Forrester Research, Inc.
Q2 2019 Earnings Call Transcript

Published: 1 Aug 2019

[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; and Mike Doyle, Forrester's Chief Financial Officer. George will open the call, Kelley will follow George to discuss sales, and Mike Doyle will discuss our financials. We'll then open the call to Q&A. A replay of this call will be available until October 30, 2019, and can be accessed by dialing 1 [phone] or internationally at 1 [phone], please reference the passcode 9604933#.Before we begin, I'd like to remind you that this call will contain forward-looking statements with 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 are based on the company's current plans and expectations and involve risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward-looking statements. Some of the important factors that could cause actual results to differ are discussed in our reports and filings with the Securities and Exchange Commission. The company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.I will now hand the call over to George Colony. George, you may begin.

[George Colony:]

Thanks for being with us for Forrester's 2019 Q2 investor call. Myself; Kelley Hippler, Head of Sales; and Mike Doyle, Forrester's CFO will give updates and then we're going to finish up with questions and answers. In the second quarter, we achieved the top end of revenue guidance and exceeded earnings per share guidance. In addition, client retention and contract enrichment both grew in the quarter continuing the trend of expansion that we experienced in 2018 and in the first quarter of this year.As we intensify the combination of SiriusDecisions, we are encountering typical integration hurdles, but the cultural, client and synergy fundamentals remain very strong. The value propositions of the combined entity are unique and powerful. We now cover the full waterfront of B2B and B2C. We’re able to guide our clients on what to do strategy and how to do it execution. And we can direct large companies on how to best align marketing, sales and product and imperative for success in the age of the customer.The second quarter was a busy quarter. We successfully integrated several SiriusDecisions and Forrester functions. We hosted two of the largest events in the history of the company. We introduced a new certification product and we continued to move forward in the development of our customer experience cloud. This was the first quarter of business line integration between SiriusDecisions and Forrester with consolidation of the consulting, learning and events teams. In addition, we brought the SiriusDecisions sales team under the management of Forrester leadership setting the structure for accelerated cross-selling.In Q2, we hosted two large events

[Kelley Hippler:]

Thank you, George. In Q2 on the Legacy Forrester business, we continue to see a number of leading indicators trending in a positive direction in our customer engagement model Forrester's go-to-market strategy. Our 12-month rolling client retention has improved over Q1, which helped to drive an increase in client counts. We're also seeing a continued increase in rolling enrichment.Q2 marks the tenth consecutive quarter that productivity of our ramped reps improved. In addition, we continue to see sales attrition ratchet down as our sellers are adjusting to their roles in the customer engagement model. We believe that there is a symbiotic relationship between sales rep retention and client retention.Just to give a reminder, we allowed the SiriusDecisions team to finish out their fiscal year in our Q1. In Q2, made an assessment and decided to expedite the integration of the sales organization. Specifically, we moved the SiriusDecisions’ sales teams under Forrester leaders based on geography and selling motion. Approximately 30% of the SiriusDecisions’ salesforce started this calendar year. We also had a group of high performing reps who had been newly promoted to manager roles.Given the strength of the leadership team that we've built over the last two years at Forrester, we chose to leverage those leaders to provide additional support and to help with ramping our new team members and managers. I'm pleased to report that with the increased clarity about future state, we are starting to see sales rep attrition taper back down.We're now in a position to start introducing a number of the operational practices we've developed at Forrester, including optimizing territory assignments, aligning sales compensation plans, and leveraging key activity metrics to drive pipeline. We continue to be very pleased with the SiriusDecisions’ products. Client feedback about the value SiriusDecisions provides across sales, marketing and products in the B2B space is very positive.Clients and prospects also continue to reinforce the adjacent nature of the SiriusDecisions product with the Forrester portfolio. We've rolled out a number of collaboration programs to help drive bookings in the second half of the year that we're starting to gain traction with. This is a precursor to having a fully integrated sales organization in 2020 that will allow us to take advantage of revenue synergies.With that, I would like to turn the call over to Mike Doyle to review our Q2 financial results.

[Mike Doyle:]

Thanks very much Kelley. I will now begin my review of Forrester's financial performance for the second quarter of 2019, including a look at our financial results, the balance sheet at June 30, our second quarter metrics and the outlook for the third quarter and full year 2019.Please note that the income statement numbers I'm reporting are pro forma and exclude the following items

[Operator:]

[Operator Instructions] Our first question comes from Tim McHugh. [William Blair & Company] Tim, go ahead with your question.

[Tim McHugh:]

Thanks. Just on the SiriusDecisions. sales integration, I guess, can you elaborate on, I guess what the direct activity is when you say it was more tightly integrated, is it the sales targets, the comp structure, the managers? I guess what I would just try to more specifically understand what change you made, I guess versus how you had been running it up to that point?

