Forrester Research, Inc.
Q1 2008 Earnings Call Transcript

Published: 16 May 2008

[Operator:]

Good day, ladies and gentlemen. Welcome to the first quarter 2008 Forrester Research Earnings Call. My name is Chantele, and I will be your facilitator for today's call. At this time, all participants in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Ms. Karyl Levinson, Vice President of Corporate Communications. Please proceed, ma'am.

[Karyl Levinson:]

Thank you. Good morning. Thank you for joining our first quarter 2008 call. With me today are George Colony, Forrester's Chairman of the Board and Chief Executive Officer, Charles Rutstein, Forrester's Chief Operating Officer, and Mike Doyle, Forrester's Chief Financial Officer. Mike will open the call and provide detail on our financial results for the quarter, George will follow Mike and provide a strategic update on the business and our role-based strategy. After George completes his review, we will open the call up to Q&A. A replay of this call will be available until May 14, 2008, and can be accessed by dialing 888-286-8010. Please reference the participant passcode 68034661. This call is also available via webcast, and will be archived in the investor section at Forrester.com. Before we begin, I would like to remind you that this call will contain 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 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 future activities and 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 result of new information, future events, or otherwise. I will now turn the call over to Mike Doyle.

[Mike Doyle:]

Thanks, Karyl. I will now begin my review of the financial performance for Forrester's first quarter 2008 results, the balance sheet at March 31st, our first quarter metrics, and the outlook for our second quarter and full year 2008. As we reviewed in our last call, we had a successful 2007, finishing strong in the fourth quarter, and establishing good momentum going into 2008. Today, I am happy to report that we have continued to maintain a positive momentum, and achieved strong results for the first quarter of 2008. With today's release, we are reporting first quarter 2008 revenues of $55 million, and pro forma operating margins of 14.6%. Revenue performance increased 16% versus prior year, with 2% attributable to foreign exchange. Margin performance was at the upper end of our guidance, and 2 points above prior year. Pro forma earnings per share came in at $0.26 per share, up 30% versus year ago. Now let me turn to a more detailed review of our first quarter results. Please note that the income statement numbers I am reporting are pro forma, and exclude the following items. Amortization of intangibles of $171,000, non-cash stock-based compensation expense of $1.4 million, a net benefit of $68,000 related to the settlement of stock option-related payroll tax exposure, offset by professional fees related to the stock option investigation, and restatement of the company's historical financial statements. Also we continue to book an effective tax rate at 39% for pro forma purposes. The actual effective tax rate for the first quarter of 2008 is approximately 45%. Forrester's first quarter revenue increased 16% to $55 million, from $47.3 million in the first quarter of last year. Let me take you through some of the details behind the increase. First quarter research services revenue increased 15% to $36 million, from $31.3 million last year. Research services revenue comprised 65% of total revenue for the quarter. We are pleased with the healthy increase in our research services revenue. First quarter advisory services and other revenue increased 19% to $19 million, from $16 million in the first quarter of 2007, and represented 35% of total revenue for the quarter. Our International revenues were 28% for the first quarter, compared to 29% in the first quarter of last year. I would now like to take you through the activity behind our revenue, and review progress for each of our products, starting with research. In the first quarter, 457 new research documents were added to RoleView. 55,638 clients have now chosen a role. The top three roles are, application development and program management professionals with 6,383 clients, Strategy professionals with 6,095 clients, and Enterprise Architecture professionals with 6,000 clients. We hosted 84 teleconferences in the first quarter, with a total attendance of 4,899 participants, all 17 roles were represented. Forrester Leadership Boards, our peer offering for senior executives, continues to perform well. The five boards focused on IT roles now have a total of 773 members. Technology Industry boards, including the analyst relations and technology marketing councils, with a total membership of 308. Finally, the Marketing and Strategy boards which include the CMO group, the database marketing council, and the interactive marketing council, now have a total membership of 206. At the end of the first quarter, the Forrester Leadership Boards had 1,287 members, an increase of 113 from year end 2007. The FLB business achieved revenue growth of 48% in the first quarter of 2008. In our data business, we continue to add and renew an impressive list of clients. The North American consumer Technographics added or renewed 32 1B+ companies, including Apple, eTrade, Motorola and Toyota. European Consumer Technographics added or renewed three 1B+ companies, including British Telecom. And our Hispanic Consumer Technographics added or renewed five new 1B+ companies, including Johnson & Johnson. Demand for our consulting services continues to be strong in the first quarter, with growth coming in our areas of traditional strength, with IT projects focused on planning, vendor sourcing, security strategy. Marketing and strategy focused on eBusiness strategy, interactive marketing, and website transformation, and tech industry roles, projects centered on total economic impact studies, market assessments, and market segmentations. Let me turn to our events. While actual events are lightest in the first quarter, our events business continues to be strong, with substantial growth in both sponsorship and attendee sales. We hosted one IT event in the first quarter. The Enterprise Architecture Forum, which was a new event for us. The event was oversubscribed and a tremendous success. In the second quarter of 2008, we will be hosting three IT events, and two marketing and strategy events. Let me turn to first quarter