Forrester Research Inc (FORR) 2003 Q1 法說會逐字稿

Please stand by for real time transcript. The Forrester Research company conference call will begin shortly.

Welcome to the Forrester Research first quarter 2003 financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a q&a session and instructions will follow at that time.

Should you require assistance during today's conference call please press star zero and a conference coordinator will be happy to assist you. As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the program over to your host, Kim Maxwell, Director of Investor Relations. Please proceed.

Good morning and thank you for joining our first quarter 2003 conference call. With me today are George Colony, Chairman and Chief Executive Officer and Warren Hadley, Chief Financial Officer. Today's call is in three sections. Warren will detail our first quarter 2003 financial results. George will take you through a review of the first quarter, the Giga integration and our plans for the second quarter. We will complete the call with question and answer session.

A replay of this call will be available until Wednesday, May 7 and can be accessed by dialing 617 801-6888. Please reference the passcode: 8389910. This call is also available via webcast and will be archived in the Investor section at forrester.com until Wednesday May 7th.

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 expect, believe, anticipate, 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 a result of new information, future events or otherwise.

Now I'd like to turn the call over to Warren.

Thanks, Kim. Good morning. Over the next several minutes I'll review Forrester's first quarter results, the balance sheet at March 31st, our first quarter metrics, and the outlook for our business for Q2 and full year 2003. Let me begin by updating you on our purchase of Giga Information Group and its impact on our Q1 financials.

The deal was completed on February 28, 2003. As a result of the acquisition, our Q1 2003 financials are consolidated and reported as follows. Our first quarter income statement includes revenue and expense from Giga operations from Marched and as compared with Forrester stand alone income statement for Q1 2002. The balance sheet at March 31st 2003 include Giga and as compared with Forrester's stand alone balance sheet at March 31st 2002. And finally our guidance for Q2 and full year 2003 represents fully integrated, consolidated financials.

In addition, please note that the income statements I'm reviewing today are pro forma to provide investors with consistent and comparable information to aid in the understanding of Forrester's ongoing recurring business. Our press release [inaudible] filed this morning contain GAAP income statements and guidance which are both reconciled to the pro forma information provided.

The pro forma income statements I'm reviewing this morning reflect adjustments for the following. One, we have excluded amortization of acquisition related intangible assets of 924,000 in Q1 2003 and 82,000 in Q1 2002.

Two, we have excluded 300,000 and 2.2 million in Q1, 2003 and Q1 2002 respectively for writedowns related to impairments of certain nonmarketable investments.

Three, our Q1 2002 income statements excludes reorganization charges totaling 9.1 million related to workforce reduction and space consolidation in that period.

And four, we have assumed an effective tax rate of 35% for pro forma tax purposes in Q1, 2003 and 30% in Q1 2002.

With that, let me turn to our [inaudible]. First quarter revenue was 24.8 million, a decrease of 5% from 26.1 million in the first quarter last year and at the high end of our revenue guidance provided last month. Net income was 2.5 million, a decrease of 26% from 3.3 million last year. Earnings per share were 11 cents on diluted weighted average shares outstanding of 22.9 million compared with 14 cents and 23.1 million shares last year and were slightly above the guidance we provided last month.

As a result of our acquisition of Giga we have reclassified our revenue presentation in Q1. Our new revenue categories are as follows: Research Services and Advisory Services and other. Research Services revenue includes core research revenue as previously reported plus our unlimited analyst access revenue.

In addition it now includes Giga's advisory research revenue. Advisory services and other revenues made up of Forrester's advisory services and events and Giga's consulting services and events. We have reclassified last year's revenue presentation for comparability purposes.

Our first quarter research services revenue was 18.8 million representing a 5% decrease from 19.8 million last year. Research services revenue income comprised 76% of total revenue in the first quarter compared with 76% in Q1 2002. Advisory services and other revenue was 6 million, a decrease of 4% from 6.2 million last year. Advisory services and other revenue comprised 24% of total revenue for the quarter compared with 24% in Q1 last year.

We held four events in the first quarter. One Forrester Forum, one Forrester Summit and two Giga events. For Q2 2003 we plan to host four events. Two Forrester Forums and two Giga events and expect advisory and other revenue to comprise 24 to 28 % of total revenue, and research services revenue to be in a range of 72 to 76% of total revenue.

On a geographic basis 28% of Forrester's first quarter revenue was derived from international sales, the same has in Q1 last year. We expect international revenue to comprise 26% to 30% of total revenue for 2003.

