Forrester Research, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unless otherwise noted, dollar amounts are in millions. The company provides research memberships, consulting and advisory services, and events.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $128.2 | $96.4 | $228.8 | $174.1 |
| Operating income (loss) | $4.6 | $11.0 | ($6.3) | $8.7 |
| Net income (loss) | $1.6 | $7.8 | ($11.8) | $6.1 |
| Diluted EPS | $0.08 | $0.43 | ($0.64) | $0.33 |
| Operating margin | 3.6% | 11.4% | (2.7%) | 5.0% |
| Net margin | 1.2% | 8.1% | (5.1%) | 3.5% |
- Q2 revenue rose 33% year over year: research services increased 31% and advisory services and events increased 36%. For the first half, revenue rose 31%: research services increased 32% and advisory services and events increased 31%.
- Q2 cost of services and fulfillment was $56.6 million, or 44.1% of revenue, versus 40.5% a year earlier. First-half operating expenses included $11.3 million of intangible amortization and $5.5 million of acquisition and integration costs.
- Operating cash flow was $33.5 million for the first half, compared with $28.3 million in 2018. Investing cash outflow was $243.6 million, primarily the SiriusDecisions acquisition; financing cash inflow was $140.7 million, primarily borrowings. Cash and cash equivalents declined to $69.8 million from $140.3 million at year-end.
- At June 30, current assets were $166.7 million and current liabilities $259.5 million. Deferred revenue was $180.9 million. The filing reports approximately $325 million of revenue expected from remaining performance obligations over the next 12 to 24 months.
- Total debt principal was $141.9 million, comprising $121.9 million of term loans and $20.0 million on the revolver; $55 million of revolver capacity remained available. Debt is floating-rate and secured, matures January 2024, and was subject to covenants with which the company reported compliance. Lease liabilities totaled $82.1 million.
Material changes versus the prior comparable period
- Growth reflects the January 2019 acquisition of SiriusDecisions, as well as legacy-business performance. SiriusDecisions contributed $27.5 million of Q2 revenue and $42.7 million in the first half; management attributed 29% of Q2 revenue growth and 25% of first-half growth to the acquisition.
- Acquisition-related expenses and amortization, together with new interest expense, weighed on earnings. Q2 SiriusDecisions direct expenses, including intangible amortization, were $32.0 million. The first-half reported a net loss, versus net income in 2018.
- Balance-sheet goodwill increased to $242.3 million and net intangible assets to $108.7 million, mainly from the acquisition. The purchase price allocation remained preliminary.
- Deferred revenue increased 27% year over year to $180.9 million, primarily due to SiriusDecisions; excluding the acquisition, it increased approximately 6%. Agreement value rose 40% to $348.9 million, with approximately 27 percentage points attributed to the acquisition.
- The company suspended dividends beginning in 2019 and made no share repurchases in the first half. It said it expected to substantially reduce or eliminate repurchases during 2019.
Outlook, commentary, risks and unusual items
- Management expects 2019 acquisition and integration costs of $7.5 million to $8.0 million and estimates a full-year effective tax rate of approximately negative 10% to negative 5%, reflecting a projected pretax loss and tax expense on nondeductible items and a tax claim settlement. The filing provides no specific revenue or EPS guidance.
- Management believes cash and operating cash flows will cover working capital, financing and capital expenditure requirements for the next 12 months. It intends to use excess cash flow, if any, to make discretionary revolver repayments.
- A hypothetical 25-basis-point change in interest rates could change annual pretax interest expense by approximately $0.4 million. The company noted the risks of acquisition integration, debt, customer retention, consulting demand, competition, technology spending, cybersecurity and privacy, international operations, and other risks referenced in its 2018 Form 10-K.
- The acquisition was funded in part with secured debt. Credit agreement covenants limit, among other matters, additional debt, asset sales and dividends. The company reported covenant compliance at quarter-end.
- The tax outlook is subject to uncertainty following a court ruling concerning stock-based compensation in intercompany cost-sharing arrangements; the company recorded no adjustment and will monitor developments. Acquisition accounting estimates, including intangible valuations and goodwill, also remained subject to finalization.
- Client retention, dollar retention and enrichment calculations were revised in 2019 to cover a broader set of client relationships and account-level activity. Reported Q2 metrics were 73%, 90% and 108%, respectively; acquisition-related effects will not be reflected in retention and enrichment until Q1 2020.
Key facts for investors to verify
- Organic revenue, bookings and margin trends separated from the contribution of SiriusDecisions, particularly the performance and integration of the acquired business.
- Progress on debt reduction, floating-rate interest exposure, covenant headroom and cash available for operations, including the company’s stated intent to keep foreign-held cash permanently reinvested abroad.
- Final SiriusDecisions purchase-price allocation, amortization burden, integration costs and any subsequent goodwill or intangible-asset impairment indicators.
- Retention and enrichment trends under the revised methodology, and comparability of future reported metrics.
- Execution against the stated acquisition-cost and tax-rate outlook, and developments related to the tax ruling and contingent consideration for FeedbackNow.