Forrester Research, Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Feb 2021

[Operator:]

Good afternoon. Thank you for joining today’s call. With me today are George Colony, Forrester’s Chairman of the Board and CEO; Kelley Hippler, Forrester’s Chief Sales Officer; Mike Doyle, Forrester’s Chief Financial Officer; and Scott Chouinard, Forrester’s Chief Accounting Officer. George will open the call, Kelley will follow George to discuss sales, then Mike and Scott will discuss our financials. We will then open the call to Q&A. A replay of this call will be available until March 17, 2021, and can be accessed by dialing 855-859-2056 or 404-537-3406. Please reference the conference ID 9079797.

[George Colony:]

Thank you for joining the call. After my overview, Kelley Hippler, Forrester’s CSO, will summarize sales results and progress. Mike Doyle, our CFO, will give an in-depth financial review of Q4 and the full-year. Scott Chouinard, Forrester’s Chief Accounting Officer, will conclude with guidance for Q1 and for full-year 2021. We will then take questions. Our remarks are in two sections. Number one, I will summarize 2020. And two, I will look ahead to our plan for 2021; in particular, the expansion of contract value. Turning first to 2020. In the fourth quarter, we beat revenue guidance by $4.6 million and EPS by $0.01. Our bookings velocity increased sequentially in Q3 and Q4, with a very strong finish in December. Client count increased in the fourth quarter. Enrichment was up from the third quarter and agreement value increased quarter-over-quarter. Now it was not the year that we had planned for, but if you had told me on March 20 that we would end with these results I would have been quite happy, given the uncertainties of the early pandemic. Fortunately for the company and its investors, Forrester is a business that is fully productive in the virtual world. And given that the pandemic challenged companies to accelerate their technology efforts, our research gained value during the crisis. Challenging times stimulate demand for research as companies struggle to quickly adapt to new facts on the ground and new customer behavior, and I had called these times the golden age of research, as our clients turned to us for how to win and retain customers during the pandemic, how to shift their workforces to be virtual and how to prepare themselves for a post-pandemic digital world.

[Kelley Hippler:]

Thank you, George. I want to reiterate how much we appreciate the efforts of our global Forrester team to focus on our clients first. We have been by our clients’ side and on their side, helping them navigate change, innovate and grow throughout the COVID-19 pandemic. As George said, our clients need Forrester’s insights now more than ever, and we are proud and honored to be their trusted strategic partner.

[Mike Doyle:]

