Forrester Research, Inc.
Q3 2010 Earnings Call Transcript

Published: 29 Oct 2010

[Operator:]

Good day, ladies and gentlemen, and welcome to the 2010 Third Quarter Forrester Research Earnings Conference Call. My name is Janine, and I will be your coordinator for today. At this time, all participants are in a 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. I would now like to turn the call over to Karyl Levinson to read the Safe Harbor statement. Please proceed.

[Karyl Levinson:]

Thank you and good morning. Thank you for joining our third-quarter call. With me today are George Colony, Forrester’s Chairman of the Board and CEO; Charles Rutstein, Forrester’s Chief Operating Officer; and Mike Doyle, Forrester’s Chief Financial Officer. George will open the call and provide a strategic update on the business and our role-based strategy. Mike will follow George and provide detail on our financial results for the quarter. After Mike completes his review, we’ll open the call to Q&A. A replay of this call will be available until November 4, 2010 and can be accessed by dialing 888-286-8010. Please reference the pass code 63306950. This call is also available via web cast, and will be archived in the Investors section at forrester.com. Before we begin, I’d 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 expect, believe, anticipate, intend, 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 result of new information, future events or otherwise. I’ll now hand the call over to George Colony.

[George Colony:]

Thank you, Karyl, and I’d like to welcome everyone to the call. I will cover five topics this morning

[Mike Doyle:]

Thanks, George. I will now begin my review of Forrester’s third-quarter financial performance, our third-quarter metrics, the balance sheet at September 30th, and the outlook for the fourth quarter and full-year 2010. Please note that the income statement numbers I am reporting are pro forma and exclude the following items

[Operator:]

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

[Laura Lederman:]

Good morning, guys. Thank you for taking my questions. The first one is the fairly broad range of revenue guidance for Q4. I’d like to understand a little bit why the range is as broad as it is? And also, following up on your comments on acquisitions that there is three, that you are kind of going through the process with and give us kind of a general sense of if your pace going forward is going to be a couple per year, what are you hoping to do from an acquisition standpoint? Thank you.

[Mike Doyle:]

Okay. Laura, its Mike. I’ll tackle the revenue piece and then we’ll jump into the acquisition. From a revenue perspective, the fourth quarter for us is busy with those things that can be variable in nature. So if you think about the number of events that we have, the revenue for them can fluctuate depending up on final attendance levels. So that’s certainly one driver. In addition, we typically sell advisory units, a good majority of which can expire in the fourth quarter, so we can have an up tick in advisory activity as well. So those two things tend to drive a little bit more variability in the fourth quarter than we might otherwise say. So that’s the reason for the broader revenue guidance. As it relates to the acquisitions, we’ve been very aggressive working the pipeline. Last year, I think we mentioned over 50 deals and this year when it’s all done, we’ll probably be no different. And I suspect, if anything, we’ll try and increase the pace as we move forward. George highlighted, we tend to still be very, very disciplined and we’re not changing that approach to looking at acquisitions. So, we can look at 50 or 60 companies in the course of the year and end up only buying one. And so, it’s always difficult to predict. There are so many variables that are affected by it, certainly valuation being most important, but a willingness to sell at a reasonable price, and a whole variety of things.

[George Colony:]

The three deals currently cooking, Laura, this is George, are at different stages of development. And as I pointed out in my remarks, none of them may happen. I mean, as a control freak I’d love to say we have a schedule on make them happen in a certain month and certain quarters, but it doesn’t work out that way. So, we just work really hard on these deals and hopefully we can close them as soon as possible.

[Laura Lederman:]

Well, are they relatively small, one small, another medium, another large, can you just kind of give a sense of types of size of things you are looking at now and also going forward?

[Mike Doyle:]

I would say a range and I would say that pricing is a little bit more aggressive now on the part of sellers with the recovery in the economy. So it’s a range and pricing has bumped up a little bit, they’re sort of all over the map.