[Kelley Hippler:]

Sure. Tim, it's Kelley. So in terms of the changes that we made, we essentially, when you look at how SD sales organization was structured, there were different teams and groups that aligned to current selling motion. So for example, there might've been a team that they would call vendor in geo that were largely selling to small technology providers that map to our core organization.So we essentially took teams in their entirety and move them under the Forrester GSL that aligned with the selling motion that they were part of. So that was sort of a structural change that we moved. So I think in most cases, all reps have the same manager that they did. It was really just realigning who that top layer of management is reporting into. And then now are reporting to Forrester sales leaders, we took some steps to harmonize comp plans, we’re probably about 75% of the way there and we'll have, similar comp plans on both sides, next year as well as our go-to market strategy.So currently Sirius in the U.S., deploys a hybrid strategy and that is something that we here are actually moved away from two years ago after seeing that a lot of good prospects are being given to account managers who are too busy to follow up on them. And then conversely, we had a lot of new business reps with sub-optimized territory, so that's something that we're working on, shifting to as we head into 2020. So a bit of structure, a bit of go-to market as well as sales comp plan.

[Tim McHugh:]

Okay. And is it still the case where you described that the former SiriusDecisions sales people are still selling SD and Forrester still selling legacy Forrester products? Or is there a blending here where there – is anyone selling something different than I guess they were selling in the past? It was in a more about managerial structure and incentives.

[Kelley Hippler:]

Yes. So it’s to-date, mostly about managerial structure. So anybody who is selling Forrester previously is still selling Forrester same on the SiriusDecisions side. But what we had been planning to do, and I think the structural move is going to help accelerate this was we’ve introduced four different collaboration programs to help drive collaboration and joint selling and areas where we see very close adjacencies and the ability to have low channel conflict. It’s also helping us to test some of our thinking around our ultimate 2020 go to market strategy. So we do have a number of collaboration programs where people are partnering together, but everybody is still exclusively selling the product portfolio with which they are aligned.

[Tim McHugh:]

Okay.

[George Colony:]

Tim, the original plan going into the year was that we would keep the sales force as separate right through 2019 and indicates we got a good look at them after they’re closing in their fiscal Q4 or fiscal Q1. We just decided, we’re going bring this – we’re going bring them together, structurally to get ready essentially for cross selling in 2020. So we wanted to do it earlier rather than later.

[Tim McHugh:]

Okay. That’s helpful. And then I guess the last question on this, in for me just, the impact on I guess the outlook for this year. Is this – are you anticipating or trying to be conservative that this could cause a disruption to the sales momentum on that side of the business? Or is this something that we’ve actually seen, I guess, during the last couple months as you’ve made this change?

[Mike Doyle:]

Tim? It’s Mike. I would say it’s a couple of things. First, by accelerating the move, I think what Kelley is doing, which she did with very effectively with our customer engagement model. She’s essentially – as things open up as we had attrition, we’re not automatically filling any, we’re assessing and her approach has always been let’s build out robust territory so salespeople can be effective. So as we factor that into our guidance balance of year as you have headcounts that tread away if you don’t replace immediately and even when you do replace immediately you’ve got – you’re going to have a revenue shortfall because there’s time to ramp in those sorts of things.So we’ve factored – I think we factored that aspect into our guidance and we do expect some noise and I think as Kelley refocuses in areas where they were further down market, we are going to move up market. We’ve tried to factor that in as well. So this is just a matter of trying to look at. The noise in attrition that occurred, it’s now tapered off, which is great. But factoring, the loss if you will productivity of a ramp rep in that situation and just put that into our revenue numbers. In addition, we have some FX headwinds in there as well. So it’s principally, the SD product because of attrition and FX.

[George Colony:]

And we are seeing attrition – George again. We are seeing attrition beginning to slow Q1 compared to Q2 – Q2 compared to Q1. Yes.

[Kelley Hippler:]

Yes.

[Tim McHugh:]

All right. And actually, sorry, go ahead.

[Kelley Hippler:]

Oh, no, I was going to say. I think part of it and part of what we were seeing and hearing Tim was that the SiriusDecisions reps some of them were concerned about what their future would be and whether or not they would have one with Forrester. So we also wanted to make a move that would help confirm that we are intending on growing the sales organization as we move forward and needed all hands on deck. And I think that that has definitely helps people to check again and get back to it in terms of building pipeline to the back half of the year here.

[Tim McHugh:]

Is the comment that the sales attrition is back to normal now or it’s I guess improving versus Q1? I guess when you say it got better in Q2?

