Forrester Research Inc (FORR) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Forrester Research third quarter 2003 financial results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Kim Maxwell, Director of Investor Relations for Forrester Research. Thank you, Ms. Maxwell, you may begin.

Good morning, and thank you for joining our third quarter 2003 conference call. With me today are George Colony, Chairman and CEO; and Warren Hadley, CFO. A replay of this call will be available until Wednesday, October 29th and be can be accessed by dialing 877-660-6853. Please reference the confirmation ID 79836 and the confirmation account 2147. This call is also available via webcast and will be archived in the investor section at www.forrester.com until Wednesday, October 29th.

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 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 SEC. 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 Warren.

Thanks, Kim, and good morning. Over the next several minutes I will review Forrester's third quarter results, year to date results, the balance sheet at September 30th, our third quarter metrics and the outlook for our business for the remainder of the year. Please note that the income statement numbers that I am reporting today are pro forma and reflect adjustments for the following items. We are excluding final integration costs in the third quarter totaling 167,000 related to the Giga acquisition. We have excluded 1.2m of reorganization costs related to our workforce reduction of 30 employees in Q3. We have excluded Q3 amortization of intangible assets totaling 2.6m and we have booked our reflective tax rate at 35 percent for pro forma purposes. Our actual anticipated effective tax rate for 2003 is 31 percent.

Forrester's third quarter results met guidance we provided on our Q2 conference call. Forrester's third quarter revenue increased 47 percent to 32.2m from 21.9m in the third quarter last year. Net income increased 8 percent to 2.8m from 2.6m last year.

EPS were 12 cents on diluted weighted average shares outstanding of 22.7m compared with 11 cents and 23.6m shares outstanding last year.

Third quarter research services revenue increased 40 percent to 23.8m from 17m last year, and comprised 74 percent of total revenue for the quarter. Research services revenue includes revenue from our Whole View and Giga research offering, as well as our unlimited analyst access and inquiry product.

Third quarter advisory services and other revenues increased 70 percent to 8.4m from 5m in Q3 of 2002, and comprised 26 percent of total revenue for the quarter. We held one forum event in Q3. We expect advisory and other revenue to comprise approximately 24 percent to 28 percent of 2003 total revenue and research services to be approximately 72 to 76 percent of 2003 total revenue.

On a geographic basis, 28 percent of Forrester's third quarter revenue was derived from international sales, compared with 27 percent in Q3 last year. This is in line with our expectations that international revenue will comprise approximately 26 to 30 percent of Forrester's total 2003 revenue.

Operating expenses for the quarter were 28.7m, up from 19.5m last year. As a result of fully integrating sales and research in Q3, we expect to save $4m to $5m per year. This is in addition to annual savings of 5m to 6m from rationalizing our G&A costs immediately after the merger.

Operating income was 3.5m, or 11 percent of revenue, compared with 2.5m, or 11 percent of revenue last year.

Now I'd like to turn to Forrester's year-to-date results. Total revenue through September 30th increased 23 percent to 90.7m from 73.4m over the same period last year. To be consistent with the presentation used for the three months ended September 30th, 2003, the year-to-date results reflect a reclassification of 1.1m, reducing both research services revenue and sales and marketing expense. This adjustment nets deferred commissions and deferred revenue from our Giga acquisition and relates specifically to purchase accounting, is a non-cash adjustment with no material impact to our operating results.

Net income decreased 14 percent to 7.8m from 9m last year. EPS for the nine months ended September 30th were 34 cents. Diluted weighted average shares outstanding of 22.8m, compared with 38 cents and 23.8m shares outstanding last year.

Operating income for the nine months ended September 30 was 8.7m, or 10 percent of revenue, compared with operating income of 8.6m or 12 percent of revenue for the same period last year.

Now I would like to review the balance sheet. We continue to maintain a strong cash position. Our cash and marketable securities at the end of the third quarter were 128.9m. . During the third quarter we used 1.5m of cash to purchase 95,000 shares on the open market pursuant to our stock buy-back program. To date we have purchased 1.8m shares for a total of 28.9m.

