Forrester Research Inc (FORR) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Forrester Research fourth quarter 2003 full year 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, press star zero on your telephone keypad. This conference is being recorded. It is now my pleasure to introduce your host, miss Kim Maxwell, Director of Investor Relations for Forrester Research. You may begin.

Good morning and thank you for joining your fourth quarter 2003 call. With me today are George Colony, Chairman and Chief Executive Officer and Warren Hadley, Chief Financial Officer.

A replay of this call will be available until Wednesday, February 4 and can be accessed by dialing 877-660-6853. Please reference the confirmation ID 89235 and the confirmation account 2147. This call is also available via webcast and will be archived in the investor section at Forrester.com until Wednesday, February 4.

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 involves risks and uncertainties that is 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 would like to turn the call over for Warren.

Thanks, Kim. Good morning. Over the next several minutes I will review Forrester's fourth quarter results, 2003 result, the balance sheet at December 31st, fourth quarter metrics and the outlook for our business in 2004.

Please note the income statement numbers I am reporting today are pro forma and exclude amortization of intangibles related to acquisitions, integration costs, reorganization costs and impairments on non-marketable investments. We have also booked an effective tax rate at 35% for pro forma purposes. The actual effective tax rate for 2003 is 31%.

I'm pleased to report that Forrester's fourth quarter results met guidance we provided on our Q3 conference call. Forrester’s fourth quarter revenue increased 50% to 35.3 million from 23.5 million in the fourth quarter last year. Net income increased 40% to 3.9 million from 2.8 million last year. Earnings per share were 17 cents on diluted weighted average shares outstanding of 23 million compared with 12 cents and 23.2 million shares outstanding last year.

Fourth quarter research services revenue increased 49% to 24.1 million from 16.2 million last year, and comprised 68% of total revenue for the quarter. Fourth quarter advisory, services and other revenue increased 52% to 11.2 million from 7.4 million in Q4 2002 and comprised 32% of total revenue for the quarter. We held four forum events in the fourth quarter. We expect advisory and other revenue to comprise 30 to 35% of 2004 total revenue and 25 to 30% of Q1 total revenue. Research services revenue will comprise approximately 65 to 70% of 2004 total revenue and 70 to 75% of Q1 total revenue.

On a geographic basis, 31% of Forrester's fourth quarter revenue was derived from international sales. Same as Q4 last year. Our Q4 international revenue is slightly above our guidance of 26 to 30% in the fourth quarter due to the acquisition of Giga group SA in France in December. Operating expenses for the quarter were 30.1 million up from 20.8 million last year. Operating income was 5.3 million or 15% of revenue compared with 2.7 million or 12% of revenue last year.

Now, I will turn to Forrester's full year 2003 results. 2003 total revenue increased 30% to 126 million from 96.9 million last year. Net income decreased 1% to 11.7 million from 11.8 million last year and earnings per share for 2003 were 51 cents on diluted weighted average shares outstanding of 22.8 million compared with 50 cents and 23.7 million shares outstanding last year. 2003 operating income was 14 million or 11% of revenue, compared with operating income of 11.4 million or 12% 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 2003 consider 126.7 million. During the fourth quarter we used 1.4 million of cash to purchase 77,000 shares on the open market pursuant to our stock buyback program. To date, we have purchased a total of 1.9 million shares for $30.3 million. Our stock buyback program allows for the use of up to 50 million to purchase shares. We plan to continue to buy back shares on an accretive basis in the first quarter of 2004.

Accounts receivable at December 31st was 40 million, up from 17.8 million at the end of 2002. Our day sales outstanding December 31st was 69 days, up from 58 days from last December 31st but a decrease from 72 days at September 30, 2003. AR over 90 was 6% up from 3% last December but down from 9% at September 30, 2003. Net property and equipment decreased to 8.2 million at December 31st from 10.7 million at the end of 2002. Our capital spending in the fourth quarter was approximately 300,000, which brings us to 1.4 million in capital spending for the full year. Our capital spending plan for 2004 is 4 million.