[Kelley Hippler:]

Yes, it is improving. So it is down to roughly 27% – SiriusDecisions, sorry. Yes. And yes, it’s SiriusDecisions, Forester is lower than that. And that is ironically that was about where we hit when we moved into the customer engagement model, Tim. So I think anytime you have a big transition, people are going to take a look at the organization where it’s going and make a determination about whether or not it’s a good fit for them and their skillset and their passions as they move forward. So the good news is I think we’re through that hump and I would expect that number to continue to trend down as we get into the back half of the year.

[Tim McHugh:]

Okay. Thank you.

[Kelley Hippler:]

Thank you.

[George Colony:]

Thanks Tim.

[Operator:]

And our next question comes from Allen Klee. [Maxim Group LLC] Allen, go ahead with your question.

[Allen Klee:]

Yes. Hi. Following up a little bit in terms of your modest change in your guidance, how would you say, how much is related to FX and how much is related to the issue of the attrition of some of the sales force?

[George Colony:]

I would say FX is 20% to 25% of it, and the balance is related to SD. So it's – FX is – it’s there, we’ve had an impact year-to-date but we've been able to overcome, but we're just looking at it, so I would say the 20% to 25% is foreign exchange and then the balance is really the impact of the SDPL product and nutrition.

[Allen Klee:]

Okay. In terms of when you have some attrition in sales force and you are trying to figure out how to build a back up, how long does it take for you to think that you'll get back to kind of a run rate where you originally hoped to be?

[Kelley Hippler:]

In terms of the serious decisions reps, I think historically it takes around a year to get to a place where folks are fully productive. Again, we're hoping to expedite that through both leveraging some of the learning, training and management tools that we've been leveraging here at Forrester along with the collaboration programs.So in one particular program we've identified a set of target accounts that are Forrester clients that have a high propensity to buy serious decisions. And we're having the Forrester rep help introduce the serious decisions rep. So while it is generally a year, we are taking steps to try to expedite that so that we see some uptick from somebody who's newer heads the backend of the year.

[George Colony:]

Yes, and as I look at it, Allen, I think that the advantage by getting in early to the point, both George and Kelly made is that we’re – because we've integrated sooner, I think we set up better as we roll into 2020 when there can be cross sell and up-sell that we have a broader range of reps who have been exposed to all of this and that’s going to help us. So that’s the goal is that because we're looking at – we didn't buy the business for the 2019 impact? We bought it for the next five-year impact and beyond and I think we feel very good about that. And we'll take – this is a modest reduction of what we think this year is going to look like, to set us up better for 2020.

[Mike Doyle:]

We all feel better – we feel better Allen doing – making the changes now rather than.

[George Colony:]

We want to get to 2020 and then we have to reeducate the SDPL sales force on Forrester products and vice versa, doing now, much better.

[Allen Klee:]

Okay. And your pro forma operating margin for next quarter guidance is a little bit lower than what you just posted, which was very good. And is that really is a result of kind of what you're factoring in with the sales force or is there something else about something else seasonality or something else?

[George Colony:]

Well, it's – well, yes, I mean, you’ve got revenue that's lower than two, right? Then that was, you know a big boost in event performance right in Q2. So that – there's a drop down in revenue and that's going to have a corresponding effect on margin just because you have a certain level of fixed cost built in. So I think that's – that's really the primary driver.

[Allen Klee:]

Okay. And then with the CX cloud and what you're building up there and integrating all the different products, can you just remind me what you're saying about, where that stands today and how the – and the future outlook for that?

[George Colony:]

Yes. So if think of it this way, Allen the first version of which by the way, we are now calling FeedbackNow. We’re calling that FeedbackNow. The first version that of course exists that is the – that is what we acquired with when we bought the company FeedbackNow, and that's the physical devices, which are the inputs into this very – at this point, Version 2 was a very simple cloud. And that is…

[Mike Doyle:]

And that business is…

[Kelley Hippler:]

No, it’s really doubling in size every year. The votes are doubling. It's a very fast growing business for us. So Version 2 now is a – thing of it really in three segments. There are inputs to the cloud. There is the brain in the center which is – which is able to process or analyze those votes and then the outputs to the client. In Version 2, which we'll be introducing late in this quarter you add to the physical inputs, now digital inputs, that's one change. Two in the brain itself we are taking a machine, we are building machine learning, set of tools there to enable our clients to figure out which of these votes are important to their experience and which are not important to their experience and that's a very important factor. And then we will also have several new outputs in version two as well. So version one was the fiscal version, which we acquired version two now it integrates digital and physical inputs to the cloud and also as an improved analytics engine into the centre of it. Does that makes sense?

