Forrester Research, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Amounts are in U.S. dollars. Forrester provides research and data memberships, advisory and consulting services, and events.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $75.2 million | $73.1 million | Up 3% |
| Research services revenue | $51.9 million | $50.8 million | Up 2% |
| Advisory services and events revenue | $23.3 million | $22.3 million | Up 5% |
| Operating income (loss) | $(0.7) million | $0.02 million | Lower by $0.7 million |
| Net income (loss) | $(0.2) million | $(0.07) million | Loss widened |
| Operating cash flow | $16.3 million | $33.0 million | Down $16.7 million |
| Cash and cash equivalents, March 31 | $50.2 million | $80.5 million | Down year over year |
Operating margin was approximately -1.0% of revenue, versus approximately breakeven in Q1 2014; net margin was -0.3%, versus -0.1%. Cost of services and fulfillment was 40.9% of revenue, up from 40.3%. Selling and marketing was 39.4%, down from 40.9%. The filing does not present a separately labeled gross margin.
At March 31, 2015, cash and cash equivalents were $50.2 million and marketable investments were $60.8 million. Total current assets were $201.5 million; current liabilities were $178.4 million. Deferred revenue was $150.4 million. The filing reports no outstanding debt balance and says the company had no line of credit. It believes cash, investments and operating cash flows will fund working capital, financing activities and capital expenditures for the next 12 months.
Changes and operating metrics
- Revenue growth was 3% reported; foreign exchange reduced growth by 3.5 percentage points. On a constant-currency basis, research revenue grew approximately 6% and advisory and events revenue approximately 8%.
- Revenue from customers outside the U.S. fell 11% reported, but increased 2% on a constant-currency basis; it represented 23% of revenue reported, or 25% on a constant-currency basis. Management cited stronger U.S. growth, with Asia Pacific and Canada growth partly offset by a European decline.
- Deferred revenue was down 6% year over year. Deferred revenue plus future contract invoicing was down 4% reported, but essentially flat after adjusting for currency.
- Agreement value rose 4% to $232.9 million. Client retention improved to 79% from 74%; dollar retention rose to 90% from 87%; enrichment remained 97%. Client count was 2,464, versus 2,461.
- Project Consulting revenue rose 93%, reflecting the transfer of consulting work from the Research segment and increased demand and delivery headcount. Research segment revenue fell 26% largely because of that transfer; Product segment revenue rose 1%.
Cash, capital allocation and unusual items
Operating cash flow declined to $16.3 million. Management attributed the decrease primarily to the timing of renewals, invoicing and collections, a slight deterioration in receivables aging, higher prepaid expenses, and higher commission and bonus payments. Accounts receivable was $50.0 million at quarter-end, compared with $67.4 million at December 31, 2014.
Investing activities used $6.7 million, primarily net purchases of marketable investments and property and equipment. Financing activities used $7.4 million, including $5.7 million of share repurchases and $3.1 million of dividends. The board authorized an additional $25 million for repurchases in February; approximately $27.1 million remained authorized at March 31. The quarterly dividend was $0.17 per share, and an April declaration set another $0.17 dividend payable June 24, 2015.
Forrester recorded $3.4 million of Q1 reorganization costs for a workforce reduction of about 4% (50 employees) intended to redirect investment toward sales expansion and areas of client demand. It expected another $0.3 million to $0.5 million of costs in Q2, largely a non-cash charge related to liquidating a small non-U.S. subsidiary; costs were expected to be substantially paid by year-end. Management said overall headcount was expected to increase 7% by year-end 2015 compared with 2014, and planned to expand the quota-carrying sales force by approximately 9% to 11%.
Outlook, risks and other disclosures
- Management estimated full-year 2015 operating cash flow would be comparable to full-year 2014. The filing provides no specific revenue or earnings guidance.
- Management cited risks including membership retention and enrichment, demand and execution for consulting engagements, technology spending, international operations and currency, new-product delivery, key-personnel and staffing needs, execution of the reorganization, competition, security disruptions, intellectual property protection, and quarterly variability.
- $30.4 million of cash and investments was held outside the U.S. The company intended to permanently reinvest those funds abroad; repatriation for U.S. operations would require accruing and paying U.S. taxes.
- Foreign currency translation produced a $3.0 million other comprehensive loss in Q1, contributing to comprehensive loss of $3.1 million. Management reported disclosure controls were effective and no material change in internal control during the quarter.
- The company was evaluating the revenue recognition standard then expected to take effect for it in Q1 2017 and had not selected a transition method.
Important facts for investors to verify
- Whether renewal bookings, deferred revenue and future invoicing stabilize or improve, particularly after currency effects.
- Whether receivables aging and cash conversion recover after the Q1 operating cash flow decline.
- Whether consulting growth and the sales-force expansion translate into sustained revenue and margins as planned.
- The final amount and timing of reorganization costs, and whether expected headcount growth and resource reallocation deliver the stated objectives.
- Effects of currency movements and the company’s plans and tax exposure for overseas cash and investments.
- Future repurchases and dividends, including remaining authorization and funding needs.