Forrester Research, Inc.
Q4 2007 Earnings Call Transcript

Published: 19 Feb 2008

[Operator:]

Good day ladies and gentlemen and welcome to the quarter four and full year 2007 Forrester Research earning conference call. My name is Michelle and I will be your coordinator for today. At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of today’s conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. And before we begin the company has asked me to read the following statement, today’s presentation by managements contains forward-looking statements within the meanings of the Securities & Exchange Act of 1934. These forward-looking statements represent the company’s present expectations or beliefs concerning future events. The company cautions that such statements are necessarily based on certain assumptions which are subject to risks and uncertanties which could cause actual results to differ materially from those indicated today. These risks factors include changes in general economic conditions, recent political events, increased competition, work stoppage, slow down, exchange rate fluctuations, variations in the mix of products sold, fluctuation in effective tax rates resulting from shift in forces of income and the ability to successfully integrate and operate required businesses. Further information on these risk factors is including in the company’s filing with the Securities & Exchange Commission. I would now like to turn the presentation over to your host for today’s conference. Mr. Mike Doyle. Please proceed.

[Michael A. Doyle:]

Good morning and thank you for joining our fourth quarter 2007 call. With me today are George Colony Forrester’s Chairman of the Board and Chief Executive Officer and Charles Rutstein Forrester’s Chief Operating Officer. I will open the call and provide detail on our financial results for the quarter. George will follow me and provide a strategic update on the business and our role based strategy. After George completes his review we will open up the call to Q&A. As Michelle mentioned a replay of this call will be available until February 20th and can be accessed by dialing 888-286-8010. Please reference passcode number 80945093. This call is also available by web cast and will be archive din the investors section at Forrestor.com and I’ll remind you of the cautionary warning on the forward-looking statement that Michelle provided at the beginning of this all. I will now begin my review of the financial performance for Forrester’s fourth quarter and full year results, the balance sheet at December 31, our fourth quarter and full year metrics and the outlook for our business in 2008. But, before I get started with the details, I would like to comment on a couple of important items I highlighted in our third quarter call regarding Forrester’s 2007 objectives. When we started 2007 Forrester established three major objectives

[George F. Colony:]

I’d like to personally welcome investor to our 2007 Q4 call. My remarks are in five parts

[Operator:]

(Operator Instructions) And your first question comes from the line of Laura Lederman of William Blair. Please proceed.

[Laura Lederman:]

A few questions obviously with the stock market and fears of the economy wanted to talk a little bit about what the CIO’s are saying, do they expect to get budget cuts? So that’s kin of part A of the question, part B is when if there talking about budget cuts what do they say about which pieces of your business would remain the strongest? Thank you.

[George F. Colony:]

I’ll go first here Laura and what I’ll tell you is that I’ve been with a number of CIO’s over the last month and a half and their all worried but none of them see it in their businesses in fact none of them have had communications form there CFO’s saying get ready. We don’t see it in the actual business of our clients. That all being said, if you watch the recession five or six years ago what happens to the budgets would be cut in May or June, they typically happen after Q1 and sometimes in Q2 but like I said we don’t see it at this point.

[Laura Lederman:]

Following along with the second part of that when they talk to you about your business what do they view as the most critical and what would they view as maybe a little less critical or more discretionary in terms of the business that you provide them?

[Charles Rutstein:]

The pattern that we saw in the last economic slow down was that they elected to do a little bit more consulting with us perhaps and a little bit less of the syndicated work. That being said we’ve made a material change in our product portfolio since that time, most notable the introduction of the leadership boards and a lot of the discussion that the leadership board members are having now is of course of how they are dealing together with the challenges that they are seeing. So it’s our belief that we may see a slightly different pattern this time around.

[Laura Lederman:]

Also one final question from me then I’ll pass it on. Can you talk a little bit what core research grew in other words if you take out boards and you take out data you mentioned that syndicated in total was a little weaker, can you talk a little bit about syndicated just core research and how that did? And what your expectations are for 2008?

[Michael A. Doyle:]

We don’t break out the detail around that so typically we just give the broader research numbers. So from our perspective obviously we said research grew at about 14% and we’re anticipating as we try and shift that mix just because of the way differed or basically our accounting booking syndicated deals occurs then what’s going to happen as we build our business next year we’ll get the benefit both in the second half and then roll into 2009. It’s just when we anticipate our mix of research business to grow considerably but we don’t anticipate that the mix is going to change year-over-year for 2008.

[Charles Rutstein:]

Laura if I can just speak in generalities we talked about Q was not meeting our plans for revenue in 2007, one of the reasons was we had a little bit weaker performance in research tan what we were looking for.

[Operator:]

And your next question comes from the line of Andrew Thut with BlackRock. Please proceed.

[Andrew Thut:]

Good to see contract failure re-accelerate there. Where is sales force turn-over rate now in the quarter? And how has that been trending year-to-date?

[Charles Rutstein:]

So we saw a sequential drop in Q3 and a sequential pop back up in Q4. So we saw a pattern through the year that was a little bit volatile. The overall turnover rate I guess I would say is not where we want it to be it is one of our focuses here for 2008.

[Andrew Thut:]

So when you popped back up in Q4 what was that on an annualized rate?

[Charles Rutstein:]

I don’t actually have that number in front I don’t know if we have it. I think we have to get back with him offline.

[George F. Colony:]

We will have to. We have just an aggregate but we will have to get back with you on total.

[Andrew Thut:]

What do you think is causing that?

