Forrester Research Inc (FORR) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the Forrester Research fourth quarter 2005 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] Also, 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 now begin.

Good morning, and thank you for joining our fourth quarter and full year 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, February 15, and can be accessed by dialing 877-660-6853. Please reference confirmation ID 188981 and the confirmation account 242. This call is also available via webcast and will be archived in the investor section at forrester.com.

Before I begin, I would like to remind that you 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 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 to Warren.

Thanks, Kim and good morning. I will begin the call by providing details on the stock option accounting error and follow with a review of Forrester's fourth quarter results, the balance sheet at December 31, our fourth quarter metrics, and the outlook for our business in Q1 and full year 2006. Yesterday, we issued a press release and filed an 8-K relating to an accounting error that was discovered by our auditors with respect to non-cash stock-based compensation expense. This error relates to 940,500 employee stock options granted on March 31, 2005.

Since the options were performance-based, with vesting determined based on achievement of specified performance metrics, and they did not include a definitive vesting date irrespective of achievement of metrics, we were subject to variable accounting under APB opinion 25.

The impact of the error is that we did not record non-cash stock-based compensation expense in Q2 and Q3 of $290,000 and $729,000 respectively. These option-based expenses had no impact on our cash flows for either quarter, or the year, and were excluded for pro forma reporting purposes as they have been for our Q4 and full year pro forma results.

We are in the process of amending, our 10-Qs for Q2 and Q3 and we will file them as soon as practicable. In addition, we expect to report a material weakness with respect to our internal controls over stock-based compensation expense in our Annual Report to be filed in March. For 2006, we will be implementing SFAS 123r and accounting for all options accordingly. Now I would like to report Forrester's fourth quarter results. Please note that the income statement numbers I'm reporting are pro forma and exclude the following items: Amortization of intangibles, reorganization costs, non-cash stock-based compensation expense, and net realized gains on sales of securities and non-marketable investments.

Also we booked an effective tax rate of 35% for pro forma purposes. The actual effective tax rate for 2005 was approximately 41%. Forrester's pro forma fourth quarter results met guidance we provided on our third quarter conference call. Forrester's fourth quarter revenue increased 9% to $41.2 million, from $38 million in the fourth quarter last year. Net income increased 22%, to $4.8 million, and earnings per share were up 23%, to $0.22 on diluted weighted average shares outstanding of 21.9 million, compared with net income of $3.9 million, and earnings per share of $0.18 on 22 million shares outstanding in Q4 last year.

Fourth quarter research services revenue increased 5%, to $26.1 million, from $24.8 million last year. Research services revenue comprised 63% of total revenue for the quarter, in line with our expectations. Fourth quarter advisory services and other revenue increased 14%, to $15.1 million, from $13.2 million in Q4 of 2004, and comprised 37% of total revenue for the quarter. The increase in advisory services and other revenue is due in part to continued strong demand for advisory services, as well as three events held in the quarter.

For 2006, we expect advisory and other revenue to comprise approximately 35% to 40% of total revenues. International revenues were 30% for the fourth quarter, compared to 34% in Q4 last year. The decline in international revenue as a percentage of total revenue is due to stronger sales in the U.S. in 2005, coupled with a weakening euro and pound.

We expect international revenues to comprise 28% to 32% of total revenues in 2006, as business is expected to continue to grow faster in the U.S. than abroad. Operating expenses for the fourth quarter were $34.6 million, up 6% from $32.6 million in Q4 last year. Operating income was $6.5 million, or 16% of revenue, compared with $5.3 million, or 14% of revenue last year, in line with our guidance for the quarter.

Turning to Forrester's full year results, 2005 total revenue increased 11% to $153.2 million, from $138.5 million last year. Net income increased 15%, to $14.8 million from $12.8 million last year, and earnings per share for 2005 increased 19% to $0.68 on diluted weighted average shares outstanding of 21.9 million, compared with $0.57 and 22.4 million shares outstanding last year. 2005 operating income was $19.7 million, or 13% of revenue, compared with operating income of $16.9 million, or 12% of revenue in 2004.

This is in line with our goal of growing operating margin one to two percentage points each year for the next couple of years. Now, I would like to review the balance sheet. Our balance sheet remains strong. Our cash and marketable securities at December 31, were $132.3 million. We generated $23.9 million in cash flows from operations for the full year. In 2006, we expect to generate approximately $28 million to $33 million in cash flows from operations. During the fourth quarter, we used $7.2 million of cash to purchase shares on the open market pursuant to our stock buyback program.

