Forrester Research, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods unless noted. Forrester provides research memberships, advisory and consulting services, and events.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $79.1 million | $73.5 million | $149.4 million | $139.2 million |
| Operating income | $11.5 million | $9.6 million | $16.1 million | $13.8 million |
| Operating margin | 14.5% | 13.1% | 10.8% | 9.9% |
| Net income | $7.8 million | $5.5 million | $11.0 million | $8.4 million |
| Diluted EPS | $0.34 | $0.24 | $0.47 | $0.36 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $39.4 million | $38.1 million |
- Q2 revenue increased 8%; research services grew 8% to $51.1 million and advisory services and other grew 7% to $28.0 million. First-half revenue rose 7%, led by 10% research growth; advisory services and other rose 3%.
- Q2 operating margin improved as selling and marketing expense fell as a share of revenue, partly offset by higher depreciation and reorganization costs. First-half depreciation increased $2.3 million, principally reflecting the new headquarters and website.
- At June 30, cash and cash equivalents were $87.7 million; marketable investments totaled $158.5 million, including $9.7 million of auction-rate securities (ARS). Total assets were $468.9 million and total liabilities $181.8 million. The filing reports no line of credit and no debt balance.
- Current assets were $318.3 million and current liabilities $164.3 million. Deferred revenue was $134.6 million, versus $147.9 million at December 31, 2011.
Changes and business metrics
- At June 30, deferred revenue was up 3% year over year to $134.6 million and agreement value up 7% to $221.6 million. Management said both growth rates had slowed from 10% at March 31.
- Client retention was 79%, versus 81% a year earlier; dollar retention was 91% in both periods; enrichment was 98%, versus 103%. Clients totaled 2,546, up 4%. The company changed its client-count methodology, and retention and enrichment comparisons are not fully comparable.
- International revenue was flat in the first half; declining European revenue offset growth in Canada and Asia/Pacific. The foreign-exchange impact reduced reported revenue growth by 2 percentage points in Q2 and 1 point in the first half.
- Management consolidated the former Technology Industry group into Business Technology and Marketing and Strategy and revised segment direct-margin calculations; prior-period segment amounts were reclassified.
Cash, capital allocation and outlook
- First-half investing cash use was $15.0 million, mainly net purchases of marketable investments and $3.2 million of capital expenditures. Financing cash use was $17.2 million, including $17.1 million of share repurchases and $6.4 million of dividends, partly offset by employee-plan proceeds.
- The company repurchased approximately 0.5 million shares for $17.1 million in the first half; $61.9 million remained under the authorization at June 30. It said it planned further repurchases during the rest of 2012 as market conditions warranted. A July dividend of $0.14 per share was declared, payable September 19, 2012.
- Management expected total revenue growth of approximately 1%–4% in the second half of 2012, citing slower agreement-value and deferred-revenue growth, weaker enrichment, higher sales-force attrition, and difficult European economic conditions. It expected 2012 capital expenditures of $5 million–$8 million.
- Management believed cash, investments, and operating cash flows would meet working-capital, financing, and capital-expenditure needs for at least two years. It said ARS illiquidity was not expected to affect execution of the business plan.
Risks, contingencies and unusual items
- ARS auctions had continued to fail since 2008, limiting near-term liquidity. The $9.7 million carrying value used Level 3 valuation assumptions; changes in those assumptions could materially affect fair value. The company reported a $1.3 million unrealized loss on the securities.
- First-half reorganization costs were $1.4 million, including severance and related costs for sales-force realignment and other reductions; the remaining $0.2 million accrual was expected to be paid by year-end. Management said it did not anticipate additional costs from these initiatives.
- Management cited risks including client renewal and enrichment, technology spending, economic and market conditions, international operations, competition, retention of professional staff and key personnel, network disruptions and security breaches, and quarterly variability. It cautioned that interim results may not indicate full-year results.
- Disclosure controls were assessed as effective as of June 30, 2012; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether the projected 1%–4% second-half revenue growth is consistent with subsequent results and the weakening deferred-revenue, agreement-value, and enrichment trends.
- Whether client retention, sales-force attrition, and European demand stabilize; note the disclosed limitations in comparing retention metrics after the client-count methodology change.
- Whether ARS liquidity and valuation assumptions change, and whether the company’s substantial investment portfolio remains available as expected.
- Whether cash generation supports dividends, repurchases, and planned capital spending without relying on external credit.
- Whether operating margin improvement persists despite higher depreciation, reorganization activity, and event-cost pressures.