Turning to expenses, operating expenses for the quarter were 22.6 million down from 22.8 million last year and in line with our plan for Q1. Operating income was 2.2 million or 9% of revenue compared with 3.2 million or 12% of revenue last year.

Now I'll review the balance sheet. Our cash balance at March 31st was 140.6 million a decrease of 54 million from year end. The decrease in cash balance is primarily due to two items.

One, we used approximately 52 million in cash for our purchase of Giga in Q1. We expect to make additional payments totaling approximately 8 million in the second quarter to purchase the remaining Giga shares through the second step merger.

And then two, during the quarter we also used 5.2 million for the purchase of 386,000 shares of our stock pursuant to our buy back program. To date, we have spent 25.3 million of cash to purchase 1.6 million shares on the open market. We expect to continue to be active with our stock buy back in Q2.

Accounts receivable at March 31, was 22.6 million up from 17.8 million at the end of 2002. Our days sales outstanding was 74 days compared to 79 days on March 31st 2002 and AR over 90 was 8% at 3-31 compared with 6% at 3-31 '02. The increase in percent over 90 was due to the addition of Giga accounts receivable which we plan to improve over the next two quarters. Net property and equipment increased to 12 million from 10.7 million at the end of 2002.

Our Q1 2003 capital spending was approximately 100,000. And our plan for the full year is 2 million. Deferred revenue onMarch 31st was 67.4 million compared to 53.4 million at March 31st last year representing a year over year increase of 26%, which was due to the addition of Giga's deferred revenue.

And now I would like to review Forrester's first quarter metrics. Agreement value is the total value of all contracts for research and advisory services in place without regard to how much has been recognized or has yet to be recognized as revenue.

Agreement value was 124.1 million at March 31st a 38% increase from March 31st 2002, again due to the addition of Giga's agreement value at 3-31 '03. Forrester's retention rate for client companies at March 31st was 59%, up from 57% in Q4. Our dollar retention rate at March 31st was 73% up from 71% in Q4.

These rates are calculated on a 12-month basis and do not include Giga. Both rates are the highest we've recorded in eight quarters. Giga's retention rate for the twelve month ended March 31st, calculated under Forrester's methodology was approximately 65%. We will report one consolidated retention rate going forward.

At the end of the first quarter our total for client companies including Giga was 1,788 representing a 16% increase over last year. For head count at the end of the first quarter Forrester had a total staff of 608, up from 344 at the end of last year. Current head count includes research staff of 202, up from 101 at the end of 2002 and sales staff of 208 up from 105 at the end of 2002.

The last topic I'd like to cover today is our business outlook for Q2 and full year 2003. We are excited about the opportunities that exist as a result of the Giga acquisition. Integration is well underway and slightly ahead of plans.

The guidance we are providing today is pro forma and excludes amortization of intangible assets which we expect to be approximately 2.6 million for Q2 and 8.7 million for full year 2003. Integration related expenses which we expect to total 1 to 2 million in Q2, and any impairment of nonmarketable securities.

For Q2 2003, we expect to meet the following financial targets: Revenues of approximately 33 to 35 million, a pro forma operating margin of 8% to 10%, interest income of approximately 800 to 900,000, a pro forma effective tax rate of 35% and pro forma diluted earnings per share of approximately 10 to 12 cents.

For full year 2003 we expect to meet the following financial targets: Revenues of approximately 125 to 130 million, a pro forma operating margin of 10% to 12%. Interest income of approximately 3. 8 to 4.2 million. A pro forma effective tax rate of 35% and pro forma diluted earnings per share of approximately 47 to 53 cents.

Thank you. I'll a now turn the floor over to George.

Thank you Warren and good morning everyone. I will start off with a review of the first quarter, including an update on the integration of Giga, I will then finish with a look ahead to Q2.

Q1 was an exciting quarter. We held three events. Our launch of pull research products ran on schedule. The deal to acquire Giga was completed. And finally, Giga integration ran throughout the quarter, intensifying in March. Now I'll discuss these milestones in more detail.

Before we move to the quarter I should point out we had a significant win in Q1. Client company renewals including Bain, Bearing Point, Best Buy, Commerce One, Eaton, Honda, Intel, Procter & Gamble, Novel and Toyota. New client companies in the quarter included BMW, Level Three and Logic Tech. And win backs included Bank of America, Fleet Boston, [inaudible] and XO communications.

We held three events in Q1. The tech leadership forum focused on organic IT. Outside speakers included Bruce Claflin the CEO of 3Com and Steven David CIO of Procter & Gamble. The automotive summit focused on the changing automotive OEM business. And finally Giga's application development conference was held in March.

