Forrester Research, Inc. — Q2 2015 Form 10-Q
Business context and period. Unaudited results for the quarter and six months ended June 30, 2015, compared with the same 2014 periods. Forrester sells research memberships and data products, advisory and consulting services, and events. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial and operating performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $82.8m | $82.9m | $158.0m | $156.0m |
| Operating income | $10.1m | $7.1m | $9.4m | $7.1m |
| Operating margin | 12.2% | 8.5% | 5.9% | 4.6% |
| Net income | $5.8m | $4.3m | $5.5m | $4.2m |
| Net margin | 6.9% | 5.2% | 3.5% | 2.7% |
| Diluted EPS | $0.31 | $0.23 | $0.30 | $0.22 |
- Revenue mix: Q2 research services revenue was $52.6m, up 1%; advisory services and events were $30.2m, down 1%. For the first half, both categories grew 1%, to $104.5m and $53.5m, respectively.
- Cash flow: First-half operating cash flow was $24.8m, down from $35.3m. Investing used $7.5m and financing used $16.0m. Cash increased $0.5m to $50.2m; marketable investments were $60.7m.
- Liquidity and debt: Current assets were $186.8m and current liabilities $166.1m at June 30. Cash plus marketable investments totaled $110.8m. The company reported no line of credit and stated it did not expect to need one except potentially for a significant acquisition; the filing does not identify outstanding debt.
- Returns to shareholders: First-half dividends paid were $6.1m ($0.34 per share declared). Share repurchases were $11.8m, versus $54.9m in the prior-year half.
Material changes versus prior periods
- Q2 revenue was essentially flat and first-half revenue rose 1%; foreign exchange reduced reported revenue growth by 3.5 percentage points in both periods. Excluding currency effects, international revenue grew 9% in Q2 and 5% in the first half.
- Q2 operating income rose to $10.1m from $7.1m, helped by lower operating expenses, including lower cost of services, general and administrative expense, and reorganization costs. First-half operating income increased despite $3.5m of reported reorganization costs.
- Events revenue declined 19% in Q2 and 20% in the first half, primarily reflecting lower sponsorship revenue. Consulting growth offset some weakness: Project Consulting revenue rose 34% in Q2 and 58% in the first half, partly due to the shift of project delivery from Research to that segment.
- At June 30, deferred revenue was $136.2m, down 5% year over year; management attributed most of the decrease to currency and said it was approximately 1% lower on a constant-currency basis. Agreement value increased 4% to $233.4m. Client retention improved to 80% from 75%, dollar retention to 90% from 87%, and enrichment remained 97%.
- First-half operating cash flow fell $10.5m year over year, mainly because of lower cash generated from receivables and increased cash use for accrued expenses and other liabilities.
Outlook, risks, and unusual items
- Management estimated full-year 2015 operating cash flow would be comparable to 2014 and said cash, investments, and operating cash flows should meet working-capital and capital needs for the next 12 months. It expected year-end headcount to increase 5%–7% from 2014 and planned to expand quota-carrying sales staff by approximately 9%–11%, subject to business conditions.
- Management cited retention and enrichment of research memberships, consulting demand, technology spending, international business risks, product development, hiring and retaining staff, competition, cybersecurity, and quarterly variability among key risks. It cautioned that interim results may not indicate full-year performance.
- A first-quarter workforce reduction affected approximately 4% of employees, with $3.2m of severance and related costs in the first half; a small non-U.S. subsidiary liquidation also generated a $0.3m charge in Q2. The filing reports $0.1m of Q2 reorganization expense on the income statement; the narrative describes offsetting components.
- The six-month effective tax rate was 42.1%, versus 41.3%, primarily due to a $0.3m foreign-subsidiary liquidation loss for which no tax benefit was recognized. Management was evaluating the new revenue-recognition standard and had not selected a transition method.
- Approximately $33.9m of cash and investments were held outside the U.S.; repatriation for U.S. operations could incur U.S. tax. Management intended to permanently reinvest these funds abroad. In July, the board authorized an additional $25m of repurchases and declared a $0.17-per-share dividend payable September 16, 2015.
Important facts for investors to verify
- Whether bookings and deferred revenue stabilize or improve, particularly on a constant-currency basis, and how agreement value converts into recognized revenue.
- Whether retention gains continue and whether the decline in event sponsorship revenue is offset by research, data, and consulting growth.
- Whether planned sales-force and overall headcount expansion supports growth without pressuring margins, and whether operating cash flow meets management’s full-year expectation.
- The impact of currency movements, the tax implications of overseas cash, and the pace and price of future buybacks and dividends.
- Whether the reported Q2 reorganization expense and narrative components reconcile in the underlying filing disclosures.