Forrester Research Inc (FORR) 2005 Q1 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Forrester Research first quarter 2005 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 star zero on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Miss Kim Maxwell, Director of Investor Relations for Forrester Research. Thank you, Miss Maxwell, you may begin.

Good morning and thank you for joining our first quarter 2005 conference 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, May 11th, and can be accessed by dialing 877-660-6853. Please reference the confirmation ID 149588 and the confirmation account 242. This call is also available via webcast and will be archived in the Investor Section at Forrester.com until Wednesday May 11th.

Before we begin, I'd like to remind you that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words, such as expect, believe, 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 the materially different from those set forth in the forward-looking statements. Some of the important factors that could cause actual future activity 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, and 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 in the second quarter and 2005.

Please note that the income statement numbers I'm reporting are pro forma and exclude the following items. Amortization of intangibles, reorganization costs, and gains on sales of securities. Also, we continue to book and effective tax rate of 35 percent for pro forma purposes. The anticipated actual effective tax rate for 2005 is approximately 39 percent.

I'm pleased to report that Forrester's first quarter results met guidance we provided on our forth quarter conference call. Forrester's first quarter revenue increased six percent to 33.8 million from 31.7 million in the first quarter last year. Net income was 2.6 million and earnings per share were up nine percent to $0.12 on diluted weighted average shares outstanding of 21.8 million compared with net income of 2.5 billion and earnings per share of $0.11 on 22.7 million shares outstanding in Q1 last year.

First quarter research services revenue increased two percent, to 23.4 million from 23 million last year. Research services revenue comprised 69 percent of total revenue for the quarter, in line with our expectations. First quarter advisory services and other revenue increased 19 percent to 10.4 million, from 8.7 million in Q1 of 2004, and comprised 31 percent of total revenue for the quarter. We expect advisory and other revenue to comprised approximately 35 percent of total revenue in 2005. In Q2, we are holding three events and expect advisory and other revenue to represent 35 to 40 percent of total revenue for the quarter.

International revenues were 31 percent for the first quarter compared to 34 percent in Q1 last year. We expect international revenues to comprised 30 to 33 percent of total revenues in 2005, as business has been growing faster in the U.S. than in Europe over the past couple of quarters.

Operating expenses for the first quarter were 30.6 million, up seven percent from 28.6 million in Q1 last year, and operating income was 3.1 million or nine percent of revenue compared with 3.1 million or 10 percent of revenue last year.

Now I'd like to review the balance sheet. Our cash and marketable securities at March 31st were 131.7 million. We generated 11.4 million in cash from operations for the first quarter, and in 2005 we expect to generate 20 to 25 million in cash flows from operations. During the first quarter we used 4.8 million of cash to purchase shares on the open market pursuant to our stock buyback program. We will continue to be active with our stock buyback program in Q2.

Accounts receivable at March 31st was 28.7 million compared to 25.3 million as of March 31st 2004. Our future AR balance, which are amounts to the invoiced in the future for clients with two-year deals or scheduled payment terms, increased to 23.2 million at 3/31/05 from 16.8 million at 3/31/04.

Our day sales outstanding at March 31st was 80 days, down from 84 days last March 31st, and AR over 90 days was nine (ph) percent, down from 13 percent last year. The decrease in AR over 90 is primarily due to improvement in collections of our business in southern Europe, where payments typically come in slower.

Net property and equipment increased to 7.1 million at March 31st, from 6.4 million at the end of 2004. Our capital spending for the quarter was 1.5 million, and our capital spending plan for 2005 is three million.

Deferred revenue at March 31st was 73 million, up nine percent over March 31st 2004. If you include future accounts receivable, deferred revenue grew 14 percent during that period.

And now I'll review Forrester's first 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 is yet to be recognized, was 128.2 million at March 31st, a six percent increase from last year.

At March 31st, Forrester's retention rate for client companies was 75 percent, and our dollar retention rate was 85 percent. Both rates are calculated on a twelve-month rolling basis, and both are within our target ranges. Our enrichment rate was 106 percent for the twelve-month period ended March 31st.

At the end of the first quarter, our total for client companies was 1872, up 66 over the 1806 we had at 3/31/04. For headcount at the end of the first quarter, Forrester had a total staff of 624, up 11 percent from 561 a year ago. Current headcount includes a research staff of 221, up 24 from 3/31/04, and sales staff of 202, up 12 from Q1 of last year.