Thanks, Kelley. I’m now going to review Forrester’s financial performance for the fourth quarter of 2020, including a look at our financial results, the balance sheet at December 31, our fourth quarter metrics. And then Scott Chouinard will provide the outlook for the first quarter and full-year 2021. Please note that the income statement figures we review on this call are non-GAAP results, which we refer to as adjusted results and exclude those items mentioned in our press release today. For the fourth quarter, Forrester delivered adjusted revenue and earnings per share that exceeded the upper end of guidance and operating margin which met guidance. The momentum in our business has continued to accelerate, with fourth quarter bookings increasing to high-single-digit growth levels versus prior year. As Kelley discussed, we had excellent performance from our sales organizations, as all sales regions achieved their target for the fourth quarter, and we saw new business rebound resulting in a net increase in client count versus the prior quarter. Revenue performance for the quarter was led by reprints and content marketing offerings, which have grown at double-digit rates every quarter of 2020. Our core Forrester Research service and Executive Programs performed better than targeted levels, as did our North American strategy consulting business. Expenses were up slightly to prior year levels due to higher employee compensation costs, offset by continued savings in travel and entertainment. With strong revenue performance and continued check on expenses, EPS exceeded the upper end of guidance. As we look back at the full-year, the second quarter was the low point in our bookings activity, declining significantly versus prior year. While bookings for the full-year were down versus 2019, we have seen a steady improvement and acceleration in our business since the end of the second quarter. Forrester finished 2020 with revenue that exceeded our revised guidance and EPS that met the top end of our revised guidance. Now let me turn to a more detailed review of our fourth quarter results. Fourth quarter revenue decreased by 4%. Compared to the fourth quarter of last year, research revenue declined by 6%, consulting revenue increased by 10% and events revenue decreased by 48%. Operating expenses for the fourth quarter increased by 2%, driven by a higher average headcount and merit increases that were issued early in the year, higher bonuses that were partially restored in 2020 and higher professional services. These increases were materially offset by lower travel and entertainment expenses due to travel restrictions and lower events production costs due to our move to virtual events. Ended headcount was up only nominally compared to the fourth quarter of 2019. Operating income was $11.1 million, or 9.2% of revenue, compared to $17.5 million, or 14% of revenue, in the fourth quarter of 2019. Interest expense for the quarter was $1.2 million, as compared to $1.7 million in the fourth quarter of 2019, due to reduced debt and interest rates in the quarter. Net income for the quarter was $6.6 million and earnings per share was $0.35, compared with net income of $10.7 million and earnings per share of $0.57 in the fourth quarter of 2019. Our business’ key metrics reflect some improvement in the fourth quarter, as agreement value, client count and enrichment all improved compared to the third quarter. We have not yet returned to 2019 levels, but we are pleased with how these indicators are trending. We have provided details in today’s earnings release. Now I would like to review the balance sheet. Our cash at December 31, 2020, was $90.3 million, which is an increase of $22.4 million from the end of 2019. Cash from operations was $18.6 million for the quarter, as compared to $2.8 million in the fourth quarter of last year. For the full-year, we generated $47.8 million of cash from operations, which we are pleased with in this economic environment, and it is down just 1% from the strong cash flow we generated in 2019. Debt payments were $2.3 million during the quarter and $23.4 million for the year, which includes $14 million of payments to fully pay down our line of credit. Property and equipment purchases were $1.6 million for the quarter, compared to $3.5 million for the fourth quarter of last year. Accounts receivable at December 31, 2020, was $84.7 million, compared to $84.6 million as of December 31, 2019, with accounts receivable over 90 days at 3% at December 31, 2020, compared to 6% as of December 31, 2019. This is a remarkable collections performance in a difficult economic environment. Deferred revenue at December 31, 2020, was $180 million, essentially flat from the prior year. So in summary, from the low point at the end of May we experienced steady improvement and acceleration in our bookings in the third and fourth quarters. The pandemic has placed increased demands on our clients to have strong digital platforms for both the front and back office, increasing the demand for our products and services. Our financial results reflect that improvement, with revenue and EPS exceeding the revised guidance we issued at the end of the third quarter. Cash flow finished strong, and our balance sheet ended with more cash and less debt than we had at the start of the year. More importantly, with our most important asset, our people, we ended the year with low attrition. We made a conscious decision early in the pandemic to retain our people so we were staffed for growth, which has paid off. In particular, with our sales organization, we believe we start the year with headcount necessary to deliver our 2021 bookings plan. While the bookings shortfall in the first half of 2020 will have an impact on revenue in the first half of 2021, which Scott will address, we end the year well positioned for a very successful 2021. I will now turn the call over to Scott.

[Scott Chouinard:]

Thanks, Mike. Before I get into our guidance for 2021, I want to discuss the metrics that we will be reporting beginning with our first quarter earnings release. As George mentioned, we will be laser-focused on growing contract value in 2021, and we will be updating our metrics accordingly. This will involve a few changes. First, we will be replacing our current agreement value metric with contract value. The contract value metric will measure the annualized value of our recurring research products. We will also modify our client retention metric to measure CV client activity only, and we will introduce a new metric called wallet retention, which will measure the amount of CV that is retained and enriched over a 12-month period. We plan to publish historical CV and retention metrics in the first quarter so that you will be able to see the trends in the business. And speaking to the trends, the bookings shortfall during 2020 that Mike mentioned will have a negative effect on CV growth in the early part of the year. However, with our focus on double-digit CV bookings this year, we should see meaningful growth in CV in the second half of the year, with growth rates in the high single-digits. Now regarding our 2021 guidance, we are projecting about a 1-point lift on revenue and expenses from foreign currency rates in 2021, which will have a small negative effect on both operating income and margins. We are expecting a second half recovery in the economy and are planning for a hybrid event experience in the second half of the year, which will be a mix of in-person and virtual experiences. And lastly, I wanted to comment on the expected trending of our financial results for 2021. As you know, with a subscription business, bookings recover faster than revenue, and our revenues in the first half of the year will be impacted by the decline in subscription bookings during the middle of last year. This will compress margins and EPS during the first half of 2021 as compared to 2020, especially since we had significant cost cuts in the first half of 2020. However, we should generate improved year-over-year operating margins and EPS in the second half of 2021 and would expect that trend to continue into 2022. Now we have provided guidance on a GAAP basis and listed the items excluded from our adjusted guidance in our press release and 8-K filed today. Our first quarter 2021 guidance on an adjusted basis is as follows

[Operator:]

Thank you. Our first question comes from Andrew Nicholas, with William Blair. You may proceed with your question.

