Forrester Research Inc (FORR) 2013 Q1 法說會逐字稿

Welcome to the Q1 2013 Forrester Research earnings conference call. My name is Trish and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note this conference is being recorded.

With me today are George Colony, Forrester's Chairman of the Board and CEO, and Mike Doyle, Forrester's Chief Financial Officer. George will open the call. Mike Doyle will follow George to discuss our financials. We'll then open the call to Q&A.

A replay of this call will be available until May 24, 2013 and can be accessed by dialing 1-888-843-7419 or, internationally, at 1-630-652-3042. Please reference the pass code 5077393.

Before we begin I would 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 expects, believes, anticipates, intends, plans, estimates, or similar expressions are intended to identify these forward-looking statements. These statements are based on the Company's current plans and expectations and involve risks and uncertainties that could cause the 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 result of new information, future events, or otherwise.

I will now hand the call over to George Colony.

Good afternoon, and thanks for joining the Q1 conference call. I will spend a few moments reviewing the quarter, after which Mike Doyle, our CFO, will give a full financial update. Mike Morhardt, Forrester's head of sales, is currently traveling in Asia. In his place, Kelley Hippler, Forrester's head of sales operations, will join Mike and me for questions and answers.

The top line on the quarter is that we are making progress toward recovery, but this work is far from completion. While employee attrition has attenuated and some sales regions had strong performance, new business sales were challenged in the quarter and enrichment came in at below 100%. We all have to remember that restoring the Company to traditional levels of performance will require multiple quarters of hard work and change. It cannot be completed in two to three months.

Now, over the next few minutes I'd like to focus on a few key areas of our business -- number one, leadership, specifically in sales; two, growth; three, differentiation; and finally, four, the use of capital.

First, I would like to talk about leadership. As I mentioned on the Q4 call, our new chief sales officer, Mike Morhardt, has brought renewed life and vigor into the sales organization. He's getting high grades from sales people for his direct and honest communications, his focus on process, and his constructive coaching on how to reach and serve prospects and clients. In the job search, I was looking for a sales leader with personal strength and a point of view on how to build a world class sales organization. And I believe that in Mike we have both.

Now, with that said, we must still work to ensure that leadership throughout the sales organization can meet its commitments. Where we have mature, proven leaders, as in North America East, premier sales, and Asia-Pacific, we're making good progress. But, in other segments where the leaders are new or the seat is yet to be filled, sales are not yet meeting our expectations. This is the work of Mike Morhardt and Kelley, to find and develop a consistently strong set of leaders capable of moving Forrester to its goals.

I now want to turn to growth. In the second quarter we will move from 17 roles to 13 roles without a reduction in coverage, analyst staffing, or client service. Now, this may seem counterintuitive, but we're making this move for three reasons. Number one, our clients' marketing organizations are evolving and shifting, and we are staying up to date with these changes. Now, as an example, interactive marketers are rising to become marketing leaders, now reporting directly to the CMO in many organizations.

Number two, we are moving our vendor clients out of narrowly defined roles into the full suite of BT and marketing roles. Including them in wider communities will enhance and deepen their knowledge of customer behavior, a primary reason why vendors are Forrester clients.

Number three, fewer roles will simplify our sales process, enabling more cross sales between BT and marketing roles.

Sharpening the roles that we address will enable sales people to grow our -- the average number of roles per account. The reduction of roles will increase our ability to drive enrichment, grow account size and streamline our selling process. Because we have consolidated, not eliminated, roles, our target market of 2.8 million executives and $12 billion in potential market remains unchanged.

Next I want to focus on Forrester's market differentiation. Playbooks -- and these are sets of research that take our clients through the life cycles of their challenges -- are unique to Forrester. Eighteen more playbooks were made available to clients in Q1, and we expect to reach our full complement by the end of 2013.

A second major differentiator is Forrester's unique ability to help BT and marketing executives collaborate. And I want to spend a few moments explaining why the BT marketing connection is growing in importance for our clients.