[Laura Lederman:]

And final question from me and then I’ll pass it on. Pricing, if you look at price increases, what are you expecting to do, what are you seeing in the market in terms of pricing? Thanks a lot, guys.

[Charles Rutstein:]

Sure. Laura, its Charles. We did our pricing at mid-year, as we often do. We talked about it on the last call, of course. Given the change that we made in the packaging model last year, that has implications for the pricing and that’s why it’s a little hard to communicate to you a single number of pricing that we took up across the board because we took it up for particular segments, for particular products. Maybe the best comment that I can give you at this point about pricing is that the price increases that we took appear to be taking in the market. We are getting those price increases. The level of discounting is at a very reasonable level. So we don’t see any headwinds on that front.

[Operator:]

Your next question comes from the line of Dan Leben with Robert W. Baird. Please proceed.

[Dan Leben:]

Thank you. First, agreement value this quarter up 4.5%, help me understand the disconnect between that and the really strong increases in deferred revenue and then deferred revenue plus future AR.

[Mike Doyle:]

Yes and a couple of things, Dan. It’s a good question. We are still lapping a change in methodology, right. So, our agreement value currently only carries the first year of any multi-year agreements that we have whereas historical numbers captured both the first and second years of multiple-year deals. So that’s one aspect of it. AV excludes consulting agreements. So, we don’t have that activity, whereas in deferred revenue and future AR, you’ve captured a lot of that activity. So, we tend to look at deferred revenue plus future AR as being the better metric, because it’s all forward-looking and we think it better captures the activity that’s going on in the business.

[Dan Leben:]

Okay. And then just a follow-up on the capital structure with the dividend. Going forward, depending on the pace of acquisitions and what not, looking at an additional special dividend at some point in the future as you continue to build cash, is that on the table, or have you given any thought to a more regular dividend?

[Mike Doyle:]

The capital structure piece, which I implied in the remarks, I think the Board has kept capital structure decisions firmly on the table, and I think that each year the Board is going to look at our situation and determine what’s the best way to enhance shareholder value, and that -you’ve described the elements that they will consider, which are certainly acquisition activity and funds required for both acquisitions and internal investment, which are still the best uses of our cash. But again, given our model, we tend to throw off a lot. And then looking at the capital structure options, absolutely things that are still on the table are more aggressive share repurchase, special dividend or ongoing. Those things have not been ruled out by the Board nor have they committed to anything. So those things will be on the table again as we go into 2011.

[Dan Leben:]

Okay. And then if you could just give us, kind of, the Board’s thoughts on share repurchase with the stock being fairly thin as it is. Is there any, kind of, desire to leave a certain amount of shares out there in the market?

[George Colony:]

We definitely don’t want see float drop, Dan. So that’s absolutely a concern. So we are balancing the need to repurchase when we think the shares are under-priced and undervalued with making sure that we don’t take too much out of the system and restrict float. I don’t think we’re at that point yet. I think there is other things we can do down the road to deal with the float issues. So we’re going to focus, I think, in the near term with the authorization in terms of buying shares back. I mean, I think at the levels we’re now, we can continue to buy shares and I don’t think we’re going to hurt our float activity in a meaningful way.

[Mike Doyle:]

As part of the dividend, Dan, it may simulate options exercises by employees to capture the dividend. So that may bump weights a little bit here.

[George Colony:]

Right, it could push shares out into the system, which we would certainly want to absorb back in.

[Operator:]

And the next question comes from the line of Brian Murphy with Sidoti & Company. Please proceed.

[Brian Murphy:]

Hi. Thanks for taking my question. Just had a question on the sales force expansion. George, I think you mentioned that the sales head count is up about 16% as of the end of the quarter and that you were on track to hit sort of did you say 20% growth or was that the 15% to 20% growth range?

[Mike Doyle:]

Well, our range is 15% to 20%, I would say, looking at Charles here, that we are going to probably get close to the high end of that range.