We have spent $23.5 million in 2005, of the $50 million authorized with regard to the stock buyback program, and we will continue to be active with the buyback in 2006 when it is accretive to our earnings per share. Accounts receivable at December 31, was $52.2 million, compared to $39.2 million as of December 31, 2004. Our future AR balance, which are amounts to be invoiced in the future for clients with two-year deals or schedule payment terms increased 9% to $28.4 million at 12/31/05, from $25.9 million at 12/31/04.

Our days sales outstanding at December 31 was 71 days, up slightly from 69 days on 12/31/04, and accounts receivable over 90 days old was 7% at December 31, the same as last year. Net property and equipment decreased to $5.8 million at December 31 from $6.4 million at the end of 2004. Our capital spending for the quarter was $636,000, bringing 2005 CapEx to $3 million. Our capital spending plan for 2006 is approximately $3.5 million.

Deferred revenue at December 31, was $86.7 million, up 20% over December 31, 2004. If you include future accounts receivable, deferred revenue grew 17% during that period. This 17% growth in deferred revenue in the future AR is one of the best leading indicators of our business.

And now I will review Forrester's fourth quarter metrics. Agreement value, the total of all contracts for research and advisory services in place without regard to the amount of revenue that's already been recognized or is yet to be recognized was $148.6 million at December 31, an 8% increase over last year. At December 31, Forrester's retention rate for client companies was 78%, and our dollar retention rate was 87%. Both rates are calculated on a 12-month rolling basis and both exceeded our target ranges. Our enrichment rate was 105% for the 12-month period ending December 31. At the end of the year, our total for client companies was 2,007, up 141 from last year and it exceeded our target of approximately 100 net new clients for the full year. For 2006, we expect to gain approximately 150 net new clients.

For head count at the end of the year, Forrester had a total staff of 693, up 17% from 593 at the end of 2004. Current head count includes a research staff of 257, up 55 from 2004, and a sales staff of 229, up 34 from 12/31/04. The last topic I would like to cover today is our business outlook for Q1 and full year 2006. Our pro forma guidance for Q1 and full year of 2006 excludes the following: Amortization of intangible assets, which we expect to be approximately $700,000 for Q1, and $2.1 million for full year 2006; gains and [INAUDIBLE] sales of marketable securities and non-marketable investments and non-cash stock-based compensation expense of approximately $2 million to $3 million for Q1 and $8 million to $10 million for the full year, as required by FAS 123r, which we are continuing to evaluate.

For Q1, we are aiming to achieve total revenues of approximately $38 million to $40 million, and operating margin of 9% to 10%, interest income of approximately $800,000, a pro forma income tax rate of 37%, and pro forma diluted earnings per share of approximately $0.12 to $0.14.

We are providing full year 2006 guidance as follows: Total revenues of approximately $175 million to $180 million, a pro forma operating margin of approximately 14% to 15%, interest income of approximately $3.2 million, a pro forma income tax rate of 37%, and pro forma diluted earnings per share of $0.80 to $0.86.

We have provided GAAP guidance for Q1 and full year 2006 on our press release and 8-K filed earlier this morning. Thank you, I will now turn the floor over to George.

Thank you, Warren, and good morning everyone. I will summarize the fourth quarter and full year 2005 and I will then update you on our plans for 2006. As Warren reported, our 2005 revenue grew 11% and earnings per share grew 19%. We have now returned to double digit organic growth, continuing the trend of steady year-to-year revenue increases since 2003. Based on deferred revenue at 12/31, the outlook for 2006 is positive. The Company growth in 2005 was strong. We ended the year with 2,007 client companies, a net increase of 141 clients from year end 2004. Our internal efforts to focus on the 1B+ companies showed results in 2005, with a net 49 1B+ companies joining Forrester during the year.

New 1B+ client companies signing on in Q4 included Capital BlueCross, Eastman Kodak, Eaton Corporation, Fairchild Semiconductor, M&T Bank, [Romanhaus], and Yale New Haven Health. Turning to a review of of each of our products starting with research. As I mentioned on the last two quarters, a key 2005 initiative for Forrester was to grow its syndicated products, led by WholeView 2. I'm pleased to report that in 2005, WholeView 2 bookings grew in the high single digits. These bookings results will drive revenue growth for WholeView 2 in 2006. The Q1 2005 price increase in our efforts to expand site licensing contributed to the growth in WholeView 2 bookings.

