Forrester Research, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited results; comparisons are with the corresponding 2019 periods unless noted. Amounts below are in U.S. dollars.
Business context and reporting period
Forrester sells subscription research, consulting and advisory services, and events. COVID-19 affected business from March 2020, reducing contract bookings and event revenue. The company moved its two flagship Q2 events online, cancelled two smaller events, and planned to hold all second-half 2020 events virtually. It also reorganized reporting into Research, Consulting and Events; prior-period segment figures were recast.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $113.5m | $128.2m | $219.9m | $228.8m |
| Operating income (loss) | $11.2m | $4.6m | $12.0m | $(6.3)m |
| Operating margin | 9.9% | 3.6% | 5.4% | (2.7%) |
| Net income (loss) | $11.8m | $1.6m | $11.3m | $(11.8)m |
| Diluted EPS | $0.63 | $0.08 | $0.60 | $(0.64) |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $25.0m | $33.5m |
- Revenue mix: Q2 Research revenue fell 4% to $73.6m, Consulting rose 3% to $34.9m, and Events fell 72% to $5.0m. First-half changes were +1%, +4%, and −72%, respectively.
- Profit and margins: Q2 operating margin improved as operating expenses declined 17%, exceeding the 11% revenue decline. First-half operating performance also improved from a loss to income. Q2 and first-half net income included approximately $2.4m of investment gains, versus small investment losses in 2019.
- Cash flow: First-half operating cash flow declined $8.5m year over year, mainly because of lower cash generated from receivables and deferred revenue amid reduced bookings. Investing used $5.1m, primarily for capital expenditures; financing used $17.6m, mainly for debt repayment. Cash and cash equivalents were $68.4m at June 30, versus $67.9m at year-end 2019.
- Debt and liquidity: Debt principal was $114.1m, down from $132.8m at year-end; the $75m revolver was undrawn, with $0.9m of letters of credit issued. Net debt carrying value was $112.2m. Current assets were $158.9m and current liabilities $227.2m. The company reported covenant compliance at quarter-end and believed cash and operating cash flow would meet requirements for the next 12 months.
- Other balance-sheet items: Total assets were $588.6m, compared with $639.2m at year-end 2019. Deferred revenue was $170.8m, down from $179.2m at year-end. Remaining performance obligations were expected to generate approximately $309.8m of revenue over the next 12–24 months.
Material changes, outlook and risks
- COVID-19 reduced event sponsorship and attendance-related revenue as events shifted online, and lower bookings began to weigh on subscription activity. Management expected reduced subscription Research, Connect and Analytics revenue in the second half, with weaker booking activity expected to continue through at least Q3.
- Management implemented cost reductions in travel, hiring and employee incentive compensation. It gave no specific full-year revenue or earnings forecast in the filing. It expected a 2020 effective tax rate of approximately 1% and integration costs of $4.3m–$4.7m.
- Deferred revenue fell 6% year over year and agreement value fell 3%. Client retention declined to 66% from 73%, dollar retention to 88% from 90%, enrichment to 98% from 108%, and client count to 2,679 from 2,875.
- The company cautioned that a more severe or prolonged pandemic could further hurt results, cash flows and liquidity, and threaten compliance with debt covenants. If covenant compliance were lost and terms could not be renegotiated, outstanding debt could become immediately due.
- First-half results included a $2.4m investment gain, a $1.4m right-of-use asset impairment related to acquired facilities, and a $0.2m contingent-consideration fair-value charge. A FeedbackNow contingent payment of up to $2.6m and a $1.0m indemnity holdback were expected during the remainder of 2020.
Important facts for investors to verify
- Whether booking trends and subscription revenue weaken further, particularly through Q3 and the second half of 2020.
- Whether virtual events can recover sponsorship revenue and profitability relative to in-person events.
- Trends in deferred revenue, agreement value, client retention, dollar retention and enrichment.
- Cash generation, debt repayments and covenant headroom under the Credit Agreement.
- The contribution of investment gains and other unusual items to reported earnings, and progress against projected integration costs.