Forrester Research Inc (FORR) 2005 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Forrester Research third-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. (OPERATOR INSTRUCTIONS) 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.

Good morning and thank you for joining our third-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 November 9 and can be accessed by dialing 877-660-6853. Please reference the confirmation ID 173152 and the confirmation account 242. This call is also available via webcast and will be archived in the investor section at forrester.com.

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 Securities and Exchange Commission. The Company undertakes to 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 will review Forrester's third-quarter results, the balance sheet at September 30th, our third-quarter metrics and the outlook for our business for the remainder of 2005. Please note that the income statement numbers I am reporting are pro forma and exclude the following items; amortization of intangibles, reorganization costs, and realized gains on sales of securities and nonmarketable investments. Also we continued to book an effective tax rate at 35% for pro forma purposes, the anticipated actual effective rate for 2005 is approximately 41%.

I'm pleased to report that Forrester's third-quarter results met guidance we provided on our second-quarter conference call. Forrester's third-quarter revenue increased 15% to 39 million from 33.9 million in the third quarter last year. Net income increased 21% to 4.1 million and earnings per share were up 27% to $0.19 on diluted weighted average shares outstanding of 21.9 million compared with net income of 3.4 million and earnings per share of $0.15 on 22.3 million shares outstanding in Q3 last year.

Third-quarter research services revenue increased 6% to 25 million from 23.5 million last year. Research services revenue comprised 64% of total revenue for the quarter in line with our expectations. Third-quarter advisory services and other revenue increased 36% to 14 million from 10.3 million in Q3 of 2004 and comprised 36% of total revenue for the quarter. The increase in advisory services and other revenue is primarily due to continued demand for our advisory and consulting services. For 2005 we expect advisory and other revenues to comprise approximately 35% of total revenues.

International revenues were 29% for the third quarter compared to 33% in Q3 last year. We expect international revenues to comprise 30 to 33% of total revenues in 2005 as business has been growing faster in the U.S. than in Europe and Asia Pacific over the past several quarters.

Operating income was 5.6 million or 14% of revenue compared with 4.5 million or 13% of revenue last year in line with our guidance for the quarter. As mentioned earlier in the year, our operating margin has ramped more steeply throughout the fiscal year and will peak in the fourth quarter.

Turning to Forrester's year-to-date results, total revenue through September 30 increased 12% to 112.1 million from 100.5 million in the same period last year. Net income increased 12% to 10.1 million from 8.9 million last year and earnings per share for the nine months ended September 30 increased 15% to $0.46 on diluted weighted average shares outstanding of 21.9 million compared with $0.40 and 22.6 million shares outstanding last year.

Operating income for the nine months ended September 30 was 13.2 million or 12% of revenue compared with operating income of 11.6 million or 11% of revenue for the same period last year.

Now I'd like to review the balance sheet. Our balance sheet remains strong. Our cash and marketable securities at September 30 were 134.6 million. We generated 19.9 million in cash from operations year-to-date on target with our guidance of generating 20 to 25 million in cash flows from operations for the full year.

During the third quarter we used 5.1 million of cash to purchase 244,000 shares on the open market pursuant to our stock buyback program. We have spent 15.3 million year-to-date on the stock buyback program and will continue to be active with the buyback in Q4.

Accounts receivable at September 30 was 28.7 million compared to 25.1 million as of September 30, 2004. Our future AR balance which are amounts to be invoiced in the future for clients with two-year deals or scheduled payment terms increased 21% to 20.5 million at 9-30-'05 from 17 million at 9-30-'04.

Our days sales outstanding at September 30 was 76 days, down from 79 days last September 30 and AR over 90 was at 11% at September 30, down from 12% a year ago. Net property and equipment decreased to 6.1 million at September 30 from 6.4 million at the end of 2004. Our capital spending for the quarter was 400,000 bringing year-to-date CapEx to 2.4 million. Our capital spending plan for 2005 is 3 million.

