Forrester Research, Inc. — Q3 2016 Form 10-Q
Business context and period: The filing covers the quarter and nine months ended September 30, 2016, compared with the same 2015 periods. Forrester sells research, Connect and Data products, advisory and consulting services, and events. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $77.4 | $74.8 | $242.6 | $232.8 |
| Operating income / margin | $7.6 / 9.8% | $5.3 / 7.1% | $21.7 / 9.0% | $14.7 / 6.3% |
| Net income / margin | $3.1 / 4.0% | $4.5 / 6.0% | $11.9 / 4.9% | $10.0 / 4.3% |
| Diluted EPS | $0.17 | $0.25 | $0.65 | $0.55 |
- Revenue mix and growth: Q3 revenue grew 4% year over year: research services rose 1% and advisory services and events rose 10%. For the first nine months, revenue also grew 4%; research services rose 3% and advisory services and events rose 7%. Foreign exchange reduced growth by less than 1% in both periods.
- Cash flow: Nine-month operating cash flow was $35.9 million, up from $28.2 million. Investing used $18.9 million, principally net investment purchases and capital expenditures; financing provided $0.6 million. Cash and cash equivalents increased to $70.1 million from $53.3 million at year-end 2015.
- Liquidity and debt: September 30 cash and marketable investments totaled $133.2 million. Current assets were $191.5 million and current liabilities $156.5 million. The filing reports no credit line and does not list debt on the balance sheet. Management said available cash, investments, and operating cash flow should cover working capital and capital spending for the next 12 months.
- Balance sheet changes since December 31, 2015: Total assets were $309.6 million versus $319.0 million; total liabilities were $166.7 million versus $191.7 million. Deferred revenue was $126.2 million, down from $140.7 million at year-end, but up 2% year over year.
- Capital returns: The company paid $9.7 million in dividends during the first nine months and declared a further $0.18-per-share dividend payable in December 2016. It made no share repurchases in the first nine months; in October, the board added $25 million to the repurchase authorization.
Material changes and management commentary
- Operating income increased year over year in Q3 and year to date, reflecting revenue growth and lower reorganization expense compared with 2015. Cost of services and fulfillment and selling and marketing costs grew more slowly than revenue over the nine-month period.
- Q3 net income declined despite higher operating income, primarily alongside a higher income tax provision and a $1.1 million net investment loss, versus a gain in Q3 2015. The Q3 effective tax rate was 53.5%; the nine-month rate was 43.4%, compared with 22.5% and 34.8%, respectively, in 2015. The filing attributes the year-to-date increase in part to a $0.6 million valuation allowance on an investment capital loss and a prior-year tax benefit.
- Agreement value increased 3% year over year to $241.1 million (5% on a constant-currency basis). Client retention fell to 76% from 80%, dollar retention to 88% from 91%, and enrichment to 95% from 97%; client count was unchanged at 2,482. Management said retention metrics had declined from 2015 highs.
- Research services growth reflected strength in Research products, partly offset by declines in Connect and Data. Advisory and consulting demand was strong; event revenue fell 8% year to date, mainly due to lower sponsorship revenue. Consulting trends differed by offering: content marketing grew while strategy consulting declined.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Subject to business conditions, management expected quota-carrying salesforce headcount to be approximately flat to 1% higher in 2016 versus 2015.
- A workforce reduction affecting approximately 2% of employees generated $1.0 million of 2016 severance and related costs; all costs had been paid by September 30. The 2015 comparison included larger reorganization charges.
- The company had $47 million of cash and investments held outside the U.S. Management intends to permanently reinvest these funds abroad; repatriation for U.S. operations would entail U.S. taxes.
- Management cited risks including membership retention and enrichment, consulting demand, technology spending, international operations, competition, recruiting and retaining staff, cybersecurity and network disruptions, privacy compliance, and variability in quarterly results. The filing reports no material change in market-risk assessment and no material change in contractual obligations.
- Upcoming accounting changes include leases, effective for the company January 1, 2019, which management expected to materially affect financial position; the company was still assessing revenue-recognition standards and had not selected a transition method.
Important facts for investors to verify
- Whether weaker client, dollar, and enrichment retention persists and affects renewals or agreement value.
- Whether growth in research, advisory, and consulting can continue, and whether Connect, Data, and event weakness improves.
- How the elevated effective tax rate and investment-fund losses affect future earnings.
- Whether operating cash flow remains sufficient as deferred revenue, accrued liabilities, dividends, and capital spending change.
- Potential tax consequences if foreign-held funds are repatriated, and the scale and timing of any share repurchases.
- Management’s forward-looking statements are subject to the risks described in the filing; no formal earnings or revenue outlook is provided.