Forrester Research Inc (FORR) 2006 Q3 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Forrester Research third quarter 2006 financial results conference call. At this time, all participants are on 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's now my pleasure to introduce your host, Phyllis Paparazzo, Director of Investor Relations at Forrester Research. Thank you, Ms. Paparazzo, you may begin.

Thank you. Good morning and thank you for joining our third quarter 2006 conference call. I am Phyllis Paparazzo, the new Director of Investor Relations. Prior to joining Forrester, I was an Investor Relations consultant at Thomson Financial for over five years and at Elias Group for three years, both in New York City. I hold a BA from Bates College and an MBA from Fordham University. I am really excited about being at Forrester, and I look forward to meeting all of you in the future.

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 8th and can be accessed by dialing 877-660-6853. Please reference the confirmation ID, 216508, 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 would like to remind you that this call will contain forward-looking statements within the meaning 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 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, Phyllis, and good morning. Over the next few minutes, I will review Forrester's third quarter results, the balance sheet as of September 30, our third quarter metrics and the outlook for our business for the reminder of 2006. Please note that the income statement numbers I'm reporting are pro forma and exclude the following items; amortization of intangibles, $474,000; realized gains on sales and securities in non-marketable investments, $98,000; non-cash stock-based compensation expense of $2.5 million.

We are also excluding the gain related to the sale of our Ultimate Consumer Panel business and the historical results of the business that have been reclassified as discontinued operations on our GAAP income statement. We recognized a gain in Q3 of $1.4 million, net of income taxes on this sale. Income from these operations that have been reclassified as discontinued operations is $51,000 for Q3 and $300,000 year-to-date.

And we continue to book an effective tax rate at 37% for pro forma purposes. The anticipated actual effective tax rate for 2006 is approximately 48%.

Forrester's third quarter revenue increased 14% to $44.1 million from $38.6 million in the third quarter of last year. Net income increased 44% to $6 million and earnings per share were up 37% to $0.26 on diluted weighed average shares outstanding of 23.4 million, compared with net income of $4.2 million and earnings per share of $0.19 on 21.9 million shares outstanding in Q3 last year.

Third quarter Research Services revenue increased 21% to $29.7 million from $24.6 million last year. Research Services revenue comprised 67% of total revenue for the quarter, in line with our expectations.

Third quarter Advisory Services and other revenue increased 3% to $14.4 million from $14 million in Q3 of 2005 and comprised 33% of total revenue for the quarter. For 2006, we expected Advisory and other revenues to comprise approximately 35 to 37% of total revenues.

International revenues were 28% for the third quarter, compared to 29% in Q3 last year. We expect international revenues to comprise 28 to 30% of total revenues in 2006, as business continues to grow faster in the U.S. than in Europe and Asia Pacific.

Operating expenses for the third quarter were $36.1 million, up 10% from $32.9 million in Q3 last year. Operating income was $7.9 million or 18% of revenue, compared with $5.7 million or 15% of revenue last year and ahead of our guidance for the quarter.

Turning to Forrester's year-to-date results; total revenue through September 30th increased 20% to $132.5 million from $112.1 million in the same period last year. Net income increased 45% to $15 million from $10.4 million last year. And earnings per share for the nine months ended September 30th increased 41% to $0.66 on diluted weighed average share outstanding of 22.6 million compared with $0.46 and 21.9 million shares last year. Operating income for the nine months ended September 30th was $19.9 million or 15% of revenue, compared with operating income of $13.7 million or 12% of revenue for the same period last year.

Now I would like to review the balance sheet. Our balance sheet remains strong. Our cash and marketable securities at September 30th were $191.6 million. We generated $35.6 million in cash from operations year-to-date and now expect to generate $38 to $42 million in cash flows from operations for the full year. During the third quarter, we used $9.4 million of cash to purchase 335,000 shares on the open market, pursuant to our stock buyback program.

We have spent $12.3 million year-to-date on the stock buyback program and will continue to be active on an accretive basis in Q4. As of 9/30/06, we have 14.5 million remaining on the $50 million buyback authorized by the board last year.

Accounts receivable at September 30th was $29.9 million, compared to $28.7 million as of September 30th, 2005. Our future AR balance, which are amounts to be invoiced in the future for clients with two-year deals or scheduled payment terms, increased 40% to $28.8 million at 9/30/06 from $20.5 million at 9/30/05. Our days outstanding at September 30th was 70 days, down from 76 days last September 30th. And AR over 90 was at 13% at September 30, up from 11.5% last year.