The boards business continued to expand in the fourth quarter, as a means of sharpening our marketing efforts we have rebranded our boards business as Forrester Leadership Boards discontinuing the Oval name. The CIO group, this is our board of technology leaders, now has 193 members, Tech Councils, our board for technology titles below the CIO, now have a total of 151 members, the Analyst Relations and Marketing Councils added members for a total of 128. Last year we launched three new programs for marketing executives, the CMO group, the Database Marketing Council, and the Email Marketing Council. We ended the quarter with 51 marketing board members. So at the end of Q4, the total Forrester leadership board membership reached 523.

For the full year in 2005, boards business revenue grew 50%. New memberships in our concerted effort to decrease discounting and elevate average seat prices for board memberships were factors. Forrester leadership boards are increasingly global with 21 countries now represented within membership.

And now we'll look at our data business which includes Consumer Technographics and the Ultimate Consumer Panel. Data revenue grew 28% in 2005, just shy of our 30% target. Q4 was particularly strong for our data products, both in the renewal and on the new business side.

Consulting services showed steady growth in 2005, revenue increased 28%, and this is in line with our targets. 90% of Forrester's consulting was performed for existing clients, stimulating concomitant sales between consulting and our research, data and community products. Strong demand enabled us to become more selective in the consulting business we took, ensuring that we are staying within the envelope of our direct expertise.

Fourth quarter events included two forums that were held overseas, The Finance Forum Europe and the Consumer Forum Europe. The Executive Strategy Forum was held in Boston and this forum focused on helping companies use IT to globalize. Outside speakers included Mitt Romney, the governor of Massachusetts and a presidential candidate, and Ralph Szygenda, CIO of General Motors. I would now like to focus on our plans for 2006.

Our 2005 effort to grow WholeView 2 will continue into 2006. As you know, our goals to maintain a 65/35 balance between our syndicated and non-syndicated revenues. WholeView 2 growth helps the Company achieve that balance. In addition to WholeView 2, we will grow our boards business in 2006, our goal is to increase membership from 523, to over 650 members by year end. We will expand membership in our nine extant boards. We are not presently planning to launch new boards in 2006.

Turning now to the data business, Consumer Technographics, this is the largest and the longest running survey in the United States and Europe on technology and consumers. It will continue to be our focus for growth. As part of this effort, we are launching the Hispanic Consumer Technographics product in the first quarter, and launch 13 charter clients have signed on for this product. The Company will host eight worldwide events in 2006, and on the consulting side, one of our goals in 2006 is to create more replicable methodologies as a means of increasing profit margins in this part of our business.

Our plan is to focus on the most critical projects for our target buyers, IT, marketing and vendors. A few words about an executive change earlier this month. We issued a press release announcing that our president of the Americas, Neil Bradford would be leaving Forrester, returning to his native U.K. as per a long-term plan. I speak for all of Forrester when I say I'm very grateful for his leadership and accomplishments as head of the Americas. Charles Rutstein will be starting as the President of the Americas effective on February 15. Charles has been with the Company for seven years working in research, leading our consulting business, and most recently managing Forrester leadership boards.

So to conclude, Forrester's top line and bottom line guidance for 2006 puts us well on the road back to our long-term target ranges. We have the right product mix, the right team, the right strategy, and the relative research to continue our acceleration of revenue in 2006. Warren, Kim, and I will be presenting at the Baird Conference on March 1 and that plans to be on the road visiting investors during the quarter. We hope to see many of you in our travels. Thank for listening in on the call. We will now take questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [OPERATOR INSTRUCTIONS] One moment, please, ladies and gentlemen, while we poll for questions. Our first question is coming from Laura Lederman of William Blair. Please proceed with your question or comment.

Just a few questions. One, can you talk a little bit about customer wins from META since Gartner bought them and separately the price increase that you instituted, can you talk about how much of that flowed through? And then I have a few other questions. Thank you.

On the META front, Laura, I would say that we had a Miss META campaign, we ran in Q2.

Q2, yes.

And I would say that it was successful but not wildly successful. I think that we definitely got a general boost from Gartner-META coming together in 2005, and, you know, I would say it was -- we probably gained 10 to 12 accounts in Q4, somewhere in that range. You know, I think it was in the 10 to 12 range.

Okay. And the price increase, that was instituted in the first quarter of last year?

