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FORR > SEC Filings for FORR > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for FORRESTER RESEARCH INC

Form 10-Q for FORRESTER RESEARCH INC


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "expects," "believes," "anticipates," "intends," "plans," "estimates," or similar expressions are intended to identify these forward-looking statements. These statements include, but are not limited to, statements about the adequacy of our liquidity and capital resources, future growth rates, anticipated increases in our sales force, future capital expenditures, continued payment of dividends, and anticipated continued repurchases of our common stock. These statements are based on our current plans and expectations and involve risks and uncertainties that could cause actual future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual future activities and results to differ include, among others, our ability to retain and enrich memberships for our research products and services, technology spending, our ability to respond to business and economic conditions and market trends, including the potential impact of the "fiscal cliff" arising from scheduled federal spending cuts and tax increases set for the end of 2012, the risks and challenges inherent in international business activities, competition and industry consolidation, the ability to attract and retain professional staff, our dependence on key personnel, the possibility of network disruptions and security breaches, and possible variations in our quarterly operating results. These risks are described more completely in our Annual Report on Form 10-K for the year ended December 31, 2011. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

We derive revenues from memberships to our research products and services, performing advisory services and consulting projects, and hosting events. We offer contracts for our research products that are typically renewable annually and payable in advance. Research revenues are recognized as revenue ratably over the term of the contract. Accordingly, a substantial portion of our billings are initially recorded as deferred revenue. Clients purchase advisory services independently and/or to supplement their memberships to our research. Billings attributable to advisory services and consulting projects are initially recorded as deferred revenue. Advisory service revenues are recognized when the customer receives the agreed upon deliverable. Consulting project revenues, which generally are short-term in nature and based upon fixed-fee agreements, are recognized as the services are provided. Event billings are also initially recorded as deferred revenue and are recognized as revenue upon completion of each event.

Our primary operating expenses consist of cost of services and fulfillment, selling and marketing expenses and general and administrative expenses. Cost of services and fulfillment represents the costs associated with the production and delivery of our products and services, including salaries, bonuses, employee benefits and stock-based compensation expense for research personnel and all associated editorial, travel, and support services. Selling and marketing expenses include salaries, sales commissions, bonuses, employee benefits, stock-based compensation expense, travel expenses, promotional costs and other costs incurred in marketing and selling our products and services. General and administrative expenses include the costs of the technology, operations, finance, and human resources groups and our other administrative functions, including salaries, bonuses, employee benefits, and stock-based compensation expense. Overhead costs such as facilities are allocated to these categories according to the number of employees in each group.

Deferred revenue, agreement value, client retention, dollar retention, enrichment and number of clients are metrics we believe are important to understanding our business. We believe that the amount of deferred revenue, along with the agreement value of contracts to purchase research and advisory services, provide a significant measure of our business activity. We define these metrics as follows:

Deferred revenue - billings in advance of revenue recognition as of the measurement date.

Agreement value - the total revenues recognizable from all research and advisory service contracts in force at a given time (but not including advisory-only contracts), without regard to how much revenue has already been recognized.

Client retention - the percentage of client companies with memberships expiring during the most recent twelve-month period that renewed one or more of those memberships during that same period.

Dollar retention - the percentage of the dollar value of all client membership contracts renewed during the most recent twelve-month period to the total dollar value of all client membership contracts that expired during the period.

Enrichment - the percentage of the dollar value of client membership contracts renewed during the most recent twelve-month period to the dollar value of the corresponding expiring contracts.

Clients - we count as a single client the various divisions and subsidiaries of a corporate parent and we also aggregate separate instrumentalities of the federal, state, and provincial governments as single clients.


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Client retention, dollar retention, and enrichment are not necessarily indicative of the rate of future retention of our revenue base. A summary of our key metrics is as follows (dollars in millions):

                                   As of               Absolute         Percentage
                               September 30,           Increase          Increase
                             2012         2011        (Decrease)        (Decrease)
        Deferred revenue    $ 124.9      $ 117.5      $       7.4                 6 %
        Agreement value     $ 221.6      $ 211.2      $      10.4                 5 %
        Client retention         78 %         81 %             (3 )              (4 %)
        Dollar retention         91 %         91 %             -                 -
        Enrichment               96 %        104 %             (8 )              (8 %)
        Number of clients     2,498        2,508              (10 )              -

The growth rate of agreement value at September 30, 2012 of 5% has trended down from the growth rate of 10% in the first quarter of 2012 and 7% in the second quarter of 2012 as compared to the prior year periods. The decrease in the agreement value growth rate is primarily due to a continuing decrease in our enrichment rates, which at 96% for the 12-month period ending September 30, 2012, reflects a decline in the contract value of existing clients as they renewed their contracts. Dollar retention rates remain near historic highs.