Deferred revenue at September 30 was 67.7 million, up 11% over September 30, 2004. If you include future accounts receivable, deferred revenue grew 13% during that period. We are very pleased to see the double-digit growth in deferred revenue and future AR as these are the best leading indicators of our business.

And now I will review Forrester's third-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 133.9 million at September 30 a 7% increase from last year. Also at September 30, Forrester's retention rate for client companies was at 78% and our dollar retention rate was 88%. Both retention rates are calculated on a twelve-month rolling basis and are our highest in eight years. We have found that our inquiry and advisory offering have been keys to increasing our retention during the past three years. Our enrichment rate was 105% for the twelve-month period ended September 30.

At the end of the third quarter, our total for client companies was 1957, up 91 from year end and we are on target with our goal of approximately 100 net new clients for the full year.

For headcount at the end of the third quarter, Forrester had a total staff of 666 up from 593 at year end and current headcount includes a research staff of 245, up 43 per year end and a sales staff of 219, up 24 from year end.

The last topic I would like to cover today is our business outlook for Q4 and full year 2005. As most of you know approximately 40% of our business for the year is booked in the fourth quarter. As a result we will be issuing guidance for 2006 on our year-end conference call. However, we are still targeting long-term revenue growth in the range of 15 to 20% and aim to achieve an operating margin in the high teens within the next three years. We believe that investments in new products and sales we have made previously and will continue to make in Q4 and beyond will aid in hitting these goals.

Our pro forma guidance for Q4 and full year 2005 excludes the following. Amortization of intangible assets which we'd expect to be approximately 800,000 for Q4 and 3.6 million for full year 2005, and gains in impairments on sales of marketable securities and non-marketable investments. For Q4, we're aiming to achieve total revenues of approximately 41 to 43 million and operating margin of 15 to 17%, interest income of approximately 700,000, a pro forma income tax rate of 35%, and pro forma diluted earnings per share of approximately $0.20 to $0.22.

We are reiterating full-year guidance as follows; total revenues of approximately 152 to 156 million; a pro forma operating margin of approximately 13%; interest income of approximately 3 million; a pro forma income tax rate of 35%; and pro forma diluted earnings per share of $0.65 to $0.69. We have provided guidance on a GAAP basis for Q4 and full year 2005 in our press release and 8-K filed earlier this morning.

Thank you. I will now turn the floor over to George.

Thanks Warren and good morning everyone. I will summarize the third quarter of 2005 and give a brief look ahead to the fourth quarter. As Warren just reported to you, our third-quarter revenue grew 15% and earnings per share were up 27%. We're very pleased with our results. The Company is showing double-digit organic revenue and EPS growth for two consecutive quarters. So after three solid quarters 2005 is shaping up to be a good year for Forrester.

A trend of improving new business continued into the quarter. 1B+ new client companies included Arbitron, Empire Blue Cross Blue Shield, Excellon, Fairchild Semiconductor, Parsons Brinkerhoff, Progress Energy and Tommy Hilfiger. Our internal effort to focus on 1B+ companies is showing results with a net 11 1B+ companies joining Forrester in Q3.

Turning to a review of each of our products starting with research. As you know, a key 2005 initiative for Forrester is to grow our syndicated products led by WholeView 2. I'm pleased to report that in Q2 and now Q3, we exceeded our internal WholeView 2 sales plan. These are booking results not revenues, so the impact is future and not current. But that said, the ability to drive bookings growth in syndicated is a positive harbinger for the future of the business. Successful sales efforts to expand site licensing and minimize discounting have both contributed to the growth of WholeView 2.

The Oval program continues to expand. The CIO group, this is our network of technology leaders, now has 183 members. Technology Councils (ph), our Board's for technology titles below the CIO now have a total of 150 members. The analyst relations and marketing council added members for a total of 122. Last year we launched three new programs for marketing executives, the CMO Group, a database marketing council. And the e-mail marketing council we ended the quarter with 47 marketing Oval members. So at the end of Q3, the total Oval membership reached 502.