Sure, the price increase is approximately 10% across the board back in Q1. I think that really, we'll be seeing primarily in 2006, that was -- we saw, you know, little push back, I think, from our clients, generally speaking. I think it was well received overall. Discounting has been down over the past four quarters, but as you know, given our revenue model, most of the benefit of that, I think, you are seeing that in our guidance for 2006 on the top line revenue growth.

If you to break out what percentage of the double digit revenue growth for '06 comes out from price, what would that be?

I would guess about 25% to 35% of it, as a result of the price increase.

There are two other factors going on here, Laura. One is that we are improving our discounting and becoming more aggressive on lowering the discount, and the second is enterprise pricing, which we have very successfully driven through Q2 of '05.

And one final question and then I will pass it on and come back in the queue. Why was revenue in the quarter at the low end of the range? Was it more back end loaded than usual?

Primarily because of the weakened euro and pound. That probably cost us about $500,000 or $600,000 for the year -- or for the quarter, rather.

What did it cost you currency for the year?

For the year, probably about -- probably about two percentage points.

Thank you so much. Good quarter.

Thanks, Laura.

Thank you. Our next question is coming from Dom LaCava of Canaccord Adams. Please proceed with your question or comments, sir.

Hi, guys. Good quarter.

Thanks, Dom.

I have a question about '06. It looks like for the pro forma EPS, it looks like it's more back half weighted. I wonder if you could talk about expectations for the first quarter, and, you know, what might be leading to that as far as being the low end of EPS?

I think one thing you will find with our Company is when we go into growth mode again, which I believe we are at at this point, if you look back historically we tend to have slower Q1 and Q2, and then kind of ramp it up to Q3 and Q4, and that kind of differs from what you saw probably in '03 and '04 when we were flattish to just growing at 3%, 5%, 10% a year. So what we are seeing more investments up front in the first quarter with hiring new people and getting them productive within the year, and then you are seeing that productivity show some fruit, if you will, in the Q3 and Q4 time periods.

It's a typical pattern that we had, Dom, in the '90s when we were in growth mode.

Right and it looks like your guidance is 12% to 14%, versus 12% a year ago. So that's kind of why I'm looking to see if -- you know --

Well, $0.12 to $0.14 for EPS?

Yes.

Versus 12% a year ago. [ Both talking at once ]

Okay. And then as far as the mix of syndicated versus non-syndicated. I know that overall you expect to see 65%/35% and you gave a 35% to 45% goal for the whole year. But can you give us some kind of, I guess, color around how we could expect it to progress quarter-to-quarter as far as that mix?

Yes, the goal is 65/35 and I think I gave some guidance of 35% to 40% for the non-syndicated piece, really just a hedge in case we have a blip or consulting continues at a really strong pace. We have incentives in place to drive that syndicated goal. That's what we are shooting to get to. Within the quarters, it's really driven, I would say by two factors, one is the timing of when clients need our advisory, and what you see is that Q4 tends to be pretty high for that as does Q2 within the year, and then the second factor is the timing of our events. Because, as you know, those are non-syndicated revenue items.

Sure. And then I guess going back to Q1, is there any, you know, looking for -- at the Q1 assumptions is there anything else, you know, around that lower, relatively lower EPS as far as, you know, higher audit fees, that kind of thing. Is there anything else --

No. It's primarily, you know, per the plan that we set up in Q3 and Q4 last year, it's really just investment in people so that we can achieve our growth rates for the year.

It's really about,, Dom, hiring new people and moving the productivity higher in Q2, 3, and 4.

Sure. Thanks, guys.

Thanks, Dom.

Thank you. Our next question is coming from Rob Skloff of Sidoti & Company. Please proceed with your question or comments.

Thank you. Just a couple of follow-ups. The receivables had gone up quite a bit year-over-year. Is that simply a function of business ramping up? That's the first question and I have one more.

Yes, and that's directly attributable to business ramping up from last year.

And I guess if you expect that business to continue, we would -- that would obviously continue?

Yes, I think it's accentuated at Q4 because it is 40% of our bookings for the fourth quarter and a large portion of those come near the end of the year, so we don't collect them until January, or early February.

So you have a cash flow?

That's exactly what you'll see is a large cash flow, it's from operations in the first quarter of the year.

Great. And then the last question relates to options expense. Is that going to be pretty uniform throughout the year?

