Forrester Research, Inc. — Q1 2023 Form 10-Q
Business context and period. This unaudited quarterly report covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. Forrester generates revenue from research subscriptions and related products, consulting and advisory services, and events.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $113.7 million | $125.0 million | Down 9% (down 8% excluding currency effects) |
| Research revenue | $80.9 million | $85.8 million | Down 6% |
| Consulting revenue | $31.8 million | $38.4 million | Down 17% |
| Events revenue | $1.0 million | $0.8 million | Up 33%; no events were held in either period |
| Operating income (loss) | $(5.1) million | $6.5 million | Turned to a loss |
| Net income (loss) | $(4.1) million | $4.1 million | Turned to a loss |
| Diluted EPS | $(0.21) | $0.22 | — |
| Cash from operating activities | $12.3 million | $22.7 million | Down $10.4 million |
Operating expenses were $118.8 million, up slightly from $118.5 million. General and administrative expense increased $5.7 million, including a $4.8 million provision for a preliminary wage-related legal settlement. Restructuring costs were $1.6 million. The reported operating margin was approximately negative 4.5%, versus positive 5.4% a year earlier; net margin was negative 3.6%, versus positive 3.5%.
Cash and cash equivalents were $104.2 million and marketable investments were $16.8 million at March 31, 2023. Management reported combined cash, cash equivalents, and investments of $121.0 million, including $88.7 million held outside the United States. Long-term debt was $35.0 million, down from $50.0 million at year-end; $114.4 million of borrowing capacity remained under the $150 million revolving facility. The facility matures in December 2026, and the company reported compliance with its covenants. Current liabilities included $215.1 million of deferred revenue, up from $178.0 million at December 31, 2022. Management said existing cash and operating cash flows should meet working-capital, capital expenditure, and known long-term needs.
Cash used in financing was $14.2 million, principally reflecting $15.0 million of discretionary debt repayments. The company did not repurchase shares during the quarter. Operating lease liabilities totaled $62.5 million; remaining lease payments were $70.6 million before estimated sublease receipts.
Material changes and operating metrics
- Contract value was $347.3 million, unchanged year over year. Client retention fell to 74% from 77%; wallet retention fell to 92% from 103%; and the number of clients declined 9% to 2,678.
- Management attributed weaker retention and client counts mainly to customer budget pressure and uncertain economic conditions, as well as the transition to the Forrester Decisions product platform. It expects these factors to pressure key metrics through 2023.
- Research revenue declined 6%; subscription research revenue grew 2%, offset by declines in reprints and smaller or discontinued products. Consulting revenue weakened amid lower advisory and project delivery and reduced demand for certain consulting offerings.
- Operating cash flow fell to $12.3 million from $22.7 million, mainly due to lower earnings and the timing of benefit payments.
Outlook, risks, contingencies, and unusual items
- The company anticipated a full-year 2023 effective tax rate of approximately 38%. The filing gives no numerical full-year revenue or earnings guidance.
- In May 2023, after quarter-end, Forrester announced an approximately 8% workforce reduction and closure of certain smaller offices, citing a revised revenue outlook, cost alignment, and operating efficiency. Expected costs were $10 million to $11 million, including approximately $2 million of non-cash lease impairment, with most cash costs expected in 2023.
- Separately, a January 2023 workforce reduction of approximately 4% generated $0.6 million of Q1 severance costs; the company expected the remaining accrued costs to be paid by year-end. Q1 restructuring also included office impairment and a software-project write-off.
- Following an April 2023 mediation and agreement in principle in a wage-related matter, the company recorded a $4.8 million Q1 expense. Management said it intended to contest other proceedings and did not expect current legal matters, based on information available, to materially affect financial position, results, or cash flows overall; outcomes remain uncertain.
- Borrowings carried a 6.125% contractual annualized rate at quarter-end. In April, the company amended its facility to facilitate the transition from LIBOR to SOFR and set the rate at SOFR plus 10 basis points.
- Management cited risks including macroeconomic conditions and client spending, retention and demand, execution of the product transition, consulting and event demand, competition, staffing, international operations, cybersecurity, privacy, and debt obligations. It cautioned that Q1 results may not indicate full-year results.
Important facts for investors to verify
- Whether contract value stabilizes while client and wallet retention remain under pressure, and how the Forrester Decisions transition affects renewals and revenue.
- Whether consulting demand and total revenue recover, and the financial effect of the revised outlook and May workforce and office actions.
- Whether the $4.8 million wage-related settlement accrual is sufficient and whether any further legal costs or liabilities arise.
- Whether operating cash generation remains adequate after debt repayments, lease obligations, and restructuring costs; also monitor offshore cash accessibility and borrowing costs.
- Whether management’s approximately 38% full-year tax-rate estimate and covenant-compliance expectations remain valid.