[Allen Klee:]

Great.

[George Colony:]

And all of this sounds at really about one thing. We believe that in the age of the customer, companies must have the ability to monitor their experience in real time and to improve their experience in real time. And this is the tool that will be able to do that.

[Allen Klee:]

Okay. You mentioned two products involved in certification, the customer experience and security. How do you think about the opportunity on the security side?

[George Colony:]

We are launching that because our clients are leaning on us to do that, I mean it's really a very demand driven launch around Zero Trust. We had some Congressman and Generals in here recently talking to Zero Trust in the military. Zero Trust is moving very, very quickly to become the philosophical standard. And companies, individuals – people working in security want to have the ability to be certified in Zero Trust. I saw a statistic the other day, we've been in the CX certification business for about three quarters now. And 35% of the executives who have been certified in our CX certification are now showing their certification badge in their LinkedIn profile.So it is – we believe it can quickly become a way for people to build resonates, but also to learn more about – on the Zero Trust side and become certified as official Zero Trust experts. So we're going there because our clients are taking us there, they really want us. So I – certification is a business, very potential, and of course we hit the two first primary opportunities in CX and Zero Trust, but a lot more to come here.

[Allen Klee:]

Okay. Thank you. My last question is just, I've been seeing some kind of mixed messages in the market of what our overall tech demand is and what the outlook is going to be. Are you sensing or what's your view of what you're seeing for overall demand for technology consulting and your services?

[George Colony:]

Allen, our projections are still healthy, I don't see – we don't see a pullback yet in techs, it may shift between categories, but we're not seeing that yet both in terms of our own analyst Andy Bartels, who looks out and monitors techs spent across the broad spectrum. And similarly, I can let Kelley talk because she’s much – she's in client – in front of clients much more than I am as is George. That there’s still a lot for folks to do this, a lot of very healthy projects that have healthy return on investment that makes sense, probably regardless of the business market, right now the business environment is good as well. But the interest rates is still low, it's still a good time to be out and investing. So I just don't see…

[Mike Doyle:]

The only worry that our economists have here, Allen is around recession because there's a pretty tight correlation between CapEx and recession spending. But our economists are generally quite – they're still quite bullish.

[Allen Klee:]

Okay. Thank you very much.

[George Colony:]

Yes. Thanks, Al.

[Operator:]

And our next question comes from Vincent Colicchio [Barrington Research] Vincent, go ahead with your question.

[Vincent Colicchio:]

Yes. Most of mine were asked. Curious – I think last quarter you said that the turnover at serious decisions that was mostly from relatively junior people. Is that still the case? Any color would be helpful.

[Kelley Hippler:]

Sure. I think we've seen a mix of turnover, I would say overall the serious decision in sales force is a bit more junior in terms of number of years of experience than the Forrester team. So it has been a little bit of a blend across some of the different pockets. So I don't know that it's skewing one way or another.

[George Colony:]

I think if you also get a attrition, Vince, if you look at the serious decisions in total, it's tends to be more on the sales side than on the product side. Product side is quite low actually for serious decisions, that's the rest of the company, rest of the product line. But I don't think it's skewed necessarily young in the sales force in general.

[Kelley Hippler:]

I don't believe so though.

[Vincent Colicchio:]

And then Kelly on the Forrester side, was the performance in the quarter sort of broad-based or were there any sales regions that stood out either way?

[Kelley Hippler:]

I mean, I think we saw relatively balanced performance, which is what we've been trying to drive here. I would say our Asia Pacific and International business team has been one of our most consistent performing double-digit growth areas and region that we will continue to invest in. But we're very pleased with the overall performance across teams.

[Vincent Colicchio:]

Okay. And Mike, what was the contribution of serious decisions in the quarter?

[Mike Doyle:]

To what Vince?

[Vincent Colicchio:]

The overall revenue number, do you still – do you have that?

[Mike Doyle:]

Overall revenue, they probably run yes, 22%, 32%.

[Vincent Colicchio:]

Okay. Sorry, 22%, 32%.

[George Colony:]

We're getting this one in one minute here, Vince; it looks like it's about 24%, roughly.

[Vincent Colicchio:]

Okay. Thanks for that. That's all I have. Thank you.

[George Colony:]

Thanks, Vince.

[Kelley Hippler:]

Thanks, Vince.

[Operator:]

[Operator Instructions] Okay, we have no more questions at this time.

[George Colony:]

Great. Thanks everyone for joining the call. We're going to be out and reaching out and calling on everyone and meeting with investors. So look forward to seeing you all in the near future. Thanks.

[Mike Doyle:]

Thank you.

[Operator:]

And thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.