[Charles Rutstein:]

Yes, I mean it’s certainly going to go north of where it is, Brian. How much is a little bit hard to say. You may recall last year that we made an aggressive push in Q4 as well. A lot of those heads actually landed on the 1st of January, so they got captured in our Q1 numbers. You may see the same phenomenon here, but it’s certainly going north.

[Mike Doyle:]

We had a job fair in Boston this week I think, for sales people, and a very successful job fair. So, we are aggressively hiring.

[Brian Murphy:]

Okay. Sounds good. And, George, could you just elaborate a little bit on some of the investments you are making in client-facing technology, and also are these ongoing expenses?

[George Colony:]

I’ll comment broadly, and then Mike can go to the expense flow here. So, we have invested in two areas to date and a third ongoing. The first was the blog platform, which has been active now about nine months. The second was the communities, which is, as I talked about in the call, big part of the role strategy in Q3. The third element is, we are investing in a new website and making very actually quite significant investments this year and they will go into next year as well. And, it’s pretty exciting, the work we are doing here, but you won’t see any changes until Q1 or Q2 of next year. As far as the expense flows, I’ll give it to Mike.

[Mike Doyle:]

Yes, in terms of the expense, Brian, what’s going to happen is, early on as you are doing the work, when you haven’t yet decided what, for example, the website is going to look like, what the final piece is going to be, all the activity that is associated with that in the beginning is expensed. Now, as we get into the mode of, okay, we finalized what it’s going to look like and we’re in pure development, basically product design and basically getting it in place, the bulk of that work will be capitalized. So I think what you’re going to see is the diminishing of what we will be recording as expenses during the course of a quarter. You’ll see cap spending pop up a little bit as it relates to that, and then that gets amortized typically over three years. So you’re going to see more and more shift to capital and over the course of the balance of this year and into next year.

[Brian Murphy:]

Okay. So, how should we think about G&A expense in 2011, just broadly? I mean, should we see that to be, sort of, flattish versus 2010?

[Mike Doyle:]

Yes, I think as a percent of revenue I certainly don’t, at this point, expect it to creep up dramatically. As we make these investments, we probably will be adding additional head count to our IT organization, our internal IT organization, not necessarily our client group. So you will have some expenses there. But as we continue to invest in technology, we begin to leverage things and get some productivity out of it. So I think we’ll get a little bit of an offset. So I don’t expect that we’re going to see a dramatic movement as a percentage of our revenue next year.

[Operator:]

Your next question comes from the line of Bill Sutherland with Boenning & Scattergood. Please proceed.

[Bill Sutherland:]

Thanks. I do feel scattered. Hey. I apologize I came in in the middle of Mike’s commentary. Did you, George, get into anything going on on the new product front?

[George Colony:]

I did not. I talked primarily, Bill, about the expansion of our communities for roles. We’re now up to 10 communities for 10 roles and we will be seeing all 19 roles by the end of this year.

[Bill Sutherland:]

Okay.

[George Colony:]

The primary areas of new products that I covered.

[Bill Sutherland:]

Okay. And so as far as roles, so that’s status quo?

[George Colony:]

No new roles. Remember, there are 4 million executives in the roles that we address currently, remember this is about $9 billion of opportunity, so it’s not like we need a new role to drive the model. We need to get to those 4 million executives that are currently in the 19 roles that we address.

[Bill Sutherland:]

Okay.

[George Colony:]

So no new roles this year, and planning for next year, considering, but not necessary.

[Bill Sutherland:]

And when you guys look at the numbers that give us some sense of the momentum, the deferred revenue and future AR, is it pretty even across the IT and market research and digital media areas?

