Forrester Research Inc (FORR) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 2010 Third Quarter Forrester Research Earnings Conference Call. My name is Jen, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Karyl Levinson to read the Safe Harbor statement. Please proceed.

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

A replay of this call will be available until November 4, 2010 and can be accessed by dialing 888-286-8010. Please reference the pass code 63306950. 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, 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 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 George Colony.

Thank you Karyl. And I'd like to welcome everyone to the call. I will cover five topics this morning; Forrester's three business imperatives, Forrester's differentiation, the economy and tech spending, company capitalization and finally acquisitions.

I'd like to update you first on Forrester's three business imperatives. These are the long-term operational priorities of the company. And they are, number one, driving the role-based strategy forward. Two, increasing the size of the sales force. And three, increasing the percentage of the Forrester's business that is syndicated.

Looking first at role-based. As I mentioned on the Q2 call, the company is in the midst of launching role-based online communities, sites enabling clients and non-clients to engage in ongoing discussions. Previous to the third quarter, we had been beta testing the communities for the application development and delivery, interactive marketing and technology product management and marketing roles. In Q3, another 10 communities went live. We expected all 19 roles will have communities by year end.

As of yesterday, we had 13,000 members in our 13 communities. During Q3, an average of 50 people joined daily. Since the launch of the 10 new communities, this has jumped to 88 new members per day. Community activity is on the rise as well. More than 300 new discussions threads have been created since mid July and the top 10 have accumulated more than 15,000 views.

Social informs Forrester's works on several fronts. It brings a diversity of views to our clients. It sharpens and accelerates our research process. And finally it enables our clients to share and learn from a broad range of best practices. Social naturally augments the role-based strategy.

The company's second business imperative is to expand the sales force 15% to 20% per year. There are approximately 4 million executives worldwide in the 19 roles that we address. Expanding our sales channel enables the company to reach more of these potential clients. Sales attrition is running at less than half of 2009 levels. Lower attrition has helped increase sales productivity. The sales force had grown 16% by the end of the third quarter and this puts us on a path to reach our expansion targets for the year.

The company's third business imperative is to increase the percentage of our business that is syndicated and we call this metric Q. Q is running at levels commensurate with 2009 and we believe that we are on track to achieve our Q targets for 2010.

A key element in Forrester's future growth is differentiation, and I wanted to say a few words on this topic. Forrester is different from its competitors in five ways. Number one, roles. Staying relevant to our clients by relentlessly focusing on what they need to be successful in their jobs. Two, the range of roles. We cover roles in IT and roles in marketing and strategy. The interplay between these sets of roles can have an outside impact on client's business performance. Three, unparalleled global consumer and business data. Four, social media leadership, Empowered, our best selling work on the subject, was published by Harvard Business School Press in September. And finally five, a focus on how companies are moving from IT to BT, that is how they are applying technology to their business. As Michael Porter has written, a successful strategy rests on defensible differentiation. Forrester's differentiation will ensure higher renewal rates and faster new business run rates.

Turning now to the economy, on October 15, Forrester published its US And Global IT Market Outlook projecting 8.1% IT market growth in the US this year and 7.4% growth in 2011. The global IT market will grow 7% in 2010 and 7% in 2011 in US dollars. Computer hardware will continue to drive this growth domestically and abroad as companies replace old PCs, servers and storage. Software communications equipment purchases are also strong globally and in the US, operating system software, middleware and applications lead the software category.

One of the key assumptions of our strong US tech market forecast is that a new cycle of technology innovation is underway. There are a number of factors in this cycle including smart computing, app internet, cloud computing and mobile. We see this cycle driving growth and technology investments at twice the rate of the overall economy.

The other key assumption of the IT model is strong macroeconomic growth. We have observed a correlation between IT investment and nominal GDP growth historically, and we are predicting nominal GDP growth of between 4.3% and 5.3% in Q4 in the US.