Now we will look at our data business. Consumer Technographics, and this is the most extensive and longest running survey in the United States and Europe on technology and consumers, grew by 13 new clients during the quarter. We remain cautiously optimistic about the ultimate consumer panel as we renewed key accounts during Q2. We now have 9 of the 11 major credit card issuers as clients.

Demand for our consulting services remained strong in Q3. Clients using Forrester for repeat consulting projects is increasing. Six clients booked projects in the quarter who have already done three or more projects with us in 2005. The most popular project topics are infrastructure and sourcing assessments, online storefront strategy, and product marketing and messaging.

As we talked about on the last conference call, the events business continues to improve. The consumer forum held in New York City had year-over-year attendance increase. Outside speakers included Jeff Fettig, Chairman and CEO of Whirlpool; Gerald Storch, Vice Chairman of Target; and Paul Tagliabue, Commissioner of the National Football League.

Now let me turn to our plans for Q4. As most of you know this is the busiest time of the year for Forrester and as Warren pointed out, 40% of the Company's contracts renew during the fourth quarter.

We will host three events; two forums will be held overseas, the Finance Forum in Europe and the Consumer Forum Europe. The Executive Strategy Forum will be held in Boston next month and this forum will focus on helping companies use IT to globalize. Outside speakers include Mitt Romney, the Governor of Massachusetts and Ralph Szygenda, CIO of General Motors.

We will launch the Operation's Management council in the Oval program in Q4. This council is designed to help IT operations executives develop best practices and benchmarking around their critical issues. And these issues include outsourcing, management tools, budgeting, application control, lifecycle management of server storage and operating systems. As much as 50% of the average IT budget in large corporations is spent on the operations function. This council will help its members get the greatest return from this expenditure. The council (indiscernible) with 14 operations professionals as chartered members.

To conclude, Forrester's business is showing continued growth. With the achievement of three solid quarters in 2005 we are working hard, actually as I speak, to finish up the year with a strong Q4. We plan to be on the road visiting investors during the quarter. We hope to see many of you in our travels.

Thank you for listing in to the call. We will now take questions.

(OPERATOR INSTRUCTIONS) Laura Lederman with William Blair.

Hi. Laura Lederman. A few questions. Good quarter, guys. This 7% increase in contract value, how much of that came from the price increase you instituted earlier in the year? And can you just talk a little bit about pricing? Is it less the price increase stuck and there's less discounting -- just kind of pricing in general. And then I have another question.

It's really a combination of both the price increase and a reduction in discounting. We've been focused on discounting for the entire year. And we've seen our averages cut rate (ph) come down each quarter including Q3. So I would say it is a combination of both the price increase that we implemented in Q1 and the discount focus that we've been working on throughout the entire year.

Great to hear. Switching subjects a little bit, can you give us the actual bookings as a percentage do you think Oval and Data (ph) will be for the year and roughly what they will be for the quarter as well so we can sort of a size those businesses?

The percentages of Data bookings --.

Bookings revenue whatever you want to provide just so we can size those businesses for both Oval and Data.

Yes, let me get you those off-line if you would.

Okay, no worries, no problem at all. Final question, if you look at the mix between the advisory and the core research and you talk about that 15 to kind of 20% growth long term, what does that imply for growth of the core research versus advisory services over the long term? Thank you.

We're looking, Laura, for a balance of around 65% syndicated, 35% non-syndicated. And that -- we will be in that range this year and those are our long-term goals. So despite the fact that advisory revenue has grown faster in the past couple of years with our new product such as Oval and the reemergence if you will of the syndicated WholeView products, we are really looking to grow those probably about equally as fast as each other.

I guess my question on that is it seems as though every single quarter or you have such lovely growth in the advisory and other so logically you would think that maybe they would grow a faster rate than core research.

Internally we are looking for resources to be allocated more in a balanced way to syndicated/non-syndicated. And there is a lot of effort internally to that right now, Laura. To maintain that 65, 35.

Charles Trafton with Americas Growth Capital.

Thanks. The new customers of that you landed this quarter did that -- did you lose any customers because of new pricing initiatives? So was that a net gain that was -- looked good but the gross was different than the past?

