Forrester Research Inc (FORR) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the 2nd quarter 2003 Forrester Research earnings call. All participants are in a listen only mode. A question and answer session will be conducted after the prepared remarks. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. This conference is being recorded. Is it is now my pleasure to introduce your host, Miss Kim Maxwell, Director of Investor Relations.

Thank you for joining our 2nd quarter 2003 conference call. With me today are George Colony, Chairman and CEO and Warren Hadley, Chief Financial Officer. A replay of this call will be available until Tuesday August 12th and be can be accessed by dialing 877-660-6853. Please reference the confirmation ID 71979 and the confirmation account 2147. This call will also be archived in the Forrester Research, Inc. website and will be available until August 12th.

Before we begin, I'd like to remind you that this call will contain forward looking statements within the Private Litigation Reform Act of 1995. Words such as expects, believes, anticipates, intends, plans, or similar expressions are intended to identify forward-looking statements 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 factors that could affect future activities and results to differ are discussed with 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 would like to turn the call over to George.

Thank you, Kim and good morning everyone. I would like to review the 2nd quarter, a brief look ahead to G3 and an update on the integration. We will move on to a financial review and then take questions.

Revenue for the 2nd quarter was $34.7 million. Proforma net income was $2.5 million, proforma EPS was 11 cents per share. Our cash position as of June 30th, was $135.6 million. While the company's pleased to meet financial guidance for the 2nd quarter, I will say the selling requirement remains quite difficult. Technology spending is guarded. As you know, Forrester surveys large corporations every few months. Our December 2002 survey, now over 6 months old, tech spending was expected to increase 1.9% in 2003. That's a very low number. We've just shown that companies have reduced the plan either further to 1.3%.

This environment is having impact on Forrester. While the renewal of existing business has improved, new business success has been inconsistent. With the exception of some of our new products, I expect our core business to remain dampened throughout 2003.

In spite of the challenging environment, we did have important wins in Q2. Client company renewals including Boeing, Lucendent, Fed Ex, Colar, Triple A, Land's End and Varitime. New companies in the quarter includes 1-800-Flowers, Home Depot, Liberty Mutual, and Tuffs Health Plan. Win backs were Carlton companies, Zemen and T Low Price.

In the second quarter, we held four events, which included [INAUDIBLE] giga world, European Tech World, and the finance forum. Despite low attendance, we were able to run profitable events primarily through careful expense management. We launched our 11th technology category, demand managment technology. 60 vendors came into our lives for our latest launch, including [INAUDIBLE], J.D. Edwards and Presient. Customer Consumer Research showed launch in Q2. Just to refresh you on this, CCR leverages us to give marketing and business clients direct insight into their specific customers. We signed four new products in Q2, including a 10-year look ahead at consumer research for international electronics companies.

I am very pleased to report that the oval program, our Boards business showed strong growth in Q2. As you remember, there are currently four Boards in our oval program. The CIO group and three technology counsels. The CIO group now has 93 members, including CIO's from Boeing, Canada Post, General Motors and Liberty Mutual. Members have engaged in two research projects, the first was focused on measuring the investments of IT investments and the second was a comprehensive study focusing on IT's agenda. The latter project included best practices from CIO's at Intel and AT&T, among others.

In addition to the CRR group, our three technology councils are gaining membership, including Endarkin Petroleum, Federal Bank of New York, the use of transportation and Washington Mutual. The cross sales ratio between the CIA group and the technology councils are beginning to ramp. We expect strong synergies between these two programs. The CIO group and technology councils have four advantages over competitive offerings. Number one, broader coverage of technology titles, we serve the CIO and direct reports. Number two, access to Forrester's deep primary research. Three, expertise. The oval staff has decades of experience in their subject areas, and number four, vertical market insight including health care, financial services, retail, CPG and travel. As our growth in the oval program accelerates, we are traditionally a push research company to a push plus pull. We're beginning to see cross-over between the two types of research. As an example, two weeks ago CIO left a competitor's board and Forrester's CIO group. One of the factors in this competitive win would be the contract of whole view and GIGA advisory seats. This is another difference in Forrester's push only and pull only clients.

In our next quarter we will have speakers [INAUDIBLE]. We will launch two new tech categories, enterprise content management. The priority changes in Q3 will center around the completion of Forrester and GIGA. This is what I call the final step of integration.