Our stock buy-back program, which we announced in October of 2001, allows for the use of up to 50m to purchase shares. We plan to continue to buy back shares in the fourth quarter.

Accounts receivable at September 30 was 19.7m, up from 17.8m at the end of 2002. Our DSO at September 30 was 72 days, a decrease from 77 days last September 30th. And AR over 90 days was 9 percent, up from 5 percent from a year ago and 8 percent in Q2. However, we have collected more than a third of the over 90 day balance in early October, and expect significant improvement in this metric by year end.

Net property and equipment decreased to 9m at September 30th, from 10.7m at the end of 2002. Our capital spending in the third quarter was approximately 100,000 which brings us to 1.1m in capital spending year to date. Our capital spending plan for 2003 is $2m.

Deferred revenue at September 30 was 51.6m, compared with 39.6m at the end of September 2002, representing a year over year increase of 30 percent, but a decrease of 13 percent sequentially as expected. With approximately 40 percent of our contracts up for renewal in Q4, we expect to see a sequential increase in deferred revenue at 12/31/03.

Now I will review Forrester's third quarter metrics. Agreement value is the total value of all contracts for research and advisory services in place without regard to the amount of revenue that has been recognized or has yet to be recognized. Agreement value was 118m at December 30th, a 51 percent increase from last year and up sequentially from June 30th, 2003.

Forrester's retention rate for client companies at September 30th was 62 percent. Our dollar retention rate at September 30th was 73 percent. Both rates continue to show signs of stabilization within the client base as we work to get these rates back to target levels.

At the end of the third quarter our total for client companies was 1,763, down a net 14 from June 30th. For headcount, at the end of the third quarter Forrester had a total staff of 549, down from 589 at the end of Q2. Current headcount includes a research staff of 193, down from 203 at the end of Q2, and a sales staff of 189, down from 207 at the end of Q2.

The last topic I'd like to cover today is our business outlook for Q4 and the full year 2003. We are issuing Q4 guidance and reaffirming previous guidance for full year 2003. Our pro forma guidance for Q4 and full year 2003 is as follows and excludes amortization of identifiable intangible assets which we expect to be approximately 2.6m for Q4 and 8.7m for full year 2003; reorganization and integration charges of approximately 2.2m for the full year; Any impairment to non-marketable securities and any charges related to the potential write down of our San Francisco office lease.

For Q4 we are aiming to achieve total revenues of approximately 32m to 35m; an operating margin of 14 percent to 16 percent; and pro forma diluted EPS of approximately 15 to 17 cents.

For the full year 2003 we are aiming to achieve total revenues of approximately 120m to 125m; a pro forma of operating margin of 10 percent to 12 percent; and pro forma diluted EPS of 47 to 53 cents.

We have provided guidance on a GAAP basis for Q4 and full year 2003 in our press release and 8K filed earlier this morning. Thank you. I will now turn the floor over to George.

Thanks, Warren and good morning, everyone. In my business review I am going to summarize the third quarter and give a look ahead to Q4. Following my remarks, Warren and I will take questions. Q3 showed a modest business improvement. New business grew, cross selling increased over Q2, our forum for the quarter was sold out and companies appear to be emerging from their three year hibernation to become more engaged in technology projects and technology spending. So I would say that I am cautiously optimistic, given Q3 results.

But several caveats here. The first is that Q3 is our lightest renewal quarter. It many not be indicative of Q4 dynamics. The second caveat is that for three years we have been in one good quarter, one bad quarter environment. No quarter has signaled a long-term trend.

There were important wins in Q3. Client company renewals included Adobe Systems, Bank One, Goldman Sachs, Manugistics, Partners Health, USAA Insurance and Vignette. New client companies in the quarter included Blue Cross/Blue Shield, Circuit City, McGraw Hill and Tweeter. Win backs included DHL, Eddie Bauer, Micro Strategy and Purdue. And then finally Giga-Forrester cross-sells included American Family Insurance, Baker Capital, FMC Corporation, U.S. Mint, and Williams Sonoma.

