Forrester Research Inc (FORR) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2011 Forrester Research Earnings Call. My name is Colby, and I will be your operator for today. (Operator Instructions). And as a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Karyl Levinson, Vice President of Corporate Communications. Please proceed, ma'am.

Good morning and thank you for joining our first quarter 2011 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 details on our financial results for the quarter. After Mike completes his review, we'll open the call to Q&A.

A replay of this call will be available until May 5, 2011 and can be accessed by dialing 888-286-8010. Please reference the passcode 27423561. This call was 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.

Thanks, Karyl. And I'd like to welcome everyone to the call. I will cover four topics this morning. Number one, Forrester's three business imperatives, two, summarizing Company investments, three, a prognosis of the tech economy, and finally four, Q2 events.

I'd like to update you first on Forrester's three business imperatives, and these are the long-term operational priorities of the Company. They are one, driving the role-based strategy forward, two, increasing the size of the sales force, and three, increasing the percentage of Forrester's business that is syndicated.

Looking first at our progress toward being fully role-based. For the past few quarters, I've updated you on how we're using social technologies to better serve our clients in their roles. Eighteen of the 19 roles we serve now have their own dedicated community, a place where peers can come together to learn from each other.

Now Forrester is social for three reasons. One, to engage non-clients with the goal of ultimately moving them to client status. Two, to connect clients to clients, increasing value and therefore increasing renewal rates. And three, to widen exposure to Forrester's advice. At the end of the day our social activities are focused on increasing new business and increasing renewal rates.

Now the Forrester communities are growing rapidly. We now have approximately 23,000 executives as members, 5,000 of whom joined in Q1. The number of discussions initiated grew by 25% and posted comments increased at commensurate rates.

When an executive does a Google Search for interactive marketing community, Forrester's community appears as the first ranking in natural search. Thirteen other Forrester communities also score first, and this is an objective indicator of Forrester's growing influence and profile within our targeted roles. Forrester is also driving its influence in role ecosystems through our role-focused blogs. This channel generated 567,000 page reads in Q1, and that's up 22% from Q4 of 2010.

In 2010, we started to chart our role-based progress using a simple metric that we call R, the average number of roles per client account. As R increases, revenue growth will accelerate and our influence and reach will widen. Ideally, R within companies that use technology can reach 15. That would be eight IT roles and seven marketing and strategy roles. And R within companies that sell technology can reach 19. That's with the addition of the four technology industry roles.

In Q1, R stayed flat at three. Under the leadership of Greg Nelson, Chief Sales Officer at Forrester, we are evolving our selling approach in 2011 to ensure that R moves upward.

Turning now to sales expansion. We strive to grow the sales force 15% to 20% per year driven by the opportunity of reaching the 2.8 million executives in the 19 roles that we address. Sales attrition remains low, and we expect to sustain 2010 levels of 15% to 20% attrition.

Low attrition plus hiring have resulted in a headcount increase of 10% in sales since December 31, and this puts us well on our way of achieving our 2011 goal of expanding sales 15% to 20% per year.

Forrester's third business imperative is to increase the percentage of our syndicated business, and we call this metric Q. We are working to attain a long-term goal of 70% Q. As I reported on the last call, Q did not advance in 2010. However, I am pleased to report that Q did increase in the first quarter to 68%, and the Company is on target to meet its yearly goal.

I'd like to talk for a few -- I'd like to talk for a few moments about the investments Forrester is making to increase efficiency and value to clients. And these investments are in four categories. Number one, increased headcount, two, improved client experience, three, improved internal systems, and finally four, facilities.

Much of the investment in headcount is centered in sales, and I've already address that above. In addition, analyst headcount has increased 7% from yearend 2010.

On the client experience front, the Company is preparing to launch a new website in 2011. The site strives to solve our clients' problems faster and to guide them to the best possible decisions. More on this in the next few quarterly calls.

Internal systems constitute our third area of investments. Forrester's CRM system provides a single view of our clients, and it used by analysts in sales to track the ongoing customer relationship. Beginning this year the Company will plan the replacement of this system with implementation rolling out in 2012.

Finally, the Company is investing in new facilities. As I mentioned on the January call, Forrester will occupy new space in San Francisco, London, New York, and Cambridge, Massachusetts by yearend. These moves will enable growth, improve client interactions, and increase the long-term efficiency of the operation. These portfolio investments are the right thing to do for the business even though they will temporarily increase capital spending.