With over 1 billion mobile devices in the world and the mainstreaming of social and digital channels, we've entered an era where the customer is firmly in control. And this is what we call the age of the customer. In this new age, there are four imperatives that all roles across technology and marketing must work together to deliver.

Imperative one is to turn customer experience into competitive advantage. Our research shows that 90% of companies now view customer experience as a top strategic priority. However, only 3% actually deliver excellent customer experience. And that's really why the customer experience professional is one of our most popular roles. But building seamless customer experience is also a mandate in which all marketing and technology professionals must participate.

The second imperative is to make what Forrester calls the mobile mind shift, and this is treating mobile as a platform for customer engagement in new revenue. According to our Consumer Technographics data, 1 in 5 consumers now expect all services to be available on all devices at their moment of need. This always-on customer segment poses an enormous challenge to the marketing and BT professionals we serve.

The third imperative is big data. Now, despite the hype, companies have managed to analyze and apply only 12% of their data. Forrester is helping customers convert data into commercial customer insights, what we sometimes call prognostics.

The fourth and final imperative is to help our clients defend their revenue streams from a new generation of digital disruptors, all those Stanford sophomores that want to put them out of business. Forrester is helping BT and marketing executives at large companies fight back, to become the disruptors rather than being disrupted.

So, four imperatives -- building customer experience; making the mobile mind shift; turning big data into business insights; and leveraging digital disruption. These trends are pushing BT and marketing executives together into a space where Forrester's portfolio of research will help them be mutually successful.

I want to end my remarks today by updating you on our use of capital. As you all know, on April 3 we announced the commencement of a modified Dutch auction self tender offer. Under the terms of the auction, we are purchasing up to $130 million of our common stock in a price range of $32 to $36. The tender will expire at 5 p.m. Eastern time on Wednesday, May 1.

The tender offer is one of many steps we've taken to more efficiently manage the Company's balance sheet and assets. Our goal is to carry between $50 million and $100 million on our balance sheet on an ongoing basis. At these levels we can invest in the business, execute on acquisitions, and optimize shareholder value.

So, in conclusion, we are making strides to restabilize Forrester's business, but we are certainly not out of the woods. While we are upgrading leadership, streamlining roles, and accentuating our differentiation, we must continue to improve the process of sales, the quality of our products, and the efficiency of our operation. There is still much work to be done.

Thank you very much for your time and your continued support of the Company. I would now like to turn the call over to Mike Doyle, who will give a financial update for Q1. Mike?

Thanks, George.

I will now begin my review of financial performance for Forrester's first-quarter results, the balance sheet at March 31, our first-quarter metrics, and the outlook for the second quarter and full year 2013.

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, net gains and losses from investments. Also, for 2013 we will utilize an effective tax rate of 39% for pro forma purposes. The actual effective tax rate for the first quarter of 2013 was approximately 37%.

The first quarter Forrester exceeded its revenue, pro forma operating margin, and EPS guidance, driven by strong consulting performance in our M&S business. In addition, our balance sheet remained strong, with cash and marketable securities increasing 13% from December 31, 2012. Financially, we had a very good quarter.

As George mentioned in his comments, we are still a work in progress on the sales front. We saw solid performance from some of our sales teams, while other sales teams are still getting traction. You see this evidenced in our deferred revenue, which was flat to prior year, and our agreement value, which is down 1% versus prior year. While we're making progress, there is more work to do before we'll declare our recovery complete.

Now, let me turn to a more detailed review of our first-quarter results. Forrester's first-quarter revenue increased 2% to $71.5 million from $70.3 million in the first quarter of 2012.

First-quarter research services revenue increased 1% to $50.4 million from $49.8 million last year, and represented 70% of total revenue for the quarter. Our first-quarter advisory services and other revenue increased 3% to $21.1 million from $20.5 million in the first quarter of 2012, and represented 30% of total revenue for the quarter. The variance to prior year was driven by improved performance in our M&S consulting and our event business. Our international revenue mix was 27% for the period ending March 31, 2013, which is down from 29% in 2012 due to a soft macro economy in Europe and our sales changes.

