Forrester Research, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unless noted, financial amounts below are in U.S. dollars. Forrester provides research subscriptions, advisory and consulting services, and events.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $84.9 million (+6%) | $80.4 million | $259.0 million (+5%) | $247.3 million |
| Operating income | $4.9 million | $6.7 million | $13.7 million | $20.1 million |
| Operating margin | 5.8% | 8.4% | 5.3% | 8.1% |
| Net income | $4.0 million | $4.0 million | $10.0 million | $13.0 million |
| Diluted EPS | $0.21 | $0.22 | $0.55 | $0.72 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $37.4 million | $36.9 million |
- Q3 research services revenue rose 4% to $56.3 million; advisory services and events rose 9% to $28.6 million. For the nine-month period, those categories grew 4% and 7%, respectively.
- Despite revenue growth, operating income fell about 27% in Q3 and 32% for the nine-month period. Higher service, selling and marketing, general and administrative, depreciation, and acquisition-related costs contributed to pressure on profitability.
- Cash and cash equivalents were $92.1 million and marketable investments were $52.4 million at September 30, 2018, totaling $144.5 million. Current assets were $207.2 million versus current liabilities of $170.3 million. The filing reports no debt or credit line.
- Nine-month investing cash use was $10.4 million, including $9.3 million for acquisitions and $3.2 million for property and equipment. Financing cash use was $12.1 million, including $10.8 million of dividends and $9.9 million of share repurchases, partly offset by equity-plan proceeds.
- Deferred revenue was $128.4 million, down 3% year over year as reported. Management said it would have increased about 4% excluding ASC 606 adoption effects. Agreement value increased 8% to $257.5 million; client retention was 74% versus 76%, dollar retention remained 88%, and enrichment rose to 100% from 94%.
Material changes and unusual items
- Forrester adopted ASC 606 on January 1, 2018 using the modified retrospective method. Adoption increased opening retained earnings by $3.8 million and reduced deferred revenue at September 30 by $9.6 million versus the previous guidance. Reported 2018 results are therefore not fully comparable with 2017. ASC 606 increased Q3 2018 net income by $0.8 million ($0.04 diluted EPS) but reduced nine-month net income by $1.0 million ($0.05 diluted EPS), compared with the previous guidance.
- A $1.0 million out-of-period revenue correction was recorded in Q2 2018 for research reprints: $0.8 million related to Q1 2018 and $0.2 million to 2017. Management concluded the error was not material to prior-period financial statements.
- Forrester acquired GlimpzIt in June for approximately $1.3 million and FeedbackNow in July. FeedbackNow’s preliminary purchase-price allocation totaled $13.7 million, including $3.0 million of contingent consideration; sellers may receive up to $4.2 million based on performance. FeedbackNow contributed about $0.5 million in revenue and $1.1 million in direct expenses during Q3.
Outlook, management commentary and risks
- Management expected a full-year 2018 effective tax rate of approximately 31%, amortization expense of $1.2–$1.3 million, and acquisition and integration costs of $1.8–$2.0 million. Sales headcount was expected to be flat to down by a low single-digit percentage versus 2017.
- Approximately $251.2 million of revenue was expected to be recognized over the next 12–24 months from remaining performance obligations. The company said cash, investments and operating cash flow should meet working-capital, financing and capital-expenditure needs for the next 12 months; it did not anticipate needing a credit line absent a significant acquisition.
- Management cited demand growth in Research, Connect and Analytics, as well as advisory and consulting services. Agreement-value growth was attributed partly to increased bookings and bundling consulting with Research and Connect offerings.
- Key disclosed risks include retaining and expanding memberships, generating consulting engagements, executing the evolving customer-engagement model, attracting and retaining qualified staff, international operations and foreign exchange, cybersecurity and network disruption, competition, privacy-law compliance, tax matters, and quarterly variability. The filing reported no material change to previously disclosed risk factors or market-risk sensitivity.
- FeedbackNow’s contingent consideration uses significant unobservable valuation inputs, including projected results and discount rates; purchase accounting remained preliminary. The company also noted ongoing review of the Altera tax case. The new lease standard, effective January 1, 2019, was expected to materially affect the balance sheet but not materially affect results or liquidity.
- Disclosure controls were assessed as effective as of September 30, 2018; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much of reported growth and deferred-revenue movement reflects underlying demand versus ASC 606 timing and presentation changes.
- Whether revenue growth can translate into improved operating margins, given higher operating expenses and declining operating income.
- Renewal and retention trends, especially the decline in client retention, and the sustainability of agreement-value and enrichment growth.
- FeedbackNow’s performance against contingent-payment targets, final purchase accounting, and the strategic progress of the planned real-time customer-experience cloud offering.
- Cash deployment through dividends and repurchases, alongside acquisition spending and the company’s stated liquidity needs.
- Tax-rate developments, including the Altera case, and the expected balance-sheet impact of lease accounting adoption.