Forrester Research, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing was signed March 13, 2020. Forrester provides research, data, advisory, consulting, peer-group, certification, and event services. The results include SiriusDecisions from its January 3, 2019 acquisition date, limiting comparability with 2018.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $461.7 million | $357.6 million |
| Research services revenue | $298.7 million | $228.4 million |
| Advisory services and events revenue | $163.0 million | $129.2 million |
| Operating income (loss) | $(1.1) million | $22.4 million |
| Net income (loss) | $(9.6) million | $15.4 million |
| Diluted earnings (loss) per share | $(0.52) | $0.84 |
| Cash from operating activities | $48.4 million | $38.4 million |
| Cash and cash equivalents at year-end | $67.9 million | $140.3 million |
- Revenue increased 29%; SiriusDecisions contributed approximately 22 percentage points of the increase. Research revenue rose 31% and advisory services and events revenue rose 26%.
- Operating margin fell to approximately (0.2)% from 6.3%; net margin was approximately (2.1)% versus 4.3%. Cost of services and fulfillment increased to 42.6% of revenue from 41.0%.
- The annual operating loss reflected higher costs, especially acquisition-related amortization and integration costs. Amortization rose to $22.6 million from $1.2 million; acquisition and integration costs were $8.9 million versus $3.8 million. Interest expense was $8.1 million.
- Operating cash flow improved by $10.0 million, primarily on stronger collections and deferred-revenue activity. Investing activities used $249.5 million, largely for the SiriusDecisions acquisition; financing activities provided $129.4 million, mainly from acquisition-related borrowings.
- Year-end debt principal was $132.8 million ($130.5 million net of deferred financing fees), including $14.0 million drawn on the revolving facility. The company had $61.0 million of undrawn revolving capacity and reported compliance with debt covenants.
- Working capital was negative $76.9 million, compared with positive $46.1 million in 2018. Current liabilities included $179.2 million of deferred revenue and $9.4 million of current debt. Management said cash and operating cash flows should cover the next 12 months’ needs.
Comparability, business metrics, and capital allocation
- SiriusDecisions added $79.3 million of revenue and $103.9 million of direct expenses, including intangible amortization, during 2019. It was acquired for consideration of $245.5 million; net cash paid was $237.7 million.
- Deferred revenue increased 32% to $179.2 million and agreement value increased 34% to $358.0 million; both measures include SiriusDecisions. Management attributed about 24 percentage points of deferred-revenue growth and 25 percentage points of agreement-value growth to the acquisition.
- Client retention was 72%, dollar retention 90%, and enrichment 106%. Management noted that these metrics were not yet affected by SiriusDecisions and that the calculation methodology had changed.
- Quarterly 2019 revenue was $100.6 million, $128.2 million, $108.6 million, and $124.3 million. Fourth-quarter operating income was $6.8 million and net income was $4.9 million, compared with $8.7 million and $5.4 million, respectively, in fourth-quarter 2018.
- The quarterly dividend program was suspended beginning in 2019. No shares were repurchased during 2019; approximately $60.1 million remained under the repurchase authorization at year-end.
- Cash dividends and buybacks are subject to the credit agreement’s restrictions. The company had $48.1 million of cash held outside the U.S. and stated that it intended to keep those funds invested abroad.
Outlook, risks, and unusual items
- The filing provides no general 2020 revenue or earnings guidance. Management expected to increase sales employees by approximately 4%–6% in 2020, incur $18.8 million of intangible amortization, $1.8–$2.2 million of integration costs, and $5.9–$6.1 million of interest expense.
- On March 13, 2020, Forrester announced that its largest event, SiriusDecisions Summit 2020, would be virtual because of COVID-19. Management estimated revenue would be $7–$9 million lower and operating income $4–$6 million lower than for a live event; the ultimate impact could vary with attendance, sponsorships, and recoverable costs.
- Management identified COVID-19 and the related potential effects on events, travel, customer demand, and the global economy as material risks. Other key risks include subscription renewals and retention, demand for project-based advisory and consulting, competition, international operations and foreign exchange, privacy and cybersecurity, talent retention, acquisition integration, and debt covenants.
- For 2020, SiriusDecisions was to be integrated into the existing Products and Research segments, ending its separate segment reporting. The company also reported adoption of lease accounting in 2019, which added lease assets and liabilities without material effect on operating results or cash flows.
- Management and PwC concluded that internal control over financial reporting was effective. Certain SiriusDecisions controls, covering approximately 2% of consolidated assets and 16% of revenue, were excluded from the 2019 assessment and audit while integration continued.
- No material legal proceedings were reported. The filing disclosed an immaterial out-of-period revenue correction in 2018 and no goodwill impairment in 2019.
Important facts for investors to verify
- Separate organic growth from acquired growth, particularly in revenue, agreement value, deferred revenue, and client count.
- Track retention and enrichment under the revised methodology and after SiriusDecisions is included in the metrics.
- Assess operating profitability excluding or including acquisition amortization and integration costs, and monitor whether expected synergies offset those costs.
- Monitor debt repayments, interest expense, covenant headroom, liquidity, and the company’s plan to reduce revolving borrowings.
- Compare the actual financial impact of the virtual SiriusDecisions Summit and broader COVID-19 disruption with management’s estimates.
- Review 2020 segment-reporting changes and the progress of SiriusDecisions control integration.