Forrester Research, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; quarterly comparisons below are for the three months ended December 31. Filed March 11, 2015.
Business context
Forrester sells research and data subscriptions, advisory and consulting services, and events, primarily to large global organizations. Research subscriptions are generally annual and billed in advance. In 2014, the company sharpened its strategy around helping clients win, serve, and retain customers, and continued shifting project consulting delivery to a dedicated consulting organization.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $312.1 million | $297.7 million |
| Research services revenue | $207.5 million | $202.8 million |
| Advisory services and events revenue | $104.5 million | $94.8 million |
| Operating income / margin | $18.2 million / 5.8% | $21.8 million / 7.3% |
| Net income / diluted EPS | $10.9 million / $0.57 | $13.0 million / $0.61 |
| Operating cash flow | $28.8 million | $30.7 million |
| Cash, cash equivalents and marketable investments | $104.5 million | $155.1 million |
| Working capital | $26.3 million | $79.0 million |
| Total liabilities | $191.1 million | $197.5 million |
| Deferred revenue | $144.6 million | $152.9 million |
| Agreement value | $231.7 million | $216.5 million |
Advisory services and events were 33.5% of revenue. The filing does not present a conventional gross-margin figure. No borrowings or credit line were reported; liabilities include substantial deferred revenue and lease-related obligations. Operating cash flow less $1.5 million of capital expenditures was approximately $27.3 million.
Fourth-quarter revenue was $80.7 million, operating income $6.2 million, and net income $3.6 million, compared with $77.5 million, $4.5 million, and $2.2 million, respectively, in fourth-quarter 2013.
Material changes versus prior period
- Full-year revenue rose 5%; research services grew 2% and advisory services and events grew 10%. Events revenue was flat, while data subscription revenue fell about $1.2 million, largely due to the phase-out of Tech Marketing Navigator.
- Operating income fell about 17% and net income about 17%. Operating expenses increased 7%, with compensation and benefit costs rising amid hiring in consulting, product, and sales functions. The effective tax rate increased to 40.9% from 34.9%.
- Agreement value increased 7%; client retention improved to 76% from 73%, dollar retention to 88% from 86%, and enrichment remained 97%. Client count declined 2% to 2,431.
- Deferred revenue fell 5%. Management attributed the decline partly to foreign exchange and about $10 million of renewals shifting from December 2014 to January 2015; deferred revenue plus future invoicing declined 6%.
- Cash and investments declined by $50.6 million. The company used $73.2 million for share repurchases and paid $12.0 million in dividends during 2014.
Outlook, risks and unusual items
- Management expected 2015 operating margin to remain roughly flat, with expense growth expected to match revenue growth. It planned to expand the quota-carrying sales force by approximately 9%–11% and expected total year-end headcount to be 7% higher than in 2014.
- A February 2015 workforce reduction of approximately 50 positions was announced to redirect investment toward sales and areas of stronger client demand. Expected related pretax costs were $3.5 million–$4.0 million in the first half of 2015.
- The board increased the quarterly dividend to $0.17 per share in February 2015 and authorized an additional $25 million for repurchases. Future dividends and repurchases remain subject to board discretion and market conditions.
- Management believed available cash, investments, and operating cash flows would meet working-capital and capital needs for the next 12 months. Approximately $33.4 million was held outside the U.S.; repatriation for U.S. use could incur tax. The company reported no off-balance-sheet financing arrangements.
- Key risks include renewal and retention of subscription clients, demand for nonrecurring consulting projects, economic and technology-spending conditions, competition, international operations and currency exposure, hiring and retention of skilled staff, cybersecurity, and execution of the reorganization and sales expansion. Europe remained a difficult selling market.
- Unusual items included a $0.5 million out-of-period tax expense and immaterial expense corrections in 2014, which management deemed immaterial to current and prior periods. A $0.4 million depreciation adjustment corrected prior-period understatements. No material legal proceedings were reported.
Important facts for investors to verify
- Whether improving retention and agreement value translate into recognized revenue, especially given lower deferred revenue and the renewal timing shift.
- Whether consulting growth and planned sales-force expansion generate sufficient bookings and productivity to offset higher compensation costs and preserve margins.
- The impact of the 2015 restructuring costs, the expected 7% headcount increase, and the company’s 2015 margin outlook.
- Cash deployment and liquidity after repurchases and dividends, including the tax implications of potentially repatriating overseas funds.
- Exposure to foreign exchange, uncertain tax positions of $2.1 million, and long-term operating lease commitments of $98.2 million.
- Governance implications of the CEO’s approximately 44% ownership stake. The auditor reported effective internal control over financial reporting and issued an unqualified opinion on the financial statements.