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FORR > SEC Filings for FORR > Form 10-Q on 12-Nov-2013All Recent SEC Filings

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Form 10-Q for FORRESTER RESEARCH, INC.


12-Nov-2013

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 dividends, anticipated continued repurchases of our common stock, and remediation of our internal control over financial reporting. 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, the risks and challenges inherent in international business activities, our ability to offer new products and services, our dependence on key personnel, the ability to attract and retain professional staff, our ability to respond to business and economic conditions and market trends, the possibility of network disruptions and security breaches, competition and industry consolidation, possible variations in our quarterly operating results, and our ability to remediate the identified material weaknesses in our internal control over financial reporting as of December 31, 2012 and September 30, 2013. These risks are described more completely in our Annual Report on Form 10-K for the year ended December 31, 2012. 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, such as workshops, speeches and advisory days, 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 and consulting 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 a single client.

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
                             2013         2012         (Decrease)        (Decrease)
        Deferred revenue    $ 125.8      $ 124.9      $        0.9                 1 %
        Agreement value     $ 210.7      $ 221.6      $      (10.9 )              (5 %)
        Client retention         76 %         78 %              (2 )              (3 %)
        Dollar retention         89 %         91 %              (2 )              (2 %)
        Enrichment               95 %         96 %              (1 )              (1 %)
        Number of clients     2,482        2,498               (16 )              (1 %)

Deferred revenue at September 30, 2013 increased approximately 1% compared to the prior year; however when including the amount of future invoicing for contracts at both September 30, 2013 and 2012, the combined amount of deferred revenue and future invoicing declined approximately 5% at September 30, 2013 compared to the prior year. This decline is consistent with the decline in agreement value, which continues a trend from 2012 of declining year-over-year growth in these metrics due to the downward trend in the growth in overall contract bookings during this period. Enrichment at 95% for the period ending September 30, 2013 is consistent with the period ending June 30, 2013; however it represents a 1% decrease from the prior year. As the enrichment rate includes a 12-month period, the decline in the rate as of September 30, 2013 compared to the prior year reflects the challenges associated with the implementation of the sales reorganization in January 2012 as well as high sales employee attrition during 2012. Client retention, dollar retention and number of clients at September 30, 2013 all decreased from the prior year; however they remained essentially flat with June 30, 2013 and the retention metrics remain near historical levels.


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Critical Accounting Policies and Estimates

Management's discussion and analysis of financial condition and results of operations (MD&A) 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 other critical accounting policies and estimates are described in our Annual Report on Form 10-K for the year ended December 31, 2012.

Results of Operations

The prior period results presented within the MD&A have been revised to reflect the error corrections disclosed in Note 1 of the interim consolidated financial statements.

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,
                                         2013           2012          2013          2012
  Revenues:
  Research services                         71.4 %        73.4 %         68.8 %       69.4 %
  Advisory services and other               28.6          26.6           31.2         30.6

  Total revenues                           100.0         100.0          100.0        100.0
  Operating expenses:
  Cost of services and fulfillment          39.5          37.4           38.8         37.9
  Selling and marketing                     36.9          35.3           36.1         34.7
  General and administrative                13.3          12.7           12.4         12.4
  Depreciation                               3.3           3.3            3.1          3.0
  Amortization of intangible assets          0.8           0.8            0.8          0.8
  Reorganization costs                        -            0.1            0.9          0.7

  Income from operations                     6.2          10.4            7.9         10.5
  Other income (expense), net               (0.1 )         0.5            0.2          0.4
  Gains (losses) on investments, net          -            1.1             -           0.4

  Income before income taxes                 6.1          12.0            8.1         11.3
  Income tax provision (benefit)             2.6          (3.6 )          3.2          1.5

  Net income                                 3.5 %        15.6 %          4.9 %        9.8 %

Three and Nine Months Ended September 30, 2013 and September 30, 2012

Revenues




                                              Three Months Ended              Absolute           Percentage
                                                September 30,                 Increase            Increase
                                            2013               2012          (Decrease)          (Decrease)
                                            (dollars in millions)
Revenues                                 $      69.8          $  68.8        $       1.0                   2 %
Revenues from research services          $      49.9          $  50.5        $      (0.6 )                (1 %)
Revenues from advisory services and
other                                    $      20.0          $  18.3        $       1.7                   9 %
Revenues attributable to customers
outside of the U.S.                      $      18.9          $  19.5        $      (0.6 )                (3 %)
Percentage of revenue attributable
to customers outside of the U.S.                  27 %             28 %               (1 )                (4 %)
Number of clients (at end of period)           2,482            2,498                (16 )                (1 %)
Number of events                                   3                3                 -                   -