In the third quarter we held one event, the consumer forum in New York City which focused on building market share and brand loyalty through coordinated, multi-channel customer experiences. The event was a success on many levels. It was sold out weeks before the forum; content and the event were highly graded by clients, and attendee satisfaction was high. Attendees were primarily marketing and business executives, and I have to say that I was very encouraged to see that this part of our customer base we are covering. The event clearly showed Forrester's differentiation, serving a wide audience including non-IT professionals who are using technology to win markets and customers.

The oval program, our board's business, continued to show strong growth in Q3. The CIO group added 18 new members, including CIOs from Blue Cross/Blue Shields, [Cap Gemini], Mass Mutual, Mitsui, Pet Boys, Triaton and the U.S. Mint. The CIO group now has a total of 111 members.

Our technology councils -- these are the boards for technology titles below the CIO -- added 17 new members including executives from Abbey National, Citgo, Standard Charter Bank and total council membership is now at 74.

Our newest oval program announced just last quarter, the analysts relations and marketing council, added seven new members including Atos Origin, Integrity and Zeimans. So now of the five oval boards, we have a total membership of 192.

Forrester's oval program offers four advantages over competitive boards. Number 1, broader coverage of technology titles; number 2, access to Forrester's deep, primary research; three, expertise. The oval staff has decades of experience in their subject matter. This is not a children's crusade. And then final Number 4, vertical market insight including health care, financial services, retail, CPG and travel. You can boil all this down to really two words. Better research. We are winning clients away from the incumbent in the boards business and we are doing it with a deeper, richer product. The CIO group will be meeting in Boston next week, featuring a special session with Carly [Feorina] the CEO of HP.

Turning now to the integration of Giga, during the third quarter only four months after closing the deal, we completed the final steps in the organizational integration of Forrester and Giga. In July the Giga and Forrester sales forces came together as one team. Sales representatives are now organized geographically and all sales people are selling all products. In August, the Giga and Forrester research staffs were combined as one, global research staff. So we are now one team across finance, marketing, sales, research and operations.

I would now like to turn to our plans for the fourth quarter. We will host four events in the quarter. The executive strategy forum will be held in Boston next week, and the topic is, what we called Extended Internet. Outside speakers include Paul [Otalini], the President of Intel, Mark Hertz, CEO of NCR and Jim McCauly, President of Michelin U.S.A. The consumer forum Europe and the financial services forum Europe will both be held in London during the quarter. And then finally, the Emerging Technology showcase will be held in Scottsdale in early December.

Moving away from events for a moment, we will launch a new tech category in the quarter, consumer marketing platforms.

The primary change in Q4 will be our introduction of the new combined Forrester-Giga research product, what we call Whole View 2. Planning has been moving ahead for Whole View 2 since March when the Giga-Forrester deal was completed. Whole View 2 was developed after extensive research and planning, including more than 60 one-on-one interviews with clients, 1,100 client surveys and intensive comparisons with competitive products. We have brought clients into this process from day 1.They have been active participants in shaping and configuring the new product lines.

A few basics before I describe Whole View 2. As you all know, Forrester's differentiation is what I call the three doors. We service IT, Marketing and Business. These three groups must closely collaborate to get technology right in large companies. Successful companies will take a Whole View approach. They will carefully factor IT, Marketing and Business issues as they create technology strategy. Forrester's Whole View research, which was introduced in January, 2002 was created to facilitate this collaboration.

Turning now to the product, Whole View 2 is a significant enhancement to Whole View 1. It offers a comprehensive view of technology from deep IT issues all the way over to salient business issues. So it creates a complete integrated research suite for IT, marketing and business professionals.