Turning first to the sales force, as of August 1, the sales force is one team. Those representatives are now organized geographically, and every sales person is selling all Legacy Forrester and Legacy Giga products. We are ensuring relationships are enhanced and geographically contacts have been enhancing relationships maintained with our clients. In August, the Forrester and Giga research teams will be fully combined. It will be called Orbitz. Teams that are focused on specific research and technology topics. We will have depth and better coverage, business analysts and IT analysts will be working side-by-side, a highly unique formula for our clients. The research and sales coming together, we have found efficiencies that have eliminated 30 positions companywide, more details forth coming in Warren's briefing.

Turning now to the integration of the product lines, we're working to create a unified syndicated research offering. After months of in depth discussions with our clients, we have developed a new core product offering, which is presently in final tests with customers. Feedback has been excellent. We believe we're building a high-value offering, providing exceptional competitive advantage. Now, I am not going to detail the combined product on this call, however I did want to outline the criteria guiding our design efforts. The goal -- I'll have to give you a list, number one, provide enhanced relevancy of the research. Number two, create greater intimacy with the clients. We have find higher connections increase renewal rates. Three, Grow new business, four, protect the group and value. Five, minimize client disruption. Six, we're looking for this new syndicated product to create excellent cross-over opportunities, and finally number seven, to increase differentiation. We are completing the final steps of integration with speed. By moving fast, we've reduced uncertainty with clients, prospects and employees. Our clients, we have found want us to win. We have been highly supported of the Giga & Forrester combination, and a very big help in the design of the new syndicated product. Employees recognize the need to grow with speed. The new organizational structure leverages our closeness. We've decided to sweep uncertainty off the table for the second half of the year and come together fast.

Now, undoubtedly, there are still many integration hurdles that remain. This catch brings with it very complex organizational and product implications. Yes, we are moving with speed but the challenges and risks remain. These are risks that are worth taking. We can effectively and uniquely serve clients behind the three doors of IT, marketing and business. We look forward to seeing many of you during this quarter.

I'll now hand the call over to Warren and we'll give you a financial briefing.

Thanks, George.

For the next several minutes, I'll review Forrester's second quarter results, year-to-date results, the balance sheet at June 30th, our second quarter metrics, and the outlook for our business for the 2nd half of 2003. Please note the income statement numbers I'm reporting today are proforma and exclude the following items. We are excluding integration costs in the 2nd quarter totaling 740,000 related to the Giga acquisition. Two, we have excluded investment gains and impairments which amount to a net charge of 272,000 in Q2. We have excluded amortization of intangible assets totaling $2.6 million. And we have booked our effective tax rate at 35% for proforma tax purposes. The actual anticipated tax rate for 2003 is 31%.

Forrester's 2nd results met guidance we provided on the Q1 conference call. Second quarter revenue increased 37%, 34.7 million from 25.4 million in the second quarter of last year. Net income decreased 20% to 2.5 million from 3.1 million last year. And earnings per share were 11 cents on diluted shares outstanding of 22.7 million compared with 13 cents and 24 million shares outstanding last year. 2nd quarter research services revenue increased 48% to $26.6 million from $18 million last year, and comprised 77% of total revenue for the quarter. Research services revenue includes revenue from a whole view and Giga research offerings, as well as our unlimited access and inquiry products. Second quarter services increased 9%, to 8.1 million to 7.4 million last year, and comprised 23% of total revenue for the quarter. We held four events in Q2.

We expect advisory and other revenue to comprise approximately 24 to 28% of 2003 total revenue, and research services to be approximately 72 to 76 % of 2003 total revenue.

On a geographic basis, 29% of Forrester's second quarter revenue was derived from international sales compared to 28% in Q2 last year. This is in line with our expectations that international revenue will comprise 26 to 30% of Forrester's total 2003 revenue. Operating expenses for the quarter were 31.7 million, up from 22.5 million last year. We worked diligently at rationalizing our G & A expenses immediately after the merger which will result in savings of 5 to 6 million on an annualized basis. Operating income is $3 million or 9% of revenue. Compared with 2.9 million or 12% of revenue last year, and in line with our target guidance of 8 to 10% for Q2.