I'd like to address the issue of company capitalization. As you know, Forrester's strong business model generates free cash flow. We have used this cash over the years to successfully invest in innovation, new product developments, company expansion and acquisitions. At the end of the third quarter, the company was carrying $285 million in cash with a projection to flow approximately $45 million in 2010. Forrester's Board of Directors have decided that a portion of this cash should be returned to shareholders in a special dividend of $3 per share payable in December of 2010. After the dividend has been paid, the Board believes that the company will still have more than sufficient funds for acquisitions and for company investment. Our ability to invest in the organic and inorganic growth of the business will be sustained. I am very pleased that Forrester is in a position to return this dividend to its shareholders, which brings me to my final topic, acquisitions.

Post dividend, we believe that the company is well capitalized to take on acquisitions even those in the higher price ranges. We will have lots of dry powder. As is typical, we are very active on the acquisition front, presently engaging in three projects, all at different development stages. But as I have noted in the past, there is never a guarantee that a deal will be completed. As you can see, the price, competitive bids, due diligence and business model fit are always significant challenges.

So to conclude, Forrester continues to recover from the recession, showing strong operating results in the quarter. The sales force under Greg Nelson continues to make strong progress in productivity and in lowering attrition. Forrester's laser focus on roles is yielding higher differentiation enabling the company to stand out from its competitors. All of this is being played out against the backdrop of a slowly improving economy and a wave of change in technology markets. These factors will stimulate Forrester's business in 2010 and beyond.

I would now like to turn the call over to Mike Doyle, who will give a review of Forrester's financial performance. Mike?

Thanks, George. I'll now begin my review of Forrester's third quarter financial performance, our third quarter metrics, the balance sheet at September 30, and the outlook for the fourth 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, duplicate lease costs, reorganization costs in 2009, acquisition-related costs and credits, and net 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 third quarter of 2010 is approximately 41%.

For the third quarter, Forrester exceeded its quarterly guidance for pro forma operating margin and met its quarterly guidance for revenue 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.

The business momentum with our customers continues to strengthen, which is reflected in our continued strong customer retention, now above historical averages, and improved customer enrichment metrics. Cash flow performance remained strong during the quarter and year-to-date performance continues to exceed prior-year levels.

Now let me turn to a more detailed review of our third quarter results. Forrester's third quarter revenue increase 11% to $59.8 million from $53.9 million in the third quarter of last year. Given our deferred revenue recognition model, we are continuing to see the positive revenue effects of our improved bookings performance, despite the negative impact of foreign currency on our third quarter revenue. In addition, consulting delivery remained strong for the fourth consecutive quarter.

Our third quarter research services revenue increased 10% to $43.9 million from $38.9 million last year. Research services revenue represented 72% of total revenue for the quarter which is in line with the third quarter of 2009. Third quarter advisory services and other revenue increased 13% to $16.9 million from $15 million in the third quarter of 2009 and represented 28% of total revenue for the quarter. Our international revenue mix declined to 27% for the third quarter 2010, compared to 30% in the third quarter last year, primarily due to the impact of foreign exchange rates.

Operating expenses for the third quarter were $51.5 million, up 17% from $44.1 million in the second quarter of 2009, due to higher compensation and incentive payments associated with increased headcount and strong operating performance. Total company headcount increased by 71 or 7.4% as of September 30, 2010 compared to the year ago period. Additionally, in the third quarter of 2010, we incurred $800,000 of expenses related to development spending on client facing technology.

Operating income was $8.3 million or 13.8% of revenue, compared to $9.8 million or 18% of revenue in the third quarter of 2009. The strong third quarter revenue was offset by the increased operating expenses as we ramp up our sales organization and investments in client facing technology.

I want to highlight other income for the third quarter, which was a loss of $945,000 compared with income of $460,000 from the prior year. The decrease was primarily due to net foreign exchange translation losses of $1.5 million resulting from the effect on our balance sheet from the 12% decline in the dollar versus the euro from the second quarter to the third quarter. This adversely impacted earnings per share by $0.04 per share.

As I mentioned in our Q2 call, we forecasted Q3 assuming no change in exchange rates. I did indicate if there was movement, it would most likely be a downward movement in the dollar, which we believe we had captured within the guidance range we provided.

Net income for the third quarter was $4.4 million and earnings per share was $0.19 on diluted weighted average shares outstanding of 23.1 million, compared with net income of $6.2 million and earnings per share of $0.27 on 22.8 million weighted average shares outstanding in the third quarter of last year. Absent the foreign exchange translation impact, EPS would have been $0.23 for the quarter.

