Forrester Research, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts below are in millions of dollars unless otherwise noted. Forrester provides subscription research products, consulting and advisory services, and events.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $108.6 | $108.6 | $328.5 | $337.4 |
| Operating income (loss) | $0.2 | $(1.6) | $12.1 | $(7.9) |
| Net income (loss) | $(3.8) | $(2.7) | $7.6 | $(14.5) |
| Diluted EPS | $(0.20) | $(0.15) | $0.40 | $(0.78) |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $29.2 | $45.6 |
- Revenue mix: Q3 Research revenue was $72.8 (down 2%); Consulting was $34.6 (up 6%); Events was $1.1 (down 20%). For the first nine months, Research was $219.2 (essentially flat), Consulting $103.0 (up 5%), and Events $6.3 (down 68%).
- Margins and costs: Q3 operating margin was approximately 0.2%, versus negative 1.5% a year earlier; nine-month operating margin was 3.7%, versus negative 2.3%. Cost of services and fulfillment was 42.5% of Q3 revenue, compared with 41.4%; for nine months it was 40.6%, compared with 43.4%.
- Cash flow and capital spending: Nine-month operating cash flow fell $16.4 to $29.2, primarily reflecting weaker cash generation from receivables and deferred revenue amid lower bookings. Capital expenditures were $7.3, making operating cash flow less capital expenditures approximately $21.9, versus $37.3 in 2019.
- Liquidity and debt: Cash and equivalents were $73.0 at September 30, including $57.9 held outside the U.S. Debt principal was $111.7, with $74.1 of revolver capacity available; cash exceeded debt by approximately $38.7. The company repaid $21.0 of borrowings during the first nine months and reported compliance with its financial covenants.
- Balance sheet: Deferred revenue was $155.4, down from $179.2 at December 31, 2019. Total assets were $592.8 and stockholders’ equity was $174.7. Approximately $301.0 of revenue was expected to be recognized over the next 24 months from remaining performance obligations.
Material changes and operating trends
- Total revenue was flat in Q3 and down 3% for the first nine months. Management said lower contract bookings related to COVID-19 weighed on subscription Research, Connect and Analytics revenue; the company expected that pressure to continue into Q4.
- Events revenue declined sharply as in-person events moved to virtual formats, with seven fewer events in the nine-month period. Consulting grew, supported by demand for project consulting.
- At September 30, deferred revenue was down 8% year over year, agreement value down 5%, client retention was 65% versus 73%, dollar retention was 88% versus 90%, enrichment was 98% versus 111%, and client count was 2,660 versus 2,867. Management attributed deterioration to reduced bookings.
- Management realigned reporting into Research, Consulting and Events during Q2 2020, eliminating the Products segment; prior-period segment figures were revised to match.
- Nine-month net income included a $2.4 gain on investments, compared with a $0.1 loss in the prior-year period. The improved operating result also reflected lower operating expenses and acquisition costs.
Outlook, risks and unusual items
- Management expected reduced subscription Research, Connect and Analytics revenue to continue in Q4 2020 due to lower bookings. Events were planned to remain virtual through the rest of 2020.
- The company forecast an approximately 25% effective tax rate for full-year 2020 and $4.5–$5.0 of integration costs for 2020. These are the filing’s stated expectations; it does not provide a full-year revenue or earnings forecast.
- COVID-19 duration and severity remain uncertain. More severe impacts could further weaken bookings, revenue, cash flow and liquidity, and could threaten compliance with debt covenants. A covenant breach could make debt immediately due if the company could not renegotiate terms.
- Forrester reported $110.0 of debt net of deferred financing fees and a $1.4 interest-rate-swap liability. The swap hedges floating-rate exposure on a portion of borrowings.
- A $2.7 contingent purchase-price obligation related to FeedbackNow was paid in October 2020. A landlord also made a $3.5 payment in Q4 for early lease termination, to be recognized as a reduction in rent expense.
- Other notable items included $1.4 of right-of-use asset impairments during the first nine months and a $2.4 investment gain. The company reported no business combinations in 2020 and no off-balance-sheet financing arrangements.
- Management said disclosure controls were effective as of September 30, 2020. Remote-work changes led to modifications in some control procedures, which were not considered material. Ordinary-course legal proceedings and claims may arise; the filing does not describe a specific material proceeding.
Important facts for investors to verify
- Whether bookings, deferred revenue, agreement value and retention metrics stabilize after their reported year-over-year declines.
- Whether Q4 subscription revenue and virtual-event performance match management’s expectations, and whether demand for consulting continues.
- Cash generation, collections and working-capital trends, given the year-over-year decline in operating cash flow.
- Debt-covenant headroom and the assumptions underlying management’s forecast of at least one year of covenant compliance.
- Whether the stated full-year tax-rate and integration-cost expectations, and the Q4 lease-termination benefit, affect reported results as anticipated.