Deferred revenue at December 31 was 68.6 million, compared with 42.1 million at the end of 2002, representing a year-over-year increase of 63%. Sequentially, deferred revenue was up 33% from Q3. The result of 40% of our full-year business being booked in the fourth quarter.

Now, I will review Forrester's fourth quarter metrics. Agreement value, the total value of all contracts for research and advisory services in place without regard to the amount of revenue that has already been recognized or yet to be recognized was 126.3 million at December 31st, a 62% increase from last year and up 7% sequentially from September 30, 2003.

Forrester's retention rate for client companies increased to 66%. Our dollar retention rate increased to 78% at December 31st. Both rates are calculated on a 12-month rolling basis and continue to show signs of improvement in Q4. Our goal is to get these rates back to their normal range, 74 to 76% for client retention and 80 to 85% for dollar retention during the next four to eight quarters.

At the end of the fourth quarter our total for client companies was 1812, up 49 from September 30. We gained a net 78 client from our acquisition of Giga group SA in December and we were down a net 29 clients for the quarter.

For headcount at the end of the fourth quarter we had a total staff of 560 up from 529 at the end of Q3. Current headcount includes a research staff of 193. Same as at the end of Q3 and a sales staff of 190, up one from 189 at the end of Q3.

The last topic I would like to cover today is our business outlook for Q1 and the full year 2004. With the acquisition of Giga group SA in France in December, our European operating group has identified efficiencies that have led to the elimination of approximately 12 positions in Europe or 2% of our staff this quarter. In addition, we expect to further consolidate some leased office space in Europe. As a result of these headcount and space reductions, we expect to record a charge of approximately 1.5 to 2.5 million in Q1, and we anticipate annualized savings of approximately 2.5 to 3.5 million going forward.

Our pro forma guidance for Q1 and full year 2003 excludes the following. Amortization of identifiable intangible assets, which we expect to be approximately 2.3 million for Q1 and 6.4 million for the full year 2003. Any reorganization, integration of lease write-off charges during the year and any impairments of non-marketable securities.

For Q1 we are guiding to total revenues of approx. 29 to 31 million. Operating margin of 9 to 11%. Interest income of approximately 650 to 750,000. A pro forma income tax rate at 35%. Pro forma diluted earnings per share of approximately 9 to 11 cents. For the full year 2004 regarding to total revenues of approximately 133 to 138 million. A pro forma operating margin of 11 to 13%. Interest income of 2.7 to 2.9 million. A pro forma income tax rate of 35%. Pro forma diluted earnings per share of 52 to 57 cents. We have provided guidance on a GAAP basis for Q1 and full year 2004 in our press release and 8-K filed this morning. Thanks.

I will turn the floor over to George.

Thanks. Good morning, everyone. In my review I'm going to summarize the fourth quarter 2003 and look ahead to 2004. Then we will take questions.

Business continues to show improvement. Q4 was a strong renewal quarter and this is good news on several fronts. We began selling whole view 2 the combined Forrester Giga product in the quarter and early reception reflected renewal rates has been very positive. Secondly, 40% of our renewals occurr in Q4. It signaled that a wide spectrum of Forrester clients approve of our direction. The structural integration of Forrester Giga is yielding results. It was a very busy quarter. The new organization showed flexibility, strength and speed.

Finally, Forrester's poll research products such as oval are getting traction, demonstrating further progress in our move to come to a push plus pull research company.

We have significant wins in Q4. Client company renewals included Allstate, Bank of America, Chevron, Colgate-Palmolive, Fannie Mae, Honeywell and Northwester Mutual Life and Pfizer.

Win backs included Enbridge, Manulife, Zeemums Slumber J and USPS and new client companies in the quarter included direct TV, United Healthcare, Provident Bank and MBNA. Just a short note here on new business. Compared to renewals, new business growth remains modest. We began selling whole view II our combined Forrester Giga research offering in Q4. Clients include members and readers. One member has access to the following elements. All research generated by Forrester and Giga, one unlimited inquiry receipt, one pass to a Forrester Giga event and attendance at all daily foretell conference calls.

