Forrester Research, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Forrester provides research memberships, advisory and consulting services, and events. Comparisons below are with Q1 2012 unless stated otherwise. Amounts are in millions except per-share data.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $71.5 | $70.3; up 2% |
| Research services revenue | $50.4 | $49.8; up 1% |
| Advisory services and other revenue | $21.1 | $20.5; up 3% |
| Operating income / margin | $3.4 / 4.8% | $4.6 / 6.5% |
| Net income / diluted EPS | $2.3 / $0.10 | $3.2 / $0.14 |
| Operating cash flow | $35.5 | $34.9 |
| Cash and cash equivalents, March 31 | $143.9 | $98.8 at December 31, 2012 |
| Marketable investments, current and long-term | $129.5 | $143.8 at December 31, 2012 |
- Gross margin was approximately 62.2% (revenue less cost of services and fulfillment); cost of services was 37.8% of revenue versus 38.3% a year earlier. Operating margin fell 1.7 percentage points as expenses rose faster than revenue.
- Selling and marketing expense increased 8% to $27.1 million, primarily from higher compensation, staffing, stock compensation, and facilities. General and administrative expense decreased 1% to $9.5 million.
- Cash from investing activities was $12.8 million, principally net maturities of investments; capital expenditures were $0.9 million. Financing activities used $1.8 million, including $3.4 million in dividends. Cash increased $45.1 million during the quarter.
- Total liabilities were $192.0 million, including $152.2 million of deferred revenue. The filing reports no debt balance and says the company has no line of credit. Current assets were $341.4 million versus current liabilities of $182.7 million.
Material changes and operating metrics
- Net income declined 26% and diluted EPS fell from $0.14 to $0.10, despite 2% revenue growth. Higher selling and marketing costs, depreciation, and reorganization costs contributed to lower operating income.
- Deferred revenue was $152.2 million, essentially flat year over year. Agreement value decreased 1% to $218.6 million. Client retention fell to 77% from 80%; dollar retention remained 90%; enrichment declined to 95% from 99%; and clients decreased 3% to 2,442.
- Management attributed weaker retention/enrichment trends in part to the January 2012 sales reorganization and high sales-staff attrition during 2012. It also cited a difficult European selling environment, including economic conditions and open sales leadership positions; international revenue declined 5% to $19.1 million.
- Business Technology revenue rose 1%, Marketing and Strategy rose 2%, and Events revenue rose 12% from a small base. The company reclassified 2012 segment figures to reflect changes in product-line and shared consulting cost allocations.
Outlook, risks, and unusual items
- No specific revenue or earnings forecast was provided. Subject to business conditions, management planned to expand the sales force by approximately 10% in 2013 and expected this investment could raise selling and marketing expense as a share of revenue.
- Management expected 2013 property and equipment purchases of $3 million to $6 million and anticipated an additional $0.3 million of severance costs in Q2, following $1.6 million of Q1 charges for eliminating 31 positions (about 2.5% of the workforce). The related accrual and additional costs were expected to be paid by year-end.
- Management believed cash, investments, and operating cash flows would cover working capital, financing needs, and capital expenditures for at least two years. It planned to continue repurchases during 2013 as market conditions warranted.
- Subsequent event: the tender offer expired May 1, 2013; on May 7 the company bought 2,054,732 shares at $36 each for $74.0 million, excluding expenses, funded from cash and investments. About $75.2 million remained under the repurchase authorization after the offer.
- Liquidity and valuation risk remains for $8.9 million of auction rate securities (ARS), with $11.0 million par value. Auctions had continued to fail since 2008; the securities are Level 3 valued, and their estimated fair value depends on volatile assumptions. Management said it did not expect the illiquidity to disrupt its business plan.
- A material weakness in internal control over financial reporting relating to evidence that advisory and consulting services were performed before revenue recognition remained unremediated at March 31. Management therefore concluded disclosure controls were not effective. It reported progress on remediation and stated that the included financial statements fairly present results in all material respects.
- Other disclosed risks include membership retention, technology spending, international operations, new-product execution, staffing, competition, quarterly variability, network disruption/security breaches, and successful remediation of the control weakness. Management cautioned that Q1 results may not indicate full-year results.
Important facts for investors to verify
- Whether bookings, agreement value, deferred revenue, retention, and client counts stabilize or improve, particularly in Europe.
- Whether the planned sales-force expansion translates into revenue growth sufficient to offset higher sales and marketing costs.
- Progress and effectiveness of remediation of the revenue-recognition control weakness.
- Execution and cash impact of the $74.0 million tender offer, subsequent repurchases, dividends, and remaining authorization.
- Valuation assumptions and eventual liquidity or recovery of the ARS portfolio, and actual capital spending and restructuring costs versus expectations.