Forrester Research Inc (FORR) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Forrester Research earnings conference call. My name is [Sealy] and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I'd now like to turn the conference over to your host for today, Karyl Levinson, Vice President Corporate Communications. Please proceed.

Good morning. Thank you for joining our second quarter call. With me today are George Colony, Forrester's Chairman of the Board and CEO; Charles Rutstein, Forrester's Chief Operating Officer; and Mike Doyle, Forrester's Chief Financial Officer.

Mike will open the call and provide detail on our financial results for the quarter. George will follow Mike and provide a strategic update on the business and our role-based strategy. After George completes his review we will open the call to Q&A.

A replay of this call will be available until August, 5, 2010 and can be accessed by dialing 888-286-8010. Please reference the pass code 90149232. 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 expect, believe, anticipate, 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 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.

I'll now hand the call over to Mike Doyle.

Thanks, Karyl. I'll now begin my review of Forrester's second quarter financial performance, the balance sheet at June 30, our second quarter metrics, and the outlook for the third quarter and full year 2010.

Please note that the income statement numbers I'm reporting are pro forma and exclude the following items -- amortization of intangibles, stock-based compensation expense, reorganization costs in 2009, acquisition-related costs and credits, and net realized gains and losses from investments.

Also, we continue to utilize an effective tax rate at 40% for pro forma purposes. The actual effective tax rate for the second quarter of 2010 is approximately 39%.

For the second quarter, Forrester met its quarterly guidance for revenue, pro forma operating margin, and earnings per share. We are pleased with the continued improvement in our operating performance, which reflects healthy revenue across all product segments and excellent operating discipline resulting in strong bottom line performance.

We continue to see signs of an improving economy both with improved customer retention, which is now above historical averages, and improved customer enrichment metrics. Cash flow performance was strong for the quarter and up versus prior year.

Now, let me turn to more detailed review of our second quarter results. Forrester's second quarter revenue increased 5% to $64.7 million from $61.6 million in the second quarter last year. Given our deferred revenue recognition model we are continuing to see the positive revenue effects of our improved bookings performance over the last three quarters despite the negative impact of foreign currency on our second quarter revenue. In addition, we continue to experience strong consulting delivery and increased events revenue.

Second quarter research services revenue increased 5% to $40.8 million from $39 million last year. Research services revenue was 63% of total revenue for the quarter, which was in line with the second quarter of 2009.

Second quarter advisory services and other revenue increased 6% to $23.9 million from $22.6 million in the second quarter of 2009 and represented 37% of total revenue for the quarter. Year-to-date advisory services increased 9% to $43.7 million from $39.9 million for the same period last year.

Our international revenue mix declined to 27% for the second quarter of 2010, compared to 30% in the second quarter last year, primarily due to the impact of foreign exchange rates. On a local currency basis, our international revenues grew at a slightly slower rate than our US business.

I would now like to take you through the activity behind our revenue and review the results for each of our products starting with research.

In the second quarter, we added 387 new research documents. The top three research roles were the Market Research professional, which was combined this past quarter. It previously was two separate roles, the Consumer Market Research and the B2B Market Research professionals.

Technology Product Management and Marketing professionals, with 4,682 members, was our second leading role and the Enterprise Architecture professional, with 4,398 members, was our third leading role. We hosted 63 teleconferences in the second quarter with a total attendance of 1,998.

Forrester leadership boards, our peer offering for senior executives, continues to improve achieving year-over-year revenue growth of 4% in both the second quarter and on a year-to-date basis.

The seven boards focused on IT roles now have a total of 963 members. Technology Industry boards now have a total membership of 282. And finally, the Marketing and Strategy boards have a total membership of 398.

At the end of the second quarter, the Forrester leadership boards had 1,643 members, an increase of 5% from March 31, 2010 and 5% from December 31, 2009.

In our data business we continue to add and renew an impressive list of clients, including the addition of 14 new 1B plus companies in the second quarter, including MasterCard, Kohl's, Anheuser-Busch, HSBC, NBC, Hilton, United Airlines, Kraft, and Virgin America.