Readers have access to research only. On a go-forward basis we are looking for a one to five ratio of members to readers.

For clients who did not want the wide view of whole view II we offered two smaller bundles the IT view and 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 equates closely with a legacy Forrester Research product. It is directed towards marketing and business executives who are using technology to satisfy customers and drive strategy.

Of the research sold in the quarter, 26% was business view, 21% was IT view and 53% was whole view II. On a seat basis, 73% of seats sold were whole view II. Whole view II will be delivered from a single integrated website and in February the new Forrester.com will supplant Gigaweb.com in the old Forrester.com. The whole view II launch was designed to wrap five imperatives. Minimal disruption for clients. Whole view II enhances giga advisory for Forrester’s whole view I The upgrade is seamless, simple and very familiar. Secondly, increased intimacy. All of the whole view II member clients will have access to unlimited inquiry. Three, high relevancy. If a client does not require the extensive coverage of whole view II they can receive the IT or business view ensuring the product is right sized given client demands Four, high differentiation with competitors. Whole view II uniquely serves the three client constituencies of IT, marketing and business. And finally, cross sell. Whole view II brings Giga and Forrester clients together under one research suite.

We held four events during the fourth quarter. The executive strategy forum was held in Boston and the topic was extended internet. Outside speakers included the President of Intel, the CEO of NCR and the President of Michelin of U.S. 95% of attendees said they would attend a Forrester event in the future. The consumer forum Europe and the financial forum services Europe both held in London were sold out and received very high marks for their content. Finally, the emerging technology showcase was held in Scottsdale in early December.

The oval program -- this is our boards business -- exceeded expectations with strong growth in Q4. The CIO group added new members ending with a total of 135. New members were drawn primarily from 1 B plus companies. Technology councils-- these are our boards for technology titles below the CIO, now have a total of 90 members. Our newest oval program announced in the second quarter, the analyst relations and marketing council added members for a total of 65. So now for the five oval programs we have a total membership of 290.

Oval members are attracted by the deep, primary research and the decades of technology expertise in our oval staff. In addition, the quality and size of the oval network, this is really the membership list, has become a critical asset for our clients. Our Financial services company CIO put it this way. “The key advantages of the CIO group provides a strategic and tactical at the extension of my organization. Highly skilled resources can be called upon as needed in a very cost effective way. To get advice and information. It gives me the opportunity to informally share ideas and decisions with my peers and Forrester analysts.”

A final note on the fourth quarter. Warren mentioned this. Forrester did acquire certain assets associated with Giga group SA. The company is located in Paris and will give us a stronger foothold in the European markets including [indiscernible] France, Italy, Portugal, Spain and Switzerland. Timing was key given the launch of whole view II.

Turning to our plans for 2004, in the first quarter of 2004 we will deliver whole view II. It will move into the final stages with a launch of a single unified website in February. We will host one event during the quarter, the technology leadership forum will be held in Coronado, California. This will focus on the business and technology benefits of open source software. Outside speakers will include the Senior Vice President of Microsoft, the Senior Vice President of technology strategy at IBM and hief Strategy and Technology officer at HP.

We have aggressive plans for oval in 2004. Just as the CIO group allows us to penetrate senior IT executives, we’re planning new ovals in 2004, which move the products to adjacent executive ranks. Look for two to three new oval groups in 2004. I will share more detail on the oval launches in the Q1 call.

To conclude, Forrester has a very exciting year ahead. Our new research product Whole View II is successfully launched with high early acceptance by our client base. The integration of Forrester and Giga is structurally complete. We move to 2004 as one company, one brand and one website. Our go to marjet strategy is rich with a complimentary suite of products for clients. Forrester is able to offer research, data, advisory and boards. Our strategy of being a push plus pull company, offering products which we push to clients like syndicated research, although the products which the clients pull to them, like oval is on track.

Finally, the economy and more specifically, the tech economy is definitely showing signs of improvement. Business appears to be stabilizing. We have now had two quarters of increasing renewals and of E-growth. While I'm not ready to call this a major trend. I will call it a minor trend. Look forward to seeing you while we’re on the road this quarter. Thank you for listening to the conference call. Warren and I will now take questions.