Turning to Forrester's year-to-date results, total revenue for June 30th, increased 16% to 59.5 million form 51.5 million from the same period last year. Net income decreased to 23% to 4.9 million from 6.5 million last year. And earnings per share for the six months ended June 30th, were 22 cents, 22.8 million. Compared with 27 cents and 23.9 million shares last year. Operating income for the six months ended June 30th was 5.2 million or 9% of revenue, compared with operating income of 6.2 million or 12% of revenue for the same period last year.

Now I'd like to review the balance sheet. We continue to maintain a strong cash position. Our cash and investments at the end of the second quarter, were $135.6 million. In Q2 we generated positive cashflows from operations, cashflows from operations were approximately $1.3 million in the 2nd quarter and $4.9 million year-to-date. During the 2nd quarter we used 2 million of cash to purchase 133,000 shares on the open market pursuant to our stock buy back program. We have purchased $1.7 million shares for a total of 27.4 million since the inception of the buy back program. Our stock buy back program, which we announced in October, allows for the use of up to 50 million to purchase shares. We plan to continue to buy back shares in the 3rd quarter. Accounts receivable was 18 million. Up from 17.8 million at the end of 2002. Our day sales outstanding were 63 days, up slightly from 62 days last year, but down from 74 days compared to Q1 in 2003. AR over 90 days was 8%, consistent with 8% a year ago and Q1 this year, although 8% is in a target range, we'll be looking to reduce our percentage of AR over 90 through the second half of the year.

Net property and equipment decreased to 10.4 from 10.7 million at the end of 2002. Our capital spending was approximately 900,000. Mostly for computer equipment, which brings us to just over 1 million capital spending year-to-date. Our capital spending for 2003 is 2 million. Deferred revenue for June 30th, was 59.5 million, compared to 45.9 million at the end of June 30, 2002. Representing a year I've over-year increase of 30%, down 12% sequentially from 67.4 million at March 31st. This decrease in deferred revenue is due to the difficult selling environment we're in as George mentioned earlier.

Turning to Forrester's second quarter metrics, 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 by revenue. Agreement value was 116 million at June 30th. A 42 % increase over last year, but down 7% sequentially from March 31st. Forrester's retention rate was 62%, up from 59% in Q1. Our retention rate at June 30th, was 74%, up from 73% in Q1. These rates are calculated on a 12-month rolling basis and now include Giga client renewals of as March 1, 2003, the acquisition date. At the end of the 2nd quarter our total was 1777, down a net 11 on a sequential basis and showing more stabilization in the client base. Our head count, Forrester had a total staff of 589 down from 608 at the end of the first quarter. The total head count includes a research staff of 203 compared to 202 at the end of the 1st quarter, and sales staff of 207 down from 208 March 31.

The last topic I'd like to cover today is our business outlook for Q3 and the full year 2003. We have entered the stages of utilization which have combined the two research teams and the two sales teams. In doing so, we have identified efficiencies that went to the elimination of 30 positions or approximately 5% of our staff today. As we a result of these head count reductions, we expect to record a charge of approximately 1 to 2 million in Q3, and more importantly, we anticipate additional annualized savings of approximately 4 to $5 million going-forward. Additionally, we are currently in the process of evaluating our San Francisco office lease which will likely result in charges beginning in Q4. Our proforma guidance for Q3 is as follows and excludes amortization of identifiable intangible assets, which we expect to be approximately 2.6 million for Q3, and 8.7 million for full year 2003. Integration charges of 1 to 2 million for Q3 and 2 to 3 million for the full year 2003. Any impairments of nonmarketable securities and any charges related to the San Francisco market lease.

With that, for Q3 we're aiming to achieve total revenues of approximately 30 to 32 million. A proforma operating margin of 9 to 11 percent. And proforma diluted earnings per share of approximately 10 to 12 cents. For the full year 2003, we are revising our revenue guidance and reaffirming operating margins and earnings per share guidance as follows, total revenues of 120 to 125 million. A proforma operating margin much 10 to 12%, and proforma diluted earnings per share of 47 to 53 cents. We are providing guidance on a GAAP basis for Q3 2003 and our press release released earlier this morning.

Thanks and we will now take questions.