Net property and equipment decreased to $5.5 million of September 30th from $5.7 million at the end of 2005. Our capital spending for the quarter was $673,000, bringing year-to-date CapEx to $2.4 million. Our capital spending plan for 2006 is $3.5 million and we expect to come in slightly under that budget.

Deferred revenue at September 30th was $74.9 million, up 12% over September 30th, 2005. If you include future accounts receivables, deferred revenue grew 19% during that period. We're very pleased to see this continued double-digit growth in deferred revenue in future AR, as these are the best leading indicators of our business.

Now, I'll review the Forrester's third quarter metrics. Agreement value to total value of all contracts for Research and Advisory Services in place without regard to the amount of revenue recognized or is yet to be recognized was $158.7 million at September 30th, an 18.5% increase from last year. At September 30th, Forrester's retention rate for client companies was 79% and our dollar retention rate was 87%. Both retention rates are calculated on a 12-month rolling basis and both are within our target range. Our enrichment rate was 110% for the 12-month period ended September 30th. At the end of the third quarter, our total client companies was 2,273, up 267 from yea-end and ahead of our target of approximately 250 to 300 net new clients for the full year.

For headcount, at the end of the third quarter, Forrester had a total staff of 752, up 13% from 666 at September 30th, 2005. Current headcount includes a research staff of 277, up 13% from a year ago and a sales staff of 263, up 20% from a year ago.

The last topic I would like to cover today is our business outlook for Q4 and full-year 2006. Our pro forma guidance for Q4 and full-year 2006 excludes the following; amortization of intangible assets, which we expect to be approximately $500,000 for Q4 and $2.1 million for the full-year 2006; gains and impairments on sales of marketable securities and non-marketable investments; non-cash stock-based compensation expense of approximately $2 to $2.5 million for Q4 and$8 to $8 .5 million for full-year 2006; and the gains in income reported from our discontinued operations previously talked about. For Q4, we're aiming to achieve total revenues of approximately $47 to $50 million and operating margin of 17 to 19%, interest income of approximately $1.7 million, a pro forma income tax rate of 37%, and pro forma diluted earnings per share of approximately $0.27 to $0.29.

We are updating our full-year guidance to reflect year-to-date results and the impact of the sale of the Ultimate Consumer Panel business as follows; total revenues of approximately $179 to $182 million, a pro forma operating margin of approximately 15 to 16%, interest income of approximately $5.7 million, a pro forma income tax rate of 37%, and pro forma diluted earnings per share of $0.93 to $0.95. We have provided guidance on a GAAP basis for Q4 and full-year 2006 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 thanks to everyone for being on the call. I will give you an update on our business in the third quarter followed by a quick look ahead to our plans for Q4. And after my remarks, Warren and I will take questions. As we have reported, our Q2 revenue grew 14% and pro forma EPS grew 37%. Our business remains strong and we're on path to achieve our full-year guidance.

The Company continues to add clients. We ended the quarter with 2,273 client companies, this is a net increase of 276 clients from year-end 2005. As mentioned on our second-quarter conference call, our goal is to end the year between 250 and 300 net new clients. New $1B plus clients signing on in Q3 included Abercrombie and Fitch, British Airways, The Hearst Corporation, MGM Mirage, Marks and Spencer, Nike, Saks and Zurich Financial Services.

I would like to review progress for each of the products, starting with Research. Continuing with the strong trend in the first half of the year, sales of WholeView 2 remained strong. The Company is well on its way to achieving its goal of 12% revenue growth for WholeView 2 in 2006. A major factor in WholeView 2's success this year has been the increased relevancy of research. And I would like to give you four examples of reports from Q3 to demonstrate that relevancy; Reinventing the Marketing Organization, this was targeted at CMOs; Is There a Career Future at Enterprise IT?, targeted at the CIO; Navigating the European Security Compliance Jungle, targeted at security and risk professionals; and finally, Key SOA Success, this was an SOA starter kit for enterprise architects. And these reports were of the most highly rated buy of Forrester's clients.

The Forrester Leadership Boards business surpassed our Q3 plan. The CIO group, our board of technology leaders, now has 230 members, the Technology Council is now the total of 195 members. The [inaudible] Relations and Vendor Marketing Councils added members, for a total of 165. Our three marketing focus boards and these are for, CMOs, data base marketing professionals and interactive marketing executives, ended the quarter with 93 board members. After much work, we now believe that our marketing boards are in good footing for growth. At the end of Q3, the total Forrester Leadership Board membership reached 683. For the full-year 2006, we continue to anticipate the revenue in our Boards business would grow approximately 40%.

