Forrester Research, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unless otherwise noted, financial amounts are in millions. Forrester provides research memberships and related advisory, consulting, analytics, and event services. Results include SiriusDecisions from its January 3, 2019 acquisition.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $108.6 | $84.9 | $337.4 | $259.0 |
| Operating income (loss) | $(1.6) | $4.9 | $(7.9) | $13.7 |
| Net income (loss) | $(2.7) | $4.0 | $(14.5) | $10.0 |
| Diluted EPS | $(0.15) | $0.21 | $(0.78) | $0.55 |
| Operating margin | (1.5%) | 5.8% | (2.3%) | 5.3% |
| Net margin | (2.5%) | 4.7% | (4.3%) | 3.9% |
- Revenue mix: Q3 research services revenue was $74.5 million, up 32%; advisory services and events revenue was $34.0 million, up 19%. For the nine months, the respective figures were $219.4 million, up 32%, and $118.0 million, up 27%.
- Cash flow: Nine-month operating cash flow was $45.6 million versus $37.4 million. Investing activities used $246.0 million, primarily for SiriusDecisions; financing activities provided $130.3 million, principally from acquisition-related borrowings. Cash and cash equivalents were $67.6 million at quarter-end.
- Liquidity and debt: Current assets were $150.9 million and current liabilities $248.6 million. Debt principal outstanding was $134.3 million ($120.3 million term loans and $14.0 million revolver); net carrying value was $131.9 million. The revolver had $61.0 million of available capacity. Debt is floating-rate; a 25-basis-point rate change would alter annual pretax interest expense by about $0.3 million. The company reported compliance with debt covenants.
- Other balance-sheet items: Total assets were $598.3 million, including $238.8 million goodwill and $102.9 million net intangible assets. Stockholders’ equity was $147.7 million.
Changes versus the prior comparable period
- Revenue increased 28% in Q3 and 30% year to date; SiriusDecisions contributed approximately 20 and 23 percentage points, respectively. Growth in the legacy business also contributed, but the filing does not state a consolidated organic-growth rate.
- Despite higher revenue, profitability declined to losses. Operating expenses rose to $110.2 million in Q3 from $79.9 million and to $345.3 million year to date from $245.3 million. The acquisition drove much of the expense increase; intangible amortization rose to $5.7 million in Q3 and $17.0 million year to date. Interest expense was $1.9 million and $6.3 million, respectively, compared with none in 2018.
- Deferred revenue rose 31% to $168.0 million and agreement value rose 38% to $355.2 million year over year; management attributed much of the increase to SiriusDecisions, with agreement-value growth also reflecting bookings and greater bundling of consulting services.
- Client retention was 73% versus 71%, dollar retention was 90% in both periods, and enrichment was 111% versus 109%. The company changed its calculation methodology in 2019; acquisition effects will not flow through retention and enrichment metrics until Q1 2020.
- The company suspended dividends in 2019 following the acquisition and related borrowing. No shares were repurchased during the first nine months of 2019.
Outlook, commentary, and risks
- Management expected full-year 2019 acquisition and integration costs of $9.0–$9.3 million and an effective tax rate of approximately 0%–5%; it also anticipated about $0.4 million of fourth-quarter tax expense to settle a foreign tax audit. No revenue or earnings guidance is provided in the filing.
- Management stated that cash and expected operating cash flows should cover working capital, financing, and capital expenditure needs for the next 12 months. It intended to use excess cash flow, if any, for discretionary revolver repayments.
- Management cited risks including integration of acquired businesses, retention and enrichment of research and other memberships, consulting demand, debt burden and covenant compliance, interest-rate exposure, competition, technology and cybersecurity, international operations, privacy regulation, and dependence on key personnel. The company was still integrating SiriusDecisions and evaluating its internal controls; the acquisition was excluded from the quarter-end controls assessment.
- The SiriusDecisions purchase-price allocation remained preliminary, including estimates for acquired intangibles, deferred taxes, and goodwill. The acquisition added $154.9 million of goodwill and $115.0 million of intangible assets; related amortization is expected to remain significant.
- Operating lease liabilities totaled $80.0 million at quarter-end. The filing reported $307.6 million of revenue expected over the next 12–24 months from remaining performance obligations.
Most important facts for investors to verify
- How much of revenue growth and deferred-revenue/agreement-value expansion is sustainable in the legacy business, apart from SiriusDecisions.
- Whether acquisition integration and cross-selling improve profitability enough to offset higher compensation, amortization, and interest costs.
- Cash generation, scheduled debt repayments, floating-rate exposure, covenant headroom, and the company’s plans for reducing the revolver.
- Whether the preliminary acquisition accounting, retention-metric methodology, and expected tax rate or foreign tax settlement change in later filings.
- The filing states that operating cash flow reported in the October 24 earnings release and Form 8-K was adjusted from $45.9 million to $45.6 million in this 10-Q.