I would now like to take you through the activity behind our revenue and review the results of each of our products starting with research. In the third quarter, 313 new research documents were added to role view. The top three research roles are market research professional with 5,558 members, technology product management and marketing professionals with 5,048 and enterprise architect professionals of 4,360 members. We hosted 49 teleconferences in the third quarter with a total attendance of 1,741.

Forrester Leadership Boards, our peer offering for senior executives, continues to improve, achieving year-over-year revenue growth of 6% in the third quarter and 5% year-to-date as of September 2010. The IT leadership boards now have a total of 932 members. The tech industry boards now have a total membership of 283 and finally the marketing and strategy boards have a total membership of 415. At the end of the third quarter, the Forrester Leadership Board had 1,630 members.

In our data business, we continue to add and renew an impressive list of clients including the addition of 15 new 1B plus companies in the third quarter including companies like Lowe's, Sears, the IRS, BlueCross BlueShield, Intuit, Chrysler and Aegon. Demand for our consulting services increased 11% from the third quarter of 2009, which reflects an improving economy and our continued focus on the needs of our clients in their roles.

Our events business continues to be profitable and a vital part of our role-based strategy. In the third quarter, we hosted one IT-role based event, the Security Forum in North America. We plan for a busy fourth quarter, hosting four IT role-based events, the CIO Forum for North America, Business Process and Application Delivery Forum for North America, The Content and Collaboration Forum North America and Sourcing and Vendor Management forum in both North America and EMEA. We are also hosting two M&S role-based events, The Consumer Forum North America and the Marketing Strategy Forum, EMEA.

And now, I will review Forrester's third quarter metrics to provide more perspective on the operating results for the quarter. 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 $191.8 million at September 30, 2010, an increase of 4.5% from the third quarter of 2009. At September 30, 2010, Forrester's retention rate for client companies was 80%, a 1 point increase from June 30, 2010, and our dollar retention rate during the same time period was 89%, which is in line with the second quarter of 2010. Both client and dollar retention are now above historical averages.

Our enrichment rate was 102% for the rolling 12-month period ended September 30, 2010, which is up 1 point from June 30. We calculate client and dollar retention rates and enrichment rates on a rolling 12-month basis due to the fluctuations which can occur between quarters, which deals with the closing early or slipping into the next quarter. The rolling 12-month methodology captures the proper trend information.

At the end of third quarter, our total for client companies was 2,562, up 2% from June 30, 2010. Client count unlike our enrichment metrics is a point in time metric at the end of each quarter. As of September 30, 2010, there are 3.1 roles per client, which is down from 3.2 in the second quarter of 2010.

For headcount, at the end of the third quarter, Forrester had a total staff of 1,031, up from 1,008 at June 30, 2010 as we continued to invest in growing our sales staff. Current headcount includes a research staff of 367 and a sales staff of 364. Sales attrition, an important driver of sales productivity, is running at a rate approximately 50% below the first nine months of 2009. This bodes well for sales productivity in the balance of 2010 and 2011.

Turning to Forrester's nine-month results, let's look at where we stand on a year-to-date basis. Total revenue for the nine-month period ending September 30, 2010 increased 7% to $183.6 million from a $171.9 million last year. Year-to-date 2010 research services revenue increased by $6.1 million or 5% to $123.1 million. Research services represented 67% of total year-to-date revenue.

Year-to-date advisory services increased $5.6 million or 10% to $60.5 million from $54.9 million for the same period last year, reflecting the uptick of consulting and event revenue due to the improving economy.

Operating income for the nine-month period was $30.1 million or 16.4% of revenue compared with the operating income of $33.2 million or 19.3% of revenue in the first nine months of 2009. The 2010 results reflect additional investment in sales personnel and client facing technology as our business activity increases.

Net income on year-to-date basis was $18.9 million compared to $21.2 million last year. Earnings per share was $0.82 on diluted weighted average shares outstanding of 23 million compared with $0.92 and 23 million weighted average shares outstanding last year.

