Forrester Research, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2020, compared with Q1 2019. Forrester sells subscription research products, advisory and consulting services, and events. From January 1, 2020, it reported two segments: Products and Research; prior-year segment data was recast.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $106.3 | $100.6 |
| Operating income (loss) | $0.7 | ($10.9) |
| Net income (loss) | ($0.5) | ($13.3) |
| Diluted loss per share | ($0.03) | ($0.73) |
| Cash provided by operating activities | $21.8 | $26.0 |
| Capital expenditures | $2.4 | $2.8 |
- Revenue grew 6% year over year: research services rose 6% to $72.8 million and advisory services and events rose 5% to $33.5 million. Management said prior-year revenue was reduced by an acquisition-related fair-value adjustment to deferred revenue; this accounted for approximately 4 percentage points of total growth.
- Operating margin was 0.7%, versus negative 10.8% in Q1 2019; net margin was negative 0.5%, versus negative 13.2%. Lower operating costs and amortization, along with lower interest expense, contributed to the improved result. Operating expenses fell 5% to $105.6 million.
- Operating cash flow declined $4.2 million, primarily reflecting lower cash generated from accounts receivable and deferred revenue amid reduced contract bookings. Operating cash flow less capital expenditures was approximately $19.4 million, versus $23.2 million.
- At March 31, cash and cash equivalents were $69.8 million; $51.8 million was held outside the U.S. Current assets were $172.9 million and current liabilities $257.4 million, including $195.4 million of deferred revenue.
- Debt principal was $116.4 million, down from $132.8 million at year-end 2019; the net carrying amount was $114.4 million. The $75 million revolver was undrawn, with $75 million available before the expansion feature. The term loan matures in January 2024. The company reported compliance with credit covenants.
Material changes and business metrics
- Deferred revenue was $195.4 million, up 2% year over year; agreement value was $354.9 million, up 3%. Client retention fell to 69% from 72%, dollar retention to 89% from 90%, and enrichment to 102% from 106%; clients declined 2% to 2,805. Management attributed weaker retention and enrichment partly to reduced March bookings as COVID-19 spread.
- Research segment revenue increased 6% to $66.4 million and segment expenses decreased 8%. Products revenue increased 5% to $39.9 million and segment expenses decreased 3%.
- Q1 2020 cash flow included $16.3 million of debt repayments, including $14.0 million of discretionary revolver repayments. Q1 2019 cash flows included the SiriusDecisions acquisition and associated borrowings.
Outlook, risks, and unusual items
- Management expected COVID-19 to have its greatest impact in Q2 2020, with negative effects potentially continuing in subsequent periods. The SiriusDecisions Summit and CX North America were converted to virtual events, expected to significantly reduce their revenue and profit; two smaller Q2 events were cancelled. Management also anticipated lower subscription and consulting revenue due to reduced bookings, expected to continue at least through Q2.
- The company implemented cost reductions in travel, hiring, and employee incentive compensation. It forecast covenant compliance for at least one year from filing, but warned a more severe COVID-19 impact could jeopardize compliance and potentially make debt immediately payable if a breach could not be renegotiated.
- Management expected a 2020 effective tax rate of approximately 10%–15% and acquisition integration costs of $3.5–$4.0 million. It believed cash and operating cash flows would meet working-capital, financing, and capital-expenditure needs for the next 12 months.
- Q1 included $0.6 million of property and equipment impairment and $1.4 million of operating lease right-of-use asset impairments associated with acquired SiriusDecisions facilities. The company also adopted expected-credit-loss accounting, recording a $0.2 million reduction to retained earnings.
- New office leases signed in Q1, commencing later in 2020, involve $17.2 million of undiscounted payments. The filing reports no material legal proceedings and states disclosure controls were effective.
Important facts for investors to verify
- Whether Q2 and later COVID-19 effects on bookings, subscription renewals, consulting delivery, and virtual events matched management’s expectations.
- Subsequent trends in client retention, dollar retention, enrichment, deferred revenue, and agreement value.
- Cash generation, debt repayment, covenant headroom, and the company’s ability to maintain covenant compliance under weaker operating conditions.
- Whether expected cost reductions and the stated 2020 tax and integration-cost expectations were realized.