Well, I would say we did want lose 1B+ customers but again, net up 11 as I said in my remarks. I would say none of that is due to price increases, Charles.

None of the ones that left?

Yes. A lot of it -- and as you know, a lot of companies are merging. There's a lot of M&A going on right now so I would say at least 50% is due to M&A. Price is not a factor here.

Got it. Yes. What about plans for cash? The balance sheet has been so flush for so long you've been buying back stock. Anything else that -- any other projects or initiatives or maybe additional acquisitions that you're talking to be Board about?

At this point, the buyback will continue to be active. We are 16.3 million in year to date. We've spent 66.3 cumulatively on the buyback and we will continue be active there in Q4. I would say it is the same story as far as acquisitions go. We do have an active development front. We are constantly looking at deals and we'd be looking to bring on new clients and a good product fit, make sure that we have good people, and when we do a deal, if it was financially accretive. Those are the four filters that we would continue to use going forward. Obviously nothing to announce today on that. But we continue to be active in that area as well.

We had a Board meeting yesterday and it is always a big topic of conversation.

Warren, what was your comment earlier about international mix of the business?

Just that international revenues 29% year-to-date -- I'm sorry, for Q3. And 30% year-to-date. And essentially the U.S. has been growing much faster than both Europe and AP at this point for the past couple of quarters.

We've seen some weakness in Europe over the last two quarters as well. That all being said, Charles, our long-term goal still remains 50-50, inside, outside the U.S.

Yes. When we were in Cambridge for your investor day, one of the things that struck me was the opportunities outside the U.S., particularly in Asia. Are you making investments there or are you just trying to harvest what you have at this point?

No. Looking at budgeting for 2006, of course, we're including our budgeting process here for next year. We very consciously put investment dollars toward A/P. It is a small part of our business. It is 7% -- somewhere in that range but we're pushing money in that direction to grow -- again, we talked about back in February that A/P is looking to be in the 12 to 15% range within two years. We are still pushing for that.

And softness in Europe the last several quarters, can you flesh that out a bit? Is that market softness?

Data Monitor is becoming a voracious competitor in the UK so there is some competitive issues there. But I would say at least half of this differential really is due to the strength in America's versus the weakness and Europe. Let's put it this way, it is a slight weakness in Europe, not a major weakness.

And a tougher compare against the U.S.?

Yes.

Thanks.

Robert Skloff of Sidoti & Company.

Good morning. A couple of quick questions. Kind of just flesh out a little pricing a little more. I know you guys raised pricing in February and it doesn't sound like there has been much push back. Is there any room to raise prices any time soon -- would be the first question? And then I believe you talked a little bit about the acquisition pipeline. How are the valuations there and how do things look there?

I would say on price increase, Rob, we are considering it at this point.

So we are actually doing a lot of work on that issue actually in our strategy group right now. So being considered. On the M&A side, I would say that we are not seeing the valuations to be as attractive this year as they were last year and the year before. We're talking in the '03, '02, '03, '04 timeframe of sub one times revenue and now we are looking at I'd say, 1.2 to 1.5 times revenue which for us feels very rich.

It is very dependent on the -- on the particular situations specific circumstances around the Company that we'd be looking at but the valuations have definitely popped in the last I'd say 18 months.

Okay, great. And the last question just relates to options expensing for next year. I know that is a pretty big hit to you guys. Is there any thoughts you might change that going forward and perhaps figure out a different way to incentivize people?

Well we look at -- we have a competition (ph) both internal and with the Board. We review that every year. And several times a year for that matter. The current plan is to continue with the incentive programs as they are in place today. We actually talked a little bit about this yesterday at the Board meeting. We will -- I understand that the expensing is going to be a large numbers. It is going to be anywhere between 6 and $10 million per year. We expect that we will continue pro forma those numbers and exclude them from our pro forma numbers. Just show comparative financial statements.

Okay, great.

But I mean the other way we look at it as well, really nothing is changing between January 1 of '06 and December 31 of '05 as far as the way we run the business and the way the business is valued.