We are in the process right now of, you know, making our estimates and calculating it for the year. It's really based on a number of factors and assumptions that will be rolled out. I'm expecting it to be about $2 million to $3 million dollars per quarter, but I am planning on giving more precise guidance once we get to the April conference call and have gone through one full quarter of calculations.

You alluded to, but have you decided -- where do you stand on any changes that might, you know, come forth in your options issuance policy?

Well, our Company is currently meeting and planning for options for this year, and we really like the concept of performance-based, that we had in 2005. As you remember, options were pegged to meet EPS targets and so that principal will continue on into '06.

Thank you.

Thanks, Rob.

Thank you. Our next question is coming from Charles Trafton of America's Growth Capital. Please proceed with your question or comment.

Hi, thanks. Did you guys already say in the prepared comments, I might have missed it, about share buybacks this past quarter?

In Q4, yes, $7.2 million we spent on share buyback, $23.5 million for the full year 2005.

Okay. And in your prepared remarks you mentioned that WholeView --

WholeView 2.

WholeView 2 bookings, I guess were up high single digits?

Yes.

That was bookings not revenue?

Exactly.

And that was primarily due to the 9% price increase?

That was partly due to the 10% price increase, yes.

Partly. Okay. So units were up something less than that? So maybe mid-single digits? What -- how does that compare to units of a year ago?

We were flat a year ago. I'm trying in my head of this to calculate this. How much the price increase had to do with this. I'm looking at Warren.

Yes, 25% to 35% of it was from the price increase and the other would be primarily new business.

Because remember, Charles, many clients don't renew until the fourth quarter.

It sounded like you said bookings were up 9% and so were prices up 9% so I'm thinking flat units.

No. No.

Okay. I mean, incremental margins in the last four quarters have gone 5, 12, 20 and 38 this past quarter and then EBIT, 9, 11, 14, 16, seemingly back on the path that you set out on a couple of years ago when you rolled out WholeView 2. Your targets for next year, I guess, seem reasonable based on that trajectory. What else do you want to do with the higher margins you are getting from each of your clients? Are there new investments planned in '06 or continuing on with the boards, as the main investment?

Your question is a general question about where does the cash go?

Yes, what do you think about '06?

Because, I mean, I will give you a quick answer. Some of this will go to margin, right? Some of it goes to driving the operating margin higher, driving the net higher.

Yes.

What I would say here, about investment is, it's a tape that I play all the time, but we have a very active development effort internally, and -- but we're really picky, you know, we look at deals that we believe are really going to work. I'm not saying we are going to do anything in 2006, but we're going to look really very hard at potential deals and, again, I think in the the last call, the pricing is tending to drift a little bit higher now, 1.2, 1.3 times revenue which to us look like high numbers. We're always looking for acquisition, but we're really in an organic growth mode right now, Charles, and so we are using this money, generally, to expand the sales force, expand the boards business and we had really good luck doing this in '05, expanding the WholeView 2 business. So it's really about organic --

New offices as a source of organic growth? Investment overseas maybe?

No. No --

No significant plans for 2006 regarding new offices.

No new offices, but I will tell you that we are investing in Asia Pacific and that's mainly in people, not in offices. The offices that we currently have in Asia Pacific, we are putting more people in those offices.

Okay. Thanks.

Thanks, Charles.

Thank you. Our next question is coming from Sandra Notardonato of Robert W. Baird. Please proceed with your question or comment, ma'am.

Thank you. My first question, actually, is a follow-up to the question that Dom was asking about the guidance for '06. You've increased your pro forma tax rate to 37%.

Yes.

And that is going up from 35% so that could have an impact on the EPS number for the first quarter? Right?

That will have an impact on the number for the entire year. Pro forma rate was 35% in 2005, and for the last couple of years, because we have higher pre-tax income and less of our pre-tax income is coming from investments or interest income, if you will, from our cash. Our rate is going up higher, so we had to reflect that in 2006. We bumped it up to 37% that has no impact on the operating margin.

Right.

And just to let everybody know, the operating margin is 12% in 2004 and 13% for 2005, and guidance for 2006 is 14% to 15% with the long-term goal of moving that a point or two per year to get up to 17% to 18% in the next two to three years.

Okay. The next question is on the enrichment rate. It really bumped, along, you know, 104% to 106% throughout the year.

Yes.

And I'm wondering, what is a target enrichment rate that we should be looking for in 2006, given that potentially we see more of that price increase that you implemented in Q1 of '05 flow through the next 12 months or so?