The last topic I'd like to cover today is our business outlook for Q2 and the full year 2005. As I mentioned on our Q4 conference call, we are investing in our business as we shift from stabilization back to growth, so we expect our quarterly operating margins to have steeper revs then we've experienced during the past couple of years or a rev that mirrors previous growth periods.

Our pro forma guidance for Q2 and full year 2005 excludes the following: amortization of intangible assets, which we expect to be approximately 800,000 for Q2, and 3.6 million for full year 2005, and gains and impairments of sales of marketable securities and nonmarketable investments. For Q2, we're aiming to achieve total revenues of approximately 37 to 39 million, and operating margin of 10 to 12 percent, interest income of approximately 700,000, a pro forma income tax rate of 35 percent, and pro forma diluted earnings per share of approximately $0.13 to $0.15.

For the full year 2005 we are reaffirming our previous guidance of total revenues of approximately 148 to 153 million, a pro forma operating margin of 12 to 14 percent, interest income of 2.7 to 2.9 million, a pro forma income tax rate of 35 percent, and pro forma diluted earnings per share of $0.62 to $0.67. We have provided guidance on a GAPP basis for Q2 and full year 2005 in our press release and 8-K filed earlier this morning.

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

Thanks Warren, and good morning everyone. I'm going to summarize the first quarter 2005, and then also give a brief look ahead to Q2. After my remarks, when I will then take questions.

As Warren just appraised to you, our first quarter revenues grew six percent and earnings per share were up nine percent. We are pleased with our first quarter results and believe that we're off to a solid start in 2005. We had important wins in Q1. Plant renewals were strong, and include FedEx, Kellogg, Limited Brands, and Unisys. New business also continued to show improvement in the quarter (inaudible) new client companies included Alcoa, Bridgestone, Caddie and Tire (ph), Fox Broadcasting, and TIAA CREF. Plants continue to increase their spending with us, as we recorded enrichment rates of 106 percent in Q1.

Turning out to a review of each of the products in our portfolio, starting with research, as I mentioned on the Q4 call, WholeView 2 is the most challenged part of our business, but we are planning for modest expansion in 2005.

In Q1, WholeView 2 met our sales plan. We have several sales and marketing efforts under way to engender growth in the research business. No. 1, we're offering enterprisewide pricing for clients. No. 2, we have implemented a 10 percent price increase, and finally, on the marketing side, we increased the number of specialized first looks. These are our e-mail newsletters summarizing relevant research. In fact, we found that First Looks (ph) have historically driven renewal rates and new business.

In addition, the company has implemented a money back guarantee. Clients now have the ability to ask for the money back at any time for the unused portion of their contracts. And we beta tested this starting the third quarter of 2004 last year, and we've already seen positive results since launching the money back guarantee. We believe that the money back guarantee will accelerate new business, increase our differentiation, improve customer satisfaction, and improve our service levels.

Turning out to data, the data business was uneven in Q1. Demand for custom consumer research and Technographics was healthy. Those are the first two components of our data business. However, Ultimate had a stellar quarter. Ultimate, as you know, remains nascent as a product. We are still in what I would call the relentless adjustment stage for this launch, and this said, we do have a good pipeline of business for Ultimate in 2005.

Consulting had another very strong quarter. Average contract size for consulting projects continue to increase from $54,000 to $60,000. Consulting demand has been centered around market assessments, IT infrastructure benchmarking, and competitive analysis. Total economic impact; this is our customized methodology that helps IT professionals make tech decisions, had a very strong quarter.

The Oval Program; this is our Board's business, continues to expand. The CIO group, our network and technology leaders, now has 154 members. Technology councils; these are the three boards for technology titles (ph) below the CIO, now have a total of 132 members. The Analyst Relations and Marketing Council added members for a total of 121, and in 2004 we launched three new programs for marketing executives; the CMO group, the Database Marketing Counsel, and the E-mail Marketing Counsel. We ended the year with 54 marketing Oval Members. So at the end of Q1, the total Oval membership for the eight programs reached 461.

We hosted one event in Q1, the Automotive Summit, now in its fifth year, and this was held in March. Presenters included Jeffrey Schwartz, President and CEO of Autobytel, and Tom Peyton, head of National Advertising for Honda.

Turning now to our plans for the second quarter, we will host three forums (ph) in the quarter. GigaWorld will be in Dallas actually next week. 80 of Forrester's analysts will be presenting and doing 101 inquiries with our clients. There will be keynotes from Bank of America, FedEx, IBM, SAP, and Sun. GigaWorld Americas has sold very well. There will be more than 1000 people on site at this event. GigaWorld Europe will be held in Prague this year. Forty of Forrester's analysts will be in attendance for speeches and meetings with clients. Industry leaders from DaimlerChrysler, the BBC, and Avia will be presenting. And finally, late in the quarter, the Finance Forum will be held in New York City in June.