[Andrew Nicholas:]

Scott touched on it briefly, but I just wanted to dig in a little bit to the operating margin guidance. It sounds like revenue dynamics in the first half of the year are, one, headwind. But I wanted to kind of just make sure I understand the different puts and takes on the margin outlook relative to last year. How much in the way of temporary cost savings from last year maybe tied to travel and entertainment are coming back online? And then to kind of wrap up this question, is there any update on how you are thinking about those margins in the medium to long term now that 2021 guidance is out there?

[Scott Chouinard:]

Sure. This is Scott. I will take that. So as we said on the call, margins in the first half were affected by a couple of things. First, the revenue shortfall from the bookings decline in the first half of 2020. And then, first half of 2020, we had full effect of our cost cuts. As you noted, some of them temporary, some of them more permanent. So first half margins really affected by that. Certainly, bonuses have been restored for 2021. That is going to be a big first half of 2021 versus 2020 comparison. As we would mentioned on earlier calls, we have restored a lot of those cuts in the second half of 2020. So the margin story progressively gets better as we move through 2021 compared to 2020. So we would expect second half margins and EPS growth to be significant on a comparative basis. And then to get to the second part of your question, from a 2022 perspective, if we hit on our CV bookings like we expect to hit, then we certainly would expect to see margins improve in 2022, likely in the 100 to 200 basis ballpark.

[Mike Doyle:]

Andrew, as a quick reminder, too, this is Mike, I think you have heard George and I say this before, in terms of medium-term outlook for the business our view is with double-digit contract value growth this business should be running at a minimum of 15% to 17% on the operating margin side. So that is how you should think about us when you get to the medium-term level. So we are obviously in a march towards that right now, and I think we like our current trends. And to Scott’s point, we don’t get all the way there in 2022, but I think you start making real headway.

[Andrew Nicholas:]

Got it. Got it. That is helpful. And then as my follow-up, on the events business, I think in your prepared remarks you mentioned an assumption for hybrid conferences in the back half of the year. How should we kind of think about the sensitivity to that business, whether or not it goes full-year virtual or there is a bigger part of the year than half that is hybrid? Any kind of sensitivity that you can give around the various scenarios on the conference business and if there is any change to kind of how you are looking at that balance long term, too, that would be helpful.

[Scott Chouinard:]

Sure. This is Scott. I will take that. So based upon the progression of our events during the year, we are not overly sensitive in 2021. Our 2 biggest events, the B2B Summit North America and CX North America, are first half events. So those are just planned as virtual events. So a lot of our smaller events are in the second half of the year. So we are expecting maybe $2 million to $3 million revenue impact from that. So if those were to go completely virtual, there would be that kind of top line effect. And from an expense standpoint, it really depends on the timing of that decision if we were to go full virtual, but I would expect the expense impact to be maybe half of that from a revenue standpoint.

[Andrew Nicholas:]

Great. Thank you.

[Operator:]

Our next question comes from Anja, with Sidoti. You may proceed with your question.

[Anja Soderstrom:]

Yes, hi. Thank you for taking my question. First of all, I’m curious about the cadence through the quarter and, if it builds up, how the momentum continues into the first quarter?

[Kelley Hippler:]

Hi, Anja, it is Kelley Hippler. Thank you for the question. In terms of momentum, I would say actually starting with Q3 we saw a steady uptick in acceleration throughout the quarter. We had a strong October. November was a little sluggish; I think there was a lot of uncertainty around that time due to the election in the U.S., resurgence of COVID. But had a very strong finish to the year in December. And we are cautiously optimistic that that will carry over into the start of 2021.

[Anja Soderstrom:]

Okay. That was helpful color. And I’m just curious, when you talk about the small events in the second half, how many people attend this kind of events broadly?

[George Colony:]

Anja, George here. What was the question?

[Anja Soderstrom:]

So specifically, the size of those events that you are having in the second half that you are planning to have physical, how many attendees do you normally have at this kind of events?

[George Colony:]

So I would say it is about one-third of the attendees for the full-year will be in the second half. So again, as Scott had said, Summit and CX forum are the 2 largest events in the world. So it is in the low thousands, probably. And by the way, just to go back to Andrew’s question, we are going to make the call. Get to midyear, find out where we are at with the vaccines. We recently surveyed our attendees from 2020, and about half of them said that they would be willing to go to a physical event in the second half of the year, but 50% at this point are not willing. So we will make the call sometime in the May, June time frame for those for the second half. And last one thing, Anja, as Scott had also said, we are planning quite conservatively for events financially. So we are pretty well hedged there.