Event attendance in the quarter was obviously a challenged by travel restrictions in the war. Despite lowered attendance we were still able to run profitable events primarily through careful expense control.

Turning now to new products, on the Q4, 2002 call I talked about our transition to become a push plus pull research company.

Pull research is client directed. The client is in a sense pulling the research to them. Examples of pull would include boards or intensive advisory projects.

Pull contrasts with push research, that's the syndicated broadcast form of research that we've always sold. Forrester's strategy is to combine the high influx of expertise of our traditional push research with the strong client relevancy of pull or client directed research. I'll update you now on the progress of our pull research offerings.

The Oval program, and that's our board's business made significant progress in Q1. Giga's Foresight CIO board was combined with Forrester's CIO group in the quarter. The CIO group now has 80 members including CIO's from Booze-Allen, M-Corp, Federal Home Bank of Atlanta, General motors, Infosys, Verizon and Ralph Lauren.

In addition to the CIO group we now have three new boards all coming over from Giga. These boards are directed at specific technology positions in one B plus companies. They include the Applications Development Council, the Security council and Enterprise Architecture council. We have 50 council members. Forrester's CIO group and technology councils offer four advantages over competitive offerings. Number one: broad coverage of technology positions.

The oval program includes CIOs and the most important technology support titles reporting to the CIO. Number two: deep primary research drawn from Forrester's core database. Number three: deep expertise. The CIO group and technology councils are staffed with technology experts with more than 85 years of experience. These are not generalists. They're former CIO's, technology executives and technology researchers. Number four: vertical market insight.

Forrester's strong understanding of financial services, media, retail, healthcare, automotive, consumer package goods, telecom, travel, electronics and manufacturing increases relevancy for Oval members. Simply stated, Oval's advantage is research.

We are not just feeding best practices back to our board members. We're offering best practices plus insight. And we are able to do this because technology is our business, it is not just one of 14 topic areas that we dabble in.

I'd now like to turn to a new pull product launched in Q1 -- Custom Consumer Research. CCR allows clients to tap into our technographics to answer specific questions about their customers. As an example, we are helping a very large North American hotel chain to decide pricing strategies for its different hotel brands. Our work provided the client with a deep dive into their customer's buying habits, brand loyalty and pricing sensitivity. Nine clients were served by CCR in the first quarter.

Our intensive advisory program continues to grow. The strategy advisory staffs from Forrester and Giga have now been combined. Giga's TEI, or total economic impact, a methodology which quantifies the economic impact of technology vendors has been added as an intensive advisory offering. Forrester's intensive advisory clients include a world class [inaudible] provider, a 1 B plus pharmaceutical company and top five North American financial services firm. The average size of intensive advisory project stands at $100,000.

I would like to update on the Giga integration. We are now one company. Giga is not a subsidiary. It is operationally combined with Forrester. Client facing products and teams will not change in 2003. We will not disrupt client relationships. The client has come first in all integration planning.

We sell two distinct brands now, the Forrester WholeView and Giga Advisory. Clients will continue to be served by the same research and account teams. We have achieved significant infrastructure economies in finance and accounting, information technology, human resources and marketing. We are proactively cross-selling the Forrester and Giga products. We believe the combined value proposition has inherent strengths. Forrester helps you plan. Giga helps you act.

Aligning planning and action will help one B plus companies get the highest returns from their technology investments. We have the potential to cross sell to 1600 companies: 800 Forrester only, 800 Giga only.

Even though our cross sell has just begun, there have already been good examples of successful cross selling. KLM Airlines, a traditional Forrester client, recently added Giga Advisory as a compliment to WholeView. KLM saw Forrester as the best combination of pragmatic and strategic advice. Finally, we've accelerated integration process by bringing Forrester and Giga people together.

Two weeks ago we brought all North American employees of Giga and Forrester to Cambridge for three days. This was a combined kickoff, planning, socializing, training and goals alignment session. Last week we held the same session for employees in Europe. All Giga employees in Cambridge are now located at Forrester's headquarters at 400 Technology Square.

I should point out that all of us are very excited about the potential of this deal. Morale is good. The level of collaboration is already very high. There has been no attrition in the Giga research staff. Giga's sales staff has attrited four people.

Turning to our plans for Q2, we will be very focused on executing as a combined company in the quarter. This will mean, number one, clients first, continuing to provide excellent, uninterrupted service to our clients. Two, continuing to develop the cultures. Three, cross selling the Forrester Giga products and widening our client base for pull products, including Oval boards.

