Forrester Research, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. Forrester sells research, Connect and Analytics subscriptions, advisory and consulting services, and events. This unaudited filing covers the three and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods unless noted. The company adopted ASC 606 on January 1, 2018, so 2018 and 2017 revenue figures are not fully comparable.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $96.4 million | $89.7 million | $174.1 million | $166.9 million |
| Operating income | $11.0 million | $10.2 million | $8.7 million | $13.3 million |
| Net income | $7.8 million | $6.1 million | $6.1 million | $9.1 million |
| Diluted EPS | $0.43 | $0.34 | $0.33 | $0.50 |
| Operating margin | 11.4% | 11.4% | 5.0% | 8.0% |
| Net margin | 8.1% | 6.8% | 3.5% | 5.4% |
- Q2 revenue rose 7% (6% excluding foreign exchange); first-half revenue rose 4% (3% excluding foreign exchange). Q2 research services and advisory services/events revenue increased 7% and 8%, respectively.
- First-half operating income and net income declined despite revenue growth, as operating expenses increased 8% to $165.4 million. Selling and marketing costs rose 8%; cost of services and fulfillment rose 7%. Depreciation increased, primarily due to software assets placed in service.
- Q2 income tax expense was $3.5 million, with a 30.9% effective rate; first-half expense was $2.8 million and the effective rate was 31.6%. The company attributes the first-half year-over-year tax expense decrease partly to the lower U.S. federal tax rate, offset in part by a $1.3 million tax-audit settlement benefit recorded in 2017.
- First-half operating cash flow was $28.3 million, versus $26.9 million. Investing activities provided $0.3 million; financing activities used $13.3 million, including $9.6 million of repurchases and $7.2 million of dividends. Cash increased $13.2 million to $93.0 million.
- At June 30, cash and cash equivalents were $93.0 million and marketable investments were $50.1 million. Current assets were $217.9 million and current liabilities $177.9 million. The balance sheet reports no borrowings, and management says it has no credit line and does not anticipate needing one absent a significant acquisition.
- Declared dividends were $0.20 per share in each of the first two quarters. The board had authorized $60.4 million of remaining repurchases at June 30.
Material changes and business indicators
- Reported deferred revenue was $143.0 million, down 2% year over year; management says it would have increased about 5% excluding ASC 606’s effect. Agreement value rose 5% to $249.5 million. Client retention was 75%, dollar retention 88%, enrichment 99%, and client count 2,355, down 3%.
- Research segment revenue grew 20% in Q2 and 15% in the first half, while Project Consulting revenue rose 3% and 2%, respectively. Research segment contribution margin turned positive in Q2; Product contribution margin increased, while Project Consulting contribution margin declined year over year.
- ASC 606 adoption reduced deferred revenue by $7.8 million at adoption and increased retained earnings by $3.8 million. For the first half, the new guidance reduced reported revenue by $2.4 million and net income by $1.8 million ($0.10 per diluted share) compared with the filing’s presentation of results under prior guidance. Management expected the revenue timing effect to primarily shift revenue among 2018 quarters, without a material full-year 2018 impact.
Outlook, commentary, risks, and unusual items
- Management expects a 2018 effective tax rate of approximately 32% and sales headcount growth flat to low single digits, subject to the business environment. It expects 2018 amortization expense of $1.1–$1.4 million and acquisition and integration costs of $1.2–$1.4 million. These are specific estimates, not full-year earnings guidance.
- Management believes cash, investments, and operating cash flow will meet working capital, financing, and capital expenditure needs for the next 12 months. It intends to permanently reinvest $70.1 million held outside the U.S.; $8.5 million of offshore cash was used for the subsequent FeedbackNow acquisition.
- Forrester acquired GlimpzIt on June 22 for approximately $1.3 million in cash to support a planned real-time customer-experience cloud. On July 9, it acquired FeedbackNow for an initial price of CHF 9.8 million, including CHF 8.36 million paid at closing; additional deferred and performance-based payments may be due.
- Q2 included a $1.0 million out-of-period revenue correction ($0.7 million after tax) in research services: $0.8 million related to Q1 2018 and $0.2 million to 2017. Management concluded the errors were not material to the current or prior periods, but the correction increased Q2 research revenue growth by about 2%.
- A tax benefit of approximately $1.5 million relating to an intercompany stock-compensation tax issue may be affected by ongoing Altera litigation. The company was assessing the impact after a court decision was withdrawn for further review.
- Management cited risks including membership renewal and enrichment, consulting demand, hiring and retaining staff, international operations, technology and security incidents, competition, privacy compliance, taxes, and quarterly variability. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How much of revenue, deferred-revenue, and earnings trends reflects ASC 606 timing changes versus underlying demand; compare reported results with the filing’s prior-guidance presentation.
- Whether agreement-value growth translates into renewals and revenue, given client retention of 75% and a 3% decline in client count.
- Whether operating expense growth moderates and first-half profitability recovers, particularly in selling and marketing and Project Consulting.
- The final purchase accounting, integration costs, and performance obligations for GlimpzIt and FeedbackNow, including any contingent payments.
- The outcome and financial effect of the Altera tax matter, and whether the expected 32% tax rate remains appropriate.
- Execution of repurchases and dividends alongside investment and acquisition spending; confirm the remaining repurchase authorization and offshore cash availability.