Turning to research in Q2, many clients look to Forrester for a rigorous evaluation of technology vendors. Now previously we had two evaluation methodologies. Based on client input, we have integrated these two approaches into one, called the Forrester Wave. We will produce 90 Wave of valuations in 2005, more than double our output in previous years. Recent Waves include Datacenter Automation software, RFID middleware, application server platforms, open source development communities, Web design agencies, and finally Sarbanes Oxley compliance software.

So to conclude, after a solid first quarter, we're feeling optimistic about 2005. We expect that the differentiation and depth of our product portfolio, this is research, data, consulting, and community, will continue to increase cross sell as well as drive enrichment. According to our research, tech spending will increase about seven percent this year, up from six percent in 2004, and negative one percent in 2003. We believe that this environment of higher tech spending will stimulate demand for Forrester's services.

We plan to be on the road visiting event shows during the quarter. We hope to see many of you in our travels.

Thanks for listening to the call. Warren and I will now take questions.

Thank you. Ladies and gentlemen 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. The confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. The participants using speaker equipment it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.

Our first question comes from Laura Lederman with William Blair. Please proceed.

Yes just a few quick questions. One is talk about long term through the launch on questions what do you think the growth is in research versus advisory because advisory is going to very quickly in research is growing anemically. So just some of your thoughts on that.

Well keep in mind Laura that we're not trying to hold you through there. Remember there are other parts of our business which are syndicated which whole view to-

Yes.

Whole view would be an example. Ultimate would be an example.

Sure.

And those are businesses that are growing and looking at Warren here-

Above 50 percent a year.

I'm talking about the two revenues lines basically.

Yeah okay. So just internally - our internal goal is to have a balance of around 65-70 percent syndicated 30-35 percent non-syndicated. So we talk about this internally all the time. It is a focus - we do not want this business to become a consulting business obviously we've talked about that in the past. So that all being said I mean one of the issues in our business model is Whole View two. How fast we grow this business and I don't know if you agree with this but we are spending a lot time on this issue. We have ideas which I have not discussed with investors as yet as to how we're going to change that business so in fact it will grow faster. I still believe that business can grow in the area of 15-20 percent a year. So I'm looking at Warren here for a different opinion.

On a real high level George if it's basically flatish why would it accelerate that much? I mean I don't know how much you're willing to tell us. Technically that sounds difficult.

It's not flatish. We're looking for growth this year.

Yes we're looking for growth at 3-5 percent on that line from a whole view standpoint so that product we expect will grow this year.

The issues about this - my theory is that I think the world of how people absorb and use information. Not just research but information be it the Wall Street Journal and the New York Times have changed and if you look at newspapers and magazines are in decline all over the world and I think this is one of the reasons and so we're going back to the basics of how you make decisions. Who they consult with when they make the decisions. Do they consult syndicated research. How they consult syndicated research. So we're really going back to the behavior of our clients and I think that the root of growth in that business really will lie in that answer.

Okay moving along a little bit. Can we talk about competition and with Gartner buying Mellon. Have you seen any changes yet? How are they acting in pricing? Is it benefiting you? Is it hurting you? I realize it's recent but what are you seeing?

I'll give you a guarantee. We'll talk more specifically on the Q2, Q3 calls. It's a little bit early at this point. I would say a few things are going on here. One is that they are raising prices and that is helping us and then around then edges obviously there were three choices. Now there are two choices. There were some Mellon clients who are obviously looking at alternatives now and that is helping us but I'll be very specific here and impressionistic because I don't really have the data for you. It is a much - and I'll use the word much. It is a much friendlier environment for us right now than it was a year ago competitively. This is a very good place for us to be. I'll get more specific on future calls for you. But it is competitively - or we're in a very good spot right now.

Alright final question. Where you see operating margins going in a couple of - obviously now you're reinvesting the business but if you take it out a couple of years where would it normalized operating margin be?

Our goal is to get the operating margin back to the 16-18 percent range which is where it been back in the '90s. We think we can do that in the next two or three years. So we're looking to raise margins about point to point and half at least each year for the next two to three years until we're at that point.

Thank you so much. I'll pass it on.

Thanks Laura.

Thank you. Our next question comes from Charles Trafton with America's Growth Capital. Please state your question.

Okay thanks. Warren what did you mean by future A/R?

