Forrester Research, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2014. Forrester earns revenue from research memberships and data products, advisory and consulting services, and events. Research memberships are generally annual and billed in advance. Unless noted, figures below are in millions of dollars.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $75.4 | $69.8 | $231.4 | $220.1 |
| Operating income | $4.9 | $4.3 | $12.0 | $17.4 |
| Net income | $3.0 | $2.5 | $7.3 | $10.9 |
| Diluted EPS | $0.16 | $0.12 | $0.38 | $0.50 |
| Operating margin | 6.5% | 6.2% | 5.2% | 7.9% |
| Net margin | 4.0% | 3.6% | 3.1% | 4.9% |
| Operating cash flow | — | $27.9 | $32.4 |
- Revenue mix: Q3 research services rose 2% to $50.6; advisory services and events rose 24% to $24.7. For the nine months, research revenue increased 2% to $153.7 and advisory and events revenue increased 13% to $77.6.
- Cash and liquidity: At September 30, cash and cash equivalents were $56.9 and marketable investments were $55.5, totaling $112.4, versus $155.1 at December 31, 2013. Current assets were $184.4 and current liabilities $156.9. The filing says existing cash, investments, and operating cash flows are expected to meet requirements for the next 12 months.
- Debt: No debt balance is reported in the supplied filing text. Forrester said it had no credit line and did not anticipate needing one except potentially for a significant acquisition.
- Cash uses: Investing activities provided $24.8, primarily from net sales and maturities of marketable investments. Financing activities used $68.7, including $66.6 of share repurchases and $9.1 of dividends. Cash declined $17.2 over the nine-month period.
Changes versus the prior comparable period
- Q3 revenue grew 8%, but nine-month operating income fell 31% and net income fell 33%. Higher service delivery, selling and marketing, and administrative costs pressured year-to-date profitability. Nine-month operating expenses rose 8% while revenue rose 5%.
- Q3 operating margin improved modestly year over year; the nine-month margin declined from 7.9% to 5.2%. Cost of services and fulfillment increased to 40.2% of nine-month revenue from 38.8%.
- Advisory and consulting growth reflected stronger demand and the build-out of a dedicated consulting organization. Project Consulting revenue rose 130% in Q3 and 103% year to date; Research segment revenue declined as project delivery shifted to that segment. Segment comparisons were reclassified to match the 2014 organization.
- Deferred revenue at September 30 was $129.4, up 3% year over year; agreement value was $226.9, up 8%. Client retention was 76% and dollar retention 89%, both unchanged year over year; enrichment improved to 97% from 95%. Client count declined 1% to 2,452.
Outlook, commentary, risks, and unusual items
- No formal revenue or earnings guidance is provided. Management expected advisory and consulting revenue growth rates to ease from Q3 levels as consulting hiring growth slows and because Q3 delivery was historically high. The consulting organization build-out was expected to be completed by year-end 2014, with essentially all project consulting delivered by that organization in 2015.
- Forrester intended, subject to business conditions, to expand its quota-carrying sales force by approximately 7%–9% in 2014 versus 2013, and planned to continue repurchases as market conditions warranted. Remaining repurchase authorization at September 30 was $14.4. An October dividend of $0.16 per share was declared for payment in December.
- Key stated risks include membership retention and enrichment, technology spending, international operations and foreign exchange, product development, hiring and retaining professional staff, economic and market conditions, network disruption or security breaches, competition, and quarterly variability. The filing also identifies possible additional risks in the company’s 2013 Form 10-K.
- Foreign currency translation reduced nine-month other comprehensive income by $2.4; comprehensive income was $4.8 versus $10.9 a year earlier. The company reported $31.2 of cash and investments held outside the U.S., intended to be permanently reinvested; repatriation for U.S. operations could incur U.S. taxes.
- Q1 2014 included $0.5 of out-of-period corrections, including $0.4 of depreciation and $0.1 of other items; management deemed the errors immaterial to prior periods. Nine-month reorganization costs were $1.8 for a workforce reduction of approximately 1%; $0.4 remained accrued at September 30. A $0.2 potential tax expense related to an ongoing U.S. state audit contributed to the higher nine-month effective tax rate.
- The 2013 comparative tax provision and net income were revised for an immaterial $0.074 tax error. Management reported disclosure controls effective as of September 30, 2014, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether bookings, agreement value, deferred revenue, and renewal metrics continue to support research revenue growth, particularly as client count has declined.
- Whether advisory and consulting demand and margins can hold up after the consulting build-out, and whether growth moderates as management anticipates.
- How operating costs, sales-force expansion, and the lower year-to-date operating margin affect full-year profitability and cash generation.
- The pace of repurchases and dividends relative to cash balances, the remaining authorization, and the company’s overseas cash tax considerations.
- Developments in the state tax audit and the adoption impact of the new revenue-recognition standard, effective for Forrester in 2017; the company had not yet selected a transition method.