to business conditions, to expand the sales force 15%–20% in 2013. Expected 2012 property and equipment purchases were $5–$8 million.
- Management said cash, investments, and operating cash flows should meet working capital, financing, repurchase, and capital expenditure needs for at least two years. In October 2012, the board added $50 million to the repurchase authorization; the filing also described an intention to repurchase $100 million of stock through 2013, subject to conditions.
- A $5.5 million deferred tax benefit from settlement of a foreign subsidiary tax audit was a major Q3 discrete tax item. Other tax-rate factors included reduced reserves for uncertain tax positions and deductions related to disqualified stock-option dispositions.
- Management corrected equity-method investment income in Q3, recording a $0.6 million reduction. It deemed the prior-period errors immaterial: income had been understated in 2007 and 2008 and overstated in 2011.
- Sales-force realignment and other cost reductions generated $1.4 million of reorganization costs in the first nine months; the remaining $0.1 million accrual was expected to be paid by year-end 2012, with no further costs anticipated.
- Approximately $9.8 million of auction-rate securities remained illiquid after repeated failed auctions. Their fair value depends on significant unobservable assumptions; management considered the unrealized loss temporary and said the illiquidity was not expected to impair its business plan.
- Management cited slowing agreement-value growth and declining enrichment, a difficult European selling environment, foreign-exchange effects, analyst attrition, and potential economic and technology-spending weakness. The filing also identifies competition, client renewal, staff retention, cybersecurity, and quarterly variability as risks.
Important facts for investors to verify
- Whether Q4 revenue falls within management’s projected range and whether slowing contract bookings and enrichment stabilize.
- Whether weaker Q3 advisory and event revenue, higher service costs, and lower operating margin persist.
- The recurring earnings and cash-tax implications of the Q3 tax benefit and the nature of the equity-method correction.
- The liquidity, valuation assumptions, and eventual recovery prospects for the auction-rate securities.
- Progress and funding of planned 2013 sales-force expansion, dividends, and share repurchases, including the stated $100 million repurchase intention.