I'd like to take you through our activity behind our revenue, starting with research. In research we continued to make progress with developing playbooks, as George mentioned, with 18 rolled out in the first quarter, bringing the total to 51. We plan to continue expanding the number of playbooks available to our clients, with a target of 80-plus by the end of 2013.

In the first quarter 301 new research documents were added to RoleView and we hosted 44 webinars with a total attendance of 1,829. At the end of the quarter the top 3 research roles were application development and delivery, with 6,130 members; market insights with 4,902 members; and the enterprise architecture with 4,081 members.

Forrester leadership boards, our peer offering for senior executives, experienced a year-over-year revenue decline of 3% in the first quarter. At the end of the first quarter Forrester leadership boards had 1,873 members, down 4% from March 31, 2012.

In our data business, it continues be a critical part of our value proposition. Our continually refreshed data covers more than 75% of global GDP. This gives both our B2C and B2B clients current and actual insights on 1,400 brands and 300 attributes. It also gives our analysts the most accurate and timely facts they need to drive their research forward.

Our consulting business grew 3% for the quarter, with M&S the driver, as I mentioned previously, offsetting softness in our BT consulting.

In the first quarter for events, we hosted 2 events in the US and Europe. These included the Sales Enablement Forum in Scottsdale, Arizona and our first ever Marketing and Strategy Forum in Shanghai, China. As a reminder, we made a number of changes to our event business for 2013, with a goal of significantly improving the client experience. We will focus on fewer, better, and bigger events, with 19 scheduled for 2013.

I will now highlight the expense and income portions of the income statement. Operating expenses for the first quarter were $64.1 million, up 3% from $62.4 million in the first quarter of 2012, primarily due to sales expenses increasing 7% as a result of headcount additions. Research and general and administrative costs were essentially flat to prior year due to lower head count.

Total headcount increased 1.5% as of March 31, 2013 as compared to the first quarter of 2012. As of March 31 we had a total staff of 1,222, including a research staff of 441 and a sales staff of 460. Research headcount was down 1% versus prior year, but up 2% from December 31, 2012 due to reduced attrition. Sales headcount increased 5% versus prior year, but was flat from December 31, 2012 as a result of a normal attrition spike in the first quarter, offset by headcount additions.

The encouraging statistic for Q1 sales attrition occurred within the quota-carrying sales reps. Last year we attrited 21 quota-carrying reps in the first quarter, of which 15 had 2 or more years of service. This year we attrited 18 quota-carrying reps, of which only 9 had 2 or more years of service. We're still not where we need to be, but we're encouraged by the progress.

Operating income was $7.4 million, or 10.4% of revenue, compared with $7.9 million, or 11.3% of revenue, in the first quarter of 2012. Other income for the quarter was approximately $400,000, which is consistent with the first quarter of 2012.

Net income for the first quarter was $4.8 million and earnings per share was $0.21 on diluted weighted average shares outstanding of 22.7 million compared with net income of $5.1 million and earnings per share of $0.22 on 23.2 million diluted average weighted shares outstanding for the first quarter of last year.

Now I'll review Forrester's first-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. As of March 31, 2013, agreement value was $218.6 million, a decrease of 1% from the first quarter of 2012.

For client metrics, as a reminder, we streamlined and improved our client count methodology beginning in the second quarter of 2012. Our refined system counts as a single client the various divisions and subsidiaries of a corporate parent and eliminates duplicate references to the same corporation. The system also aggregates separate instrumentalities of federal, state, and provincial governments, which differs from our past practice for government entities. The change resulted in the combination of entities that were previously treated as separate clients.

At the end of the first quarter, our total for client companies was 2,442, a decline of 1% versus the fourth quarter of 2012. Client count, unlike our retention and enrichment metrics, is a point-in-time metric at the end of each quarter.

At March 31, 2013 Forrester's retention rate for client companies was 77%, which is flat from December 31, 2012. And our dollar retention rate during the same time period was 90%, also flat from the prior quarter, but remaining at historically high levels.