Right. Okay, thank you.

Dom LaCava with Adams Harkness.

Hi, guys. Good quarter. I guess a few questions here. Can you provide a little color around some of the revenue upside you saw in the quarter in terms of the money back guarantee? And the You Got META campaign? Just kind of any color you can add as far as what those campaigns may have added in Q3?

We won about six deals via the Get META campaign.

In the quarter?

In the quarter which was down from last quarter. We, as I said, in the area of -- I'm looking at the notes here -- like 10 last quarter and probably nearer six this quarter. I would say actually, Kim, do you want to give some color here on competition?

Sure. I talked to sales management and got a lot of feedback from them just in terms of the quarter. I think as far as direct quarterly correlation, as George said, there is approximately six deals that you can say that we won as a result of Get META campaign or the acquisition.

But I think more importantly the story here is that there is a lot of interest in Forrester. It is opening a lot of doors and we're having a lot of conversations. A lot of their contracts come up for renewal in Q4. But in terms of sharing budget dollars, that is where we will see a lot more upside than absolute relationships. Clients were maybe Gartner (ph) META now they could be Gartner Forrester and that is good for us.

So, Dom, more doors are opening for us which is nice. We are not saying absolute deals yet but a lot more doors are opening.

Sure, that makes sense.

And on the money back guarantee, Dom, I guess we would say that program has been live now for about six months give or take. And on the upside, while we can't attribute any specific deals 100% to just implementing that program, we can contribute a lot of deals that come in because that program has helped a salesperson close the deal if you will. It hasn't been -- (multiple speakers)

I think the number are somewhere nearer 20% of those customers mentioned money back guarantee when they bought it.

It has been a good I think lift helping us on the revenue upside. On the flip side when you are looking at has it come back to hurt us? We've seen about give or take 10 or 12 deals come back and ask for money back and about half of those have been really around money back or M&A rather. So a company get acquired, a small company gets acquired and they come back for the money back. It hasn't been a material amount of money at all. It's less than $100,000 cumulative year to date. So right now I would say the program is working for us and we will continue with it.

And our D books, Dom, are not out of line from last year or '03.

As a matter-of-fact they are in a little bit better shape than they were in the last few years so --.

Okay. And then another question around some of the drivers. Last time we spoke you had mentioned that you are seeing some activity pick up related to the hurricane season. Now did any of that demand slip into the end of Q3 or is that more of a Q4 '06 story? And how does that -- how do you see that shaping up and is the demand still there?

Well, I would say it has diminished as the month has gone by. There was definitely a pop for the Dells and the Ciscos of the world. I think you are going to see it kind of -- a faint demand impact here through Q4 into Q1 and Q2. I wouldn't say this is major. I don't think it is a big factor in our business. But I think it definitely there is a faint demand driver there. So we are certainly hearing that from the Dells and the Ciscos of the world.

Sure. You covered the cancellations and then I guess I have a question about deferred revenue. I know that you're putting more emphasis on the deferred revenue plus future AR metric. But just specifically looking at deferred revenue, it was up nicely but the year-over-year growth ticked down a little bit from prior two years as far as year-over-year growth. Is this an issue of difficult compare of is there more to it?

Yes, I think a little bit could be due to timing. It was up 11% and then 13% if you include future AR. Q4 is a large quarter for us. Again 40% of our business comes in. So that number should spike pretty significantly in the fourth quarter. And other than that, I don't really have any news about it.

Okay. And then I guess my last question is -- given the upside, I guess you could say in Q3, you are maintaining guidance. Are you looking for the business to tick down a little bit in Q4 or is it still looking -- I would've guessed maybe that you may have increased the guidance a little bit.

I think -- we increased guidance back in July. I think (indiscernible) stable. We had a good Q3. We're happy with that. As we go into Q4 we are looking to invest to ensure that we can grow 15 to 20% next year and beyond. So those are some of the things that we are looking at as well.

We'd like to get an early start on 2006.

Okay, banks, guys.

There are no further questions at this time. Do you have any closing comments for the audience?

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

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.