Now I would like to review the balance sheet. Our strong balance sheet reflects the continued improvement in our business. Our total cash and marketable securities at September 30th were $285 million, up $25.2 million from our year end 2009 balances. We generated $37.7 million in cash from operations during the first nine months of 2010, which is up $1.2 million or 3% from the prior year, primarily due to increased bookings activity due to the improving economy and customer need for our products and services. We've received $11.8 million in cash from options exercised and the employee stock purchase plan in the first nine months of the year. During the first nine months of 2010, we repurchased 446,000 shares at a total cost of $14 million versus $15.2 million in the first nine months of 2009.

Accounts receivable at September 30, 2010, was $39.2 million compared with $36.4 million as of September 30, 2009. Our day sales outstanding at September 30th was 60 days, down from 62 days at September 30, 2009. And accounts receivable over 90 days was 8% at September 30, 2010, down from 9% a year ago, reflecting improved collections performance.

Our capital spending for the third quarter 2010 was $3.8 million compared to $700,000 in the third quarter of 2009. Capital spending for the first nine months of 2010 was approximately $6.2 million versus $3.5 million in the first nine months of last year. The increase reflects investment in computer equipment and leasehold improvements as we moved both our London and New York offices.

Deferred revenue at September 30th was $104.6 million, up 12% over September 30, 2009. Deferred revenue plus future accounts receivable grew 17.6% year-over-year. Our future accounts receivable balances are the amounts to be invoiced in the future for clients with multi-year deals or scheduled payment terms. 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 would also like to cover two important capital structure items. We announced this morning that our Board of Directors authorized a $3 per share special dividend payable in December of this year. As we had mentioned in previous calls, our Board was evaluating various capital structure ideas to enhance overall shareholder return. The dividend payment represents approximately 20% of cash and investment balances, which is a good return to shareholders. More importantly, we will have in excess of $200 million in cash and investments remaining following the dividend payout. This gives us the ability to continue to invest in the business, pursue strategic acquisitions and evaluate other capital structure options to enhance shareholder value.

Our Board also increased our share repurchase authorization by $60 million, bringing the total available authorization to $105 million. We will continue to buy back shares in the market when we believe they are undervalued.

The last topic I would like to cover today is our business outlook for the fourth quarter and full year 2010. In summary, sales performance and continued expense management discipline during the first nine months 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 in our key customer retention and enrichment metrics, which are exceeding historical performance levels.

Our balance sheet is in excellent shape, with cash flow of 3% year-over-year allowing us to be opportunistic in this market, pursuing acquisitions, new business, and other vehicles to enhance shareholder value. In addition, as I previously mentioned, the Board has declared a special dividend of $3 per share and increased our share repurchase authorization by $60 million, reflecting a commitment to enhancing shareholder return.

We continue to look for opportunity to drive growth in our business and enhance shareholder value. The strength of our business model as George mentioned earlier ensures that these activities are not mutually exclusive.

Deferred revenue, a key indicator of future performance was up 12% and deferred revenue plus future AR was up 17.6%. We continue to focus on hiring additional sales personnel, while maintaining low attrition compared to last year. Our continued progress on the sales front is laying the foundation for a very successful 2011. As the result, we have increased our full year guidance for the revenue and operating margin while keeping earnings per share in line with previous guidance to reflect our intent to continue to reinvest in the business.

amortization of intangible assets, which we expect to be approximately $900,000 for the fourth quarter and approximately $3.6 million for the full year 2010, stock-based compensation at the expense of $1.1 million to $1.3 million for the fourth quarter and approximately $5 million for the full year 2010, and gains and losses on investment.

For the fourth quarter, we are aiming to achieve total revenues of approximately $65 million to $68 million. This range reflects a 6% to 11% improvement versus prior year, pro forma operating margins in the range of 13% to 15%, pro forma income tax rate of 40% and pro forma diluted earnings per share of approximately $0.21 to $0.27.

Our pro forma full year guidance is as follows. Total revenues of approximately $247 million to $252 million. This reflects an increase between 6% and 8% versus prior year; pro forma operating margins of 15% to 16%, other income of approximately $1.3 million, a pro forma income tax rate of 40% and pro forma diluted earnings per share of $1.03 to $1.09. We have provided guidance on a GAAP basis for the fourth quarter and full year 2010 in our press release and 8-K filed this morning.