                                              Nine Months Ended               Absolute           Percentage
                                                September 30,                 Increase            Increase
                                            2013               2012          (Decrease)          (Decrease)
                                            (dollars in millions)
Revenues                                 $     220.1          $ 217.9        $       2.2                   1 %
Revenues from research services          $     151.4          $ 151.1        $       0.3                  -
Revenues from advisory services and
other                                    $      68.7          $  66.7        $       2.0                   3 %
Revenues attributable to customers
outside of the U.S.                      $      57.8          $  61.0        $      (3.2 )                (5 %)
Percentage of revenue attributable
to customers outside of the U.S.                  26 %             28 %               (2 )                (7 %)
Number of events                                  10               10                 -                   -


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Total revenues increased 2% and 1% during the three and nine months ended September 30, 2013 compared to the prior year periods, respectively, due to growth in revenues from advisory services and other revenues partially offset by a decline from research services revenues during the three months ended September 30, 2013. Foreign exchange fluctuations accounted for approximately 1% of revenue growth during the quarter and were not material to the year-to-date period in 2013. Revenues from customers outside of the U.S. in the nine months ended September 30, 2013 declined by 2% as a percentage of total revenues compared to the prior year period due primarily to a decline in revenue from the European region. The general economic conditions in Europe as well as sales leadership challenges have contributed to a difficult selling environment in that region.

Research services revenues declined $0.6 million and increased $0.3 million during the three and nine months ended September 30, 2013, respectively, compared to the prior year. Research services revenues are generally recognized as revenue ratably over the term of the contracts, which are generally twelve-month periods. The decline in revenue in the three months ended September 30, 2013 results from the downward trend in the growth in overall contract bookings during the prior twelve month period.

Revenue from advisory services and other increased $1.7 million and $2.0 million during the three and nine months ended September 30, 2013, respectively, compared to the prior year. The increase during the 2013 periods is due entirely to advisory and consulting revenue as event revenues were insignificant during the three months ended September 30, 2013 and declined by $0.3 million during the nine months ended September 30, 2013.

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
                                              2013             2012          (Decrease)        (Decrease)
Cost of services and fulfillment
(dollars in millions)                       $    27.6         $ 25.7        $        1.9                 7 %
Cost of services and fulfillment as a
percentage of total revenues                     39.5 %         37.4 %               2.1                 6 %
Number of research and fulfillment
employees (at end of period)                      554            533                  21                 4 %




                                               Nine Months Ended              Absolute         Percentage
                                                 September 30,                Increase          Increase
                                              2013             2012          (Decrease)        (Decrease)
Cost of services and fulfillment
(dollars in millions)                       $    85.4         $ 82.5        $        2.9                 4 %
Cost of services and fulfillment as a
percentage of total revenues                     38.8 %         37.9 %               0.9                 2 %

The increase in cost of services and fulfillment expenses during the three months ended September 30, 2013 compared to the prior year is primarily due to an increase in compensation costs resulting primarily from an increase in the number of employees, an increase in incentive bonus payments and annual merit increases. The increase in cost of services and fulfillment expenses during the nine months ended September 30, 2013 compared to the prior year is primarily due to an increase in compensation costs due to the aforementioned factors as well as to an increase in facility costs due to new office space in the Asia Pacific region in the second half of 2012. These increases were partially offset by a decrease in professional services fees related to the amount of surveys performed and a decrease in travel and entertainment expenses.

Selling and Marketing



                                               Three Months Ended             Absolute         Percentage
                                                 September 30,                Increase          Increase
                                              2013             2012          (Decrease)        (Decrease)
Selling and marketing expenses (dollars
in millions)                                $    25.8         $ 24.3        $        1.5                 6 %
Selling and marketing expenses as a
percentage of total revenues                     36.9 %         35.3 %               1.6                 5 %
Selling and marketing employees (at end
of period)                                        533            506                  27                 5 %




                                               Nine Months Ended              Absolute         Percentage
                                                 September 30,                Increase          Increase
                                              2013             2012          (Decrease)        (Decrease)
Selling and marketing expenses (dollars
in millions)                                $    79.6         $ 75.7        $        3.9                 5 %
Selling and marketing expenses as a
percentage of total revenues                     36.1 %         34.7 %               1.4                 4 %

The increase in selling and marketing expenses during the three and nine months ended September 30, 2013 compared to the prior year period is primarily due to an increase in compensation costs resulting from both an increase in sales and marketing employees and incentive bonus payments. In addition, for the nine months ended September 30, 2013, facility costs increased due to new office space in the Asia Pacific region in the second half of 2012.

Subject to the business environment, we intend to expand our quota carrying sales force by approximately 7% to 9% in 2013 as compared to 2012. Any resulting increase in contract bookings of our research services would generally be recognized over a twelve-month period, which typically results in an increase in selling and marketing expense as a percentage of revenues during periods of sales force expansion.


