Forrester Research, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. Amounts below are in U.S. dollars.
Business context and reporting period
Forrester sells research memberships, advisory and consulting services, and events. Research contracts are generally renewable annually and paid in advance, with revenue recognized over the contract term. The company reports Business Technology (BT), Marketing and Strategy (M&S), and Events segments.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $78.2m | $79.1m | $149.7m | $149.4m |
| Operating income | $9.0m | $11.5m | $12.4m | $16.1m |
| Operating margin | 11.5% | 14.5% | 8.3% | 10.8% |
| Net income | $5.6m | $7.8m | $8.0m | $11.0m |
| Diluted EPS | $0.26 | $0.34 | $0.36 | $0.47 |
| Operating cash flow | Not separately reported for the quarter | $37.2m | $39.4m |
- Q2 revenue fell 1% year over year; first-half revenue was essentially flat. Q2 research revenue was $50.5m, down 1%, and advisory and other revenue was $27.7m, down 1%.
- Q2 operating expenses rose 2% to $69.2m as cost of services and selling and marketing costs increased. First-half operating expenses rose 3% to $137.2m. Higher expenses and reorganization charges contributed to lower operating and net margins.
- At June 30, cash and cash equivalents were $55.1m, marketable investments were $132.5m, current assets were $243.9m, and current liabilities were $164.8m. Total liabilities were $174.0m. No borrowing balance is shown; the company said it had no line of credit and did not anticipate needing one.
- Cash declined $43.7m during the first half, mainly reflecting $92.1m of share repurchases and $6.4m of dividends, partly offset by operating cash flow and net investment maturities. Operating cash flow was down $2.2m year over year.
Material changes versus the prior comparable period
- Profitability weakened despite broadly flat first-half revenue: first-half operating income fell 23% and net income fell 27% year over year.
- Q2 segment revenue was down 3% in BT, up 2% in M&S, and down 5% in Events. For the first half, BT was down 1%, M&S up 2%, and Events down 4%.
- Key commercial indicators were mixed to weaker year over year: agreement value was $211.0m, down 5%; client retention was 76% versus 79%; dollar retention was 89% versus 91%; enrichment was 95% versus 98%; and client count was 2,451 versus 2,546. Deferred revenue increased 2% to $136.8m, but deferred revenue plus future invoicing declined about 5%.
- The company repurchased $92.1m of stock in the first half, including a modified Dutch auction tender for 2.05m shares at $36 per share for $74.0m, plus $1.1m of related costs. The share repurchases substantially reduced cash and equity.
Outlook, commentary, risks, and unusual items
- Management intended, subject to business conditions, to expand the sales force by about 10% in 2013 versus 2012, which could raise selling and marketing costs before associated research revenue is recognized. Planned 2013 capital expenditures were $3m–$6m.
- The company planned to continue repurchases during the remainder of 2013 as market conditions warranted. A July 2013 authorization increase of $25m brought remaining authorization to approximately $80m. A $0.15-per-share dividend was declared in July, payable in September.
- Management believed cash, marketable investments, and operating cash flows would meet working-capital, financing, and capital expenditure needs for at least two years. This is a forward-looking statement, not a guarantee.
- First-half reorganization costs were $1.9m for the elimination of 31 jobs, about 2.5% of the worldwide workforce; the remaining $0.6m accrual was expected to be paid by year-end 2013.
- A material weakness in internal control over revenue recognition for advisory services and consulting projects remained unremediated at June 30, 2013. Management concluded disclosure controls were not effective; remediation efforts included improved project scoping and performance review controls and training.
- About $8.9m of auction-rate securities remained illiquid after repeated failed auctions. The company valued them using Level 3 assumptions and recorded a $2.1m unrealized loss; it said it did not expect their illiquidity to impair execution of its current business plan.
- Management cited Europe’s economic conditions and sales leadership challenges as factors in a difficult regional selling environment. Other disclosed risks include retention and bookings trends, competition, economic conditions, key-personnel dependence, and network disruption or security breaches.
Important facts for investors to verify
- Whether bookings, agreement value, deferred revenue plus future invoicing, and retention indicators stabilize or continue declining.
- Whether planned sales-force expansion improves bookings and revenue enough to offset higher selling costs and pressure on margins.
- Progress and effectiveness of remediation of the advisory and consulting revenue-control material weakness.
- Cash and investment balances after further repurchases and dividends, and the remaining repurchase authorization.
- Liquidity and valuation developments for auction-rate securities, including the assumptions underlying their Level 3 fair value.