Our enrichment rate was 95% for the period ended March 31, 2013, unchanged from December 31, 2012. 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 with deals that close early or slip into the next quarter. The rolling-12-month methodology captures the proper trend information. As of March 31, 2013, there were 2.6 roles per client, flat to the prior quarter.

Now I'd like to review the balance sheet. Our total cash and marketable securities at March 31 were $273.5 million, up $30.8 million, or 13%, from our year-end 2012 balances. We generated $35.5 million in cash from operations during the first quarter of 2013, which is up from $34.9 million from the prior year.

We received $1.4 million in cash from options exercised in our employee stock purchase plan for the first quarter of 2013. Due to the pending Dutch auction we repurchased no Forrester stock during the first quarter of 2013.

We also paid a dividend in the first quarter which amounted to $3.4 million, or $0.15 per share.

Accounts receivable at March 31, 2013 was $49.2 million compared to $52.2 million as of March 31, 2012. Our days sales outstanding at March 31, 2013 was 62 days, down from 68 days at March 31, 2012. And accounts receivable over 90 days was 5% at March 31, 2013, down from 9% at March 31, 2012.

Our capital spending for the first quarter of 2013 was approximately $900,000 compared to $2.4 million during the first quarter of 2012.

Deferred revenue at March 31, 2013 was $152.2 million, up 0.3%, or essentially flat, over March 31, 2012. Deferred revenue plus future A/R, a key indicator of future performance, declined 3.5% year over year. Our future A/R balances are amounts to be invoiced in the future for clients with multiyear deals or scheduled payment terms.

As George mentioned in his remarks, our modified Dutch auction tender for $130 million of our shares is scheduled to end on May 1. To remind shareholders, we entered into this process because we believe our share price is undervalued based on recent performance. In addition, we believe that keeping between $50 million to $100 million in cash on our balance sheet, augmented by short-term borrowing when necessary, will support ongoing investment in our business and allow for acquisition opportunities. We remain committed to enhancing our shareholder value.

Before I begin my review of 2013 guidance, I want to reiterate the comment I made in my opening remarks. We had a strong quarter financially and exceeded guidance on revenue, operating margin, and earnings per share. Cash flows and the balance sheet remained healthy and we're working hard to return value to our shareholders through the Dutch auction.

That said, our deferred revenue and agreement value performance suggests we are still working through the changes we made to our sales organization in 2012. We're making good progress, and have already seen success with some of our teams. We are confident in our sales leadership and the process improvements implemented during the first quarter, but our recovery is still in process. We will keep you updated as the year progresses.

Now I'd like to review our guidance for 2013.

As a reminder, our guidance excludes the following -- amortization of intangible assets, which we expect to be approximately $600,000 for the second quarter and approximately $2.3 million for the full year 2013; stock-based compensation expense of $0.9 million to $1.1 million for the second quarter and approximately $5.7 million to $6.2 million for the full year 2013; and reorganization costs of approximately $300,000 for the second quarter and $1.9 million for the full year 2013; and investments, gains, and losses.

In addition, please note financial guidance regarding shares outstanding and per-share amounts does not -- and I repeat does not -- take into account any purchase of shares in Forrester's modified Dutch auction self tender offer to purchase up to $130 million of our common shares and may materially change, depending upon the outcome of the self tender offer. For purposes of full-year guidance we utilized the same shares outstanding as previous guidance in February of 2013. We will update our guidance for shares outstanding and earnings per share upon completion and settlement of the Dutch auction.

For the second quarter of 2013 we're aiming to achieve total revenues of approximately $77.5 million to $80.5 million; pro forma operating margins of between 11% and 13%; a pro forma income tax rate of 39%; pro forma diluted earnings per share of approximately $0.23 to $0.27.

For the full year our guidance remains unchanged, and we are targeting total revenues of approximately $290 million to $298 million; pro forma operating margin of 9.5% to 10.5%; other income of approximately $800,000; a pro forma income tax rate of 39%; and pro forma diluted earnings per share of between $0.79 and $0.86.