We will host four events in Q2. The European Tech Leadership Forum was held in Amsterdam in early April. The finance forum will be held in New York City in May, next week. Outside speakers of the finance forum include Scott McNealy CEO of Sun and Carl Pascarella, CEO of VISA USA. Giga World U.S. and Giga World Europe will be held in May. Giga World will focus this year in helping companies reduce IT costs while increasing business returns.

I want to end by noting there's a lot of excitement at Forrester these days. We've new products, Giga integration, our solid base of clients and our strong financial position and all of these mean that we can be the differentiated alternative in the technology research business. We can be the company best positioned to help large companies plan and act on their technology decisions. We look forward to seeing many of you while we're on the road this quarter. Thank you for listening in on the conference call. Warren and I will now take questions.

If you have a question at this time, please press star one on your telephone. If your question has been answered or you wish to withdraw your answer, press star two. Questions are taken in the order they are received. The first question is from Fred McCrea. Your question, please.

Good morning, everybody.

Good morning, Fred.

Couple questions. First, you talk about the rationale or any that has taken place at the Giga staff as a result of the merger. Can you quantify if there has been any.

Sure Fred, in the first quarter we did have a reduction of staff in March. The plan is about 55 people that were reducing, of which about 30 were out in March and about 25 people on transition to get us through integration through the second quarter.

Any estimated ...

Mostly SG&A and some marketing.

Any assumption about what that should look like?

From what standpoint?

In terms of total cost savings.

On an annual basis?

Yes.

Probably million and a half to $2 million range.

Perhaps you can talk a little bit about the sales process. George, do you envision that? Obviously it looks like we're still working with one research group in the Giga product and the sales force is supported the same with Forrester in an effort to keep the client continuity. What are your thoughts beyond this year going into '04

Just to reiterate this year, Fred, if Giga will sell -- Giga sales guys still sell Giga, Forrester will sell Forrester. So if I'm a Forrester sales person and I'm working with a client and they want Giga, then I'm going to work with a Giga sales person. Next year, obviously this rationalization will happen throughout this year. We don't want to unplug any wires for the client. So obviously the client comes first here. So this is a long transition. I'd say it will probably take us 12 months to fully rationalize the sales force. Obviously, it's not going to make sense next year to have two people selling to HP right? There'll be one person there eventually.

Understood. And you'll migrate them to your sales model that you've been working on?

They'll all come over to solution selling. They're actually coming over to [inaudible] as we speak. Their forecasting system was okay, but not great. We have a very good system at [inaudible]. So they will be over, I believe by the end of this month. They'll be using all of our systems. Jeff from our sales force went over to run the Giga sales force.

Very good. Finally maybe you can talk about Forrester business and the stand alone. Some of this is from Warren's comments. Some improvement in renewal rates. Maybe you can talk about that, in terms of what might have been driving that.

I would say the renewal rates are 59% highest in the past eight quarters on a client company basis. I call the quarter pretty much a stabilizing quarter. [inaudible]

It wasn't a big jump forward. The war and SARS and everything else going on, it's been crazy, but it continues to stabilize here.

Plus there was a lot of time spent on the integration planning and the deal itself, so. If you look at the Forrester stand alone, Fred, 46% of our clients now are one B plus companies and as we talk about [inaudible] they don't tend to move out. It's a basis that's moved closer to 50%. It has helped stability.

Any insights into Q2 in terms of increasing initial feedback from the sales force in terms of increasing [inaudible]

At least in April, I did not -- no big jump forward here. Incremental improvements. There's no decline in business but there's no big jump forward either. So we're still very guarded on the quarter.

What about Forrester stand alone customer account?

How so?

In terms of, we looked at the combined number, how did that compare any net adds, net gains for Forrester in stand alones?

Client companies for Forrester stand alones at 3-31 is 1,028. We were down a net 97 for the quarter. We had 88 new clients and 185 lost clients. Some of that is seasonality. We do have about 40% of our business is booked in the 4th quarter. And our renewals come up for renewal in the fourth quarter. So, a lot of these are clients that we actually lost in Q4 but they were still with us until the end of the year and they actually come out of client company accounts in Q1.

Perfect. Thanks, much.

The next question is from Sandra Notardonato. Your question, please.

Got your name right, Sandy.

We've been practicing. A couple questions on the Giga contribution. First, if you're willing to give what Giga contributed in the quarter, in terms of revenue, agreement value and deferred revenue and what the guidance for 2003 includes from Giga.