Effective as of June 30, 2012, we modified our calculation of the number of clients in accordance with an automated system that counts as a single client the various divisions and subsidiaries of a corporate parent and also aggregates separate instrumentalities of federal, state, and provincial governments. The number of clients as of September 30, 2011 has been recalculated to conform to the current methodology; however prior period client and dollar retention and enrichment are not recalculated. Accordingly, the client and dollar retention and enrichment percentages at September 30, 2012 are directionally but not absolutely indicative of the actual change from the comparable period in 2011.

Critical Accounting Policies and Estimates

Management's discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our policies and estimates, including but not limited to, those related to our revenue recognition, stock-based compensation, non-marketable investments, goodwill and other intangible assets, income taxes, and valuation and impairment of marketable investments. Management bases its estimates on historical experience, data available at the time the estimates are made and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are described in our Annual Report on Form 10-K for the year ended December 31, 2011.


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Results of Operations

The following table sets forth our statement of income as a percentage of total
revenues for the periods indicated:



                                         Three Months Ended           Nine Months Ended
                                            September 30,               September 30,
                                         2012           2011          2012          2011
   Revenues:
   Research services                        73.4 %        70.6 %         69.4 %       67.5 %
   Advisory services and other              26.6          29.4           30.6         32.5

   Total revenues                          100.0         100.0          100.0        100.0
   Operating expenses:
   Cost of services and fulfillment         37.6          35.9           37.9         37.6
   Selling and marketing                    35.5          35.7           34.7         36.6
   General and administrative               12.3          11.4           12.2         12.0
   Depreciation                              3.3           2.0            3.0          1.6
   Amortization of intangible assets         0.8           1.0            0.8          0.9
   Reorganization costs                       -             -             0.7           -

   Income from operations                   10.5          14.0           10.7         11.3
   Other income (expense), net               0.5           0.5            0.4          0.1
   Gains on investments, net                 0.2            -             0.1          0.3

   Income before income taxes               11.2          14.5           11.2         11.7
   Income tax provision                     (3.9 )         6.3            1.4          5.0

   Net income                               15.1 %         8.2 %          9.8 %        6.7 %

Three and Nine Months Ended September 30, 2012 and June 30, 2011

Revenues



                                                     Three Months Ended           Absolute         Percentage
                                                       September 30,              Increase          Increase
                                                    2012             2011        (Decrease)        (Decrease)
                                                   (dollars in millions)
Revenues                                         $      68.5        $  69.8      $      (1.3 )              (2 %)
Revenues from research services                  $      50.3        $  49.2      $       1.1                 2 %
Revenues from advisory services and other        $      18.2        $  20.5      $      (2.3 )             (11 %)
Revenues attributable to customers outside of
the U.S.                                         $      19.5        $  20.5      $      (1.0 )              (5 %)
Percentage of revenue attributable to
customers outside of the U.S.                             28 %           29 %             (1 )              (3 %)
Number of clients (at end of period)                   2,498          2,508              (10 )              (0 %)
Number of events                                           3              2                1                50 %

                                                     Nine Months Ended            Absolute         Percentage
                                                       September 30,              Increase          Increase
                                                    2012             2011        (Decrease)        (Decrease)
                                                   (dollars in millions)
Revenues                                         $     217.9        $ 209.0      $       8.9                 4 %
Revenues from research services                  $     151.1        $ 141.1      $      10.0                 7 %
Revenues from advisory services and other        $      66.7        $  67.8      $      (1.1 )              (2 %)
Revenues attributable to customers outside of
the U.S.                                         $      61.0        $  62.0      $      (1.0 )              (2 %)
Percentage of revenue attributable to
customers outside of the U.S.                             28 %           30 %             (2 )              (7 %)
Number of events                                          10             10               -                 -

Total revenues decreased by 2% and increased by 4% during the three and nine months ended September 30, 2012, respectively, compared to the corresponding periods in the prior year. Total revenues were driven by a 2% and 7% increase in research services revenue during the three and nine months ended September 30, 2012, respectively, while advisory services and other revenue decreased by 11% and 2% during the three and nine months ended September 30, 2012, respectively. Foreign exchange fluctuations from the prior year had the effect of reducing


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revenue growth by 2% and 1% for the three and nine months ended September 30, 2012, respectively, while the effect of the Springboard Research acquisition in May 2011 had an insignificant impact on revenue growth during the 2012 periods. Revenues from customers outside the U.S. during the nine months ended September 30, 2012 compared to the prior year declined by 2 points as a percent of total revenues due to both the effect of foreign currency rates and to a decline in revenue from the European region. The general economic conditions in Europe have contributed to a difficult selling environment in that region. We expect overall revenue growth for the fourth quarter of 2012 to range from a decline of 4% to growth of 2%.