Certainly. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. If you would like to ask a question, press star one on your telephone keypad. A confirmation tone will indicate your line is in the question cue. Press star two if you would like to remove your question. For participants using speaker equipment, it may be necessary to pick up your hand set. Our first question is calming from Charles Trafton of America growth capital.

Good morning. Looks like you had the first growth in client organizations in several years. You did mention some of them came from Giga SA. How many came from there?

78 were from G 2. They were down net 29 quarter-over-quarter.

Okay. Backing those out, you mean?

There is a little timing involved with that. Some of the renewals, some of the new business that came in in the fourth quarter doesn't start until January of '04.

Okay. You mention on the rolling four quarters basis, your DSO was relatively steady. If I just took the one quarter at 40 million over the 35 million in revenue, it was up pretty well. Is that because you're Pre-selling the whole view II since October and it's not going to be rolled out until February?

Are you looking at revenue? I reported bookings DSO. The revenue DSO jumped to 104. It is up from a 56 the last quarter. It is a matter of timing. We had a strong bookings quarter in Q4. A lot of that came in at the end of the quarter. That's why we reported on a bookings basis as opposed to revenue bases.

What do you attribute the strength in events you are looking for in '04? You have a couple with Giga you didn't have before.

We had a Giga event in 2003. Our view on events is it is a difficult business for three years. A lot of companies are getting out of the business, Jupiter, E market world. We've hung in there. Our events planned is ten events worldwide?

Nine.

We've cut back a few events for 2004. I would say as 2003 ended. It was -- we definitely saw a warming up in the events business. Actually bookings -- checking with the events bookings group yesterday, they're saying bookings are strong, looking good for the first half of 2004.

Okay. And is the -- do you look for positive cash from operations in Q1 as whole view II goes out? Is the launch of the product actually going to help cash flow after February?

I think they're unrelated. Cash flow from operations for Q1 should be pretty good for us. About 15 million, give or take in cash flow from operations.

That's because of the strong Q4.

And the bookings. Thanks.

Thank you. Our next question comes from Fred McCrea of Thomas Wiesel partners.

Good morning, everybody. A follow up on the events planned. Certainly looking at Q4, advisory services and a larger projection than we expected or results than we expected relative to our projections and your guidance is a little higher than we were expecting. Is that given what you just mentioned, George, in terms of the back end strength you saw in the events business?

Yeah, Fred. Q4 was a strong advisory quarter for Forrester. Our analysts are doing advisory and consulting. That's some of the reasons you see a high number. That's for the guidance in 2004.

Is it four events you held in Q4?

Yes.

How did it stack up to the previous year.

The previous year we had three.

Then looking at the guidance you gave, I thought we might get a little more leverage on the operating lines than the 11 to 13%. How should we be thinking about that? Are we looking at more marketing and sales spend or more on the research side?

I would say this is really about launching new products. We're putting a lot of money into oval this year. We have several product areas. We're not talking about this or maybe not even on the next call. We continue to invest. That's really the major point there.

Okay. Then in terms of the other question about the DSOs. Maybe you can talk about pricing a little bit and, also, are you given terms in terms of the Q4 renewals that you did. Any quarterly pay contracts increase there?

Yeah. If you look at future accounts receivable that number jumped to 18.8 million at the end of the quarter. A big part of that, almost two-thirds, $12 million, is payment terms.

Okay.

We are seeing a little bit more payment terms from larger deals we're booking with larger clients.

Yeah. Q4 was a huge large deal quarter for us.

Sure.

IBM and large companies coming into that quarter.

Okay. By that, you mean, quarterly bookings as opposed to payments?

Yeah.

How did that break out in Q4? How did it look as a percentage of over all --

Future accounts receivable?

In terms of the accounts renewed in Q4, they were 90% on annual pay and 10% on quarterly.

Probably more 85-15.

You moved to, like, 75-25 now?

No. I would say about 85% of our clients that we book are being -- are paid upfront and 15% are being paid on quarterly payments.