In our consulting business, the demand for our consulting services increased 4% from the second quarter of 2009, which we believe reflects an improving economy and a continued focus on the needs of our clients in their roles. Consulting improvement was broad based across each of our operating segments.

In our events business, as they did in the first quarter of 2010, our second quarter 2010 events business continued to strengthen in both sponsorship and attendee sales. The second quarter is typically one of the larger quarters for our event business.

We hosted two IT role-based events in the second quarter, our flagship IT events, IT Forum North America, and IT Forum AMEA. And two M&S role based events, Marketing Forum North America and Customer Experience Forum North America.

In the third quarter of 2010 we are hosting one IT role-based event, Security Forum North America. In the fourth quarter we will host five IT role based events -- our new CIO Forum North America, Content and Collaboration Forum North America, Business Process and Application of Delivery Forum North America, and Sourcing and Vendor Management Forum in both North America and AMEA.

We will also host two M&S role-based events in the fourth quarter, Consumer Forum North America, and Marketing and Strategy Forum North America.

Operating expenses for the second quarter were $52.2 million, up 10% from $47.4 million in the second quarter of 2009, due to significantly higher commissions, bonus payouts, and higher compensation and benefit costs associated with increased headcount, primarily in sales. Travel and entertainment expenses have also increased as business activity continues to improve.

Operating income was $12.5 million or 19.3% of revenue, compared with $14.2 million or 23% of revenue in the second quarter of 2009. The strong second quarter revenue was offset by the increased operating expenses as we ramp up our sales organization to reflect the improved economy.

In addition, operating income was negatively impacted by the fluctuation of exchange rates in the second quarter of 2010 as compared to the same period in 2009.

Other income for the second quarter was $1.1 million, up 153% from the second quarter of 2009. The increase is primarily due to a net foreign exchange gain on foreign liability balances, partially offset by a decrease in interest income reflecting lower global interest rates.

Net income for the second quarter was $8.2 million and earnings per share was $0.35 on diluted weighted average shares outstanding of 23.1 million, compared with net income of $8.8 million and earnings per share of $0.38 on 22.9 million weighted average shares outstanding in the second quarter of last year.

Turning to Forrester's six month results, total revenue for the six month period ending June 30, 2010 increased 5% to $123.8 million from $118 million last year. Year-to-date 2010 Research Services revenue increased by $2.1 million or 3% to $80.2 million. Research Services represented 65% of total year-to-date revenue, a 1% decline compared to the same period in 2009.

Operating income for the six month period was $21.9 million or 17% of revenue compared with operating income of $23.3 million or 19.8% of revenue in the first six months of 2009. The decline versus prior year reflects additional investment in sales personnel as our business activity increases.

As a reminder, with our deferred revenue model, bookings run ahead of revenue. We plan our reinvestment based on bookings activity, knowing there can be a lag between revenue and expense, particularly post recession.

Net income on a year-to-date basis was $14.5 million from $15 million last year, a decline of 3.8%. Earnings per share was $0.63 on diluted weighted average shares outstanding of 23 million compared with $0.65 and 23 million weighted average shares outstanding last year. The decrease is primarily the result of reinvestment in the business, principally in our sales organization.

Now I'd like to review the balance sheet. Our strong balance sheet reflects the continued improvement in our business. Our total cash and marketable securities at June 30 were $287 million, up $27.2 million from our year end 2009 balances.

We generated $32.4 million in cash from operations during the first six months of 2010, which is up $3 million or 10% from prior year primarily due to increased bookings activity due to the improving economy and customer need for our products and services.

We have received $8.3 million in cash from the options exercised in the employee stock purchase plan in the first six months of the year. During the first six months of 2010, we repurchased 159,000 shares at a total cost of $5 million, versus $10 million in the first six months of 2009.

We will continue to be active with the buyback at selected price points and have $53.8 million remaining in our repurchase authorization.