Thanks very much for listening. I would now ask Charles Rutstein, Forrester's Chief Operating Officer, to join George and me for the Q&A session of the call.

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

Good morning guys. Thank you for taking my questions. The first one is the fairly broad range of revenue guidance for Q4. I would like to understand a little bit of why the range is as broad as it is? And also following up on your comments on acquisitions that there is three this year, kind of going through with the process with, you can give us kind of a general sense of -- if your pace going forward is going to be a couple for a year, what you are hoping to do from an acquisition standpoint? Thank you.

Okay. Laura, it's Mike. I will tackle the revenue piece and then we will jump into the acquisition. From revenue perspective, the fourth quarter for us is busy with those things that can be variable in nature. So, if you think about the number of events that we have, the revenue for them can fluctuate depending upon final attendance levels, that's certainly one driver. In addition, we typically sell advisory units, a good majority of which can expire in the fourth quarter. So we can have an uptick in advisory activity as well. So those two things tend to drive a little bit more variability in the fourth quarter than we might otherwise see. So, that's the reason for the broader revenue guidance.

As it relates to the acquisitions, we have been very aggressive working the pipeline. Last year, I think we looked at, I think over 50 deals and this year when it's all done, we will probably be no different and I suspect if anything we will try and increase the pace as we move forward. George highlighted, we tend to still be very, very disciplined and we are not changing that approach to looking at acquisition. So, we can look at 50 or 60 companies in the course of a year and end up only you know buying one and so it's always difficult to predict. There are so many variables that are affected by it, certainly evaluation being most important, but the willingness to sell at a reasonable price, a whole variety of things.

There are three deals currently cooking, Laura, this is George, at variable -- at different stages of development. And as I pointed out in my remarks, none of them may happen. I mean, as a control freak, I would love to say we put and have a schedule and make them happen in certain months in certain quarters but it doesn't work out that way. So, we just work really hard on these deals and hopefully we can close them as soon as possible.

No, are they relatively small, one small another medium, another large, just kind of the types of five things you are looking at now and also on going forward?

I would say a range and I would say pricing is a little bit more aggressive now on the part of sellers with the recovery in economy, so it is a ranging and pricing has bumped up a little bit, but they are all over the map.

And final question from me and then I will pass it on. Pricing, if you look at price increases, what you are expecting to do, what are you seeing the market in terms of the ability to raise pricing and what Gartner is doing, and Forrester.

Sure Laura, it's Charles. We did our pricing at midyear as we often do. We talked about it on the last call, of course. Given the change we made in the packaging model last year, that has implications for the pricing and that's why it's hard to communicate to you a single number of pricing that we took up across the board, because we took it up for particular segments, for particular products. Maybe the best comment that I can give you at this point about pricing is that the price increases that we took appear to be taking in the market. We are getting those price increases, the level of discounting is at a very reasonable level. So we don't see any headwinds on that front.

Thank you so much.

Thanks, Laura.

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

Thank you. First, agreement value, this quarter up 4.5%. Help me understand the disconnect between that and the really strong increases in the deferred revenue and then the deferred revenue plus future AR?

Couple of things, Dan, that is good question. We are still lapping a change in methodology, right? So, our agreement value currently only carries the first year of any multiyear agreements that we have. So whereas historical numbers captured both the first and second years of multiple year deals, so that is one aspect of it. Maybe excludes consulting agreement, so we don't have that activity whereas in deferred revenue and future we have captured a lot of that activity. So, we tend to look at deferred revenue plus future AR as being the better metric, because it's all forward looking, and we think it better captures the activity that is going on in the business.

Okay. And then just to follow up on the capital structure with the dividend. Going forward, depending on the pace of acquisitions and what not, looking at additional special dividend at some point in the future as you continue to build cash, is that on the table or have you given any thought to have more regular dividends?