Q4.

I don't think we have it at our fingertips.

I don't think it was a big spike.

Okay. I will turn it over and come back.

Our next question comes from Sandra Notardonato of Adams, Harkness & Hill.

Hi. How are you? Good. Let me ask a question -- you broke up the revenue coming from IT view, business view and whole view. What's the likelihood that we see IT view and business view buyers become whole view buyers? Is that the goal for those? Do you think you will always have a percentage of revenue coming from those two areas?

Over time if you were to look at -- let's call it Q4 of '04. I think you will see the numbers in the 80% range with whole view II and IT view and business view, 2 years out it could be lower. I'll tell you that our sales force is leading with whole view II. That's the primary product.

What do you think the barrier was to getting those two groups from buying the whole view product?

Why did some buy --

yeah.

They want to see -- they're waiting. The Giga clients. They've had a product for six years. They want to feel more comfortable at this point. We were very happy with these numbers.

I'm happy with them, too. I'm trying to get a sense of where they could go.

Give it some time here.

Charles Trafton can do the math in his head. I can't. What was the client renewal rate?

71%.

Great. What are you doing to get the renewal rate spread a little bit more evenly throughout the year rather than having that big slow coming in Q4, if anything?

That's one of the things we would love to be able do. The deal is, we're at a shift of big force. We want a lot more 1 B plus companies as clients. It is number one for our mission of the year. As we do that, you will see this perhaps be even more -- instead of problem, it is a reality. If you deal with large corporations they tend to budget in September and spend the money in the fourth quarter. It is the way they flow. In fact, those are the companies we want. We have to deal with that flow.

Okay. Couple more questions. Do you have a sense of what your enrichment rate for your largest clients was in the quarter?

How do you define large?

Well, maybe, you know, your top 25 -- how about million plus revenue generators.

Nothing specific as that. What I can tell you is I have a couple stats for you. Of the clients that renewed in the quarter, 29% of them didn't renew. 71% renewal rate. 33% renewed for an equal or lesser amount. There are budget cuts. 37% of our clients that renewed in the quarter renewed for a greater amount than in previous years spend. That resulted in 164% return rate.

It was a fantastic quarter for enrichment.

Sounds like it. Penetration rate on your target market, you give that number. Do you have it?

14% into the 1 B plus. Pushing like hell to move it higher.

A couple more. Sorry. Advisory revenue. Do you have what that was as a percentage of total, and where do you think that's going to go. Just the advisory piece, not the event piece. I'm trying to get a sense of the demand for your people to do face-to-face time.

We haven't broken it out in the past. I don't have it. My guess is that will continue to increase as we go into '04.

20 to 25% range.

Do you track a utilization rate on those types of services that you provide, the consulting services?

It is very difficult. It's not a dedicated consulting staff. We have this very broad population of 200 analysts who are doing a lot of different types of work. It is hard to measure them on utilization.

Okay. Hiring trends. What do you think the plan will be for 2004.

2004 plan, probably 3 to 5% headcount increase.

Which is not much.

Moderate.

Okay. Any change to the competitive landscape? I'm hearing that Yankee group, there is a buyer for Yankee group. Does that have any impact on Forrester and the landscape in general?

This is speculation. The Yankee group buyer looks to us like it will be a financial buyer and not someone with much synergy in their back pockets. I'm not much worried about that. Yankee has been a nonplayer for years anyway. The measure -- the measured rumors are around. I think the worst scenario there is if they Were to ally with IDC. We can live with it and we will compete with them every day gladly. That would be difficult. We go from being number two to number three.

That's helpful. Thank you.

Competitively, again, being a CEO, I hear from our clients and sales guys. It is a random sample. I didn’t hear much about competition in the quarter. We were so busy and our product felt so strong we didn't hear much about competition.

No talk about any particular competitor being more aggressive less aggressive on pricing. Anything you can give on pricing.

No.

Thank you.

Our next question comes from Terry Lally from Kramer Rosenthal.

Good morning. With renewal rates they were good with 40% renewing. Any breakdown in terms of Forrester versus Giga customers?