Forrester's Data business saw a change in the quarter. As you know, in September we sold the Ultimate Consumer Panel business to Lightspeed Research, a division of WPP, for $2.5 million in cash. Forrester sold Ultimate because it no longer fit with our charter to build broad data global sets for a wide range of clients. Our go-forward strategy is to outsource panel work and not to own panels, as we did with Ultimate. Ultimate accounted for approximately 1% of our revenue.

Staying on the Data business; Technographics, Data and Services grew 32% year-over-year. TD&S gathers and analyzes data on consumers from 15 countries, constituting 70% of the world's GDP. For the North American products, we added a number of $1B plus companies, including AT&T, [AMAX], Bank of America, [inaudible], Hearst, Polo,Toyota and Tweeter. The Hispanic-American adoption survey added AOL, Cisco, Omnicom, WPP, among others. Finally, the Asia Pacific adoption survey added clients including Cisco, Microsoft and VML.

Turning now to Forrester's Consulting business. As I talked about on the last conference call, Consulting bookings were not at plan in Q2. In Q3, we worked to improve our performance on two fronts. Number one, reducing deal size back into our historical sweet spot of $50,000 to $90,000. And two, dedicating additional resources to the contract process that had been slowed by Sarbanes-Oxley. And I am glad to report that both efforts have resulted in improved results, putting Consulting back on track in Q3. I'd like to give a few examples of Consulting products we completed in the quarter. And the first was the segmentation of the small office -- home office market for a major PC company, the second was the analysis of global cosmetic firm's web infrastructure, and finally, an in-depth analysis of the open-source marketplace and open-source technologies for a major IT services organization.

As we talked about in the last conference call, the Events business continues to perform well. We held two events in Q3, the Forrester Security Forum and the Forrester Technology Leadership Forum. For a first time event in a competitive space, we were quite pleased to beat our attendance and revenue goals for the Security Forum. Speakers included Rich Jackson, Chief Information Protection Officer at Chevron and Claudia Natanson, Chief Information Security Officer at Diageo. The Technology Leadership Forum, which was held in Phoenix, featured a number of speakers, including; Shaygan Kheradpir, he's the CIO at Verizon Communications; Steve Mills, the head of IBM Software; and finally, Nandan Nilekani, the CEO of Infosys Technologies.

I wanted to say a few words about the appointment of Charles Rutstein as Chief Operating Officer Designate. As you all know from our press release, Charles will become COO on January 1, 2007. He's been with the Company for seven years with a career spanning Research, the Boards business and Consulting. Most recently, he's been President of Forrester Americas. His background includes an MBA from Worton and a career at PriceWaterhouse Consulting. We formed the COO position for three reasons; number one, to increase our operational focus as we scale; number two, to drive standard processes across an increasingly global business; and finally number three, to create a clear succession path to the CEO job. I'm very happy to have Charles working side-by-side with me as we continue to build Forrester.

Turning now to our plans for Q4, as most of you know, this is the busiest time of the year for Forrester. Over 40% of the Company's total sales of the year take place during the fourth quarter. We're hosting the following events in Q4; The Forrester U.S. Consumer Forum, actually taking place this week in Chicago; and the Forrester European Consumer Forum, taking place on November 21 and 22 in London.

To conclude, we're pleased with our financial performance in the third quarter and we remain on track for the full year. We will be visiting investors in the fourth quarter and we hope to see many of you out on the road. Thank you for listening to the call. And we will now take questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Laura Lederman with William Blair.

Yes, hi, good morning. Just a few quick questions. One, can you talk a little bit about the acquisitions, going forward? You've, in the past, talked a little bit about potentially accelerating European growth. Can you talk a little bit about how active you're being on the acquisition front?

And secondly, revenues came in a little bit light versus what the Street was looking for. And if you had to look at all of your businesses, did you think any of them came in a little bit below what you were looking for, internally? Thank you.

On that acquisition front, Laura -- I think I talked about this on the last call, we will end the year $195 to $200 million in cash, somewhere in that range. And so we are -- as we have in the past, we have become quite active in the development office at Forrester looking at potential deals. And we're looking in the U.S., we're looking in Europe, we'd be looking for geography but we also be looking to fill product holes. So, I'm not going to say we're going to buy something next month or next quarter, but I would say that we're quite active in -- we're taking good looks at several targets.

Is there a lot of interesting stuff out there or not really?