Turning now to the economy. On the January call I outlined Forrester's worldwide economic forecast showing moderate global GDP growth and higher IT spending. While our non-US numbers have not changed, we have updated the US IT market growth to 8% in 2011 and 10% in 2012.

Software continues to be the largest and fastest growing component of the domestic IT market. We are forecasting 8.6% growth this year and 14.8% growth next year in this segment. Communications equipment will be the second fastest growing segment of IT spending growing at 8.3%. Our forecast also shows a strengthening US economy. We're predicting 3.1% real GDP growth domestically in 2011 moving to 3.3% in 2012.

Which brings me to my final topic, which is events. Forrester's events business continues to expand in Q1, continuing its post-recession recovery. Forrester's two largest IT events, that's IT Forum US and IT Forum EMEA, will be held in Q2, and both are tracking to plan.

The marketing forum focused on all seven marketing and strategy roles was held in San Francisco three weeks ago. We had record attendance at this event with paying attendees exceeding plan by 50%. With over 1,100 attendees on site, it was the largest marketing event in the Company's history. Sponsorship of this event was sold out months in advance, and sponsors are already booking for the 2012 marketing forum.

Also of note in the quarter was the first Forrester event for technology sales enablement professionals. These are the executives that ensure that sales forces within vendors like IBM or Cisco are highly effective. This was a small event but profitable for a first outing. What stood out was the laser focus on a role that no other research firm covers. Forrester's differentiation was prominently on display.

So to conclude, Forrester is off to a good start for the year. Sales attrition is at historical lows, our syndicated/non-syndicated mix is trending in a positive direction, our expanding communities and social reach is driving influence within role ecosystems, the Company is making investments to ensure future growth, the economy is improving, and our events business continues to accelerate.

Thank you very much, and I now want to pass the call over to Mike Doyle. Mike?

Thanks, George. I will now begin my review of financial performance for Forrester's first quarter results, balance sheet at March 31, 2011, our first quarter metrics, and the outlook for the second quarter and full year 2011.

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, acquisition-related costs and credits, and net gains from investments.

Also, we continue to utilize an effective tax rate at 40% for pro forma purposes. The actual effective tax rate for the first quarter of 2011 is approximately 38%.

For the first quarter Forrester exceeded its quarterly guidance for revenue and pro forma operating margin and was at the upper end of its EPS guidance. Similar to 2010, we continue to see strong financial performance and steady results in our key customer metrics. As a result, we continue to increase our headcount primarily in our sales organization as we look to capitalize on the growing demand for our product and services.

Now let me turn to a more detailed review of our first quarter results. Forrester's first quarter revenue increased 11% to $65.7 million from $59.2 million in the first quarter of last year. Given our deferred revenue recognition model, we are continuing to see the positive revenue effects of our strong bookings performance in 2010. In addition, consulting, delivery, and events performance continue to remain strong.

First quarter research services revenue increased 13% to $44.5 million from $39.4 million last year. Research services revenue represented 68% of total revenue for the quarter, a one-point increase versus a year ago.

First quarter advisory services and other revenue increased 7% to $21.2 million from $19.8 million in the first quarter of 2010 and represented 32% of total revenue for the quarter.

The international revenue mix was 30% for the period ending March 31, 2011, which is flat to prior year.

Operating expenses for the first quarter were $57.6 million, up 16% from $49.8 million in the first quarter of 2010 as a result of higher compensation due to increased headcount primarily in sales, higher commission expense, and travel increases associated with our all-employee company meeting, which we did not do in 2010.

Total Company headcount increased by 134, or 14% as of March 31, 2011 compared to the year-ago period.

Operating income was $8.2 million or 12.4% of revenue compared with $9.4 million or 15.9% of revenue in the first quarter of 2010. The growth in the first quarter revenue was offset by increased operating expenses as we continue to increase headcount to keep pace with the projected customer demand.

Other income for the quarter was a negative $109,000, down from $1.1 million of income in the first quarter of 2010. The decrease is primarily due to lower interest income reflecting lower global interest rates as well as a net foreign exchange loss associated with intercompany payables and receivables.

Net income for the first quarter was $4.8 million and earnings per share was $0.21 on diluted weighted average shares outstanding of $23.3 million compared with net income of $6.3 million and earnings per share of $0.28 on $22.9 million diluted weighted average shares outstanding in the first quarter of last year.