[Anja Soderstrom:]

Okay. Understand. And you alluded to growth by acquisition, potentially. What do you see in that environment?

[George Colony:]

Prices are high, primarily because of the IPO moves that we have seen. So prices remain somewhat high. But I would say our war chest is growing. We have a lot of dry powder now, and we are going to flow good cash in the first and second quarters. So I would say we are looking. We are still of course digesting SiriusDecisions, which was the largest acquisition in the history of the company, but we are warming up, let’s put it that way. Mike, do you want to add something there?

[Mike Doyle:]

I would say that I’m with George. I think the likelihood of anything in the first half is very slim, just because we don’t have anything currently in the hopper. If something of interest would come along, to George’s point, we are in a position that we could do something relatively quickly. I think the greater likelihood is everything is going to come more in the second half and then into 2022, just given how we are looking at the rhythm. And I agree with George

[George Colony:]

Anja, most of the opportunities are really in the data space.

[Anja Soderstrom:]

Okay. Got it.

[George Colony:]

Thank you. good questions.

[Anja Soderstrom:]

Thank you.

[Operator:]

Our next question comes from Vincent Colicchio, with Barrington Research. You may proceed with your questions.

[Vincent Colicchio:]

George, could you give us a sense for the cadence of when some of the new products will be released during the year and maybe give us some color in terms of the cadence of when the more important ones will be released?

[George Colony:]

I have a one-word answer for you, Vince

[Vincent Colicchio:]

That is fine. And Kelley, could you give us a sense for maybe the research pipeline of opportunity? Is that markedly better right now than it was this time last quarter?

[Kelley Hippler:]

Thanks, Vince. So at this point, we did a really nice job converting our Q4 pipeline. So we are in a pipeline-rebuild mode. So actually, our conversion rate was 5% higher than prior year in Q4. So the downside of that means we have less pipeline walking into the quarter. But we are building things at a normal cadence that we would expect to see and have good confidence that we will be able to get to our contract value bookings growth targets this year based on what we are seeing out of the gates.

[Vincent Colicchio:]

Okay. And then can you give any color on pricing? Did you guys increase prices this year or do you plan to increase prices?

[Kelley Hippler:]

So we did do our annual price increase at the start of January. So historically, we had done that in July. And given the market conditions in 2020, we did hold off and put it into market effective January 1st. So we are expecting to see a bump in our research sales, given the price increase.

[Vincent Colicchio:]

And then, George, could you give me some color on why consulting was so strong and will that follow through in the first half of next year?

[George Colony:]

I think it was a big surprise for the year. You go virtual and you figure consultants can’t get on airplanes and be in conference rooms and boardrooms. So we are worried about it, Vince. But you know companies, our clients adjusted quickly and the staff adjusted really quickly. I think it is one of those big lessons we are all going to take from the pandemic, that, “hey, you can do a lot of great projects virtually.” So it was one of the good surprises of the year. And a little weaker in Europe, stronger in the U.S., and a little bit stronger in Asia. And by the way, that will continue forward, being able to do those network virtually.

[Mike Doyle:]

The other item, George, because it is in our consulting, which you highlighted it I think when you opened, was the content marketing teams absolutely became so important as well as research reprints in a virtual environment where people couldn’t get out on the road. So I think those things really accelerated our consulting performance in a really meaningful way.

[Vincent Colicchio:]

And I assume the reprint strength will follow through in the first half?

[Mike Doyle:]

Yes, I think that is right. I think as long as the environment continues to - look, it has been a good business for us, period. But it clearly stepped up and accelerated in the pandemic, where people don’t have the opportunity to be out there. The reprint business was a great way to market. So I think we are expecting that it will continue in the first half.

[Vincent Colicchio:]

Thanks guys.

[George Colony:]

Thanks Vince.

[Operator:]

Thank you. And I’m not showing any further questions at this time. I would now like to turn the call back over to Mike Doyle for any further remarks.

[Mike Doyle:]

Great. Thanks, everybody. Listen, we appreciate you joining the call. We are going to be out virtually to be visiting with investors in the first quarter. We are going to be at the Sidoti conference, and we are also making dates available. So looking forward to seeing all of you in a virtual manner with investors shortly.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.