Future A/R. Those are clients that sign up for contracts for either two year deals or for scheduled payment service. So we don't invoice the entire thing on day one.

So not counting. You just invoice the first year and the second year?

Correct. So its not sitting on the balance sheet in either A/R or deferred revenue.

Okay got it, but it's in the AV number?

Yes, it's an AV number.

Right. Okay. What was the enrichment number a year ago. The 106 was this quarter.

The 106 was this quarter. It was 107 at the end of Q4 and a year ago it was 99%.

Yeah and what do you attribute that rise to George? The 99 to 106? Are people buying other products or just more research seats?

Yeah the impression is - it's really about I think cross-selling. It's - we have four products now to sell to our clients. So as contracts come up for renewal if they are an earlier research client we have the opportunity to upgrade them to an older client. Maybe sell some consulting. Perhaps sell them a data product as I would attribute most of it to that.

I think it fits the portfolio mold Charles and I think there's a lot more room in that model to grow that number.

I was just wondering if there's any particularly successful line that was working.

I would say the oval would be a good suspect now if your looking at where our investment is going. Although it would be a good spot. Fifty percent of oval clients are brand new to us. They don't buy anything from us. Fifty percent are current clients so you'll see - so that's driving some of that enrichment.

I think at your Investor Day a few months back one of the impressions people left with was how under penetrated you are in Asia. Can you talk about if there are any new marketing efforts underway in '05 or maybe something you're planning for '06 that might spark that?

I want to debate this because I could talk about this for an hour. Charlie Chang is now the president of Forrester for Asia Pacific. For three years we had difficulty making numbers out there and in his first quarter he did a great job. He had a wonderful quarter. Now you know one robin doesn't make a spring right? So obviously there's many quarters down the road here but right out of the box he's meshing well and running a very tight ship. He's brought in some very good people. So that just means they were operating better in Asia Pacific. That's probably number one. Number two is that he is spending a lot of time in China and we haven't seen the hard business yet. I have to be in China in two weeks. There is a lot of business to be had and a lot of good prospects for us that he's already working with.

So in India and we've talked about this in the past, India is still the fastest growing region for Forrester worldwide. So it's a small business for us. It's four percent-you know it's four or five percent of our business and so we have a lot of potential out there. Feeling very good about that.

Four or five percent is Asia last year?

Asia Pacific yes. I'll just say this. The way that we will penetrate new markets out there is with data first. I won't get anymore specific but that is a good - instead of punching (inaudible) you go with the excellent data and build from there and that will be our strategy in Asia Pacific.

I'm working on my window. I don't know what spring is right now. I'm interested in a 10 percent price increase. Did you start that in April?

That was actually what was rolled out effective February 1 in the quarter it was rolled out.

February 1 and what is your sales people initial feedback from clients?

Not much resistance to the price.

And that's the list price and therefore nobody pays list anyway or is that - are you realizing a 10 percent increase in price?

It's really too early to tell because it was just rolled out in Q1 and a lot of the contracts are already in place at August the end of the old pricing. So we'll see as the pipelines fill up for Q2 and Q3--

Is that for Q2?

It's across the board for Q2 for all those - our data products. Our consulting advisory et cetera. It's 10 percent across the board. Some are eight. Some are nine.

There's variability there.

I did say Charles that something we watch very, very closely. I see a report every quarter now in discounting and we try and keep this kind of roughly under control and rationale so with the price increase we should see a lift then.

Okay thanks. Good luck the rest of the year.

Thank you Charles. Appreciate it.

Thank you. Our next question comes from Marcello Diesso (ph) with Triato (ph) Capital. Please state the question.

Hi. I was going to ask you about the price increase and I did not understand that it was just - across the board and it wasn't just Whole View. And is that the first price increase you've put in in how long?

Since we've changed - it was three years ago essentially. The Whole View one march.

And is that in your guidance I guess or are you just--

That was not factored into our plan and our guidance for 2005.

Okay and then secondly. What's your share authorization buyback?

Approximately a billion.

It was 50 million in Q1. We spent 4.8 so far on that 50.

Okay great thanks.

Thanks Marcello.

Our next question comes from Don Motovo (ph) with Adams Harkness. Please state your question.

Hello guys. A couple of questions have been answered but any updates on acquisitions pursuits specifically getting into Europe potentially?

I'll run my tape here again which I always try to do to recall. But very active. We are spending a good amount of time on this issue. Interesting enough if the economy's recovered even in the last 12 months we've seen more deals so there's an nice little buffet out there for us right now and that being said whatever we deals - we've done about three big deals in the company's history. We are very careful about this. We know the literature.

