Forrester Research, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the same 2016 periods unless noted. Unaudited consolidated results. Forrester sells subscription research and data products, advisory and consulting services, and events.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $80.4m | $77.4m | $247.3m | $242.6m |
| Operating income | $6.7m | $7.6m | $20.1m | $21.7m |
| Operating margin | 8.4% | 9.8% | 8.1% | 9.0% |
| Net income | $4.0m | $3.1m | $13.0m | $11.9m |
| Net margin | 4.9% | 4.0% | 5.3% | 4.9% |
| Diluted EPS | $0.22 | $0.17 | $0.72 | $0.65 |
- Q3 revenue grew 4%; research services rose 3% and advisory services and events rose 6%. Nine-month revenue grew 2%, with research services essentially flat and advisory services and events up 6%.
- Operating income declined in both periods as expenses increased faster than revenue. Cost of services and fulfillment rose 9% in Q3 and 6% year to date; selling and marketing rose 5% and 3%, respectively.
- Cash from operating activities was $36.9m for the first nine months, versus $38.3m in 2016. Capital expenditures were $5.8m. Cash and cash equivalents were $80.0m; marketable investments were $54.0m.
- At September 30, total assets were $314.4m, total liabilities $179.2m, and stockholders’ equity $135.2m. The filing reports no borrowings or credit line and says the company does not anticipate needing a line of credit except possibly for a significant acquisition.
Material changes and operating indicators
- Deferred revenue increased 5% year over year to $132.9m, which management attributed to contract billings exceeding recognized revenue and increased bookings. Agreement value declined 1% to $237.8m, or was essentially flat after currency effects.
- Client retention was 76% and dollar retention 88%, both essentially unchanged year over year. Enrichment was 94%, down one percentage point; the number of clients fell 4% to 2,393.
- Project Consulting revenue increased 13% year to date, while Research segment revenue declined 3%. Segment comparisons reflect revised internal allocations, with prior-year figures reclassified.
- For the first nine months, the company repurchased approximately 1.1m shares for $40.0m and paid $10.2m in dividends. Remaining repurchase authorization at September 30 was approximately $20.1m.
Outlook, risks, and unusual items
- Management expected 2017 operating cash flow of $37m–$41m, a full-year effective tax rate of approximately 35%, and sales headcount growth of 3%–6% versus 2016. Project Consulting revenue growth was expected to be single digit in Q4. No consolidated revenue or earnings guidance is provided in the filing.
- The lower year-to-date effective tax rate, 32.6% versus 43.4%, reflected a $1.3m tax-audit settlement benefit, approximately $0.3m of share-award tax benefits, and a prior-year $0.6m valuation allowance. These items affected period comparability.
- Adoption of the new revenue standard was planned for January 1, 2018, using the modified retrospective method. Management did not expect a material impact on results, but identified potential balance-sheet reductions for cancellable contracts and quarterly timing changes for unused prepaid services. Implementation work remained in progress.
- The company said adoption of the lease standard in 2019 is expected to materially affect its financial position because lease assets and liabilities will be recorded on the balance sheet.
- Management cited risks including membership retention and enrichment, consulting demand, customer engagement changes, technology spending, international operations, competition, hiring and retention, cybersecurity, privacy compliance, taxes, and variability in quarterly results. It reported disclosure controls effective and no material quarter-end change in internal control over financial reporting.
Important facts for investors to verify
- Whether improved deferred revenue and bookings translate into sustained agreement-value and revenue growth, given the client-count decline and unchanged retention rates.
- Whether expense growth moderates and operating margins recover after year-to-date margin contraction.
- Whether operating cash flow meets the $37m–$41m outlook, particularly as working-capital cash generation weakened.
- How much net income and the expected tax rate depend on discrete tax benefits, and whether repurchases and dividends remain supportable from cash generation.
- The realized balance-sheet and revenue-timing effects of the 2018 revenue-standard adoption; confirm lease-related liabilities when the 2019 standard takes effect.