expense and operating income. Operating expenses for the first quarter were $46.9 million, up 14% from $41.3 million in the first quarter of last year. The operating expense increase was primarily driven by higher net headcount in both sales and research. Operating income was $8.1 million, or 15% of revenue, compared with $6 million, or 13% of revenue last year. The improved margin performance year-over-year, reflects leveraging of our expense base, as revenues are growing faster than expenses. Net income increased 28% to $6.2 million, and earnings per share were up 30% to $0.26 on diluted weighted average shares outstanding of 23.6 million, compared with net income of $4.8 million, and earnings per share of $0.20, on 23.8 million weighted average shares outstanding within the first quarter of last year. Now, I would like to review the balance sheet. Our balance sheet remained strong. Our cash and marketable securities at March 31st were $267.5 million, up $18.5 million from our year end 2007 balances. The portion of our marketable securities relating to auction rate securities has been reclassified as a long-term asset on the balance sheet. This is a result of the current liquidity issues in the auction rate marketplace. We fully expect these securities to redeem at par value. We generated $29.8 million in cash from operations for the first quarter, which is up $8.3 million from prior year, due primarily to net income improvement and strong cash collections. During the first quarter of 2008, we repurchased 538,000 shares, at a total cost of $14.4 million, and will continue to be active with buyback at selected price points. Accounts Receivable at March 31, 2008 was $50.9 million, compared with $40.2 million as of March 31, 2007. Our Days Sales Outstanding at March 31st was 84 days, up from 77 days last March 31st. Accounts Receivable over 90 days was 21% at March 31, 2008, up from 10% from March 31 of last year. Q1 is historically our busiest collections quarter, and we focused on our largest balances regardless of aging. Overall cash collected was good, 20% higher than the first quarter of last year, but our aging slipped. We have seen a substantial portion of the over 90 balance come in during the first few weeks of April. We expect this area will be back in-line with historical levels in the second quarter. Net Property & Equipment stayed flat at $6.8 million at the end of March of 2008. Our capital spending for the first quarter this year was approximately $1 million. Deferred revenue at March 31st was $117.1 million, up 16.9% over March 31st of last year, and up 4.8% from year end. Our future [AR] balances are amounts to be invoiced in the future, for clients with multi-year deals or scheduled payment terms. Deferred revenue plus future AR grew 13.4% year-over-year, which is reflective in part to a favorable mix shift towards our syndicated business. Now a review of Forrester's first quarter metrics performance. Agreement value. This represents the total value of all contracts for research and advisory services in place, without regard to the amount of revenue that has already been recognized, or has yet to be recognized, and was at $195.6 million at March 31, 2008. A 13% increase from last year. At March 31st of this year, Forrester's retention rate for client companies was 76%, and our dollar retention rate during the same time period was 87%. Our enrichment rate was 106% for the 12 month period ending March 31, 2008. Client and dollar retention rates and enrichment rates are calculated on a rolling 12-month basis. At the end of the fourth quarter, our total for client companies was 2,490, up 22 from the prior quarter. For headcount at the end of the first quarter, Forrester had a total staff of 935, up from 903 at year end. Current headcount includes a research staff of 346, up 10 from year end. A sales staff of 327, up 19 from year end. Sales turnover was substantially less in the first quarter of 2007. We will continue to add resources to the sales organization as the year progresses. In this quarter, we are introducing a new metric, roles per client. This metric captures the number of unique roles in each of our clients for the agreements in place at the end of each quarter. We believe this additional metric, coupled with enrichment, provides greater insight into the performance of our role-based strategy. The metric for the first quarter was 3.2 roles per client. We will be providing this metric on a quarterly basis going forward. The last topic I would like to cover today is our business outlook for the second quarter and full year 2008. In summary, we have started 2008 on a very good note. Revenue growth was solid, and deferred revenue growth lays the foundation for continued strong performance. Expenses are in-line, resulting in strong margin and earnings per share performance. Given our sizable cash position, interest income is an important part of our EPS, with the continued decline in interest rates, we have reduced our other income projections for the year. However, given our projected operating performance, we are not reducing our full-year earnings per share projections. Our pro forma guidance for the second quarter and full year 2008 excludes the following, Amortization of intangible assets which we expect to be approximately $23,000 for the second quarter, and $250,000 for full year 2008, and noncash stock-based compensation expense of 1.2 to $1.6 million for the second quarter, and $5 million to $6 million for 2008. Costs associated with the stock option investigation and restatement of our historical financial statements, and gains and impairments on sales of marketable securities and non-marketable investments. For the second quarter, we are aiming to achieve total revenues of approximately $62 million to $64.5 million, and operating margin of 18% to 19%. Other income of approximately $1.8 million, a pro forma income tax rate of 39%, and pro forma diluted earnings per share of approximately $0.32 to $0.36. Our pro forma full-year guidance is as follows. Total revenues of approximately $240 million to $248 million, a pro forma operating margin of approximately 17% to 18%. Interest income of approximately $8 million. A pro forma income tax rate of 39%, and pro forma diluted earnings per share of $1.28 to $1.36. We have provided guidance on a GAAP basis for the second quarter and full year 2008 in our press release and 8-K filed this morning. Thank you. I will now turn the floor over to George.