I'd know like to take you through the activity behind our revenue and review the results for each of our products starting with research. In the first quarter, 375 new research documents were added to RoleView. The top three research roles are tech marketing for technology marketing professional with 5,779 members, market insight professional with 5,624 members, and the enterprise architecture professional with 4,054 members.

We hosted 63 teleconferences in the first quarter with a total attendance of 3,536.

Forrester leadership boards, our peer offering for senior executives, continues to improve, achieving year-over-year revenue growth of 13% in the first quarter. The IT leadership boards now have a total of 987 members. The technology industry boards now have a total membership of 293. And finally, the marketing and strategy boards have a total membership of 476. At the end of the first quarter, the Forrester leadership boards had 1,756 members, up 12% from March 31, 2010.

In our data business, we continue to add and renew an impressive list of clients including the addition of 17 new 1B+ companies in the first quarter, including Fox News, Cox Media Group, ING, Sprint, AOL, and Travelers.

Consulting revenue for the first quarter of 2011 continued an upward trend as it increased 6% compared to the year-ago period, reflecting the increased -- our increased focus on our syndicated business.

Events. Keeping up with the trend from 2010, our first quarter event business continued to strengthen. In the first quarter 2011, we hosted four IT role-based events, the Enterprise Architecture Forum in both North America and EMEA, as well as the Infrastructure and Operations Forum EMEA and the Security Forum in EMEA. We also hosted the inaugural Technology Sales Enablement Forum in North America for technology industry professionals.

In the second quarter of 2011, we are hosting two IT role-based events, IT Forum in North America and EMEA, and two MNS role-based events, Marketing Forum North America and the Customer Experience Forum North America.

And now I'll review Forrester's first quarter metrics to provide more perspective on the operating results for the quarter. First, 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 $201 million at March 31, 2011, an increase of 8% from the first quarter of 2010.

At March 31, 2011, Forrester's retention rate for client companies was 80%, in line with December 31, 2010, and our dollar retention rate during the same time period was 91%, also in line with the previous quarter, and both metrics remain at all-time highs.

Our enrichment rate was 103% for the period at March 31, 2011, which is down one point from December 31, 2010. We calculate client and dollar retention rates and enrichment rates on a rolling twelve-month basis due to the fluctuations, which can occur between quarters with deals that close early or slip into the next quarter. The rolling twelve-month methodology captures the proper trend information.

At the end of the first quarter, our total for client companies was $200, 605, up 1% from December 31, 2010 and up 5% versus the same quarter last year. Client count, unlike our retention and enrichment metrics, is a point-in-time metric at the end of each quarter. As of March 31, 2011, there are three roles per client, which is line with the fourth quarter of 2010.

For headcount, at the end of the first quarter, Forrester had a total staff of 1,120, up from 1,078 at December 31, 2010, as we continue to invest in our sales and research staffs. Current headcount includes a research staff of 401 and a sales staff of 416, which reflects a 10% increase over our sales headcount on December 31, 2010.

Now I'd like to review the balance sheet. Our total cash and marketable securities at March 31, 2011 were $239.8 million, up $23.8 million from our yearend 2010 balances. We generated $32.2 million in cash from operations for the first quarter, which is up $9 million or 39% from prior year due to healthy fourth-quarter bookings activity, which is reflected in our first quarter cash collections and improved advisory revenues.

We received $2.1 million in cash from options exercise during the course of the quarter. During the first quarter of 2011, we repurchased 237,000 shares at a total cost of $8.6 million. In the first quarter of 2010, we did not buy back any shares.

Accounts receivable at March 31, 2011 was $48.3 million compared to $46.9 million as of March 31, 2010. Our day sales outstanding at March 31, 2011 was 66 days, down from 71 days at March 31, 2010. And accounts receivable over 90 days was 8% at March 31, 2011, down from 12% at March 31, 2010.

Our capital spending for the first quarter of 2011 was $10.7 million compared to $1.4 million during the first quarter of 2010. As George mentioned, the increase reflects investments in computer equipment and leasehold improvements associated with our office relocations.

We are in the process of consolidating our two California offices and continuing the build out of our new corporate headquarters in Cambridge. These projects will continue through the third quarter of this year and be the last of four major office relocations we've undergone since last summer. These moves will increase our office capacity by 60% and give us adequate space for future growth.