We provided on a GAAP basis for the second quarter and full year 2013 in our press release and 8-K filed today.

Thanks very much. And I'm going to ask Kelley Hippler to join George and me for the Q&A portion of the call. I will now turn the call back over to the Operator.

Thank you. (Operator Instructions) Brendan Matthews; Northland Securities.

I'm calling in for Bill. Just a couple quick questions for you guys. Have you seen any measurable impact yet on renewals or enrichment from the playbooks?

I would say not as yet. The impressionistic view is -- a number of clients have said that they -- it looks like it's moving us away from what I call the big pile of research problem where a CIO, as an example, would go online, put -- call it computing or big data in search, and they would get 500 documents. Now it is a very clear, simple way for them to see all the research for the CIO for cloud computing or whatever the topic is, and to see it across the whole life cycle.

So impressionistically we're feeling really good about it. We have not actually done -- we use something called the Customer Experience Index for our customer satisfaction. So we are about to test it with CXi, but we have not done that as yet. Do you have some ideas here?

Yes. Just to build on that, George, we have gotten very good feedback from our clients about the concept, I think, to George's point. The great thing about the playbooks is that it maps to how our clients think about problems and it's helping us to become more embedded. So, while it's still early days and we haven't been able to correlate that, we do feel confident that over the fullness of the year it will impact renewal rates as well as enrichment rates.

All right. Thank you. And just one more for you guys. Can you tell us at all how growth was split between tech and marketing and strategy?

You mean in the guidance, Brendan, for the full year?

Yes.

Yes, we haven't broken that out. I think it's a fair assumption to say that we expect our marketing strategy business to grow at a faster rate than our traditional business technology business. That's sort of the trend we've experienced up until last year. And we expect that we're going to rebound and get that back on track. But we haven't given specific guidance at this point in terms of the BT and M&S businesses.

Okay. Thank you very much.

(Operator Instructions) Vincent Colicchio; Noble Financial.

You'd said in your prepared remarks that senior sales leadership is still not where it needs to be in certain regions. And I think you mentioned Eastern US and Pacific Rim as far as being strong. So I assume your weaknesses are in the rest of the US and Europe. First, am I right on that?

And what is the source of the weakness at this point? Did you just not have the right people in the positions or did you have some attrition that hurt you?

Hey, Vince, this is Kelley. To your points, yes, the areas where we are still putting some focus are Europe, new business, and then in North America in the West. Two of those three areas we had new leaders who just took on their roles and are just coming up to speed with their teams and their businesses. And we have every confidence that over the fullness of time they will be able to deliver business expectations. In Europe we are still in the process of finding a leader to run that organization. So the areas we have gaps are either due to new leaders or open headcount, two things that we expect to remedy over the fullness of time. And are very pleased with the performance that our existing leaders were able to contribute in Q1.

And, Mike, per your guidance for the year, it looks like you're assuming a slight decline, basically relatively flattish second half in revenue versus the first half. Is there something seasonally going on there or are you just -- do you think you're being conservative?

We're being cautious, I think, similar to the first quarter. I think that, given last year's performance, we're more reliant upon one-time and less reliant on syndicated to drive our revenue numbers, Vince. So we're at this point being conservative. I really want to see how the second quarter plays out to get a better sense for are we really getting the foundations built, which I think is what's going to happen. And then we'll go from there. I would agree if you just look at what happened in the first quarter it would certainly suggest that, gee, revenue ought to come up and EPS ought to come up. But at this point I think it's still too early in the year for us to make that call, given all the changes that have gone on. Like I say, we're making good progress but I think it's premature to adjust our full year to reflect those things.

And how far along are you in terms of reassigning sales territories? I mean, are we in the sixth inning -- ?