We would be looking to reach, you know, double digits so 110%, 112% in the enrichment rate by the end of the year.

By the end of the year. And maintaining what you are seeing on the client renewal in dollar -- in the dollar attention side?

Yes, we are very happy with where those rates are today. Obviously, we would like to push them a little bit higher but at a minimum.

They're at historically high rates right now.

They are at historically high rates, that's's right. So does that mean, you mentioned that you want to push them higher, but is there risk that they revert back to what is the historical average of the Company?

I would be happy with where they are at right now. You always want more. But those are very good rates.

Okay. Do you give the average number of seats that your customers are purchasing on WholeView 2?

No, I do not have that here.

Can you give us a sense of how that's progressed since you've made that transition to WholeView 2?

The average number of seats bought my each WholeView 2 member?

Yes. We have got it someplace, but not in the room right now. It's such a wide range, Sandy. It's hundreds or thousands.

We have several clients that are enterprisewide deals and so they don't really have a specific number. It's the entire Company has access to it. So it's the total number of employees and the total number of employees in IT, et cetera.

So we'll get back to you.

No, that's fine, that's fine. And then your comments on the investments you are making in 2006, what do you think the right ratio is in terms of research personnel to sales personnel?

I would say that right now our research -- that percentage is a little bit high, on the research side.

Okay.

I would like to invert that, as we -- as we get to end of year.

Okay.

What that probably means is holding research steady and moving sales higher.

And resumes on the sales front, what is the quality of people that you are seeing there?

I look at the quality of people we hired in '05, and it was terrific! I mean, I am looking at the attrition numbers now. We attrited 11% voluntarily out of sales in '05 and 10% voluntary out of research, and it's a very impressionistic statement but I do come to work every day and talk to these people, this is like the highest quality staff ever at Forrester in the history of the Company. I don't know if you have any comments, Warren or Kim, on that?

I would agree and I think the resumes continue to come in and I think they continue to get high quality resumes in. I was talking to a sales director this morning earlier in the hallway and he had several interviews lined up today for hiring. It was a good sign.

I think the "Boston Business Journal" named us as one of the top five companies in Boston to work for right now. So that's not a problem.

And then I think you mentioned in the prepared remarks, the 10% of your consulting business is coming from customers that are not subscribers to WholeView 2?

Yes.

Are they subscribers to the Oval program or are they really -- or I should say the leadership of the boards program, or are they really new clients completely to Forrester and how have you acquired these customers?

They are brand new customers. They are not buying any other products from Forrester.

Okay.

That's primarily through brand and coming into the website and coming in through leads.

So that's not your sales force out there pitching consulting business?

No our whole leads process was overhauled in '05 and it is far more efficient at working -- it's yielding some fairly big deals for us right now. So it's coming in mainly through the website.

Okay. And my last question, if I look at the guidance that you started the year off with in FY '05.

Mm-hmm.

It sounded like you were thinking you could you do $148 million to $153 million, and $0.62 to $0.67 in EPS. That's what you had indicated.

Yes.

You raised the guidance mid-year, and you did a great job coming in, you know, where you came in, but I'm wondering, what were you thinking at mid-year that didn't actually come to fruition as the year ended to get to the high end of the revised guidance?

I think the primary thing is really on the exchange rates.

Okay.

It was about 600k in Q4 and maybe another 400k, 500k -- I mean $1 million of revenue was lost, if you will, in the translation due to a lower euro and pound compared to where it had been previously.

Okay.

And also, I'll add onto that, Sandy, and say that European business weakened in the second half of the year.

Okay.

And so that was another factor.

Do you think that maybe the price increase not sticking as much in Q4 had some impact, or --?

No. Not an issue.

Thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS] With that, we do have a follow-up question coming from Ms. Laura Lederman of William William Blair.

I was just trying to question -- out there in the market, who do you see competitively versus WholeView, in addition to IT?

It's interesting. Before the call started we were asking ourselves that question. And, you know, we have two competitors Core Executive Board and Gartner Group, and the noise factor on Gartner has been incredibly low in the last quarter and, again, very impressionistic, Laura, I don't have the data for you. But the noise factor has been very, very low. And, you know -- and I will just say that, again, very impressionistically, observation, but Gartner may have helped us a lot, and I can't qualify it for you, but they really helped us a lot in '05. And I would say if I look at the META clients we picked up, I would say the ones I really can see that are visible to me are on the vendor side and not on the user side. I'm sure there was some more on the user side that I didn't see, but the vendor side was very evident to me.