We understand that most of these deals don't work but right now there's good prospects out there. What we're looking for of course is geographic would help us a lot. Great people match - you know they've got to making money for our product line and it was really the four that we're looking for so I'm not saying we're doing a deal, but I'm saying there are good deals to be had at this point.

Sure--

I mean the pricing environment remains reasonable.

Okay. Fair enough. I guess the next question would be around the addition of new analysts and research. I know you had a plan to hire roughly ten in the first half or the next six months or so. How is that progressing?

I think - according to plan the number of research the number reported for 221 at the end of the first quarter that's total research staff and the number of analysts I think were up about five or six and the end of the first quarter.

We should have gone back down to our old cycles that we had in the '90s where we tended to lay on staff in Q1 and a little bit of return to that cycle. That's what you're seeing.

Okay and my last question will be around - I know the ultimate consumer panel right now is kind of small piece of business but are you seeing the cross-selling opportunities you're hoping to see out of that?

I hope I didn't say something wrong before but Ultimate is cross-sell tool has limitations because it is sold to very, very - people very deep in organizations being the credit cards and banks. We're very, very data centric. So it is - I think there's good cross-sell within the data portion of our portfolio but going from an Ultimate consumer over to Oval or over to OB2 would be more difficult. So Ultimate for us is really a good driver of the older data business but it is not as valuable as a cross-sell in the full portfolio. Hope that helps.

Okay thanks guys.

Thank you. Just a reminder if you would like to ask a question at this time please press star on your telephone keypad. We will pause for a few moments to poll for questions.

Our next question comes from Charles Trafton with America's Growth Capital. Please state your question.

On the money back guarantee is that something that you guys thought up or had people requested that and came around so you said it was successful. I assume that means successful, i.e., Mellon took it? More people signed up and because they got the guarantee.

Long history here Charles. When the company was launched we had a money back guarantee that last for many years. Somewhere it lost in the shuffle in the '90s and we've decided to bring it back. It's deep in the DNA of the business that it's the right thing to do for our customers. We researched it for a year. We actually beta tested it with a number of sales people and a number of clients and it was quite successful in helping them to bring in new business. When I say successful I mean the beta test was successful. This launched on April 1 for us. If you go to our website you'll find it on the website now.

Another thing said. In the month of April in the last month of the quarter there were a couple of pretty big wins that came in somewhat driven by money back guarantee. I won't give any names here but accounts that wouldn't talk to us for a couple of years but said hey let's take the call let's see what you have to have and say - and then end up saying we're going to buy - we like the value, we like the product, we like the company but you're also seeing behind it here.

So we're going to sign on these clients. So we really feel that it's - do for current clients its a way to bring the business - it's the right business ethics. It's who we want to be. We want to stand behind these products and (inaudible) it's very differentiated. No one else in our business does this.

Now our executive board has always done this so that's in one segment of the portfolio that there's a company doing it but in the IT research business no one else does this. So we like the differentiation. And again we're not doing it against anybody. We're doing it because this is who we are as a business.

Right and does the affect - because there's the risk of a product return. Does this affect revenue recognition or A/R?

No not at all. It's the standard accounting rules. We continue to do business as we always have. Typically we run e-books. E-books are running about a one percent per annum base as it is anyway. Obviously it's too early to tell if we're going to have a large amount of new e-books as a result of this but so far we haven't had any and all so that's good news there. Because in the beta test clients and there's 25 clients who've been under this regime for nine months. No one's asked for money back. If you look at the literature on this Charles we did a huge amount of research on this. E-books - people demanding money back guarantees will be - sub one percent and often a tenth of one percent.

Right, okay good. Thank you.

Thank you Charles.

Our next question comes from Laura Lederman with William Blair. Please state your question.

Hi. Just to follow-up on the last one on the money back guarantee. How exactly does it work? In other words if they're using the service then they can't get the money back or if they use it a ton and then say we don't like it. How does it work?

No questions asked and also for the unused portion of the contract Laura. So if you a W2 client for six months and say I want out you're getting half your money back. But there's not questions asked and they can do it for any reason. They can say you know we don't like your logo. We want our money back. So there's no questions asked there.

Okay thank you.

Okay thanks Laura.

Thank you. Ladies and gentlemen there are no further questions at this time. I will now turn the conference back to Ms. Kim Maxwell to conclude.

Thank you for joining our call. We look forward to seeing many of you on the road this quarter.

Thanks very much.

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