[George Colony:]

Thanks, Mike, and welcome to our 2008 Q1 call. I will be addressing four topics morning. Number one, Forrester's business imperatives, two, projected tech spending for 2008, three, acquisitions, and then finally, I have some concluding remarks. As Mike has noted, we started the year strongly. I am happy to report that we showed strength across all client groups, and across all primary geographies. In addition, all products performed to plan led by our syndicated offerings. Many of the new employees will be added in the second half of 2007 are now fully ramped, and we are staffed to plan for 2008. As we have talked on past calls, Forrester has three business imperatives. Number one, completing the build-out of role-based, two, growing our sales platform, and three, increasing the quotient of syndicated business, what we call Q. After making major strides in 2007 toward roles, we believe that we are now on-track to complete our transition of the new strategy in 2008. Dedicated research groups now focus on each of the 17 roles. The directions of these teams are now goaled on the profitability of their respective roles. Forrester's Events are now targeted at specific roles, a factor in their continued success. As an example, the company held its first event for enterprise architects in the first quarter. 280 paid attendees was well above our plan of 150. 60% of attendees were EA professionals, and the role-based content received, one of the highest scores of any Forrester event. We are tracking the transition to roles with a new metric that Mike outlined roles per client. On a quarterly basis, this metric will show our ability to reach all 12 roles in a user account, and 17 in a vendor account. We have a lot of opportunity here. Forrester's target market centers on 25,000 global organizations, containing 4 million executives in our 17 target roles. This represents a potential market of $9 billion. Ultimately, roles drives relevancy, and relevancy will drive renewal rates and new business win rates. Forrester's second business imperative is to expand our sales platform. Our goal is a 15% to 20% yearly expansion of the sales force. From Q1 2007 to Q1 2008, our sales force has grown 20%. Forrester's efforts to place multiple sales teams in accounts has proceeded smoothly. 85% of accounts are now serviced by role-based sales specialists. Which brings me to our final business imperative increasing Q. Our Q products are RoleView, Boards, and Data. Non-Q products are Events and Consulting. Q products are the most profitable and renewable in our product portfolio. In 2007, 62% of our revenue was syndicated. Our goal is to move Q by 1 to 2 points per year, with a long-term goal of 70%. In the first quarter, we implemented a new commission plan that rewards salespeople to sell syndicated products. I am pleased to report that the plan has significant impact driving Q beyond our plan in the first quarter. These results will begin to push Q revenue higher later in the year. In future calls, we will continue to update you on our progress in the three business imperatives. I know that many investors are tracking technology spending trends, and would like to get Forrester's latest estimates. We are now forecasting tech spending to increase in the U.S. by 3% in 2008, versus 6% in 2007. Worldwide tech spending will increase 6% to 7% in 2008. The fastest growing technology segments will be software and outsourcing. Three changes in the last five years give Forrester more resiliency in a slowing market. Number one, fewer competitors, two, a more diverse product portfolio and three, a role-based strategy that gives the company relevancy, in good times and bad times. Turning now to acquisitions, one benefit of the economic slowdown is a more rational pricing of acquisition targets. This dynamic coupled with Forrester's high cash position and high cash flow, is increasing buying opportunities for the Company. We are looking for acquisitions that meet six criteria. One, they bring more roles to our portfolio. Two, they bring more content to existing roles. Three, good people. Four, a cultural fit. Five, a habit of profit and finally, six, attractive financial terms. The Company prices prospective targets, using a discounted cash flow analysis adjusted for risk. We remain confident in our ability to make strategic acquisitions that balance both the future growth of the company and shareholder interests. So to conclude, Forrester is off to an excellent start for the year. We are continuing the role-based transition, widening our sales platform, and successfully pivoting the company toward higher Q. The people of Forrester are making our role-based strategy come alive. On all fronts, they are fulfilling the company's value proposition, making leaders successful every day. One of these efforts is a new Forrester book entitled Groundswell, which is being published tomorrow by Harvard Business Press. Thank you for listening to the call. I would now like to welcome Charles Rutstein, Forrester's COO, to join Mike and me for questions. We will now take questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of Mr. Jeff Houston of William Blair. Please proceed.