Deferred revenue at March 31, 2011 was $137.5 million, up 17% over March 31, 2010. Deferred revenue plus future AR grew 16% year-over-year. Our future AR balances are amounts to be invoiced in the future for clients with multiyear deals or scheduled payment terms. The strong year-over-year increase reflects continued positive momentum in our business.

The last topic I'd like to cover today is our business outlook for the second quarter and full-year 2011. In summary, continued positive momentum in our operating performance during the first quarter of 2011 allowed us to exceed our revenue and pro forma operating margin and perform at the upper end of our EPS guidance.

During the quarter we invested in hiring high-quality personnel, and we expect this investment will continue in 2011 as we forecast strong demand for our products and services. In addition, performances on our key customer retention and enrichment metrics remains strong, reinforcing our belief that 2011 will be another good year for Forrester.

Our balance sheet is in excellent shape with cash flow up almost 40% year-over-year, allowing us to be opportunistic in this market to enhance shareholder value. Deferred revenue, a key indicator of future performance, was up 17%.

As George mentioned in his comments, we will continue to invest in our infrastructure including customer facing and sales enabling technology as well as completing the build out of our new headquarters in Cambridge and our West Coast office in San Francisco. These investments will enable greater customer interaction and improve client service as well as give us significant capacity to grow.

Our investments in office space represent a significant capital outlet for 2010 and 2011, and our related rent and depreciation costs will increase. However, we have significantly increased our capacity for growth. While these investments compress margin in the near-term, our operating leverage excluding rent and depreciation is increasing and will continue to increase. As we move forward to 2012 and beyond, this will accelerate as rent and depreciation level off in 2013.

As a reminder, our guidance excludes the following. Amortization of intangible assets, which we expect to be approximately $400,000 for the second quarter and approximately $1.8 million for the full year 2011, stock-based compensation expense of $1.1 million to $1.3 million for the second quarter and approximately $5 million to $5.5 million for the full year 2011, duplicate lease costs of approximately $1.5 million for the second quarter of 2011 and approximately $3.5 million for the full year 2011. Duplicate lease costs for 2011 primarily represent a non-cash accounting charge for the time period that we have access to our new Cambridge headquarters for construction purposes up until the time that we occupy the facility for operations. It will also -- we also exclude acquisition costs and investment gains and losses.

For the second quarter of 2011 we are aiming to achieve total revenues of approximately $71.5 million to $74.5 million. This range reflects an 11% to 15% improvement versus prior year. We expect pro forma operating margin in the range of 15% to 17%, a pro forma income tax rate of 40%, and pro forma diluted earnings per share of approximately $0.29 to $0.33.

At this time we are reiterating our pro forma full year guidance, which is as follows. Total revenues of approximately $282 million to $288 million. This reflects an increase of between 12% and 15% versus prior year. Pro forma operating margin of 16% to 17%, other income of approximately $500,000, a pro forma income tax rate of 40%, and pro forma diluted earnings per share of $1.22 to $1.28. We have provided guidance on a GAAP basis for the second quarter and full year 2011 in our press release and 8-K filed this morning.

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

(Operator Instructions). Your first question comes from the line of Dan Leben with Robert W. Baird. Please proceed.

Good morning. This is Mig Dobre for Dan Leben. Thank you for taking my questions. First question is on agreement value. Can you provide a little more color about the progression of agreement value there? If I'm correct here, I believe we're -- that metric is down sequentially. How should we think about that?

Yes, Mig. It's Mike. Yes, AV is down sequentially, which, by the way, you see that's a typical seasonality that does occur going from Q4 to Q1, so it's not surprising that it's down sequentially. The year-over-year growth numbers continue to accelerate. In the fourth quarter AV was up 4%. We're up 8%. So, that's encouraging. So I think from perspective, AV numbers look reasonable and in line with what we expected.

Okay. And then switching over to research services revenues. Again, I'm noticing that we're talking about a 2% year-over-year decline. We're trying to -- I'm sorry, rather sequential decline. So we're trying to understand how should we think about that progression as well? Is there something in particular that would result in this sequential decline from the fourth quarter in research?

I don't see that as an issue as we look quarterly because I don't -- I think again from a seasonality perspective, I don't think again that that's out of line. I'm more interested in our year-over-year performance, which it's up 14%. And that, from our perspective, that's encouraging and that's where we would like to be. So I don't -- again, I don't anticipate that the quarter-over-quarter movement, meaning from fourth quarter to first quarter, is material.

