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FORR > SEC Filings for FORR > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for FORRESTER RESEARCH, INC.

Form 10-Q for FORRESTER RESEARCH, INC.


6-Aug-2014

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, the continued build-out of a dedicated consulting organization, anticipated increases in our sales force, future 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, 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, 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, 2013. 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 and data 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 and service fees for cloud-based information systems are allocated to these categories according to the number of employees in each group.


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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
                                  June 30,             Increase          Increase
                             2014         2013        (Decrease)        (Decrease)
        Deferred revenue    $ 143.9      $ 136.2      $       7.7                 6 %
        Agreement value     $ 225.5      $ 211.0      $      14.5                 7 %
        Client retention         75 %         76 %             (1 )              (1 %)
        Dollar retention         87 %         89 %             (2 )              (2 %)
        Enrichment               97 %         95 %              2                 2 %
        Number of clients     2,439        2,451              (12 )              -

Deferred revenue and agreement value at June 30, 2014 increased approximately 6% and 7%, respectively, compared to the prior year due primarily to increased contract bookings. Enrichment at 97% for the period ending June 30, 2014 is consistent with the past two quarters, however it represents a 2% increase from the prior year. Client retention and dollar retention at June 30, 2014 have been consistent or up slightly compared to the prior two quarters but continue to be lower than the year ago period.

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 other critical accounting policies and estimates are described in our Annual Report on Form 10-K for the year ended December 31, 2013.


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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           Six Months Ended
                                               June 30,                    June 30,
                                          2014           2013          2014         2013
   Revenues:
   Research services                         63.1 %        65.0 %        66.1 %       67.6 %
   Advisory services and events              36.9          35.0          33.9         32.4

   Total revenues                           100.0         100.0         100.0        100.0
   Operating expenses:
   Cost of services and fulfillment          40.5          39.0          40.4         38.5
   Selling and marketing                     34.5          33.9          37.5         35.8
   General and administrative                11.8          10.7          12.4         11.9
   Depreciation                               2.8           2.9           3.2          3.1
   Amortization of intangible assets          0.6           0.7           0.7          0.7
   Reorganization costs                       1.3           0.4           1.2          1.3

   Income from operations                     8.5          12.4           4.6          8.7
   Other income, net                          0.1           0.3            -           0.4
   Gains (losses) on investments, net         0.1           0.1            -          (0.1 )

   Income before income taxes                 8.7          12.8           4.6          9.0
   Income tax provision                       3.5           5.0           1.9          3.4

   Net income                                 5.2 %         7.8 %         2.7 %        5.6 %

Three and Six Months Ended June 30, 2014 and 2013

Revenues



                                                     Three Months Ended            Absolute         Percentage
                                                          June 30,                 Increase          Increase
                                                    2014             2013         (Decrease)        (Decrease)
                                                   (dollars in millions)
Revenues                                         $      82.9        $  79.0      $        3.9                 5 %
Revenues from research services                  $      52.3        $  51.3      $        1.0                 2 %
Revenues from advisory services and events       $      30.6        $  27.6      $        3.0                11 %
Revenues attributable to customers outside of
the U.S.                                         $      20.4        $  19.7      $        0.7                 4 %
Percentage of revenue attributable to
customers outside of the U.S.                             25 %           25 %              -                 -
Number of clients (at end of period)                   2,439          2,451               (12 )              -
Number of events                                           5              5                -                 -




                                                      Six Months Ended              Absolute        Percentage
                                                          June 30,                  Increase         Increase
                                                    2014              2013         (Decrease)       (Decrease)
                                                    (dollars in millions)
Revenues                                         $     156.0        $  150.3      $        5.7                4 %
Revenues from research services                  $     103.1        $  101.6      $        1.5                2 %
Revenues from advisory services and events       $      52.9        $   48.7      $        4.2                9 %
Revenues attributable to customers outside of
the U.S.                                         $      39.8        $   38.9      $        0.9                2 %
Percentage of revenue attributable to
customers outside of the U.S.                             26 %            26 %              -                -
Number of events                                           7               7                -                -

Total revenues increased 5% and 4% during the three and six months ended June 30, 2014, respectively, compared to the prior year periods due primarily to the growth in revenues from advisory services and events and to a lesser extent growth in research services. Foreign exchange fluctuations had the effect of increasing revenue growth by 1% in each of the three and six month periods ending June 30, 2014 compared to the prior year. Revenues from customers outside of the U.S. increased 4% and 2% during the three and six months ended June 30, 2014 compared to the prior year periods, respectively, which was primarily due to foreign exchange fluctuations. Strong growth in the Asia Pacific region and Canada was partially offset by a revenue decline (on a constant currency basis) in the European region.