[Laura Lederman:]

Hi. Can you hear me?

[George Colony:]

Yes, we can.

[Laura Lederman:]

Hi. It is actually should be from the line of Laura Lederman, so I don’t know, its coming from the line Jeff Houston that’s what. Anyway, a few questions. One, following up on the economy, it looks like your business was strong. Did you see any economic weakness anywhere in the business, like financial services or companies that sell mortgage-backed securities, and on the same note, it seems like the vendor business in theory, or in terms of what you sell to vendors would be potentially hit more if the economy were to worsen? How does the vendor business as well?

[George Colony:]

I think you saw the numbers from Google, IBM, etcetera. The vendor business remained very strong in the quarter, Laura. I can't really speculate on where we're headed here, but so far, so good with vendors. Vendor service is definitely weaker and we did see a little bit of tightening on the approval process for contracts, but generally, we didn't feel much of the economy in Q1.

[Laura Lederman:]

Why do you think that is? And I realize you said there are three differences in your business from the last economic downturn in tech, but beyond those three changes, in terms of you having a broader product portfolio, and more relevancy and less competition, anything else that you would think, because you are also relatively small, so you wouldn't see it?

[George Colony:]

My view is I don't think this is much of a tech recession. I think that there was so much tightening in '01, '02, '03 in tech, tremendous efficiency in the way tech spending happens. So, we did not obviously see a tech recession in Q1. Although there was a slowdown here, I don't think it will be very severe.

[Laura Lederman:]

One final question on the economy, then a different line of questioning. If you look at SAP this morning, if you look at Oracle, their results were not so good. Given your visibility and your views on the whole world, what do you think explains that in terms of the weakness they are seeing, if the tech spending is still healthy?

[George Colony:]

I haven't seen the numbers but we believe that actually software will be the fastest-growing segment of tech in this year, according to our numbers.

[Laura Lederman:]

Okay. Switching gears a little bit, can you talk about the new sales [higher]? You mentioned it is up 20% year-over-year. How much of the 20% increase is ramped, and where do you plan to take the head count to for the full year in sales?

[Charles Rutstein:]

Sure. Hey Laura, it's Charles. The head count continues to ramp, I would say many of those people are more ramped than they would typically be at this point in the year. As we mentioned on the previous calls, we elected to start hiring for '08 sooner. We saw some of the benefit of that in Q1. The long-term run rate as we said is 15% to 20% growth rate in the sales force headcount, and so you should expect to see that this year as well.

