Forrester Research, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also provides unaudited fourth-quarter results. Forrester sells subscription-based research, advisory and consulting services, and events to business and technology professionals.
Financial performance and position
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Revenue | $283.6 million | $250.7 million | +13% |
| Research services revenue | $191.6 million | $168.5 million | +14% |
| Advisory services and other revenue | $92.0 million | $82.2 million | +12% |
| Operating income | $37.0 million | $30.8 million | +20% |
| Net income | $23.0 million | $20.5 million | +12% |
| Diluted earnings per share | $0.99 | $0.89 | +11% |
| Operating margin | 13.0% | 12.3% | +0.7 percentage points |
| Net margin | 8.1% | 8.2% | -0.1 percentage points |
- Fourth quarter: Revenue was $74.7 million, operating income $13.4 million, and net income $8.9 million; diluted EPS was $0.38. In Q4 2010, the corresponding figures were $67.1 million, $7.1 million, $4.1 million, and $0.18.
- Cash flow: Operating cash flow was $55.4 million, up from $38.7 million. Management attributed much of the increase to $10.7 million less cash income tax paid, primarily because of payment deferrals, as well as higher net income. Investing activities used $53.0 million, including $39.8 million of property and equipment purchases and $7.5 million for acquisitions. Financing activities used $6.3 million; share repurchases were $18.4 million.
- Liquidity: Year-end cash and cash equivalents were $81.0 million; marketable investments totaled $146.6 million, including $9.6 million of long-term auction-rate securities. Working capital was $158.1 million, versus $146.1 million. The company reported no credit line and said available cash, investments, and operating cash flow should meet requirements for at least two years.
- Debt and obligations: The filing reports no line of credit and does not identify material borrowings. Total liabilities were $196.8 million, including $147.9 million of deferred revenue. Operating lease commitments totaled $115.3 million, including $70.7 million due thereafter.
- Business indicators: Deferred revenue rose 12% to $147.9 million and agreement value rose 9% to $221.1 million. Clients increased 4% to 2,683. Client retention held at 80%; dollar retention eased to 90% from 91%, and enrichment declined to 101% from 104%.
Material changes versus the prior year
- Growth reflected stronger demand, expanded sales staffing, foreign exchange benefits of about 1% of revenue growth, and the May 2011 Springboard Research acquisition, which contributed about 1% of revenue growth. International revenue grew 21% and reached 30% of total revenue, up from 28%.
- Marketing and sales expense rose 20% to $101.5 million, faster than revenue, reflecting additional personnel, commissions, travel, and facilities. Cost of services and fulfillment rose 10%, but declined as a share of revenue to 36.5% from 37.5%. General and administrative expense decreased 2% to $33.3 million.
- Capital spending increased substantially, and property and equipment rose to $50.4 million from $19.8 million, largely reflecting the new Cambridge headquarters. The company expects 2012 property and equipment purchases of $5 million to $8 million.
- Springboard was acquired for approximately $9.0 million, including a $2.3 million holdback subject to conditions. The acquisition was not material to consolidated results.
Outlook, risks, and unusual items
- Management gave no specific revenue or earnings guidance. It expects 2012 capital expenditures of $5 million to $8 million and additional severance and related costs of $1.3 million to $1.5 million in the first half of 2012. The sales realignment included the elimination of approximately 11 positions in early 2012; further cost initiatives were also planned.
- The board declared a $0.14-per-share quarterly dividend in February 2012 and said it intends to begin regular quarterly dividends, subject to future board discretion. The company also planned to continue repurchases as market conditions warrant; $79.0 million remained authorized at year-end. No shares were repurchased under the program in Q4 2011.
- Auction-rate securities remained subject to failed auctions dating from 2008. Their $9.6 million carrying value was below the $11.0 million par value; recovery timing and near-term liquidity are uncertain. Management judged the loss temporary and said it did not expect the illiquidity to disrupt its business plan, but further market deterioration could lead to additional losses or impairment.
- Key risks include renewal and retention performance, economic conditions and client technology spending, competition, international operations and currency movements, attracting and retaining skilled staff, and timely development of relevant research and products. The company also cites cybersecurity, investment valuation, tax uncertainty, and dependence on key management.
- The 2011 effective tax rate was 40.5%. Operating cash flow benefited from tax-payment timing; investors should distinguish this from recurring cash generation. The company recorded $0.4 million of reorganization costs in 2011 and a $0.9 million credit from revised estimates for performance-based stock awards.
- Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether subscription renewals, dollar retention, and enrichment stabilize or improve, and whether agreement-value growth converts into recognized revenue and cash.
- How much operating cash flow reflects recurring operations versus deferred tax payments and working-capital movements.
- Whether sales-force realignment and expense growth support sustainable margin improvement, accounting for severance and higher headquarters-related depreciation and lease costs.
- The recoverability and valuation assumptions for auction-rate securities and the company’s other investments.
- Actual 2012 capital spending, acquisition holdback payments, share repurchases, and dividend declarations compared with management’s stated plans.