Forrester Research, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. Forrester sells research, Connect and Data memberships, advisory and consulting services, and events. This unaudited filing covers the quarter and six months ended June 30, 2016; comparisons are with the same 2015 periods. Unless noted, amounts are in millions of dollars.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $87.8 | $82.8 | $165.2 | $158.0 |
| Operating income | $11.5 | $10.1 | $14.2 | $9.4 |
| Operating margin | 13.1% | 12.2% | 8.6% | 5.9% |
| Net income | $7.5 | $5.8 | $8.7 | $5.5 |
| Net margin | 8.5% | 6.9% | 5.3% | 3.5% |
| Diluted EPS | $0.41 | $0.31 | $0.49 | $0.30 |
Q2 revenue rose 6%: research services increased 5% and advisory services and events increased 9%. First-half revenue rose 5%: research services increased 4% and advisory services and events increased 6%. Q2 growth in advisory and consulting was strong; first-half event revenue declined 9%, mainly due to lower sponsorship revenue.
For the first half, operating cash flow was $30.6, versus $24.8 in 2015. Investing used $12.2, including $9.9 net purchases of marketable investments and $2.3 of property and equipment. Financing used $2.2, primarily for $6.4 of dividends, partly offset by $4.1 of employee equity-plan proceeds. Cash and cash equivalents increased to $68.9 from $53.3 at year-end.
At June 30, cash and cash equivalents were $68.9 and marketable investments were $57.7; total assets were $316.1 and total liabilities were $179.4. Current assets were $195.0 and current liabilities $169.9. The balance sheet reports no debt, and the company said it had no line of credit. Approximately $47 million of cash and investments was held outside the U.S.; repatriation for U.S. use could incur U.S. taxes. The company stated it intended to permanently reinvest those funds abroad.
Material changes and operating indicators
- First-half operating margin improved to 8.6% from 5.9%, helped in part by lower reorganization costs ($1.0 versus $3.5). First-half selling and marketing expense rose 3%; general and administrative expense rose 7%, primarily due to professional-services costs.
- Deferred revenue was $138.6, up 2% year over year, or 3% at constant currency. Agreement value was $241.8, up 4%, or 5% at constant currency.
- Client retention fell to 76% from 80%; dollar retention to 88% from 90%; enrichment to 96% from 97%. Client count was 2,481 versus 2,482.
- The company made no stock repurchases in the first half of 2016, compared with $11.8 of repurchases in the first half of 2015. Remaining authorization was approximately $36.9.
Outlook, risks and unusual items
- Management intended, subject to business conditions, to expand its quota-carrying sales force by approximately 1%–3% in 2016 and anticipated productivity improvements. It expected available cash, investments and operating cash flow to meet working-capital, financing and capital-expenditure needs for the next 12 months. No specific revenue or earnings guidance was provided.
- In Q1 2016, Forrester reduced its workforce by approximately 2% and recorded $1.0 of severance and related costs; remaining costs were expected to be paid during 2016. First-half 2015 included $3.5 of reorganization costs.
- Management cited risks including membership renewal and enrichment, demand for consulting engagements, technology spending, competition, international operations, talent retention, cybersecurity and privacy, and variability in quarterly results. Retention metrics had declined from recent 2015 highs.
- The company expected the new lease accounting standard, effective for it January 1, 2019, to have a material impact on financial position; impact on results was still under evaluation. Revenue-recognition and share-based-payment accounting changes were also being evaluated.
- Management reported disclosure controls were effective as of June 30, 2016, with no material change in internal control over financial reporting during the quarter. Results for the interim periods may not indicate full-year performance.
Important facts for investors to verify
- Whether the improvement in operating income and margins is sustainable, given expense growth and lower first-half event sponsorship revenue.
- Whether declining client and dollar retention stabilize, and whether deferred revenue and agreement-value growth translate into recognized revenue.
- How the planned sales-force expansion affects productivity, costs and growth.
- The allocation, liquidity and potential tax implications of the approximately $47 million held outside the U.S.
- The balance and future use of the share-repurchase authorization, dividend policy, and potential effects of forthcoming accounting standards.