Does that create a difficult comparison at all for '06 if the Gartner-META thing helped you a lot in '05 or would you expect a continued assistance from that?

I think it keeps running out there. I mean, if you are, you know are a large vendor and you are -- and you need help, there's only two players, you -- in most cases, the vendors can't go to one of us now. They have to play on both sides and that's really been the advantage for META moving to Gartner for us. They could go to META-Gartner before, and now they go to Gartner-Forrester. I think that will continue onward.

Just in question a little bit. How come no additional boards in '06, do you feel you have enough to focus on in '06 and maybe add more boards in '07?

Yes.

And one final question for Warren what is your expected currency impact assuming the rates don't change on revenues for '06?

Compared to '05, it would be another, you know, probably 2%, about 1.5% to 2% in total.

A negative?

A negative, that's right. The rates are down from where they were.

Okay. Thank you so much.

Thank you, Laura.

We do have another follow-up question coming from Dom LaCava of Canaccord Adams. Sir, your line is live.

Hi, I just wanted to follow up on the boards business, that's the key to getting the research component to grow. I just wanted to see if you could give a little color behind kind of the rebranding, what was the thinking around that? And then also I'm not sure -- I know you broke out the percentage growth of the Oval. I just wanted to see if you had a number handy as far as what percentage of overall research revenue was from Oval, how much of that was pricing, versus new clients and then what are your expectations as far as percentage of research services revenue from Oval in '06?

Yes, I can -- I will take some of the number questions first, the leadership boards for 2005 represented about 8% of our total revenues, that's total revenues so you'd have to back in and figure out on the research side. For 2006, we'd expect that to go to about 8% to 10% in that range, and as you mentioned earlier, it is our fastest growing syndicated product that will be growing 40%, give or take, in 2006. It will be leading the way with growth on the syndicated line item. But we still need our WholeView 2 research to grow, as well, because that's still half of our total business.

Sure.

And on the rebranding, Dom, you know, we always say good marketing communicates what it is, although didn't really quite communicate what it was. The word "Boards" in there is a critical word. That's really the simple answer on that one.

Okay. Great. Thanks, guys.

Thanks, Dom.

We do have one final question coming from Steve [Cole] of Matador Capital Management. Please proceed with your question or comment, sir.

Thank you for taking the question. Just out of -- a brief one, just looking at cash flow and I know one of the earlier callers talked about incremental margins and how they've ramped up. Could you give us a little color as you look at your thought process for this year and really looking out beyond that for a couple more years, where incremental margins could go, given the proposed mix, and the second question is, your cash flow guidance for the year, how does that change given the shift in the business? I mean, do we see that and really looking -- I'm more interested in free cash flow, but do we see free cash flow margins expanding dramatically as this continues to build over the next couple of years?

Yes, the cash flows, $28 million to $33 million for 2006, up from $23.9 million, in 2005, should continue to grow at a fairly good clip. There's a couple of factors. One is, as you mentioned, our business mix. The higher leveraged we are, the better it is for our cash flows, because we get paid up front for that business.

So if we are able to maintain a 65/35 split, we should be able to continue to grow cash flows from operations at that same clip, 25%, 35% per year.

The other factor in cash flow that's really driving it is the fact that we have a large deferred tax asset on the balance sheet, which -- I mean, I give you pro forma tax rates of 37% for the year and I tell you that we expect a GAAP tax rate of 44% for 2006 in the press release, but at the end of the day, we are paying about $1.5 million to $2 million in taxes worldwide, mainly as a result of either international or state minimum taxes that are due. So we have a large net operating loss, a large deferred tax asset on our balance sheet which, as a result of, we do not pay, you know much, if anything at all.

The NOL was acquired with Giga, it was a major asset that we bought with Giga.

That's another factor that drives the cash flows from operations.

I was just going to ask you on Giga, when you look at your modeling, how big is that asset today or how many years do you think we still have left on it?

I mean, it's hard to exactly give you a number but we have about $120 million remaining on the net operating loss, and that should give us another, you know, three to five years depending on how fast we grow both top line and the margins.

Sounds good. Thank you very much.

Thank you very much.

There's no further questions in queue.

Great. Thanks for joining our call and we look forward to seeing many of you on the road this quarter.

This concludes this morning's teleconference. Thank you all for your participation and you may disconnect your lines at this time.