Forrester Research, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited. Forrester sells research memberships, advisory and consulting services, and events. Research memberships are generally renewable annually and paid in advance. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $69.8 | $68.8 | $220.1 | $217.9 |
| Operating income | $4.3 | $7.1 | $17.4 | $22.8 |
| Operating margin | 6.2% | 10.4% | 7.9% | 10.5% |
| Net income | $2.4 | $10.7 | $10.8 | $21.4 |
| Diluted EPS | $0.12 | $0.47 | $0.50 | $0.93 |
| Operating cash flow | Not separately stated | Not separately stated | $32.4 | $42.8 |
- Q3 revenue grew 2%; advisory and other revenue rose 9% to $20.0, while research revenue declined 1% to $49.9. For the first nine months, revenue rose 1%, with advisory and other up 3% and research essentially flat.
- Margins and earnings weakened as operating costs rose faster than revenue. Q3 cost of services and fulfillment increased 7% and selling and marketing increased 6%. Nine-month operating income fell 24%.
- The Q3 effective tax rate was 42.6%, compared with a tax benefit in Q3 2012; the nine-month rate was 39.5% versus 13.0%. The prior-year comparison benefited from a $5.5 million deferred tax benefit related to a foreign tax audit settlement, among other tax items.
- At September 30, cash and cash equivalents were $70.7 and marketable investments were $96.1. Current assets were $221.7 and current liabilities $151.9. The balance sheet reports no borrowings; the company said it had no line of credit and did not expect to need one absent a significant acquisition.
- Nine-month financing cash outflow was $104.3, primarily reflecting $109.2 of share repurchases and $9.4 of dividends, partly offset by $14.5 in employee equity-plan proceeds. Cash declined $28.1 to $70.7 from year-end 2012.
Changes versus comparable periods
- Q3 net income declined 77% year over year; nine-month net income declined 50%. The filing attributes pressure principally to higher operating expenses and, in the tax comparison, the absence of prior-year tax benefits.
- Key business indicators were mixed to weaker: deferred revenue was $125.8, up 1% year over year, but agreement value declined 5% to $210.7. Client retention fell to 76% from 78%, dollar retention to 89% from 91%, enrichment to 95% from 96%, and client count to 2,482 from 2,498.
- Q3 Business Technology revenue was essentially flat; Marketing and Strategy revenue grew 4%, primarily from advisory and consulting services. Nine-month Events revenue declined 3%.
- The company repurchased approximately 3.0 million shares for $109.2 during the first nine months, including a May modified Dutch auction purchase of 2.05 million shares at $36 each. Remaining authorization at September 30 was approximately $65.0.
Outlook, risks and unusual items
- Management planned to expand its quota-carrying sales force by approximately 7%–9% in 2013 versus 2012, subject to the business environment, and expected $3–$5 million of property and equipment purchases in 2013. It planned to continue repurchases as market conditions warranted.
- Management stated that cash, investments, and operating cash flows were expected to meet working-capital, financing, and capital expenditure needs for at least two years. The filing does not provide numerical revenue or earnings guidance.
- On October 30, 2013, after quarter-end, Forrester sold its entire auction-rate securities portfolio for $9.1 million, realizing a $1.9 million loss expected to be recorded in Q4 2013 (approximately $0.09 per diluted share). The securities had previously suffered failed auctions and were classified as Level 3 investments.
- Forrester incurred $1.9 million of reorganization costs in the first nine months, eliminating 31 positions, or approximately 2.5% of its global workforce. The remaining $0.3 million accrual was expected to be paid by year-end.
- The company identified prior-period errors affecting 2011, 2012, and 2013 interim results, including revenue recognition for event tickets bundled in subscriptions, investment results, deferred-revenue reconciliations, and software capitalization. It revised the affected periods, concluded the errors were not material individually or in aggregate, and said amendments to prior filings were not required.
- Disclosure controls were deemed ineffective as of September 30 because of material weaknesses in controls over event-ticket revenue in subscription products and monitoring of services performed for advisory and consulting revenue. Remediation steps were described, but controls had not operated long enough to validate remediation.
- Risks cited include retention and enrichment of research memberships, technology spending, international conditions, hiring and retaining staff, competition, quarterly variability, network or security disruptions, and remediating internal-control weaknesses. Management noted difficult European selling conditions and sales-leadership challenges in that region.
Investor verification points
- Track agreement value, combined deferred revenue and future invoicing, retention, and enrichment for evidence of bookings and membership trends.
- Verify whether revenue-control remediation is implemented and tested, and review the effect of the identified material weaknesses on subsequent filings.
- Confirm Q4 recognition of the $1.9 million auction-rate securities loss and its effect on reported earnings.
- Assess whether expense growth, sales-force expansion, and the expected 2013 capital spending translate into stronger bookings and margins.
- Review the sustainability of repurchases and dividends alongside operating cash generation and the reduced cash balance.