Whole View 2 includes the following elements. All research generated by Forrester and Giga; one unlimited inquiry suite; one pass to a Forrester event; and finally, attendance at all daily Fortel conference calls.

For clients who prefer a more specialized view, there are two smaller bundles. The IT View and the Business View. The IT View closely matching the value and focus of the legacy Giga advisory product helps clients with IT decisions, both tactical and strategic. The Business View includes most of the value from the Legacy-Forrester research product. It is directed toward marketing and business executives who are using technology to satisfy customers and drive strategy. All of this value will be delivered from a single integrated website, a new Forrester.com which will replace Giga.com and the old Forrester.com.

The Whole View 2 launch is designed around five imperatives. Number 1, minimal disruption for clients. Whole View 2 is an enhancement to Giga Advisory and Forrester's Whole View 1. The upgrade is seamless, simple and familiar.

Number 2, increased intimacy. All Whole View 2 member clients will have access to unlimited inquiry. Number 3, high relevancy. If a client does not require the extensive coverage of Whole View 2, they can receive the IT View or the Business View, ensuring that the product is right-sized given client demands. Number 4, high differentiation with competitors. Whole View 2 uniquely serves the three doors of IT, Marketing and Business. And then finally, cross-sell. Whole View 2 brings Giga and Forrester clients together under the aegis of one research suite.

Forrester's sales force is presently selling Whole View 2. Full training for the North American sales force was completed in early October, and the product is now in the fields. Training for the international sales forces is taking place this week. Most of the elements of Whole View 2 are available now, with additional features launching throughout the quarter, and pricing of Whole View 2 is AV neutral.

So to conclude, business appears to be stabilizing with modest improvements, although I am not ready to call this a trend. The organizational and product integration of Giga and Forrester is now complete. Challenges certainly still lie ahead, but they are primarily cultural and not structural. Whole View 2 is in the field now, a substantial enhancement to the former Giga Advisory and Forrester whole View 1. The combined strength of Giga and Forrester has created a unique, differentiated product unlike any other in the marketplace. We look forward to seeing many of you while we are on the road this quarter. Thank you for listening to the conference call and Warren and I will now take questions.

(Operator instructions) The first question today will be coming from Fred McCrea of Thomas Weisel. Mr. McCrea, please state your question.

Good morning, George, Warren, and Kim

Good morning, Fred.

I apologize for the background noise, I'm actually on the airplane right now. Quick question. In terms of the integration of two research teams, will the Giga name survive as a branded entity in the Whole View 2 piece.

It will persist for probably those six to nine months, Fred, but by the end of 2004 it will be gone.

With the Forrester name continuing to be the banner name, and then Whole View 2 beneath it?

Right.

Very good, and then maybe--

It's important to keep the Giga name involved, because when we go out to clients and we say we have a deeper product than IT, they say, "Oh yeah, you bought Giga." To remind them that we own Giga now is helpful to keep it there.

And then in terms of the executive forum next week, can you give us any insights as to how bookings, for both the vendor floor and attendees is going?

It's a rather specific topic on what we call extended Internet, so it's more of a manufacturing topic than our typical wide topic. So its not going to be a sell out. It'll do fine, but it's not going to be a sell out.

Okay, and that's within the range of guidance that you provided today?

Absolutely.

Great. Thank you so much.

Our next question will come from Sandra Notardonato of Adams Harkness & Hill. Ms. Notardonato, please state your question.

Thank you. Let me start with the oval program. In the press release you talked about adding 17 folks, getting you up to 190 members. Do you have the breakout between CIOs and non-CIO memberships?

Are you saying the difference between the CIO group and the councils?

I guess I don't have that level of detail in the press release, but if that would answer my question, George, sure.

We added 17 for the technology councils, we added 18 to the CIO group.

So 18 to the CIO gets you to how many?

The CIO group now has a total of 111 members.

111 members. And the non-CIO's totally 190?

So that's the CIO group. The technology councils, of which there are three, there are currently 74 members of those three councils.