No. The Forrester versus Giga clients went away in Q2 when we brought the systems together.

Any tone, obviously, with the integration and retention of Giga customers?

We don't see any fall out from Giga customers or Forrester customers. We did a customer stat round with 1,000 of our customers Giga and Forrester a month and a half ago. It was rising, not falling at this point. It is above 80%, which are high numbers. The Giga customers, I believe, are happy.

The whole view, it sounds as if you are expecting the mix to shift that's predominantly whole view. How will that impact your business model in terms of ASPs and margins?

The starting selling price for whole view is about 20% higher than business view or IT view. Any client thatthat we get to move from IT to whole viewwill increase the price.

Strategically, Terry, if you had a legacy Giga client on the IT side that buys whole view II. What it will do is expose us to the turtlenecks and the ties. The marketing and business guys of the company. That's more usage for us and a Likely a larger contract in the future. Whole view II is a strategic product for the formerly only IT driven companies would be good for us.

Sure. It strings deeper into your organization. The oval product, you mentioned that you made some investments here. For each board, how much does it cost to start up. What type of membership do you need to break-even?

It is back into the envelope. We're fairly early into this. I would say start-up is in the 700K range. I think break-even is 50 to 60 membership range.

Okay.

I'm looking at Warren.

Between 700 and a million. It takes us two to three quarters to get to a breakeven run rate.

Ovals are sticky. We’re not going to give you renewal rates, we're not ready for that. Early indications are good.

That's positive. A small question. '04 D and A. I caught the cap ex but not the D and A.

The capital expenditure plan?

Depreciation and amortization.

3 to 5%.

Does that include the intangibles itself?

That excludes the amortization of intangible assets

George, you mentioned new client budgets are still tough. The renewals are strong. What about your customers that have previously went with Forrester and cut with budgets? What do you see in the pipeline there?

I would say, like all new business, it is okay. It is okay to modest. The tech spending we did showed tech spending up only 1.7%. The survey was done in November. It is early. They are across-the-board. Our formal numbers, Forrester’s is 4% tech increase next year for '04. So I think that you're going to see some increasing this year, you’ll definitely have shelf life problems out there. Expiration dates and shelf life and software on pc’s.. I saw Michael Dell last week he says he felt good because a lot of PCs are being reupped now. Win backs -- if you look at new business in '04. I bet 50% will be win backs.

Great. Good to see things getting better.

Thanks.

Our next question will come from Mike Nerry, Nerry Asset Management.

Trying to figure out the free cash flow in the company. I guess I missed the cap ex and '04, also what it was in '03 and what options were in '03 what you think about option grants in '04.

Capital expenditures are 1.4 million in ‘03. and the plan is 4 million in ‘04.

4 million or?

Then as far as options go, the way we look at that, we review overhang on a quarterly basis. It has been running at about 20% level the past year, year and a half. We expect to keep it there as we move into 2004 and beyond.

We want to keep overhang controlled and managed.

You issued about 900,000 in '02. You typically buyback stock equal to the option you issue.

Pretty close.

I'm trying to figure out how much cash you have to spend on buying back stock next year to do that. Did have you a plan in terms of options?

We don't have a plan specific as to how much we're going to spend buying back shares.

The option plan will be between 500,000 and a million options.

Great. Thanks very much.

)) Thanks, Mike.

Our next question will be a follow-up calming from Fred McCrea.

One quick follow-up. A quick question for Warren. In terms of when you gave the metrics you talked about 66%. Am I correct?

Yeah. Client company renewal rate, 66%.

How does that equate to the 71%.

71% was for the quarter.

Okay. For the quarter.

66% was for 12 months.

Thank you so much.

Once again, ladies and gentlemen , if you would like to pose a question, please press star one to enter the queue for questions. Gentlemen, we appear to have no further questions. Do you have any closing comments?

No. Thank you for joining our conference call. We look forward to seeing many of you on the road this quarter.

Thank you very much.

Thank you very much ladies and gentlemen. This does conclude this morning's teleconference. You may diskebt your lines. Thank you for your participation.