Forrester Research, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods unless noted. Unaudited. Amounts below are in millions of dollars except per-share data and percentages.
Business context and financial performance
Forrester sells research memberships and data products, advisory and consulting services, and event-related offerings. Research memberships are generally billed in advance and recognized over the contract term. The company reports Business Technology, Technology Industry, Marketing and Strategy, and Events segments.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $69.8 (+17%) | $59.8 | $209.0 (+14%) | $183.6 |
| Research revenue | $49.2 (+15%) | $42.9 | $141.1 (+15%) | $123.1 |
| Advisory services and other revenue | $20.5 (+21%) | $16.9 | $67.8 (+12%) | $60.5 |
| Operating income | $9.7 | $5.8 | $23.6 | $23.7 |
| Operating margin | 14% | 10% | 11% | 13% |
| Net income | $5.7 | $3.7 | $14.1 | $16.4 |
| Net margin | 8% | 6% | 7% | 9% |
| Diluted earnings per share | $0.25 | $0.16 | $0.61 | $0.71 |
| Operating cash flow | Not separately provided | Not separately provided | $46.5 | $37.7 |
- Margins and costs: Q3 cost of services and fulfillment was 36% of revenue versus 37%; selling and marketing rose to 36% from 34%. For the nine-month period, selling and marketing rose to 36% of revenue from 33%, while cost of services remained 38%. Management attributed higher selling costs primarily to sales-force expansion, compensation, commissions, and facilities.
- Cash, investments, and liquidity: At September 30, cash and cash equivalents were $73.6; short-term marketable investments were $139.0 and long-term marketable securities were $9.5. Current assets were $285.4 and current liabilities $150.5 (calculated current ratio approximately 1.9). No debt is listed on the balance sheet; the company said it had no line of credit and did not expect to need one.
- Cash uses: Nine-month investing cash outflow was $48.9, including $33.2 of property and equipment purchases, $7.2 for acquisitions, and net purchases of marketable investments. Financing cash outflow was $11.0, including $18.4 of share repurchases. Cash declined $13.3 from year-end 2010 to $73.6.
- Deferred revenue and customer metrics: Deferred revenue was $117.5, up 12% year over year; agreement value was $211.2, up 10%. Client retention was 81% (80% prior year), dollar retention 91% (89%), and enrichment 104% (102%). Client count increased 6% to 2,703.
Material changes versus prior periods
- Q3 revenue growth reflected higher demand, more clients, existing-client enrichment, and one additional event; foreign exchange added approximately 1.5% to quarterly revenue growth. Springboard Research contributed approximately 1% of Q3 revenue growth and an insignificant amount for the nine-month period.
- Q3 operating income improved despite increased selling and marketing costs; lower general and administrative expense and reduced incentive bonus expense contributed. Nine-month operating income was nearly flat, while net income declined, partly reflecting higher effective taxes and lower investment gains.
- The company acquired Springboard Research in May 2011 for approximately $9.0, including $2.3 of holdback subject to contingencies. It expands Asia Pacific and emerging-market coverage.
- Property and equipment increased to $51.5 from $19.8 at year-end, principally reflecting investment in the new headquarters. The company began depreciating the new headquarters in August and reported overlapping lease costs for the old and new locations during the period.
Outlook, commentary, and risks
- Management expected Q4 2011 year-over-year revenue growth to be below Q3’s 17% rate. It described an ongoing initiative, subject to business conditions, to expand the sales force by 15%–20% annually.
- Management expected depreciation expense to rise from current levels due to the new headquarters and planned customer-facing technology. It planned to continue share repurchases during the rest of 2011 as market conditions warranted; $79.0 remained under the authorization at September 30.
- Management believed cash, investments, and operating cash flows would fund working capital, financing, and capital expenditures for at least two years. It cited no material changes to contractual obligations or market-risk assessments.
- Investment liquidity and valuation: Auction-rate securities with $11.0 par value were carried at $9.5 fair value after repeated auction failures since 2008. They may be difficult or impossible to liquidate in the near term; valuation uses Level 3 assumptions that are volatile. Management considered the loss temporary and said operating liquidity was not dependent on selling them, but further market deterioration could require additional losses or impairment charges.
- Other stated risks include membership retention and enrichment, technology spending, economic and market changes, international operations, competition, staffing and key-person dependence, and quarterly variability. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- ASU 2009-13, adopted January 1, 2011 for qualifying contracts, changed allocation of revenue among deliverables; management said adoption had no material effect on financial position, results, or cash flows.
Most important facts for investors to verify
- Whether the Q4 revenue-growth slowdown and higher sales-force spending affected subsequent revenue, margins, and cash generation as management anticipated.
- Whether deferred revenue, agreement value, retention, and enrichment continued to support recurring research revenue.
- The cash-flow and return implications of headquarters and technology investment, including the expected increase in depreciation.
- The status, valuation assumptions, and potential liquidity or impairment exposure of the auction-rate securities.
- The Springboard holdback contingencies and the effects of the acquisition on revenue, integration costs, and results.
- The pace and price of further share repurchases and the company’s continuing liquidity needs.