Okay. What's the goal as you look out to I guess next quarter in 2004, breaking them out the same way as you just broke them out?

I would say by the end of 2004, and this is right back to the envelope, Sandy, but I would say the CIO Group between the 250 to 300 range. Technology councils I think will settle in the 150 to 200 range. Of course there will be other councils too, in addition to these. There also will be other groups.

Okay, what is the plan in terms of how many councils you plan on launching for 2004?

We are right in the middle of, all of the 2004 planning is going on right now, but I would say if you look over the next 12 months, we will launch between two and four additional boards, let's put it that way.

Are you seeing any attrition from other companies that provide a similar type of product coming to Forrester?

Yes.

Do you have a sense of what number you may have essentially -- I hate to use this word -- but stolen from another company?

I don't have the specific number, but its in the double digits. That has been surprisingly easy. That is a big surprise in all of this. But of course, if you have a non-competitive environment I mean, you would imagine the second player in would get -- that that would happen.

I missed the comment you made about the pricing of the new product offering, Whole View 2. What was the comment that you made, George?

AV neutral. Which means, there is obviously new pricing and we are modeling this and we believe it is AV neutral. It is AV neutral, I would say the "X" of cross-sell, if you follow here. If you took all of our clients now and put them into Whole View 2 it would be AV neutral, but of course the whole point, one of the imperatives of Whole View 2 is to cross-sell. So that is AV neutral.

And when do you think we are going to start to see some momentum behind the cross-sell? Is that a second half of 2004 event, or do you think that will happen right away?

I think it's building quarter to quarter. I mean, we had better cross sell in Q3 than we had in Q2, and I think with Whole View 2 now it's going to be driven in Q4. I mean, it's not an explosion, but I think it's a steady building here.

Additionally, with 40 percent of our contracts up for renewal in the Q4, that is really the opportunity to cross-sell.

Okay.

Plus the product, now having Whole View 2, Our sales guys are super excited it's really a great way to cross sell.

The renewal rate in the quarter, the standalone Forrester company, I don't believe I recall it having the seasonality in Q3. Is it the Giga side of the house that caused a little bit of pressure on renewal rates here in Q3, or was it equal across both companies, if you have that answer?

Equal across both companies, although we don't break it out any longer from a Giga versus Forrester standpoint, but at 62 percent pretty much stable with what we did at Q2, and obviously Q4 is going to have a big impact on that number as well.

Okay.

We would like to see a couple of points there.

It was a strong new business quarter, so.

Just a couple more questions. Advisory services is higher than what I was expecting, what is driving the growth in advisory services, and are you getting the sense that in Q3 folks bought advisory services instead of buying core research?

Certainly there is market demand there, Sandy. I've been talking about this for a year now, but this move from push to pull, we certainly feel that in the marketplace. There is more demand for specific, what does it mean to me, what does it mean to my company, what does it mean to my problem?

I think that will continue for a while. I think that trend is here to stay, actually. The way we want to attack that trend is with a one to many product like oval, like the data, like Fortel. We will have our council business growing, but we don't want to become a 50/50 consulting, research business. Not our goal.

Right. Is there any data that you have on how much its costing your clients to buy the advisory services? Any trends there? Have you noticed that you have to give your analysts away a little bit cheaper in this environment, or have you been able to keep stable rates/

No, I would say pricing, in that side of the business, has actually been quite stable if not showing a bit of strength, actually.

There has been good, solid market demand for it. If anything we are getting into some larger contracts in that area.

Okay. And my last question is the deferred revenue that is beyond the one-year renewal period. What was that number this quarter?

That's 11.3m, that is the future accounts receivable, yes.

Okay. Thank you.

Thanks, Sandy.

Thanks, Sandy.

(Operator instructions) Gentlemen, there are no further questions at this time.

Thanks for being on the call. Much appreciate it, and good bye.

This concludes today's conference. Thank you for your participation.