Accounts receivable at June 30, 2010 was $39.8 million compared to $36.3 million as of June 30, 2009. Our day sales outstanding at June 30 was 56 days, up from 54 days at June 30, 2009. Accounts receivable over 90 days was 8% at June 30, 2010, down from 9% last year, reflecting improved collections performance.

Our capital spending for the second quarter 2010 was $1 million compared to $200,000 in the second quarter of 2009. Capital spending for the first six months of 2010 was approximately $2.4 million compared to $2.7 million in the first six months of last year. We expect capital spending to increase in the second half of 2010 as we increase our investment in customer facing technology.

Deferred revenue at June 30 was $108.5 million, up 11% over June 30, 2009. Our future accounts receivable balances are amounts to be invoiced in the future for clients with multiyear deals or scheduled payment terms.

Deferred revenue plus future AR grew 12% year-over-year. The strong year-over-year increase reflects improved business activity as our business continues to rebound strongly from 2009 levels and is the best indicator of future performance.

I'll now review Forrester's second quarter metrics. Agreement value --this represents 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 and was $189.3 million at June 30, 2010, an increase of 2% from the second quarter of 2009.

At June 30, 2010, Forrester's retention rate for client companies was 79%, an increase of two points from March 31, 2010. Our dollar retention rate during the same time period was 89%, an increase of one point from our first quarter 2010.

Our enrichment rate was 101% for the rolling 12-month period ended June 30, 2010, which is up three points from March 31, 2010. We calculate client and dollar retention rates and enrichment rates on a rolling 12-month basis due to the fluctuations between quarters with deals that close early or slip into the next quarter. The rolling 12-month methodology captures the proper trend information.

At the end of the second quarter our total for client companies was 2,523, up 36 from March 31, 2010. As of June 30, 2010 there are 3.2 roles per client, which is flat with the first quarter 2010 levels.

Overall, our client and dollar retention and enrichment metrics, coupled with our deferred revenue performance, highlight the continued improvement we're seeing in our business.

For headcount at the end of the second quarter, Forrester had a total staff of 1,008, up from 986 at March 31, 2010, as we continue to invest in growing our sales staff. Current headcount includes a research staff of 362 and sales staff of 356. Sales attrition, an important driver of sales productivity, is running at a rate approximately 50% below the first six months of 2009. This bodes well for sales productivity in the balance of 2010.

The last topic I'd like to cover today is our business outlook for the third quarter and full year 2010. In summary, sales performance and continued expense management discipline during the first half of 2010 allowed us to perform at or above our revenue pro forma operating margin and EPS guidance.

In addition, we are encouraged by the positive trends on our key customer retention and enrichment metrics.

Our balance sheet is in excellent shape with cash flow up 10% year-over-year, allowing us to be opportunistic in this market pursuing acquisitions, new business and other vehicles to enhance shareholder value.

Deferred revenue, a key indicator of future performance, was up 11%. We continue to focus on hiring additional sales personnel while maintaining low attrition compared to year-ago levels. Our progress on the sales front is laying the foundation for a strong second half of 2010 and positions us for a successful 2011.

As a result, we have increased our guidance for the balance of the year, increasing our revenue guidance and raising our earnings per share guidance above previous levels. We have kept operating margin in line with previous guidance to reflect our intent to continue to reinvest in the business.

Our pro forma guidance for the third quarter and full year 2010 reflects our view that the economic conditions are improving and, therefore, continued investment in our business in the form of sales and research talent is appropriate.

As a reminder, our guidance excludes the following -- amortization of intangible assets, which we expect to be approximately $900,000 for the third quarter and approximately $3.6 million for the full year 2010; stock based compensations expense of $1.1 million to $1.3 million for the third quarter and approximately $5 million for the full year 2010; and gains and losses in investments.

For the third quarter 2010 we're aiming to achieve total revenues of approximately $57.5 million to $60.5 million. This range reflects a 7% to 12% improvement versus prior year, operating margin of 11.5% to 13.5%, other income of approximately $250,000, a pro forma income tax rate of 40%, and pro forma diluted earnings per share of approximately $0.18 to $0.22.