Okay. And to kind of switch away from this to another topic, obviously your cash balances are starting to build again, and I guess we're wondering, can you give us an update as to what your thoughts for usage of cash are for 2011?

Yes, I think that as we highlighted, we are -- we did buy back shares in the first quarter, and again we'll remain opportunistic in that area in terms of buying back shares.

We continue to look at and get a healthy amount of deal activity and deal flow, so we are in a continuous mode of evaluating M&A opportunities. And as we mentioned on the last call, the Board always is considering, as we did last year, a special dividend. We will review where we sit and -- each year and make a determination of what's the most appropriate use of the cash as it relates to capital structure.

So right now it's share buyback and continue to look at M&A opportunities.

But you wouldn't be able to give us some sort of a timeframe as far as when a decision around that would be made?

I'm not going to put a stake in the ground on that. I mean, we evaluate it on an annual basis with the Board, so I think that -- we haven't put a specific date out there yet in terms of when we would announce anything.

The other -- obviously another use of cash this year, which is somewhat unusual, our capital spending number this year will probably when it's all done exceed $30 million. So there'll be a healthy use of cash this year, which is unusual for us. That will dip back down to what I would consider to be more normal, $3 million to $4 million, as we get into 2012. So we're watching that as well.

And we expected that frankly. We knew that we were basically paying for our own leasehold improvements. It gave us a slight advantage in terms of cost, so that's the other big use of cash this year.

Thank you. I'll jump back in the queue.

Thank you, Mig.

Thanks.

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

Good morning, guys. I guess Charles or George, you had talked about a price increase this year. We realize you can't differentiate, but any comments there would be appreciated.

Yes, sure Vince. It's Charles. As you say, we typically do undertake price changes in the summertime. This year will be no exception. So you should expect a price change that'll take effect on July 1, 2011. As always, same three factors in play for us, product demand, the value that we're delivering to our clients in their roles, and then of course the competitive environment.

We will share the more specific results, I'm sorry the more specific detail around that price increase on the next quarterly call. In general though, you're right. You should expect it to be tuned to each of our customer segments rather than a flat across-the-board increase. That's the advantage that we now have with the packaging structure that we have.

And Mike, what level of Q should I assume for this year and next year?

Well, I think you could assume certainly steady growth. I think we've targeted another point on Q this year, and the game plan, as George said, our target is 70%. So we would like to obviously get another point or two in 2012. We haven't firmed up the target there. But clearly our intent is to continue to grow our percentage of syndicated business each year.

Your -- I'm not sure who this would be for, but your overall metrics appear to be fairly positive considering seasonality and so forth. It looks like your guidance may be conservative. Any comments on that would be helpful. And also what type of economic outlook is implied in your guidance? Is it your current outlook? That would be helpful. Thanks.

Sure. I'll tackle the last one first. So our current assumptions from an economic standpoint are what George spoke to. I mean, we look at and are still, from our perspective, bullish on what's going on in tech right now. And our outlook for the business is positive.

Relative to our guidance, we -- I think that as George mentioned, it might appear -- while it might appear conservative, we are continuing to invest in the business, both in terms of people, but also in terms of infrastructure. So we have a lot of activity that's reflected in our margin guidance right now, and I think that's appropriate.

We try and, as we always do with our guidance, give our best sense as to the range, and we certainly want to land in the range. And if we can surprise on the upside, that's always a good thing as well.

If I can add on to that, Vince, this is George. You saw the GDP numbers this morning. At one point 8% I believe in the quarter. Despite that, we're still at about 3% for the year on GDP in the US, our internal forecasters. So we are sticking with that number.

It's not a brilliant recovery, but this is a good modest recovery. That's point one.

Point two is that -- I forgot what I was going to say. Give it a second.

You're feeling good, but not too -- not overly excited.

Oh, I remember what I was going to say. I talked about the IT market growing and having very healthy growth this year and next year. If you look at the numbers for, let's imagine the calls to market economy, how much the marketing roles will spend, the seven roles of marketing, that is growing even faster than the tech market. So that's -- in fact we MS growing faster than IT for Forrester. So, it's -- this is not a brilliant recovery but it's a good -- I think it's a good recovery at this point.

Okay. Thanks, guys.

I hope that helps, Vince.

Thanks, Vince.

(Operator Instructions). At this time, there are no further questions appearing in queue.

Operator, thank you very much. Thanks everyone on the call. Enjoy the rest of your day. Bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.