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Research services revenues are recognized as revenue primarily on a ratable basis over the term of the contracts, which are generally twelve-month periods. Research services revenues increased 2% during the three and six months ended June 30, 2014 compared to the prior year, which is essentially consistent with contract bookings growth during this period. Revenues from our data subscription products declined by approximately $0.8 million and $1.9 million during the three and six months ended June 30, 2014, respectively, the majority of which is due to the phasing out of our Tech Marketing Navigator product that began in 2013. The decline in data subscription revenues was offset by growth in our research product revenues.

Revenue from advisory services and events increased 11% and 9% during the three and six months ended June 30, 2014, respectively, compared to the prior year periods. The increase was driven by strong growth in advisory and consulting revenues due primarily to an increase in consulting headcount as we continue to build out a dedicated consulting organization that began in 2013 and strong demand for both advisory and consulting services. Events revenues increased 2% and 6% during the three and six months ended June 30, 2014, respectively, compared to the prior year periods due to higher ticket and sponsorship revenues for the events in 2014 as compared to the prior year.

Please refer to the "Segments Results" section below for a discussion of revenues and expenses by segment.

Cost of Services and Fulfillment



                                                     Three Months Ended           Absolute       Percentage
                                                          June 30,                Increase        Increase
                                                     2014            2013        (Decrease)      (Decrease)
Cost of services and fulfillment (dollars in
millions)                                          $    33.6        $ 30.8      $        2.8               9 %
Cost of services and fulfillment as a percentage
of total revenues                                       40.5 %        39.0 %             1.5               4 %
Number of research and fulfillment employees (at
end of period)                                           576           534                42               8 %




                                                      Six Months Ended            Absolute       Percentage
                                                          June 30,                Increase        Increase
                                                     2014            2013        (Decrease)      (Decrease)
Cost of services and fulfillment (dollars in
millions)                                          $    63.0        $ 57.8      $        5.2               9 %
Cost of services and fulfillment as a percentage
of total revenues                                       40.4 %        38.5 %             1.9               5 %

The increase in cost of services and fulfillment expenses during the three and six months ended June 30, 2014 compared to the prior year periods is primarily due to a $2.2 million and $4.4 million increase in compensation and benefit costs, respectively, resulting primarily from an increase in the number of employees (primarily consulting and product specialist employees) and annual merit increases, partially offset by lower incentive bonus expense. We hired additional consulting employees during 2013 and 2014 to build out a dedicated consulting organization to provide research-based project consulting services to our clients, allowing our analysts to spend additional time on writing research and providing shorter-term advisory services. In addition, both periods in 2014 include higher costs for the Forrester events and increased costs for travel and entertainment.

Selling and Marketing



                                                     Three Months Ended           Absolute       Percentage
                                                          June 30,                Increase        Increase
                                                     2014            2013        (Decrease)      (Decrease)
Selling and marketing expenses (dollars in
millions)                                          $    28.6        $ 26.8      $        1.8               7 %
Selling and marketing expenses as a percentage
of total revenues                                       34.5 %        33.9 %             0.6               2 %
Selling and marketing employees (at end of
period)                                                  553           527                26               5 %




                                                      Six Months Ended            Absolute       Percentage
                                                          June 30,                Increase        Increase
                                                     2014            2013        (Decrease)      (Decrease)
Selling and marketing expenses (dollars in
millions)                                          $    58.5        $ 53.8      $        4.7               9 %
Selling and marketing expenses as a percentage
of total revenues                                       37.5 %        35.8 %             1.7               5 %


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The increase in selling and marketing expenses during the three and six months ended June 30, 2014 compared to the prior year periods is primarily due to a $1.5 million and $3.7 million increase in compensation and benefit costs, respectively, resulting from an increase in sales employees, annual merit increases and increased commission costs, partially offset by lower incentive bonus expense. In addition, we incurred increased costs during the six months ended June 30, 2014 due to a larger sales kick off meeting in 2014 and costs to terminate a contract with an independent international sales representative.

Subject to the business environment, we intend to expand our quota carrying sales force by approximately 5% to 7% in 2014 as compared to 2013. 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.