Our pro forma full year guidance is as follows --total revenues of approximately $244 million to $252 million, this reflects an increase of between 5% and 8% versus prior year, pro forma operating margin of approximately 14.5% to 15.5%, other income of approximately $2.7 million, a pro forma income tax rate of 40% and pro forma diluted earnings per share of $1.03 to $1.09.

We provided guidance on a GAAP basis for the third quarter and full year 2010 in our press release and 8-K filed this morning. Thank you. I will now turn the floor over to George.

Thank you, Mike, and I'd like to welcome everyone to the call. I will cover four topics this morning. Number one, the economy and Forrester's forecasts; two, an update on the company's three business imperatives; three, Forrester's social efforts; and finally, number four, I would like to say a few words about the capital structure of the company.

Turning first to the economy and tech spending, as we move beyond mid year, Forrester continues to project growth in the IT market both here and abroad. Our analysts forecast that tech spending will increase 9.9% in the US this year and 7.8% globally in US dollars.

We continue to project that computer equipment and software spending will lead this growth. We see the market for equipment growing 19.1% and the market for software growing 10.5%.

We forecast IT services to grow at 6.4%. Services expenditures follow the purchase of software, so it necessarily lags the general recovery in tech.

Globally, Forrester is forecasting 7.2% growth in Asia Pacific tech spending measured in local currency. Western and Central Europe will experience the slowest IT market growth at 4.1%, also measured in local currency.

Tech spending, as you know, is closely correlated with GDP growth. Forrester expects nominal US GDP to increase 3.5% in 2010.

I'd like to turn now to Forrester's three business imperatives and they are, number one, becoming more role based; two, increasing the size of the sales force; and, three, increasing the percentage of Forrester's business that is syndicated.

Looking first at the extension of role based, on the research front we continue to make important progress toward roles. Practice leaders, the managers of each of the role businesses, continue to tune the research, board, consulting and data project streams to form a coherent and relevant suite of offerings for the individual roles. Achieving relevancy is now a shared goal of the product teams under the egis of the practice leaders.

Relevancy was very much on display at the four forums we held in the second quarter, each highly oriented to specific roles and the decisions and challenges confronting those roles. The two IT forums addressed the eight IT roles in special sessions. The marketing forum, held in Los Angeles, centered on interactive marketing professionals, CMO and marketing leadership professionals and technology product management and marketing professionals.

Finally, we held a forum in June that was centered directly on the customer experience professional. As a footnote, this event was sold out and over-subscribed. We're certainly not all the way to our destination but we are making great progress developing relevant content for roles.

We continue to reshape our selling to be more focused on people and less on institutions and companies. While this may feel like a fine point, it is critical to our goal of expanding roles per account, a metric which has remained at 3.2% through the first half of 2010.

Speaking of sales, this is a good segue to Forrester's second business imperative, the expansion of our sales force. The company's goal is to expand the number of sales people 15% to 20% per year.

In 2010 Forrester's sales headcount has grown 13% putting us on target for the year. Now, as Mike has noted, sales attrition is running at less than one-half of 2009 levels. This is a very encouraging sign for productivity increases in the second half of the year.

The company's third business imperative is to increase the percentage of our business that is syndicated; we call this metric, "Q". The second quarter showed solid performance for events and for consulting, our two non-Q businesses. However, we also experienced a strong quarter for research, boards and data, meaning that our business showed good balance. We are on track to achieve our Q targets for 2010.

I'd now like to talk for a few moments about Forrester's efforts in social. As you know, Forrester offers free content, which is available to the wider world beyond our client base. And we do this for four reasons -- number one, to generate sales leads; two, an open social platform builds a broad community of ideas and views increasing value for our clients; three, to broadly expose and market Forrester's ideas and brand; and finally, four, social has opened up new means of doing research.

Our analysts use these tools to test their ideas, perform quick surveys, and to detect the subtle changes in the market, which may have impact on the roles that they serve. In short, social is enabling Forrester to universally sell, market, research and serve our clients.