The capital structure piece, which I implied in the remarks, I think the Board has kept capital structure decisions firmly on the table and I think that each year the Board is going to look at our situation and determine what's the best way to enhance shareholder value, and you have described the elements that they will consider, which are certainly acquisition activity and funds required for both acquisitions and internal investment, which are still the best uses of our cash. But again our model, we tend to throw off a lot. And then looking at the capital structure options, absolutely things that are still on the table are more aggressive share repurchase, special dividend or ongoing. Those things have not been ruled out by the Board nor have they committed to anything. So those things will be on the table again as we go into 2011.

Okay. And then if you just give us kind of the Board's thoughts on share purchase with the stock being fairly thin as it is, is there any kind of desire to leave a certain amount of shares out there in the market?

We definitely don't want to see float drop Dan, so that's absolutely a concern. So, we are balancing the need to repurchase when we think the shares are underpriced and undervalued with making sure that we don't take too much out of the system and restrict float. I don't think we are at that point yet. I think there is other things we can do down the road to deal with the float issues. So we are going to focus I think in the near term with the authorization in terms of buying shares back. I mean I think at the levels right now, we can continue to buy shares and I don't think we're going to hurt our float activity in a meaningful way.

As part of the dividend, Dan, it stimulated -- it may stimulate options, exercises by employees to capture the dividend. So that may bump ways a little bit here.

Righty. Could push years out into the system which we would certainly want to absorb back in.

Great. Thanks guys.

Thanks Dan.

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

Hi, thanks for taking my question. Just had a question on the sales force expansion. George, I think you mentioned that the sales headcount is up about 16% as of the end of the quarter and that you were on track to hit sort of, did you say 20% growth or was it that the 15% to 20% growth range?.

Well, our range is 15% to 20%. I would say looking at Charles here that we are going to probably get close to the high end of that range.

Yes, I mean it's certainly going to go north of where it is, Brian. How much is a little bit hard to say. You may recall last year, we made an aggressive push in Q4 as well. A lot of those heads actually landed on the 1st of January, so they got captured in our Q1 numbers. You may see the same phenomenon here, but it's certainly going north.

We had a job fair in Boston this week I think for sales people and a very successful job fair so...

Yes.

We are aggressively hiring.

Okay, sounds good. And George, could you just elaborate a little bit on some of the investments you are making in client facing technology and also are these ongoing expenses?

I will comment broadly, and then Mike can go to the expense flow here. So we have invested in two areas to date and a third ongoing. The first was the blog platform, which has been active now by nine months. The second was the communities, which as I talked about in the call, big part of the role strategy in Q3. The third element is we are investing in a new website and making very actually quite significant investments this year and they will go into next year as well and it's pretty exciting the work we are doing here. And you won't see anything, any changes until Q1 or Q2 of next year. As far as the expense flows, I will give it to Mike.

Yes, in terms of the expense Brain what's going to happen is, early on as you are doing the work, we haven't yet decided what, for example, website is going to look like, what the final piece is going to be. All the activity that is associated with that in the beginning is expense. Now, as we get in the mode of okay, we finalize what it's going to look like and we are in basically product design and basically getting it in place, the bulk of that work will be capitalized. So I think what you are going to see is the diminishing of what we will be recording as expenses during the course of the quarter. You will see cap spending pop up a little bit as it relates to that and then that gets amortized typically over three years. So you're going to see more and more shift to capital and over the course of the balance of this year and into next year.

Okay. And so how should we think about G&A expense in 2011 just broadly? I mean should we see that be sort of flattish versus 2010?

Yes, I think as a percent of revenue I certainly don't at this point expect it to creep up dramatically. As we make these investments, we probably will be adding additional head count to our IT organization, our internal IT organization not necessarily our client group, but so you will have some expenses there. But as we continue to invest in technology, we began to leverage things and get some productivity out of it. So I think we will get a little bit of an offset. So I don't expect that we are going to see a dramatic movement as a percentage of our revenue next year.

Okay. Thanks very much.

You bet.

Thanks.

Your next question comes from the line of Bill Sutherland with Boenning & Scatter [sic]. Please proceed.

Thanks, I do feel scattered. I apologize. I came in the middle of Mike's commentary. Did you, George, get into anything going on in the new product front?

I did not. I talked primarily, Bill, about the extension of our communities for roles. We are now up to 10 communities for 10 roles and we will be extending to all 19 roles by the end of this year.

