Business context and reporting period
Forrester Research, Inc. filed this Form 10-K for the fiscal year ended December 31, 2016. It provides research, data, consulting, advisory, peer-network and event services to business and technology leaders. Research subscriptions are generally annual and billed in advance; subscriptions represented about 66% of 2016 revenue. No client accounted for more than 2% of revenue.
Financial performance and liquidity
Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $326.1 | $313.7 | +4% (+5% currency-adjusted) |
| Research services revenue | $215.2 | $210.3 | +2% |
| Advisory services and events revenue | $110.9 | $103.5 | +7% |
| Operating income | $30.8 | $18.8 | +63% |
| Operating margin | 9.4% | 6.0% | +3.4 percentage points |
| Net income | $17.7 | $12.0 | +47% |
| Diluted EPS | $0.97 | $0.66 | +$0.31 |
| Cash from operating activities | $41.9 | $32.5 | +$9.4 |
- Net margin was 5.4%, versus 3.8% in 2015. The effective tax rate rose to 42.5% from 37.9%, primarily due to a valuation allowance on investment-related capital losses and a nonrecurring 2015 tax benefit.
- Operating expenses increased less than 1% while revenue grew 4%. Lower reorganization costs and cost controls contributed to operating-margin improvement.
- Cash and marketable investments totaled $138.1 at year-end, up from $101.1; working capital was $46.0, compared with $15.3. Operating cash flow less $4.1 of capital expenditures was approximately $37.7.
- Total liabilities were $185.7, including $134.3 of deferred revenue. The balance sheet reports no borrowings; the company said it had no line of credit and did not expect to need one except potentially for a significant acquisition.
- Cash dividends were $13.0 in 2016 ($0.18 per share quarterly). The board raised the quarterly dividend to $0.19 in February 2017. The company had $60.1 remaining under its repurchase authorization at year-end.
Material changes versus the prior comparable period
- Agreement value increased 1% to $238.4 (3% currency-adjusted), while deferred revenue declined 5% to $134.3. Management attributed the deferred-revenue decline to revenue growth exceeding contract bookings.
- Client retention fell to 75% from 77%; dollar retention fell to 87% from 89%; enrichment fell to 93% from 98%; and client count declined 2% to 2,432. Management said these measures had declined during 2016.
- Advisory services and events advanced faster than research services. Consulting and advisory revenue grew 7%, and events revenue grew 4%; research growth was partly offset by declines in Connect and Data products.
- Cash from operations increased, while investing activities used $17.9, primarily for net purchases of marketable investments and property and equipment. Financing activities provided $2.5, including $16.7 of employee equity-plan proceeds, offset mainly by dividends.
- 2016 included $1.0 of reorganization costs, versus $4.4 in 2015. The 2016 workforce reduction was about 2%; 2015 included larger workforce and product-group reorganizations.
Outlook, commentary, risks and unusual items
- For 2017, management forecast revenue growth of negative 1% to positive 2%, or positive 1% to 3% currency-adjusted; operating margin of 7.8% to 8.8%; operating cash flow of $32–36; capital expenditures of $4–7; and an effective tax rate of about 36%.
- Management expects to increase sales headcount by 8%–10% in 2017 as it implements a revised customer-engagement model, and to add consulting employees. It expects this hiring and near-flat revenue to pressure 2017 margins, with sales-force growth intended to support faster growth later in the year.
- Key risks include weaker subscription renewals or demand, project-based consulting volatility, execution of the customer-engagement changes, economic and technology-spending weakness, competition and pricing pressure, hiring and retention of skilled staff, cybersecurity and privacy issues, international and currency exposure, and tax uncertainty. About 23% of revenue came from outside the U.S.
- Future minimum operating lease commitments totaled $88.8, including $11.9 due in 2017. The company expects adoption of the new lease accounting standard in 2019 to materially affect its financial position.
- Non-marketable investments were $2.8 at year-end; investment losses were $0.8 in 2016. The company recorded a $1.0 tax expense related to a valuation allowance on capital losses. It reported $1.8 of unrecognized tax benefits, of which $1.1 was expected to be recognized within 12 months. No material legal proceedings were reported.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether retention, enrichment, deferred revenue and agreement-value trends improved after year-end, and whether bookings support the 2017 revenue outlook.
- Whether the new customer-engagement model and planned sales-force expansion deliver improved productivity, renewals and growth without greater-than-expected cost pressure.
- Whether 2017 margin and operating-cash-flow guidance was achieved, particularly given hiring plans and the decline in 2016 deferred revenue.
- The sustainability of dividend increases and repurchases relative to cash generation, lease commitments and other operating needs.
- The eventual effects of revenue-recognition and lease-accounting changes, and the resolution of tax matters and investment-related exposures.