I would say there is nothing large. There are several mediums. And mediums would be in the area of $20 to $40 million in size -- revenue. And then there is a lot of small, being $1 to $5, $1 to $10. I would -- so let's say the targets in the mid-range are probably two to three world-wide and in the small range, you have in the area of five to ten targets. That's what we're looking at. Well, maybe Warren will talk about revenue here.

Yes. And on the revenue question, our guidance was $44 to $46 and we did come in at $44.1 million. A couple of items; one is the Ultimate Consumer Panel, the revenue from that product is not included. That's now part of discontinued operations.

And if you add that back in again, what would the revenue have been?

That would have been between $0.5 million to $600,000 for the quarter. That would have gotten it up to about $44.6, $44.7, in that range.

By the way, for the full-year, can you do the same math? In other words, if you add back what you think you'd be for -- ?

Yes, $2.5 million.

I'm sorry?

Would have been about $2.5 million, give or take, for the full --

So, to readjust your guidance back, we would have to add that back?

Correct.

Okay.

And then the second piece I would say is, Consulting came in a little bit under plan for the quarter. And I think there is really two reasons for that. One is the Q2 bookings, we talked about that. We came in under on our bookings on the consulting side in Q2 and that certainly carries into Q3 and perhaps a little bit into Q4. And the second piece, on the Attrition, we have seen a little uptick in Attrition over the past couple of quarters in the research communities as a result of, really the vendor market kind of heating up. And so from that perspective, we did come in a little under our Consulting plan.

Our voluntary attrition is a little bit above our average voluntary attrition.

Can you talk about what it usually is? And where it is trending now, how much above that?

Right now, it's about -- around 20%, give or take. And it's usually in the mid- to upper teens, in the 16, 17% range.

Is that voluntary and involuntary or is that just -- ?

No, that's voluntary.

Voluntary attrition.

Okay, and talking a little bit more about Consulting, you just mentioned, I think it was Warren, that it might have a little bit of an impact, the weak bookings,of Q2 on Q4. Can you give us a sense of beyond that, how you're feeling about Consulting, what you think that can grow long-term? Or have you kind of adjusted downward your long-term thought on what Consulting can grow?

Sure, a couple of thoughts on that. One is, I think we did bounce back nicely in Q3 on the consulting bookings, so that should certainly help the back half of Q4 and as we enter into 2007. Aside from that, we -- I think you understand fully how we look at a mix of 65/35 syndicated/nonsyndicated, and as we're currently planning for our 2007 year, as well as looking at it long-term, three- to five-year planning; we're considering the implications of pushing that mix from 65/35 to 70/30 to help continue drive good profitability in the future.

One thing we did this year is, Laura, is we adjusted our compensation in the sales force, compensating higher for syndicated versus nonsyndicated. And in fact, we have seen the results of that. I think in 2Q, we saw too much a result of that. We got back on track in Q3. Using compensation techniques like that, we think, perhaps we can get to 70/30.

Final question, I was noticing the Advisory and other had such weak growth and usually it's been growing like weeds? Can you talk a little bit about that?

Yes, I think it's a combination of the factors that we already discussed -- the weaker Q2 bookings, a little bit of the attrition factor. And despite the fact that we did have two events in the quarter, one was a new event and the second was our Technology Leadership event, which is one of our smaller events now. And that compared to one event last year in Q3, which is our Consumer Forum and that is a very strong forum. The two events that we did this quarter were about the same as the one event that we did last year in Q3, from a revenue perspective.

Okay. Thank you.

You're welcome.

Thanks, Laura.

Our next question is from Dom LaCava with Canaccord Adams.

Hello, good quarter, guys.

Hey, Dom.

How are you?

Just to follow-up on the Consulting and the events; you're saying you had two events in the September quarter this year and one last year. And you are saying the revenue is flat?

It's up slightly. But we had two new -- well, one is new event this year, the Security Forum, we hadn't held before.

Right.

And the second would be one of our smaller event, Leadership Technology Forum. Those are the two events that we had this year in Q3.

So it does, really, kind of isolate down to a weaker Consulting business?

Yes.

Yes.

And as you said, the booking went up to Q3, so we should see Q4 pick back up again?

I would think so.

However, the attrition issue is still out there for us.

Right. Okay.

The weaker Consulting in revenue for Q3 is really caused by two factors, one is weaker booking in Q2 and the second is the attrition factor.

Okay, got it. So, I guess then, in terms of attendance for the two events; the one that you that had last year, what was the growth like?

The technology?

Yes.

That was relatively flat.

Relatively flat and Security was --

Ahead of plan.