In the first quarter of 2010 we rolled out a standard platform for individual analyst blogs and for aggregated role blogs. This has enabled our social content to be indexed, linked, and incorporated with the company's research, data events and other products.

As an example, an infrastructure and operations professional who is planning [cost] strategy can now get an integrated view across all Forrester content, be it socially derived, or contained in a research report, or proprietary data. We had more than 180,000 blog post views in June, up 17% from May and up 146% from June of 2009.

In addition to blogs, the company has introduced online communities for three of our roles. Traffic on our main community page increased 24% in Q2 over Q1. At the end of Q2 there were 6,800 members of the three communities with 70 new members joining every day. We plan to add communities for the remaining 16 roles in the near future.

And a final note on social. We are excited to announce that on September 14th, a new book authored by Forrester analysts will be issued by the Harvard Business School Press. Titled, "Empowered", the book builds on Forrester's best seller, "Groundswell". The book outlines how employees can use new tools to help customers.

I'd like to end with a few words about Forrester's capital structure. Now as Mike has noted, Forrester is presently carrying $287 million on its balance sheet and this is 123% of our 2009 revenue.

At the company's April and July board meetings there have been discussions about the uses of this cash. Now our top priorities remain acquisitions and reinvestment in the business. In addition, the board is considering other approaches to enhance shareholder value, and these could include dividends and increased buy back of the company's shares. The board will continue to analyze and research this topic. I will give an update on the Q3 call.

So to conclude, Forrester's momentum of the first quarter continued to build in the second quarter. While the economy climbs a wall of worries it is nonetheless in recovery; and, by the way, that also includes recovery in Europe.

Forrester's acquisition pipeline remains filled and the price of potential deals continued to stay at reasonable levels. We're very excited about the new Forrester book and our experiments and advances in social. Our march to change all the company's DNA to be role based continues, and with every step we take, we can see palpable increases in the relevancy of our work.

Finally, sales attrition has dropped into a much more manageable range, which bodes very well for sales productivity in the second half of 2010. If you're in the neighborhood, please visit us here in Cambridge and we look forward to seeing many of you on the road during the quarter.

Thank you for listening to the call. I would now like to welcome Charles Rutstein, Forrester's COO, to join Mike and me for questions. We will now take questions.

(Operator Instructions) Your first question comes from the line of Laura Lederman with William Blair. Please proceed.

Good morning and thanks in advance for taking my questions. One is can you talk a little bit, and I guess this is a Mike question, between the difference in the growth in deferred and in the agreement value, which was up much less? Then I have some more questions. Thank you.

You bet. That's a good question, Laura. What we did, we've made a change in methodology on agreement value midstream last year. Basically, what we stripped out of agreement value going forward was the second year multiyear deals. So our historical numbers still carry the multiyear deal activity in there, whereas our current year performance reflects only the first year of a multiyear deal.

So as we cycle through that metric it'll become more normalized I would expect as we get into 2011, but for now it's going to create some distortions, which is why we still believe the deferred revenue, and deferred revenue plus future AR become better signals of what's going to happen with our business.

Do you have by chance the apples-to-apples growth in agreement?

I don't have that. What we can do is we'll try and pull that together on an approximate basis and we'll push it out onto the website as metrics so it's available to all investors.

That would be great. Thank you. My second question is AMEA and how your business looked as you went through the quarter. There's been a lot of rhetoric and concern about Euro zone demand in general. So I guess a two-prong question is how did your business look as you went through the quarter in AMEA?

Also, separately, I know, George, that you gave a number for growth in Europe being fairly weak, but what type of deterioration are you guys actually seeing in IT spending in general in Europe? So that 3% for the full year, does that include a negative second half given there has been good demand in the first? Sorry for the long-winded question.

Laura, its Charles. I'll start and then perhaps pass to George. With respect to our business in AMEA in the quarter, we definitely saw softness relative to other parts of the world.

That being said, the business grew nicely in AMEA, so which is to say that it's growing at a slower rate than we were able to grow here in the US. I think that that outlook probably persists for our business certainly as far as I can see into this quarter. It's not like it was during the times back in '09 and end of '08. We're not talking about deals just evaporating. It's just sort of a slower pace of things going on.