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General and Administrative



                                              Three Months Ended             Absolute           Percentage
                                                September 30,                Increase            Increase
                                             2013             2012          (Decrease)          (Decrease)
General and administrative expenses
(dollars in millions)                      $     9.3         $  8.7        $        0.6                   7 %
General and administrative expenses as
a percentage of total revenues                  13.3 %         12.7 %               0.6                   5 %
General and administrative employees
(at end of period)                               176            179                  (3 )                (2 %)




                                               Nine Months Ended              Absolute          Percentage
                                                 September 30,                Increase           Increase
                                              2013             2012          (Decrease)         (Decrease)
General and administrative expenses
(dollars in millions)                       $    27.2         $ 27.1        $        0.1                 -
General and administrative expenses as
a percentage of total revenues                   12.4 %         12.4 %               0.2                 -

The increase in general and administrative expenses during the three months ended September 30, 2013 compared to the prior year is primarily due to an increase in compensation costs due to an increase in incentive bonus payments and annual merit increases and to an increase in professional service fees for recruiting and accounting and tax service fees. The increase in general and administrative expenses during the nine months ended September 30, 2013 compared to the prior year is primarily due to increases as described for the three months ended September 30, 2013, partially offset by a decrease in professional service fees related to information technology projects.

Depreciation

Depreciation expense remained essentially consistent during the three months ended September 30, 2013 compared to the prior year. Depreciation expense increased approximately $0.4 million during the nine months ended September 30, 2013 compared to the prior year primarily resulting from the initiation of depreciation for our new website in March 2012.

Amortization of Intangible Assets

Amortization expense remained essentially consistent during the three and nine months ended September 30, 2013 compared to the prior year.

Reorganization Costs

During the nine months ended September 30, 2013 we incurred $1.9 million of severance and related costs for the elimination of 31 jobs or approximately 2.5% of our workforce worldwide to streamline our operations. All costs incurred for the reorganization are expected to be paid by the end of 2013.

During the nine months ended September 30, 2012 we incurred $1.4 million of severance and related costs for the elimination of 17 jobs in connection with the realignment of our sales force and other cost reduction initiatives.

Other Income (Expense), Net

Other income (expense), net primarily consists of interest income on our investments as well as gains and losses on foreign currency. The decrease in other income (expense), net during the three and nine months ended September 30, 2013 is primarily due to lower interest income earned in 2013 due to lower investment balances.

Gains (Losses) on Investments, Net

Gains (losses) on investments, net primarily represent our share of equity method investment gains (losses) from our technology-related investment funds. The decrease in investment gains during the 2013 periods is primarily due to increased losses at the investment funds due to increased expenses and a decrease in the value of their investments during 2013.

On October 30, 2013 we sold our portfolio of auction rate securities (par value $11.0 million) for a realized loss of $1.9 million, or approximately $(0.09) per diluted share, which will be recognized in our consolidated statement of income as a loss on investments for the three months ended December 31, 2013.

Provision for Income Taxes



                                              Three Months Ended              Absolute          Percentage
                                                 September 30,                Increase           Increase
                                             2013             2012           (Decrease)         (Decrease)
Provision (benefit) for income taxes

(dollars in millions) $ 1.8 $ (2.5 ) $ 4.3 173 % Effective tax rate 42.6 % (30.5 %) 73.1 240 %

                                               Nine Months Ended             Absolute          Percentage
                                                 September 30,               Increase           Increase
                                              2013             2012         (Decrease)         (Decrease)
Provision for income taxes (dollars in
millions)                                   $     7.1         $  3.2        $       3.9                121 %
Effective tax rate                               39.5 %         13.0 %             26.5                204 %

The increase in the effective tax rate during the three and nine months ended September 30, 2013 as compared to the prior year periods is primarily due to the 2012 periods including a $5.5 million deferred tax benefit resulting from the settlement of a tax audit at one of our foreign subsidiaries. In addition, the 2012 period included a reduction in the reserve for uncertain tax positions as well as a credit due to a remeasurement gain of a euro-denominated deferred tax liability.


Table of Contents

Segment Results

We are organized into two client groups with each client group responsible for writing relevant research for the roles within the client organization on a worldwide basis. The two client groups, which are considered operating segments, are: Business Technology ("BT") and Marketing and Strategy ("M&S"). In addition, our Events segment supports both client groups. Each client group generates revenues through sales of research, advisory and other service offerings targeted at specific roles within their targeted clients. Each client group consists of research personnel focused primarily on issues relevant to particular roles and to the day-to-day responsibilities of persons within the roles. Amounts included in the Events segment relate to the operations of the events production department. Revenue reported in the Events segment consists primarily of sponsorships and event tickets to Forrester events.

We evaluate reportable segment performance and allocate resources based on direct margin. Direct margin, as presented below, is defined as operating income excluding sales expenses, certain marketing and fulfillment expenses, . . .

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