Right. Ahead of plan, but smaller than its first year, essentially.

Got it. Okay. And are you still seeing upside from sponsorship revenue at these events?

Yes. At the Consumer Event, which is in Chicago this week, has done very well.

Yes, that should be a solid event for us.

Okay. Any price increases on the horizon that we can look to?

I would say, as we now do every year, we're very looking closely in the plan for next year. But no decisions as yet.

Okay. Moving on to international; looks like you ticked down your expectations by two percentage points on the high-end, from 28 to 32%, down to 28 to 30%. Is international still -- ? What is the outlook there and how can we think about that?

I think that's just really a result of three quarter of business behind us now and we're at 29% year-to-date. Q4, we can move it a point one way or another, but it's not going to move three points. So I brought it from 28 to 32%, down to 28 to 30% as a result of that.

Okay.

Still, obviously, we think international is a big part of the future of Forrester. It's certainly an area that we're going to focus on. It just so happens in the last six quarters, seven or eight quarters, we have been growing faster in the U.S. than international.

Right.

I was in India two weeks ago and that business has come up very fast. As you know, it's been the fastest-growing business for us in the last five years. And as I look at the prospects of that business over the next three years, I think they are quite good, actually.

Okay.

I think we have gone through a pause, here, internationally. And I think that we're going to turn around the next few years.

Got it. As far as the Leadership Boards, I know the language changed a little bit from 40% growth year-over-year in '06 to approximately 40%. Is there anything there or -- ?

No, this is --

That business is doing great.

Okay.

It's in wonderful shape.

Okay, good. And then the outlook as far as expanding into new areas, as far as the Boards business; HR, finance, that kind of thing?

Currently planning.

Okay, maybe in '07?

We'll give you more in January.

Okay. And then I guess my last question would be, as far as this new COO role -- how does this change your role, George?

Yes, the board wants me to be more external. I don't want to get too deeply into this. But essentially, they said, look, we can find great operational talent but we can't find people who are well-known in the world the way you are.

Right.

You go to India and get five speeches and know every CEO very well, and I've known them for many years. They want me to spend more time with clients, as the public face of Forrester. By the way, I'm very good at doing that, I think. But at the same time, I will -- I'll still be involved operationally, with Charles.

Okay.

But it essentially makes me more outside, less inside.

Sure. So just kind of day-to-day operations and maybe kind of targeting acquisitions, that kind of thing?

Exactly.

Okay. All right, thanks, guys.

Thanks, Dom.

[OPERATOR INSTRUCTIONS] Our next question comes from Matt McConnell with Robert W. Baird & Co.

Hi, guys. Of the new clients that you added, I guess over the last year, are most of them current Gartner clients? Or were they -- had they not been buying research before?

I would say -- the number of we've used over several years is about 50% would have been either former or current Gartner clients.

Okay.

Remember, we entered three doors in a large company. We entered the IT door, we entered the market door and then the strategy door. Two of those doors are Gartner's audience. If you look at a company like Nike, we're entering a marketing door there. Actually, I'm not sure, I'm making this up as I go along, but as a potential example. Nike might be a Gartner IT client, but not a -- and then we would come in as a -- they would be a marketing client for us. So, overall, that would be 50%, 50% with most of these clients, with Gartner.

Okay. And have you seen any change in the way they -- like Gartner has been selling products? We've heard of some unbundling it. Does that affect -- have you seen that? And how does it affect you guys?

I'd say the major -- and I'm talking generalities here, the major feedback we're getting about Gartner is, a tightening of their business -- their business rules around seat usage and licensing agreements. That's not necessarily bad for them. I think it's -- but some of the clients are having to adjust to that at this point.

Okay. Now, on the leadership boards, do you have any update on the pipeline of the ideas you're working on, things that might be rolled out in FY '07?

We do but we'll defer til January to give you more details on that.

Okay.

It's a great business and we'll be expanding our Boards business.

Okay.

I would say -- and it kind of goes back to Dom's questions as well, we will likely expand between one and three boards next year.

Okay, great. Thanks. Coming into the fourth quarter renewals, have you received any indication of how that -- how you expect that to trend? Or -- any info there would be helpful.

I would say at this point, it's early in the quarter. Obviously, October is a big quarter for us. We have a week to go here. And the sales force is out there working hard to make this happen in the fourth quarter. Not a lot to update at this point, anyway.

All right. Great, thanks very much.

Thanks very much.

I'm showing no further questions in queue at this time.

Okay, thank you for joining us on the call. We'll see you out on the road. Thank you.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.