Research services revenues are recognized as revenue ratably over the term of the contracts, which are generally twelve-month periods. Accordingly, the increase in research services revenues during 2012 reflects increased contract bookings during the prior twelve-month period. Revenue growth over the comparable periods in 2011 has trended downward during each of the first three quarters of 2012 reflecting a trend downward in the year-over -year growth in contract bookings during this period.

Revenue from advisory services and other decreased 11% during the three months ended September 30, 2012 due to a $1.1 million decrease in event revenues and a decline in advisory and consulting revenue during the quarter as compared to the prior year quarter. The decline in event revenue resulted principally from the smaller scope of events in the current quarter as compared to the events held in the prior year quarter. We count co-located events, which enable our clients to attend multiple events with one event ticket, as a single event in the tables above. The decline in advisory and consulting revenue was due primarily to lower productivity during the quarter and to higher attrition of research analysts as compared to the prior year. Revenue from advisory services and other decreased 2% during the nine months ended September 30, 2012 due primarily to the same factors that impacted revenue during the third quarter.

Please refer to the "Segment Results" section below for a discussion of revenue and direct margin results by segment.

Cost of Services and Fulfillment



                                                   Three Months Ended           Absolute         Percentage
                                                      September 30,             Increase          Increase
                                                   2012            2011        (Decrease)        (Decrease)
Cost of services and fulfillment (dollars in
millions)                                        $    25.7        $ 25.1      $        0.6                 3 %
Cost of services and fulfillment as a
percentage of total revenues                          37.6 %        35.9 %             1.7                 5 %
Number of research and fulfillment employees
(at end of period)                                     531           552               (21 )              (4 %)

                                                    Nine Months Ended           Absolute         Percentage
                                                      September 30,             Increase          Increase
                                                   2012            2011        (Decrease)        (Decrease)
Cost of services and fulfillment (dollars in
millions)                                        $    82.5        $ 78.6      $        3.9                 5 %
Cost of services and fulfillment as a
percentage of total revenues                          37.9 %        37.6 %             0.3                 1 %

The increase in cost of services and fulfillment expenses during the three months ended September 30, 2012 compared to the prior year period is primarily the result of increased salary and benefit costs resulting from annual pay increases and higher incentive bonuses (partially offset by salary savings from lower average headcount in 2012) and due to higher travel and entertainment costs. These increases were partially offset by lower event costs as the third quarter 2012 events were smaller in scope as compared to the events in the prior year quarter. The increase in costs of services and fulfillment as a percentage of total revenues during the three months ended September 30, 2012 compared to the prior period is primarily due to the reduction in both event and advisory/consulting revenue compared to the prior year.

The increase in cost of services and fulfillment expenses during the nine months ended September 30, 2012 compared to the prior year period is primarily the result of increased salary and benefit costs resulting from annual pay increases and higher incentive bonuses (partially offset by salary savings from lower average headcount in 2012), increased professional services fees in support of consulting revenue and an increase of $0.9 million of stock compensation costs resulting from a credit to expense in the 2011 period resulting from a change in estimate for the amount of performance-based RSUs that would vest.


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Selling and Marketing



                                                    Three Months Ended          Absolute         Percentage
                                                       September 30,            Increase          Increase
                                                    2012            2011       (Decrease)        (Decrease)
Selling and marketing expenses (dollars in
millions)                                         $    24.3        $ 24.9      $      (0.6 )              (2 %)
Selling and marketing expenses as a percentage
of total revenues                                      35.5 %        35.7 %           (0.2 )              (1 %)
Selling and marketing employees (at end of
period)                                                 510           490               20                 4 %

                                                     Nine Months Ended          Absolute         Percentage
                                                       September 30,            Increase          Increase
                                                    2012            2011       (Decrease)        (Decrease)
Selling and marketing expenses (dollars in
millions)                                         $    75.7        $ 76.4      $      (0.7 )              (1 %)
Selling and marketing expenses as a percentage
of total revenues                                      34.7 %        36.6 %           (1.9 )              (5 %)

The decrease in selling and marketing expenses during the three and nine months ended September 30, 2012 compared to the prior year periods is primarily the result of a decrease in total compensation costs resulting from lower sales commissions principally due to modifications to our sales commission plan in 2012. The decrease in commissions was partially offset by an increase in incentive bonuses and salary and benefits resulting from an increase in the number of selling and marketing employees. The decrease in selling and marketing expenses as a percentage of total revenues during the 2012 periods is primarily due to lower commission expense as a percentage of sales. Subject to the business environment, we intend to expand our sales force by 15% to 20% in 2013 as compared to 2012. Increased sales of our research services are generally recognized over a twelve-month period, which typically results in an increase in selling and marketing expense as a percentage of revenue during periods of sales force expansion.

