Forrester Research, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; unaudited consolidated results. Dollar amounts below are in millions except per-share data.
Business context
Forrester earns revenue from research and data memberships, advisory and consulting services, and events. Research memberships are generally annual and billed in advance, so a substantial portion of billings is initially recorded as deferred revenue.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $74.8 | $75.4 | $232.8 | $231.4 |
| Operating income | $5.3 | $4.9 | $14.7 | $12.0 |
| Operating margin | 7.1% | 6.5% | 6.3% | 5.2% |
| Net income | $4.5 | $3.0 | $10.0 | $7.3 |
| Net margin | 6.0% | 4.0% | 4.3% | 3.1% |
| Diluted earnings per share | $0.25 | $0.16 | $0.55 | $0.38 |
- Q3 research services revenue rose 3% to $52.2; advisory services and events fell 9% to $22.5. For the nine-month period, research revenue rose 2% and advisory/events revenue declined 2%.
- For the first nine months, operating cash flow was $28.2, compared with $27.9 a year earlier. Capital expenditures were $2.3, versus $1.1. Cash and cash equivalents declined $4.1 to $45.6 over the period.
- At September 30, cash and cash equivalents were $45.6 and marketable investments were $58.6. Current assets were $172.0 and current liabilities $154.4. Total liabilities were $163.7; the balance sheet reports no debt. The company said it had no credit line.
- Cash dividends paid were $9.2 in the first nine months; dividends declared were $0.17 per share in each of the first three quarters. The company announced a further $0.17-per-share dividend payable in December 2015.
Changes versus prior comparable periods
- Q3 revenue decreased 1%, while nine-month revenue increased 1%. Foreign exchange reduced revenue growth by approximately 3.5 percentage points in both periods. On a constant-currency basis, research revenue grew approximately 7% in Q3 and 6% year to date.
- Q3 operating income increased 8% and net income increased 46%; nine-month operating income increased 22% and net income increased 37%. Lower operating costs and, for Q3, a lower tax provision contributed to improved earnings.
- Q3 consulting revenue weakness reflected fewer consulting employees and comparison with unusually high Q3 2014 revenue. Nine-month event revenue fell primarily because of lower sponsorships.
- Key business metrics at September 30: deferred revenue was $124.2, down 4% year over year (approximately 1% lower excluding currency); agreement value was $233.3, up 3%; client retention improved to 80% from 76%, dollar retention to 91% from 89%, and the client count rose 1% to 2,482. Enrichment remained 97%.
Outlook, management commentary, and risks
- Management expected full-year 2015 operating cash flow to be comparable to 2014 and believed available cash, investments, and operating cash flows would meet working-capital, financing, and capital-expenditure needs for the next 12 months.
- The company planned to expand its quota-carrying sales force by approximately 4%–6% in 2015 and expected year-end headcount to be about 1% above 2014. It noted that sales-force expansion could increase selling and marketing expense as a percentage of revenue.
- Management cited client retention, consulting demand, technology spending, international business, product development, key-personnel recruitment and retention, competition, security and network disruptions, and quarterly variability among factors that could affect results. It reported no material change to previously disclosed market-risk assessments; the annual-report risk factors remain applicable.
- Reorganization costs were $4.4 for the first nine months, including a workforce reduction of about 4% in Q1 and Q3 Products Group changes. Management said most related costs would be paid by year-end, with approximately $0.5 expected in 2016. A $0.2 software project write-off was also recorded.
- A $0.7 tax benefit related to the July 2015 Altera tax-court opinion contributed to the lower Q3 effective tax rate. The company said it would monitor developments and potential financial-statement impacts.
- Approximately $32.4 of cash and investments were held outside the U.S.; repatriation for U.S. operations could require U.S. taxes. The company said it intended to permanently reinvest those funds abroad. No off-balance-sheet financing arrangements were reported.
Important facts for investors to verify
- Whether improving retention and agreement value translate into renewed bookings and revenue growth, given deferred revenue’s reported decline.
- Whether research growth can offset softness in consulting, advisory services, events, and sponsorship revenue; assess reported results both as stated and on a constant-currency basis.
- The sustainability of improved margins and earnings, including the impact of sales-force expansion, reorganization costs, and the Altera-related tax benefit.
- Cash generation and capital allocation: share repurchases were $18.6 in the first nine months versus $66.6 a year earlier; approximately $39.1 remained authorized at September 30.
- Foreign-currency exposure and the tax implications of any future repatriation of offshore funds. The filing says interim results may not indicate full-year results.