Sure. Actually it's still early days there, Vince. So, one of the deliberate parts of the strategy and definitely one of the areas that hurt us in 2012 was breaking that relationship between client and sales rep. So this really is an evolution that we're going through to move to a geographic footprint. So what we are doing is, as an individual moves and potentially takes another role on another team or a territory becomes available, we are at that point aligning to a resource in region.

But one of the things that we are adamant about not doing this year is breaking those client relationships because you lose a lot of capital. And as we saw from the Q1 results, it still takes time to build those relationships back up. So I would say we're probably in the first third of the game right now.

Yes. If I recall, Mike, I think had said it could take as long as two or three years to get the whole process done, by the time you sort of let it all evolve in the natural way and stick to his guideline, which was minimize the number of account shifts. So I think it's going to take a little time, Vince.

Okay. That's it for me. Nice quarter and looks like a step forward.

(Operator Instructions) Tim McHugh; William Blair.

This is Matt Hill in for Tim McHugh this afternoon. Just a quick question on the client count numbers. It looks like the dollar retention stayed flat, but client count the decrease picked up a little this quarter. Are you guys seeing any difference between the sizes of the clients? Are you doing better at retaining some of the bigger ones and maybe losing some smaller guys?

I think, to give you some perspective, Matt, and I probably should have put it in my script. Because this is -- we've had a couple of quarters, really, this is the third one in a row with a steady decline. And it's a function of new business. So a lot of our business there's a certain level of churn that always occurs in our business, typically with smaller clients and smaller vendors, not surprisingly.

And the way the cycle works is if the new business group is sort of working at full potential, we're bringing in more new clients than are churning and leaving the system. And I think when we had some transition in our new business, which Kelley's referenced -- we've got a new leader and I think we're going to get back on track. Until that gets back on track, you're going to see this client count noise, as I call it. The fact that dollar retention is holding up suggests larger clients are staying, and that's not surprising.

So I think we've just got to work through the new business piece, and I think this will settle itself. So we probably have another quarter or two of noise until that starts settling a bit. That might get better sooner or it might take a little longer; I'm just not sure.

Okay. And then, I may have missed this earlier on the call, but the research analyst turnover and attrition, can you comment on the trends there?

Trend is very positive. We saw research attrition really ramp down nicely in the first quarter. We were really happy. We were at -- I think I mentioned a couple calls ago that that had been spiking up and down. And we saw it really fall off nicely. We're really happy, actually, with where attrition is from a research standpoint right now, and obviously we're hoping to sustain it.

We did make, as I think I mentioned on the last call, changes to compensation for nonsales employees. And specifically we made changes to the research teams, both in their variable bonus pay as well as their pay for performance. And I think that's beginning to have some effect. So the trend is really good and overall attrition is down, and certainly well below last year's levels and well below what we were seeing in the previous quarters.

Okay. And then, just one more. In the press release it mentioned different geography performance and then also it talked about different performance [in] sales teams. Were those related comments or was that speaking to different trends, maybe macro trends within some different geographies outside of the new sales leadership.

I think that we -- first of all we still have -- we've got a continuing challenge in Europe. And I think some is macro, but I think, as Kelley referenced, we're looking for a sales leader there. And because Mike has shifted his organization and his leadership is now carved out a little bit more geographically, we have a challenge in Europe that's -- really last year was a tough year for us in Europe. And we're not off to the best of starts there.

The West is, because of the leadership change -- we have a brand new leader there -- is not performing as well as North America East. But I think that's sort of a temporal situation and as the leader settles in, that's going to resolve itself. And then new business cuts across all geographies. So there's a little bit of a geographic spin when we talk to it, but there's also some things that are broader based. The new business is broader based. But then think about Europe as just an ongoing challenge that we're working to resolve. And the West, which I think again is temporal, and that's going to resolve itself relatively quickly.

Okay, great. Thank you.

At this time we have no further questions. I'll now turn the call back over to Mike Doyle for closing remarks.

Great. Thank you very much. Thanks, everyone, for joining our call, and thanks for joining us at the start of the year. We look forward to seeing many of you when we're out on the road in the upcoming quarter.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.