General and Administrative



                                                    Three Months Ended           Absolute        Percentage
                                                         June 30,                Increase         Increase
                                                    2014            2013        (Decrease)       (Decrease)
General and administrative expenses (dollars in
millions)                                         $     9.8        $  8.4      $        1.4               17 %
General and administrative expenses as a
percentage of total revenues                           11.8 %        10.7 %             1.1               10 %
General and administrative employees (at end of
period)                                                 177           174                 3                2 %




                                                      Six Months Ended            Absolute       Percentage
                                                          June 30,                Increase        Increase
                                                     2014            2013        (Decrease)      (Decrease)
General and administrative expenses (dollars in
millions)                                          $    19.3        $ 17.9      $        1.4               8 %
General and administrative expenses as a
percentage of total revenues                            12.4 %        11.9 %             0.5               4 %

General and administrative expenses increased $1.4 million during the three and six months ended June 30, 2014 compared to the prior year periods, due primarily to a $0.7 million and $0.5 million increase, respectively, in compensation and benefits costs resulting from increased headcount, annual merit increases and increased payroll taxes, partially offset by lower incentive bonus expense. In addition, stock compensation costs increased in 2014 due to lower employee turnover in 2014 and recruiting costs increased due to increased hiring in 2014 primarily for consulting and sales employees.

Depreciation

Depreciation expense during the three months ended June 30, 2014 was consistent with the prior year, and during the six months ended June 30, 2014 increased by $0.4 million compared to the prior year. The $0.4 million increase during the six months ended June 30, 2014 is primarily due to a $0.4 million adjustment recorded during the three months ended March 31, 2014 to correct an immaterial understatement of depreciation expense of approximately $0.2 million in each of 2013 and 2012.

Amortization of Intangible Assets

Amortization expense remained essentially consistent during the three and six months ended June 30, 2014 compared to the prior year.

Reorganization Costs

During the three and six months ended June 30, 2014 we incurred $1.0 million and $1.9 million, respectively, of severance and related costs for the termination of approximately 1% of our employees across various geographies and functions primarily to realign resources due to our new organizational structure put in place in late 2013. The accrual at June 30, 2014 is expected to be paid by the end of 2014.

During the three and six months ended June 30, 2013 we incurred $0.3 million and $1.9 million, respectively, of severance and related costs for the elimination of 31 jobs or approximately 2.5% of our workforce worldwide to streamline our operations.


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Other Income, Net

Other income, net primarily consists of interest income on our investments as well as gains and losses on foreign currency. The decrease in other income, net during the three and six months ended June 30, 2014 is due to both lower interest income earned in 2014 due to lower investment balances as well as foreign currency losses of $0.2 million and $0.3 million during the three and six months ended June 30, 2014, respectively, compared to insignificant gains and losses in the prior year periods.

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. Activity within the funds was insignificant during the 2014 and 2013 periods.

Provision for Income Taxes



                                                     Three Months Ended          Absolute         Percentage
                                                          June 30,               Increase          Increase
                                                     2014            2013       (Decrease)        (Decrease)
Provision for income taxes (dollars in millions)   $     2.9        $  4.0      $      (1.1 )             (26 %)
Effective tax rate                                      40.4 %        39.0 %            1.4                 4 %




                                                      Six Months Ended           Absolute         Percentage
                                                          June 30,               Increase          Increase
                                                     2014            2013       (Decrease)        (Decrease)
Provision for income taxes (dollars in millions)   $     3.0        $  5.2      $      (2.2 )             (43 %)
Effective tax rate                                      41.3 %        38.6 %            2.7                 7 %

The increase in the effective tax rate during the six months ended June 30, 2014 as compared to the prior year period is primarily due to $0.2 million recorded in the six months ended June 30, 2014 for potential additional tax expense resulting from an ongoing U.S state audit.

Segment Results

At the end of 2013 we reorganized our fulfillment organization into a single global research organization and a single global product organization to better support our client base by facilitating better research collaboration and quality, promoting a more uniform client experience and improved customer satisfaction, and encouraging innovation. During 2013 we also established a dedicated consulting organization to provide research-based project consulting services to our clients, allowing our research personnel to spend additional time on writing research and providing shorter-term advisory services. As of January 1, 2014 we conformed our internal reporting to match the new organizational structure and as such we are reporting segment information for the newly formed Research, Product and Project Consulting organizations. The 2013 segment amounts have been reclassified to conform to the current presentation.

The Research segment includes the costs of our research personnel who are responsible for writing the research and performing the webinars and inquiries for our RoleView product. In addition, the research personnel deliver advisory services (such as workshops, speeches and advisory days) and a portion of our project consulting services. Revenue in this segment includes only revenue from advisory services and project consulting services that are delivered by the research personnel in this segment. During 2013, we began to transition the delivery of project consulting to a dedicated project consulting organization. We anticipate that the transition will be complete by the end of 2014 such that essentially all project consulting will be delivered by the project consulting organization in 2015.

. . .

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