Thank you. At this time we will be conducting a question-and-answer session, if you would like to ask a question, please press star one on your telephone keypad. You may press star 2 if you would like to remove your question from the queue. For the participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Mr. Fred McCrea from Thomas Weisel Partners. Please state your question.

Good morning, Fred McCrea.

Hey, Fred.

How are you?

Good.

Quick question, George, in regards to the marketplace right now, in terms of the Giga relative to the Forrester traditional product offering, where are you getting the most traction? a definitive difference between the work the sales force is doing or the results they're achieving with the two various products?

We talked about this before, but the major budget cuts in technology and less on the IT side, I would say there's more traction on the Giga side than -- there's somewhat more attraction on the giga side.

I was just trying to get a feel for the change there.

No, it's the same --

And then we could talk about where the sales force is at right now in terms of the integration between the two. Has that process begun yet?

Yeah, they've been cross training for 30 days, Giga and Forrester. They're all selling right now. And geographical organization we're going to of the 7 regions, five will be run by Giga sales leaders, so there's a lot of -- they have -- there's something called magnetism between those groups, Giga wants to sell to Forrester and Forrester wants to sell to Giga. This is a reaction to cross sell in the quarter was not as strong as we wanted it to be in Q2, and by integrating the sales forces, we're already beginning to see much faster cross sell.

Great. Thank you so much.

Thanks.

Once again, if you have a question, press star one on your telephone keypad, keeping in mind if you are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our next question comes from Miss Laura Lederman, with William Blair & Company.

Can you talk about pricing in the industry and what's happening there, and also competitive environment or how that's looking as well. I guess those two questions are kind of related. Thank you.

Yeah, I'll give you a little color on this one. There is aggressive pricing coming from Medi Group and Guarder Group right now. I think they're trying to front run our joint syndicated product. We've seen a lot of aggressive pricing from those two players in Q2. By the way, I didn't mean we didn't win a lot of deals against them, but they're definitely pricing aggressively. On the Corporate Executive Board side, I would say that they continue to raise prices and they're giving us a really nice umbrella to price underneath their Board offerings, but that's the good news. Competitively, it's -- especially on the IT side, it really is the Giga against Medi and Guarder. With Guardner, it's the one we're really focused on at this point.

Shifting a little, I've been in technology -- I feel old, like almost 25 years now, George. And I have never seen a period where there's so little new. Are you seeing anything pick up? One of the things on the Forrester's side -- it seems as though we've been living in the environment for a status quo. All the CO's I talked to are making due with what they have. They don't feel there's a new technology they must have, that hurts the Forrester can side, we talk about technological innovation it do you see anything new happening out there in the labs and number two, you know, how does Forrester come up with new products when that happens? On the Giga side it doesn't affect it, but it certainly affects the Forrester side.

We talked about this two calls ago. There's a lot of change in technology, but there's not much buying going in technology, have you to separate those two. I spoke at the EPC conference a few weeks ago. Replacing bar codes with chips. And let me tell you, from the Wal-Marts to the Gillettes to the Procter & Gambles, there's a lot of change in those companies right now. Not just on the products themselves, but also on how to manage the data. Basically, the realtime understanding of the business, there's a lot of change going on in the consume per packaged goods being driven by the EPSC change coming up. These technological changes, web services -- what we call adaptive supply networks, what we call extended internet and executable internet, the main deal here is that there's a lot of cowardice out there on the part of CEO's, CFO's and CIO's right now. They won't step up to the plate for capital expenditure. There's a lot of change going on, but not a lot of buying going on. As I said in the numbers, you'll win from 1.9% in December, to that 1.3%. Those are very low numbers. And I expect that will persist through the year.

When do you think they'll start thinking strategically again.

We talked a lot about this and what it takes is a couple breakaway players in certain player [INAUDIBLE] once you go -- they're going to fall behind. Then you have to start to move to keep up. It's going to take all the cowards out there. Make the changes, get advantage and then begin to dry the business. That's what's going to happen, but it's going to happen vertical by vertical.

Thank you.

Gentlemen, there are no further questions at this time. Would either of you prefer to make closing comments?

That's it. Hopefully we'll see you on the conference tomorrow and on the road this quarter. Thank you very much.

Ladies and gentlemen, this concludes today's conference. Thank you again for your participation.