Okay.

The primary area of new product that I covered.

Okay. And so as far as roles so that's status quo?

No new roles. Remember there are 4 million executives in the roles that we address currently. Remember it's about $9 billion of opportunities, so it's not like we need new role to drive the model. We need to get to those 4 million executives that are currently in the 19 roles that we address.

Okay.

So no new roles this year and planning for next year considering but not necessary.

And when you guys look at the numbers that give us some sense of the momentum, deferred revenue and future AR, is it pretty even across the IT and market research at digital media areas?

Bill, it's Charles, I will take that one. So it probably would not surprise you that the marketing and strategy client group is growing the fastest among those, mostly because of the uncertainty in that marketplace.

George did touch in his remarks on a bit of the social media stuff. We released our latest book in the quarter, right squarely on that topic. So they are growing the fastest. The other two are lagging a bit behind that, but I think still growing right about where we want them to grow. So very aggressive growth rates.

Charles, well I've got...

All aggressive with MNS being the fast, the most.

That's correct.

Yes.

Right. And then sales cycles, any change in those?

No change within the quarter, Bill, some change certainly since this time last year. So if you look at it on year-on-year, it's awfully different story, but sequentially virtually unchanged.

Okay. And then last Mike, when you were talking about those investments that you have been making this year, mostly current, what -- have you guys talked about what that kind of aggregated to for the blog the communities, and starting out now with the new website development?

On the quarter it was $800,000, Bill, and my guess is, all in we are probably a little north of $1 million so far. I think there will be some additional expenses not to the level for example that we saw in this quarter that will occur in the fourth quarter. But we will begin moving into what I call more heavier production mode around the website, where you will see the capital spending in that area go up. So it's shifting out of near term expense into capital as we rotate forward, because we are going to be in production mode in terms of real production development on the site.

So, we see capital spike up and in aggregate I think next year we will probably in February give an update on capital spending, because next year we will see a spike up both as it relates to this kind of investment as well as because of moving into the building you will see an increase in lease hold improvements and things like that. So next year will be a little bit of an aberration and we will give you much more detail on the February call on that.

Great, thanks very much.

Thanks, Bill.

(Operator Instructions). Your next question comes from the line -- a follow-up from Laura Lederman with William Blair, please proceed. Ms. Lederman your line is open. Okay. We will go forward to the next question. Your next question comes from the line of Brian Murphy with Sidoti & Company. Please proceed.

Hi, thanks. Just a quick follow up. On your build out of these communities George, could you give us some color on what your expectations are as you build out your social capabilities and these communities expand? I mean what are you thinking in terms of how that might affect client retention rates?

Yes, I will get 20,000 feet for you here Brian. We have an idea we call internally Value 360, which says that we want to bring the value from Forrester to our client is what is called 180 degrees. There is 180 other degrees out there to bring to a client and most of that comes from other clients as it turns out.

If you are interval, if you are an enterprise architect, you are constantly looking for mistakes you could make that you want to avoid, best practices that you want to pursue, the right product to buy at the right time, the products to avoid at the right time, and so the communities are intentionally build for our clients, by the way I am talking about the research communities here, not the FLB. The FLB communities are just private communities for the FLB members. But the research communities are built for our clients and for the outside world. Anyone can join those communities. And so what we are looking to do here is to build a very, very wide group of executives in those specific roles that can share information, share the best practice, share the right vendor, the wrong vendor and by doing so we then become somewhat of a arbiter or a broker for that 360 degrees of value coming to our client.

So we think ultimately that they can become very valuable communities and they will inhibit -- they will stimulate our clients to renew their contracts and also for new clients for not currently clients to become part of the community. So we see this as critical to the value proposition. And especially as you get younger executives moving into those roles, they live, they swim in that water and they breathe out, they breathe the air of social and this is how they operate, this is how the networks are built. So we see social as fundamental of the strategy to the role strategy.

Interesting, thanks very much for the detail on that. That's it from me.

Okay, thanks, Brian.

There are no more questions in queue. So I will turn the call back over for closing remarks.

Thank you very much operator. Thank you everybody for joining the call today. Enjoy the rest of the day. Bye.

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