I guess it's one of those deals, Laura, where if you read the paper you think that Europe is in major distress, but we see gradual recovery there. We actually expect the Euro to strengthen as the year continues onward. So it's not as bad as the daily news would show. Again, as Charles said, we have good growth here, just not as fast as the US.

Can you talk about price increases and what you're thinking of there, what you've implemented, what you're likely to implement and also the markets [receptance] to price increases?

Sure. As you know, Laura, we typically undertake price changes in the summer time. This year is no exception. We always look at the same three factors -- product demand, value that we deliver, and the competitive environment.

Now it's important to note that we made an important change to the packaging last year, as you may recall. That has implications for the pricing. The big win out of that packaging change was that we now have the flexibility to differentially price our offerings by client segment and that allows us, of course, to extract appropriate value from clients for the value that we deliver.

Therefore, the picture that I'll tell you about, the pricing front is a little muddy. It's a little hard to see. It's not an across-the-board price increase. Rather, the price change that we're making isn't across the board, but rather specific to the segment. So, in general, we're taking prices up a few percent in line with the rising cost of doing business, maybe a little more aggressive in places where we face little competition, and a little less aggressive elsewhere.

In general, though, the pricing environment has been very good. Our rate of discounting has come down during this year. Part of that is the discipline of the sales force, and part of that, I think, is the environment in which we're operating.

Thank you. One final question and then I'll pass it on. If you look at your last comment about some areas more competitive, some areas less competitive, can you talk about which those areas are, and which are less and which are more?

Sure. As you may expect, Laura, in places where we have a direct competitor, for example in the IT space with Gartner, that's going to be more competitive in places where there is no pure analog as in the marketing and strategy business. There's less competition.

That's what I figured but it never pays to assume. Thanks a lot, guys.

Thanks, Laura.

Your next question comes from the line of Kevin Ciabattoni from Boenning & Scattergood. Please proceed.

Good morning, guys. Can you give us some color on what you've seen in terms of sales cycles in the quarter? Then also what your strategy is going forward in terms of account segments, and a plan to maybe increase penetration in the 1B plus accounts.

You're looking at how we move that 3.2 number?

Yes.

So a couple things there. With respect to the sales cycles, they have become much more predictable than they were, let's say, this time last year. That is perhaps the most significant change.

I would say the cycle time may be down, but only modestly. The difference is that it's become highly predictable. During the downturn what we saw typically was a deal would be on track until a very late stage, and then something unexpected, unexpected both for us and for the buyer, would happen.

That's no longer going on. In fact, our forecast accuracy based on the cycle times we expect has been rock solid all the way through the first half of the year. So that feels stable to me.

With respect to the second part of the question about deeper penetration into those 1B plus accounts, Greg Nelson, who's our chief sales officer, is working hard on just that. Now that metric gets a little bit muddied by the fact that it includes both the enrichment, which Mike talked about, in the quarter into existing 1B plus accounts, but it also includes the new signings.

When we sign new accounts they will typically come on at fewer [seats], so that kind of dilutes the metric and it's a little hard to see from the outside what's going on there.

But it's a big deal because, as you know, we sold traditionally to companies and institutions, and not to individuals, and that's really the transition that is underway here in sales. And the transition that Greg is really driving us toward is this movement to if we have three roles at Federal Express to now look for the fourth through tenth role.

I'd say that the sales transition roles is like a little bit to research, but we would expect by 2011 that we will be headed down that road and driving that number higher.

That's very helpful. What are you guys seeing in terms of an acquisition pipeline and are you guys leaning towards either IT or the research side of things?

Pipeline continues to be quite good. As I said in my remarks, pricing is still reasonable. I would say that we are tending to approach more companies than being approached by those companies and that is somewhat of a more difficult road to move down.

But I'd say our pipeline is still very strong. At the board meeting on Tuesday we reviewed it. I would say it is as full as it was at this time last year.