General and Administrative



                                                   Three Months Ended           Absolute         Percentage
                                                      September 30,             Increase          Increase
                                                   2012            2011        (Decrease)        (Decrease)
General and administrative expenses (dollars
in millions)                                     $     8.4        $  7.9      $        0.5                 6 %
General and administrative expenses as a
percentage of total revenues                          12.3 %        11.4 %             0.9                 8 %
General and administrative employees (at end
of period)                                             177           180                (3 )              (2 %)

                                                    Nine Months Ended           Absolute         Percentage
                                                      September 30,             Increase          Increase
                                                   2012            2011        (Decrease)        (Decrease)
General and administrative expenses (dollars
in millions)                                     $    26.7        $ 25.2      $        1.5                 6 %
General and administrative expenses as a
percentage of total revenues                          12.2 %        12.0 %             0.2                 2 %

The increase in general and administrative expenses during the three and nine months ended September 30, 2012 compared to the prior year periods is primarily due to an increase in professional services costs principally related to information technology projects, including our updated website, and an increase in salary and benefits costs.

Depreciation

Depreciation expense increased by $0.8 million and $3.2 million during the three and nine months ended September 30, 2012, respectively, compared to the prior year periods primarily due to the initiation of depreciation for our new corporate headquarters in August 2011 and our new website in March 2012.

Amortization of Intangible Assets

Amortization expense has remained essentially consistent during 2012 as compared to the prior year.


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Reorganization Costs

We incurred reorganization costs of $1.4 million during the nine months ended September 30, 2012. In the first quarter of 2012 we realigned our sales force to simplify the selling process to our customers and to increase the productivity of the sales organization. We incurred approximately $0.4 million of severance costs in the fourth quarter of 2011 for three sales employees located outside of the U.S. based on statutory termination benefits in their country of employment and the fact that termination was considered probable at December 31, 2011. We incurred an additional $1.4 million of severance and related costs during 2012 for the termination of 17 additional employees related to the sales reorganization and other cost reduction initiatives. We do not anticipate incurring any additional costs related to these initiatives and expect that all amounts incurred will be paid by the end of 2012.

Other Income, Net

Other income, net, decreased by $21,000 and increased by $0.6 million during the three and nine months ended September 30, 2012, respectively. The increase during the nine month period of 2012 was primarily due to lower net foreign exchange losses in the 2012 period as compared to the prior year period.

Gains on Investments, Net

Gains on investments primarily represent our share of equity method investment gains from our technology-related investment funds. The decrease in gains during the nine months ended September 30, 2012 is primarily due to a smaller increase in the valuation of certain assets within the funds as compared to the prior year period.

Provision for Income Taxes



                                                     Three Months Ended          Absolute        Percentage
                                                        September 30,            Increase         Increase
                                                     2012            2011       (Decrease)       (Decrease)
Provision for income taxes (dollars in millions)   $    (2.7 )      $  4.4      $      (7.1 )           (161 %)
Effective tax rate                                     (35.0 %)       43.4 %          (78.4 )           (181 %)

                                                      Nine Months Ended          Absolute        Percentage
                                                        September 30,            Increase         Increase
                                                     2012            2011       (Decrease)       (Decrease)
Provision for income taxes (dollars in millions)   $     3.1        $ 10.4      $      (7.3 )            (70 %)
Effective tax rate                                      12.8 %        42.4 %          (29.6 )            (70 %)

The decrease in the effective tax rate during the 2012 periods as compared to the prior year periods is due to a $5.5 million deferred tax benefit recognized in the third quarter of 2012 resulting from the settlement of a tax audit at one of our foreign subsidiaries, a reduction in the reserve for uncertain tax positions and higher deductions from disqualified dispositions of incentive stock options in the 2012 periods as compared to the 2011 periods. In addition, the nine months ended September 30, 2012 includes a remeasurement gain of a euro-denominated deferred tax liability compared to a remeasurement loss in the 2011 period.

Segment Results

. . .

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