[Charles Rutstein:]

Well I did do a little bit of a diag, Andrew and we’re still assessing here but the quick diag that I did on that suggests that a little bit over half of that was involuntary attrition which means that we are still continuing to be aggressive about pushing low performers out of the organization. The balance of course would be voluntary so I can actually feel pretty good about the involuntary we’re keeping the standards high. It’s the involuntary piece that we need to continue to focus on, or rather the other way around, the voluntary piece we need to continue to focus on.

[Michael A. Doyle:]

Let it be said Andrew this is an area we’re going to work on a lot in the first half of the year.

[Andrew Thut:]

Is there a bonus payment that happens early this year that people are waiting for or no?

[Charles Rutstein:]

No. There is no annual component to the plan at this point.

[Andrew Thut:]

Okay. And it’s also nice to see client adds. I mean I know from talking to Mike it’s sort of a metric that we’re focused on that you guys aren’t particularly focused on but you know that client adds dipped in Q2o of this year and if started to pick back up meaningfully. Any color you can give there?

[Charles Rutstein:]

I think that we as we get into the Q1 call Andrew we’re going to have two metrics for you here on this one, one is clients and the other is the roles per client and what we’re seeing is as we become a more role based company we’re tending to get deeper relationships in the existing clients. That means probably not going to see client count move as fast as it did in example in 06 but more depth in those clients. So I think you’re going to have to look at the depth and the width of the client base, we are certainly doing that.

[Operator:]

(Operator Instructions) And your next question comes from the line of Bill Sutherland. Please proceed.

[Bill Sutherland:]

George I was curious as you look at the expansion potentially of roles perhaps through acquisition what are some of the just broadly speaking just kind of categories that we should think about?

[George F. Colony:]

The categories? By the way we don’t need more roles to grow this company fast, just to be very clear about that. As I said we have 4 million executives and $9 billion in the currently 17 roles. But in the acquisition side what we’d be looking for potentially supply chain and manufacturing, potentially in the finance areas of roles and also in the HR spaces. Those are the ones that come quickly to me but any other ideas Charles?

[Charles Rutstein:]

Sure I mean I think George’s point is well taken. Those acquisitions that we’re looking at are not all about expanding the footprint of roles many of them are about expanding our depth within the roles we already serve.

[Bill Sutherland:]

Any characterization you can put on the size of the some of the candidates in the platform?

[George F. Colony:]

Size of companies? Anywhere from $1 million to $100 million.

[Bill Sutherland:]

Okay. I figured it was wide. And then last as you push up the research quotient I guess this is sort of a little vague but you know looking out a few years do you have a sense kind of where the operating margin can go either GAAP or pro forma?

[Michael A. Doyle:]

I think what we’ve said Bill is that we in the near term we were going to stay in the range of 16.5 to 17.5, but when we look at the model we believe that long term we can be 17 to 19% and still be growing the top line at double digits. You know I think George on the last call mentioned we could push the margin well above 20% if we chose to and grow the business as fast but we feel that in the near term it’s a good balance to target 16.5 to 17.5 with double digit revenue growth and we think you know in a few years out as we leverage the model more 17 to 19 is certainly doable with still double digit revenue growth. And our recent experience suggests that that’s absolutely the case.

[Bill Sutherland:]

And so Mike, that would be a combination of scale and the increasing Q?

[Michael A. Doyle:]

That’s correct. I think if you move Q as high as 17% which that’s a possible target for us you might in fact see margins grow even higher than 17 to 19% and growth even higher as well. That’s a long term stretch curve.

[Operator:]

And your next question is a follow-up from the line of Laura Lederman. Please proceed.

[Laura Lederman:]

Just two quick follow-up questions, one is as you work to accelerate the syndicated research by increasing the pay out on that what is the risk that the other business doesn’t grow as much and that they’d lose a little bit of focus on that?

[Charles Rutstein:]

I mean at some level, it’s a zero sum gain, if they’re going to hit their number at some level of performance their going to sale one or the other. So you’re trading off one against the other. I think what we’ve really done is we have a aligned the rewards that we give sales people in terms of the commission rates with the benefit to Forrester. So the syndicated business pays out at a much higher rate and that’s because as you know is much more profitable for us. So I think it’s inevitable that there is probably some trade off between the two, if somebody is busy pursuing a syndicated deal that time is not available for them to pursue a consulting deal. Now that being said, let me be clear about one point which is that we still intend to grow the consulting business at material double digit rates here in 2008 and beyond. All we’re looking to do is shift a few percentage points of the mix at the margin.

[Michael A. Doyle:]

And what we found over time Laura is that clients who consult with us tend to renew the Q products at much higher rates. So there’s various synergy between those two sets.

[Laura Lederman:]

Final question which is in the past you’ve talked about price increases is that something you would not do this year based on economic concerns or just kind of thoughts on price increases?

[George F. Colony:]

So as we’ve talked about in the past Laura, we look at kind of three things there. We look at product demand, we look at the value that we’re delivering and we look at the competitive landscape. We will typically institute a price increase in mid-year for most of our products which is what we did last year in July. We did a very modest price increase here in January. Which is sort of an off cycle one for us, not for any of the core products but we did increase prices slightly for consumer data for business data and for some of the larger user group packages. But I think as we get into 2008 here we will follow the same pattern. We will look at the competitive landscape, the demand and the value delivered an as you know the economic stances. So I would say we are not ruling out any changes at this point.

[Operator:]

Ladies and gentlemen that does conclude the question and answer session. I’ll now turn it back to management for closing remarks.

[George F. Colony:]

Thanks very much for being on the call and please give us a call if you want to see us while we’re on the road. Thank you very much.

[Operator:]

Ladies and gentlemen thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.