[Charles Rutstein:]

Hi, Bill. It’s Charles. I’ll take that one. So, it probably would not surprise you that the marketing and strategy client group is growing the fastest among those, mostly because of the uncertainty in that marketplace. George did touch in his remarks on a bit of the social media stuff. We released our latest book in the quarter, squarely on that topic. So, they are growing the fastest. The other two are lagging a bit behind that, but I think still growing right about where we want them to grow, so very aggressive growth rates.

[Bill Sutherland:]

Charles, while I’ve got...

[George Colony:]

All aggressive, with M&S being the most.

[Charles Rutstein:]

That’s correct.

[George Colony:]

Yes.

[Bill Sutherland:]

Right, right. And then sales cycles, any change in those?

[Charles Rutstein:]

No change within the quarter, Bill. Some change certainly since this time last year. So if you look at it year-on-year, it’s an awfully different story, but sequentially virtually unchanged.

[Bill Sutherland:]

Okay. And then last, Mike, when you were talking about those investments that you’ve been making this year, mostly current, have you guys talked about what that kind of aggregated to for the blog, the communities, and starting out now with the new website development?

[Mike Doyle:]

On the quarter it was 800,000, Bill and my guess is, all in, we are probably a little north of 1 million so far. I think there will be some additional expenses not to the level, for example, that we saw in this quarter that will occur in the fourth quarter. But we will begin moving into, what I call, a more heavier production mode around the website that you’ll see the capital spending in that area go up. So it’s shifting out of a near-term expense into capital as we rotate forward because we’re going to be in production mode in terms of real production development on the site, so you’ll see capital spike up. And in aggregate I think next year, we’ll, probably in February, give an update on capital spending because next year we’ll see a spike up both as it relates to this kind of investment as well as because we’re moving into the building you’ll see an increase in leasehold improvements and things like that. So next year will be a little bit of an aberration and we’ll give you much more detail on the February call on that.

[Operator:]

(Operator Instructions) Your next question comes from the line a follow-up from Laura Lederman with William Blair. Please proceed. Ms. Lederman, your line is open. Okay. We’ll go forward to the next question. Your next question comes from the line of Brian Murphy with Sidoti & Company. Please proceed.

[Brian Murphy:]

Hi. Thanks. Just a quick follow-up on your build-out of these communities. George, could you give us some color on what your expectations are as you build out your social capabilities and these communities expand? I mean, what are you thinking in terms of how that might affect client retention rates?

[George Colony:]

I’ll get 20,000 feet for you here, Brian. We have an idea what we call internally Value 360, which says that we want to bring the value from Forrester to our clients is, let’s call it, 180 degrees. There is 180 other degrees out there to bring to a client, and mostly that comes from other clients as it turns out. If you are in a role, if you’re an enterprise architect, you’re constantly looking for mistakes you could make that you want to avoid, the best practices that you want to pursue, the right product to buy at the right time, the products to avoid at the right time, and so the communities are intentionally built for our clients, by the way, I’m talking about the research communities here, not the FLB. The FLB communities are just private communities for the FLB members, but the research communities are built for our clients and for the outside world. Anyone can join those communities. So what we’re looking to do here is to build a very, very wide group of executives in those specific roles that can share information, show us best practices, share the right vendor, the wrong vendor, and by doing so, we then become somewhat of an arbiter or broker for that 360 degrees of value coming to our clients. So, we think ultimately that they could become very valuable communities and they will inhibit, they will stimulate our clients to renew their contracts and also for clients who are not currently clients to become part of the community. So, we see this as critical to the value proposition. And, especially as you get younger executives moving into those roles, they live, they swim in that water and they breathe the air of social and this is how they operate, this is how their networks are built. So we see social as fundamental to the role strategy

[Brian Murphy:]

Interesting. Thanks very much for the detail on that. That’s it from me.

[Operator:]

There are no more questions in queue. So I will turn the call back over for closing remarks.

[Karyl Levinson:]

Thank you very much, operator. Thank you, everybody for joining the call today. Enjoy the rest of the day. Bye.

[Operator:]

Thank you for you participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.