[Laura Lederman:]

Final question for me, then I will pass it on. If you look at competition obviously, what is left is your biggest competitor is Gartner. Any changes in terms of the market ability to sustain the pricing increase, and what does that mean for your pricing, in terms of whether you would increase it or not?

[George Colony:]

So, I will call you back, Laura, to the factors we look at. We look at product demand. We look at value delivered. We look at the competitive landscape, which you mentioned with Gartner. We did a price increase both in July of last year, and in January of this year on various pieces of the portfolio. I would say we have not received any significant pushback from clients on those. We are seeing that pricing. As is typically our pattern, we will continue to look at it, and do an assessment for a potential increase in July of this year.

[Laura Lederman:]

When you say you took one in July of last year, and January on some of the products, can you give us a sense of, was that on the syndicated products and which ones, can you give us any more color on what specifically the price increase, where it was taken?

[George Colony:]

Sure can. In July of last year, we did sort of a cost of living level increase on RoleView sort of 3% to 5%. We did a little bit more substantial increase on FLB. In January of this year, we increased the pricing on some of the larger user group contracts that is clients who have many, many seats. We also increased prices on data earlier this year both on the consumer and on the business side.

[Laura Lederman:]

Thank you so much. Nice quarter.

[George Colony:]

Thanks, Laura.

[Operator:]

Your next question comes from the line of Mr. Bill Sutherland of Boenning & Scattergood.

[Bill DiTullio:]

This is actually Bill [DiTullio] for Bill Sutherland.

[George Colony:]

Good morning, Bill.

[Bill DiTullio:]

Good morning. Got a quick question. You talked about you classified the available for sales securities from current to long-term. Do you foresee any future reclassifications?

[Mike Doyle:]

It is Mike Doyle. No, I don't. We moved to long-term. Just because it is prudent accounting for this. It is our expectation as I mentioned in my comments that these are going to redeem at par. We have already seen a substantial redemption. We had a little north of $120 million, for example, in auction rates at year end, and our position now is actually it is under $60 million at this point. So, I don't anticipate any further actions, other than as things come up for redemption, we are going to redeem at par, and shift those into other types of securities.

[Bill DiTullio:]

But you are fully confident that after this passes, that you will be able to redeem these at par?

[Mike Doyle:]

Yes. Our typical investment practice has been AA and AAA. So, we are fully confident in what we have invested in, the underlying securities are good. The current liquidity in the auction rate market makes it a challenge, since we don't need to try to sell the discounts, we don't plan to.

[Bill DiTullio:]

You also talked about that the decrease in other income would be offset and improve margins. Would that come either from the research product, or more events, or a mix of both?

[George Colony:]

It is primarily going to come from research. We have put our emphasis on that this year, and we are off to a good start. So, we are going to see it come from research primarily this year.

[Bill DiTullio:]

Okay. One final question. You gave us that new metric of roles per client. Can you give us a feel of where that has been in the past, and have you set a target that you are willing to share with us where you see that in the future? Or where you would like to see it in the future?

[Charles Rutstein:]

This is our first stake in the ground on roles per client. We were not client-oriented historically. So we don't have historical data. So, we put a stake in the ground, as a starting point of 3.2, Bill. I think that that is what we use going forward. In terms of a goal, if you look at it theoretically in vendor clients, I think George gave 17. Obviously that would be very long-term goal, but George sets aggressive targets for us. And for non-vendor clients, you have an optimal number of 12 right now. That said, I think it is going to be something that comes over time. If you think, Bill, in terms of size of clients, smaller clients might not have all of the roles, so you could have situations, where you have some clients that don't have all 12 roles, for example. So, we will just have to see as we go. But those are our goals in the longer term.

[Bill DiTullio:]

Okay, great. Thank you very much.

[Charles Rutstein:]

Thanks, Bill.

[Operator:]

(Operator Instructions) At this time, there are no further questions in the queue. I would like to turn the call back over to Mr. George Colony for closing remarks.

[George Colony:]

Thank you very much for being on the call. Hope to see you on the road some time this quarter. Thank you very much.

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.