Forrester Research, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Amounts are in U.S. dollars.
Business context and reporting period
Forrester generates revenue primarily from research memberships, consulting and advisory services, and events. On January 3, 2019, it acquired SiriusDecisions for approximately $247.3 million at closing, funded in part with new debt. The acquisition added a third reportable segment and materially affects year-over-year comparisons. Forrester also acquired FeedbackNow in 2018.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / comparator |
|---|---|---|
| Revenue | $100.6 million | $77.7 million; up 29% |
| Research services revenue | $68.6 million | $51.7 million; up 33% |
| Advisory services and events revenue | $32.0 million | $26.0 million; up 23% |
| Operating loss | $10.9 million | $2.3 million |
| Net loss | $13.3 million; $0.73 per diluted share | $1.7 million; $0.10 per diluted share |
| Operating cash flow | $26.0 million | $7.8 million |
- Net loss margin was 13.2% of revenue, compared with 2.2% in Q1 2018; operating loss margin was 10.8%, compared with 2.9%.
- Operating expenses were $111.5 million, up from $80.0 million. Cost of services and fulfillment was 44.8% of revenue versus 43.9%; selling and marketing was 41.8% versus 42.5%; general and administrative was 13.1% versus 13.8%. Intangible amortization rose to $6.2 million from $0.2 million, and acquisition and integration costs were $3.0 million.
- Cash and cash equivalents were $75.0 million at March 31, down from $140.3 million at December 31, 2018. Cash, cash equivalents and restricted cash were $76.4 million. Current assets were $177.7 million and current liabilities were $269.8 million.
- Cash used in investing was $241.7 million, principally the $238.9 million net cash outlay for SiriusDecisions. Financing provided $151.4 million, primarily from borrowings.
- Debt principal outstanding was $153.4 million ($150.8 million net carrying amount). The company had $30.0 million drawn on its $75.0 million revolver, with $45.0 million of capacity available. Debt carried a 5.0% annualized rate at quarter-end and is floating-rate. The company was in compliance with its financial covenants.
- Deferred revenue was $191.6 million, up 23% year over year; excluding SiriusDecisions, it increased approximately 3%. Remaining performance obligations expected to be recognized over the next 12 to 24 months were approximately $357.9 million.
Material changes versus the prior comparable period
- SiriusDecisions contributed $15.2 million of Q1 revenue and $24.9 million of direct expenses, including intangible amortization. Management attributed most of the reported expense increases to the acquisition.
- Revenue growth also reflected increased demand for Forrester research products and stronger legacy consulting delivery. Legacy segment revenue increased 15% in Products and 6% in Research.
- Agreement value rose 40% to $345.3 million; management attributed approximately 28 percentage points of growth to SiriusDecisions, with the remainder mainly from increased bookings and more bundled consulting.
- Client retention was 72%, dollar retention 90%, and enrichment 106%. Forrester changed the calculation methodology in Q1 2019; it cautioned that retention and enrichment would not reflect SiriusDecisions until Q1 2020.
- The company suspended its dividend program in November 2018 in connection with the acquisition and related debt. No dividend was declared or paid in Q1 2019; Q1 2018 included a $0.20-per-share dividend.
Outlook, commentary, risks and unusual items
- Forrester expects 2019 acquisition and integration costs of $6.5 million to $7.5 million and anticipates a full-year effective tax rate of approximately 5%, based on a projected pretax loss. The filing gives no specific full-year revenue or earnings guidance.
- Management believes cash balances and operating cash flows will meet working-capital, financing and capital-expenditure needs for the next 12 months. It plans to use excess cash flow, if any, for discretionary revolver repayments.
- A 25-basis-point change in interest rates could change annual pretax interest expense over the following 12 months by approximately $0.4 million. Debt covenants restrict certain actions, including additional borrowing and dividends, subject to exceptions.
- Purchase-price allocations for SiriusDecisions and FeedbackNow remained preliminary, including estimates for acquired intangible assets, working capital, goodwill and tax items. SiriusDecisions goodwill was not tax deductible.
- Management cited acquisition integration, client retention and membership enrichment, consulting demand, competition, technology spending, privacy and cybersecurity, international operations including Brexit, and debt among relevant risks. Disclosure controls were assessed as effective, but the assessment excluded SiriusDecisions; integration and evaluation of its internal controls were ongoing.
- Forrester adopted the new lease standard on January 1, 2019, recognizing operating lease right-of-use assets and liabilities; management said adoption did not materially affect results or cash flows. It also disclosed a $0.6 million discrete tax expense related to settlement of a U.S. Competent Authority claim.
Important facts for investors to verify
- Whether SiriusDecisions integration delivers expected cross-selling, growth and cost synergies, and how its results perform as a separate segment.
- Progress on the preliminary acquisition accounting, including final working-capital adjustments, intangible-asset valuations and any resulting amortization or goodwill changes.
- Underlying organic revenue, bookings and retention trends, accounting for the acquisition and the revised client-retention and enrichment methodology.
- Debt repayment, revolver usage, floating-rate exposure and continued compliance with leverage and fixed-charge coverage covenants.
- Whether operating cash generation can support liquidity needs while the dividend remains suspended and acquisition-related expenses continue.