Forrester Research, Inc. — Q2 2017 Form 10-Q
Business context and period. Quarterly report for the three and six months ended June 30, 2017, compared with the same 2016 periods. Forrester earns revenue from subscription research and data products, advisory and consulting services, and events. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
- Q2 revenue: $89.7 million, up 2% year over year. Research services revenue was $54.6 million, down 1%; advisory services and events revenue was $35.2 million, up 7%.
- Q2 earnings: Operating income was $10.2 million, down from $11.5 million; operating margin was 11.4%, versus 13.1%. Net income was $6.1 million, down from $7.5 million. Diluted EPS was $0.34, versus $0.41.
- First-half revenue and earnings: Revenue was $166.9 million, up 1%. Operating income was $13.3 million, down from $14.2 million; operating margin was 8.0%, versus 8.6%. Net income was $9.1 million, up from $8.7 million, and diluted EPS was $0.50, versus $0.49.
- Cash flow: First-half operating cash flow was $26.9 million, compared with $31.5 million. Investing activities used $0.1 million; financing activities used $38.9 million, primarily for $36.5 million of stock repurchases and $6.8 million of dividends. Cash declined $9.9 million to $67.1 million.
- Liquidity and debt: Cash and cash equivalents were $67.1 million and marketable investments were $58.1 million at June 30. Current assets were $200.0 million and current liabilities were $178.8 million. The filing reports no line of credit and does not show borrowings on the balance sheet. Management said available cash, investments, and operating cash flows should cover working capital and capital needs for the next 12 months.
- Other balance-sheet items: Total assets were $314.2 million and total liabilities were $186.8 million. Deferred revenue was $145.4 million, up 5% year over year. The company held $54.4 million of cash and investments outside the U.S.; repatriation for U.S. operations could incur U.S. taxes.
- Shareholder returns: The company repurchased approximately 1.0 million shares for $36.5 million in the first half and paid dividends of $0.38 per share. It declared a further $0.19-per-share dividend in July, payable September 20, 2017. Remaining repurchase authorization was approximately $23.6 million.
Changes versus the prior comparable period
- Revenue growth was modest, with research services declining and advisory, events, and consulting contributing growth. Management attributed research weakness primarily to lower demand for Data products.
- Q2 operating expenses increased 4% while revenue increased 2%; cost of services and fulfillment rose 7%, and its share of revenue increased to 41.1% from 39.2%. Management cited higher compensation, event costs, and professional services.
- First-half operating cash flow declined $4.6 million, mainly because working-capital cash generation weakened, including lower cash collections and increased cash used for accounts payable.
- Client and contract indicators were softer year over year: agreement value declined 2% to $236.7 million; client retention was 75% versus 76%; dollar retention was 87% versus 88%; enrichment was 94% versus 96%; and client count fell 3% to 2,417.
- Project Consulting revenue grew 25% in Q2 and 19% in the first half, while Research segment revenue declined 9% and 4%, respectively. Segment comparisons reflect reclassifications of certain Asia Pacific consulting revenue and client support activities.
Outlook, commentary, and risks
- Management expected 2017 sales headcount to increase 4%–7%, subject to the business environment. It expected Project Consulting growth to moderate to a single-digit rate in the second half.
- Management estimated a full-year 2017 effective tax rate of approximately 36%. The first-half rate was 31.2%, benefiting primarily from a $1.3 million tax-audit settlement benefit recorded in Q1; the Q2 rate was 41.0%.
- The company cited risks including membership retention and enrichment, consulting demand, its customer-engagement model, technology spending, international operations and foreign currency, competition, talent retention, cybersecurity and network disruption, privacy compliance, taxation, and quarterly operating variability. It stated that previously disclosed 2016 Form 10-K risk factors remained applicable.
- The company said adoption of the new revenue-recognition standard was not expected to materially affect results, but the balance-sheet effect of cancellable contracts had not been determined. It planned modified-retrospective adoption and expected implementation work to finish in late 2017. The new lease standard, effective for Forrester in 2019, was expected to materially affect financial position through recognition of lease assets and liabilities.
- Forrester reported effective disclosure controls as of June 30, 2017, no material change in internal control over financial reporting during the quarter, and no off-balance-sheet financing arrangements. Management cautioned that interim results may not indicate full-year results.
Important facts for investors to verify
- Whether research-service demand, particularly Data products, and retention, enrichment, and agreement value stabilize or improve.
- Whether Project Consulting growth moderates as management expects, and whether its recent growth reflects sustainable demand or delivery of backlog.
- Whether expense growth and weaker working-capital cash generation continue to pressure operating margins and cash flow.
- How the $1.3 million tax-audit benefit and stock-award tax effects affect the reported effective tax rate and comparability of earnings.
- Whether continued repurchases and dividends remain supported by operating cash flow, and whether overseas funds would be needed for U.S. operations.
- The eventual balance-sheet impact of revenue-standard adoption and the expected lease-standard recognition of lease assets and liabilities.