Yes, I would agree. I think that the activity has been good. I agree with George. I think we're being more aggressive in pursuing, in addition to any ideas that come across, to your question about client group; we look for all client groups. So we are opportunistic because we are, frankly, we're bullish in all three of our client group businesses. So if we see opportunities out there we're going to pursue them. So it tends to be across client groups.

The pipeline includes targets for all the three client groups.

That's correct.

Then one last thing, just housekeeping, what was the impact of FX in the quarter and what are you guys feeling for the back half of the year?

The impact on revenue for the quarter was about a point on our growth. So our revenue was up 5%, absent FX it would have bee up 6%. Now that tends to drop down and have a very modest impact adversely on the bottom line.

As I think I've said before, we have a natural hedge and a lot of our expenses sit outside the US as well. We have analysts, we have sales people who are sitting in host countries as well, so that softens the impact.

For the balance of the year, our guidance assumes that both the Euro and the pound will stay at rates where they sit today. But our low end of the guidance captures what we think could be some downside to both the Euro and the pound and some of the upside captures it.

I don't expect, frankly, much upside on foreign exchange. But at this point we assumed flat, and our downside captures what we think could be the downside on both the Euro and the pound.

Great. Thanks.

You bet.

Your next question comes from the line of Brian Murphy with Sidoti & Company. Please proceed.

Hi. Thanks for taking my questions. Mike, the consolidated gross margin is down a couple hundred basis points year-over-year. I was wondering if you could just give us a rough breakdown of the impact there. I'm guessing part of that is currency, but what was the rest? Was it mix, or is that higher salaries, or what?

Yes, you have a couple of things going on, Brian. I think that most importantly is that as our business rebounded, if I look at both what we paid out in commissions and what we paid out in our matrix bonuses, which we pay out quarterly based on business performance, versus prior year they are up significantly.

As I've always said, that's a good problem for us to have in expenses, because that means our business is growing both from a top line basis but also that we're hitting bottom line numbers as well. The other piece of it is headcount growth. We are up year-over-year and that adds to it. So we're continuing to reinvest in the business.

So, yes, there was. FX actually gives us a little bit of favorability on the expense side. But the bulk of it is really, its comp and benefits associated with increased headcount and improved business performance.

George, you gave us a lot of detail about what you guys are doing with social. Would you say that that's where Forrester's research coverage is most differentiated right now? And maybe give us a little bit more detail on why that might give you a leg up moving forward.

I think it is a good area of differentiation, but it's not the only area of differentiation. I would say that as we're becoming more role based, we're becoming more differentiated from the competition that our research is specifically about the problems and challenges of each of those roles.

So I'd say if you asked me the question, generally what's your differentiation, I'd say roles, number one. I'd say in the differentiation with Gartner, as an example, because we have a large practice in marketing and strategy we're able to help IT groups in market and marketers work together on issues like social computing.

So probably the second area of differentiation are roles, number one. Two would be the fact that we are in the marketing strategy space would be number two. Then number three, I think you're right. I think we have a very, very strong practice in social. I think I'm a little biased here I guess, but I'd say we are the world leaders in analyzing social and its direction and its future.

As you know, Groundswell was the best selling book at Harvard Business School Press in 2008, and Empowered, a new book coming out; we expect to be just as successful. So I think it's a good area of strength for us.

Sounds good. Thanks a lot.

Your next question comes from the line of Vincent Colicchio with Noble Financial. Please proceed.

Good morning, guys. The advisory business had a strong quarter. Could you give us a little more color in terms of which service lines have stood out?

Sure, Vince. This is Charles. I think we saw strength in each of the constituent parts that make up that line item. So events was up nicely year-on-year. Consulting delivery was up even more sharply and some of the other much smaller one-time items, the data and so forth, were up as well. So I'd say it was fairly widespread, but the fastest growing was probably the consulting business.

Is that a good sign in terms of foreign upturn in IT spending? Isn't that an early indicator?

Oh, yes, you bet. One of the things here, Vince, is that as the sales force productivity goes up and we continue to add to the backlog of consulting. We're working our way through that.