Sure on the revenue line item they contributed I believe the number is 5.4 million. In deferred revenue it was 27.1 million and then on the agreement value side they contributed 55.2 million.

Okay. The revenue number seems a little bit better than what I was expecting. Was the agreement value and deferred revenue better than what you were expecting in the quarter or was it as --.

It was pretty much as planned.

What about for 2003.

The 2003, they're fully integrated into Forrester's numbers. It's our guidance for the full year.

So there's no way to break out what you expect.

As we go forward, Sandy, our systems are all going to be one system. We're going to have clients -- they're all going to be on one contract so both products -- it will be tough to tease apart. It was easy enough to do at 3-31. But going forward it will be very difficult to tease apart client companies based on are they buying this product or that product. So we do have a lot of -- just to give you some quick numbers here, Forrester had about 28 client companies. Giga had 1,012, but there were 252 overlapping client companies.

Okay.

So the net there-- that's how we get down to 1788. And it was somewhat easy to do in Q1 because there was just one month of it. But as we go forward, the numbers are gonna really become joint.

And actually that overlapping number was a good leadin into my next question. You had a little bit more time to go through the data. What percentage of the Forrester clients and Giga clients, do you think that there's a reasonable chance to cross sell in Q4, which I think is a big quarter for you in terms of renewal rates.

It's up 40% for us, actually it's 40% for them as well. Aggregated 40%.

Is there a plan for Q4? And if you could talk about next year that would be helpful.

I would say for Q4 it will be about 350 companies on both sides. Almost 700 companies in Q4. 1600 total for the year. We talked about this before. When we were looking at the deal back in December this was a real tipping point for us when we saw those client lists. We realized how little overlap there was. So that's very good news for us.

Our approach here Sandy, is to be very proactive in the cross sell. That's one of our three imperatives for Q2 and the year. We also have a very proactive plan for the overlapping clients. We don't want our overlapping clients to come back to us and say we want a huge deal. We want to go with them with a proactive deal. And that's actually a very attractive deal that we have for them. We're being proactive on the overlapping clients as well.

Additionally on the cross sell opportunity, sales have a specific program in place to make sure that sales people from Giga and sales people from Forrester are working together to make that happen.

A lot of collaboration going on there.

The win-back rate that you mentioned on the call, have you seen an acceleration since you started to look at this or has this been steady quarter over quarter?

Win backs for Forrester stand alones?

Yes

I don't have the numbers, I can think of some names of some companies, but I don't have the actual numbers but we can get 'em for you probably.

Yeah, I can get those for you.

OK ... that would be helpful. You also mentioned that the integration process has been running a little bit ahead of plan. What exactly is ahead of plan and what drove that?

I'll say a few words here and Warren can light the stage here. We did not believe the deal would close until March 17th, and the deal closed February 28th, which is good news for us. Because if you were a Giga employee, you were hanging out there. There was tremendous uncertainty. People can deal with change but they can't deal with uncertainty typically in business. That was great that this happened almost a month early for us. We started planning integration actually January 3rd, even before we announced the deal.

I am -- I don't want to be too effusive here. I'm very proud of what the team did in the quarter. The management team just worked beautifully with the Giga management team and we got a lot done. So we really emerged on April 10th as a fully integrated company. That has helped across the board in sales collaboration and research collaboration and just taking uncertainty out for the Giga people. I don't think it could have gone faster than that. Okay. Well, thank you very much.

Okay. Thank you.

The next question is from John Patak of William Blair & Company.

What percentage of the customer base is up for renewal in current quarter?

On the Q2, approximately 22%.

And then did you give -- you had previously given a plan for the full year of events. Did that change?

It did change because we had the Giga events.

What is that now?

The total? Kim do you have that?

There's the two Giga Worlds this quarter John, and those are larger events and they have a very small one in December. So --

Those are the only additions.

Those are the only additions to what we had previously announced for the full year. Full year are seven forums and one summit.

Plus we're adding two Giga Worlds plus one smaller event in December for Giga.

Did you give the average contract size by advisory.

The average contract size for Q1 for the research services was 44,000, down 1% from a year ago of 44,400 and for our research and advisory contracts, the average contract size is 78,500 down 8% from 85,700 and those are Forrester only contracts, and going forward we will be combining Giga contracts in with those. Giga's average contract size is definitely smaller.

Great. Thanks.

If you have a question, please press star one on your touch tone telephone. There are no more questions at this time.

Great. Thanks for joining us everyone. We'll see you on the road this week, this quarter. Thank you very much.

Ladies and gentlemen, this concludes your call for today. You may now disconnect. Good day.