So let me say it differently. So we sell a contract, and it's got both syndicated and non-syndicated products in it. We're going to recognize the syndicated over time and the non-syndicated often right upfront. So that's why you may see some of the delta.

The other factor is Strategic Oxygen, our acquisition that we closed at the tail end of last year. That drove a bunch of non-syndicated business as well.

Mike, a question on the month-by-month progress as the quarter unfolded. Was there any difference? There was a wall of worry later in the quarter in the June period. Did you see revenue impacted in any way?

No. I think what happens with us, because as you know Vince, I'd love to see the cycle change. It certainly would cut down on the grey hairs I have. But our cycle's been the same since I've been here. I think since George started the business, we tend to build up towards the end of the last month of every quarter, and the last two weeks of every quarter are always a lot of fun, depending on how you look at it.

This quarter was no different. But we were happy with the way the quarter came out. It worked as we had expected and I'm fairly confident that we'll roll in and our month-by-month will make September an exciting month for us and December is the most exciting month of the year for us.

We saw a deceleration, Vince.

Right.

Thanks, guys.

Thanks, Vince.

Your next question comes from the line of Dan Leben with Robert W. Baird. Please proceed.

Good morning. This is Mig Dobre for Dan Leben. Just a couple of questions for me. First, surrounding the metrics that you mentioned earlier, I'm trying to understand how much of the metric's improvement was activity in the quarter versus rolling off 2Q '09, which obviously was a bit of a different operating environment. How should I think about that?

That's a good question, Mig. I think that, first of all, the retention metrics I'm thrilled by. They're above historical norms. So even if you assume that there's some factor in there that would suggest that we're building off a somewhat lower base, although it wasn't that dramatic because it wasn't a huge drop down in 2009 like there had been in years past.

That suggests really strong performance and it implies that we've come back very rapidly from the recession. And actually, at this point, are running a little bit ahead of what we've done in years past.

I think enrichment, that's sort of the slower build back, but the fact that we're north of 100 on a rolling 12 I'm happy about. It implies that the quarter was reasonably good. So given that none of those metrics dip that much when we went into 2009, the fact that they've rebounded as strongly as they have suggests that we've had a very, very nice recovery off of a difficult recession for a lot of businesses, less so for Forrester. So I feel that if you discount them at all, it's marginal. It really is relative to a year ago.

I'm with Mike here, Mig. It's Charles. Regardless of what data are dropping out from Q2 of last year, the fact remains that as a point in time metric it's well above the historical norms. So as a snapshot in time we're very happy with that performance.

Excellent. One final point for me here, can you please elaborate a little bit on the capital structure discussion? Perhaps give us some insight as to how the board is thinking about it, and what are some of the goals that they're aiming for in this discussion.

Sure. Basically, where we are, first and foremost, the uses for our cash. Primary and priority uses for the cash continue to remain the same, which is we are going to reinvest in the business, and we will look for acquisitions that we think add to value.

That, by the way, has not changed. That's been the historic Forrester practice and, as we move forward, all of the board discussions have absolutely started and ended with that thought in mind. So we're not moving away from that. I agree with George that there's a lot of opportunity in the M&A pipeline.

Again, we are selective. I think as he's pointed out, and I think a number of you have pointed out over the years. So that tends to be that we get acquisitions sporadically.

The next pieces that we look at are how do we enhance shareholder value? Obviously there's a number of levers to pull. There's dividends in a variety of forms, and there's more aggressive share repurchase. Those are things that the board is considering.

Obviously, it's complicated by a very uncertain tax situation in the US right now. So I think the board is trying to factor all of these pieces in. We've had I think very good discussions with the board and I think there's more to come, to George's point. I think we'll be in a better position to talk and give an update in the third quarter, as George suggested.

Thank you.

What I'd say here, Mig, is that the board is looking at this issue broadly, and leave it at that.

Thank you.

(Operator Instructions) If there are no further questions I'd like to hand the call back over to Karyl Levinson, please.

Thank you very much for joining us today. Have a good day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.