Forrester Research Inc (FORR) 2018 Q3 法說會逐字稿

Good afternoon. Thank you for joining today's call. With me today are George Colony, Forrester's Chairman of the Board and CEO; Kelley Hippler, Forrester's Chief Sales Officer; and Mike Doyle, Forrester's Chief Financial Officer.

George will open the call, Kelley will follow George to discuss sales, and Mike Doyle will discuss the financials. We'll then open the call to Q&A.

A replay of this call will be available until November 23, 2018, and can be accessed by dialing 1 (888) 843-7419 or internationally at 1 (630) 652-3042. Please reference the passcode 8066275#.

Before we begin, I'd like to remind you, 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 can 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 reports and filings with the Securities and Exchange Commission. The company undertakes no obligation to update publicly any looking-forward statements, whether as a result of new information, future events or otherwise.

I'll now hand the call over to George Colony.

Thank you very much, and good afternoon. Welcome to Forrester's 2018 Q3 Investor Call. After my short brief, I will hand the call over to Kelley Hippler, Chief Sales Officer, who will give an update on the selling team. Mike Doyle, the company's CFO, will give a financial review. And then Mike, Kelley and I will take questions.

The company's positive momentum from Q2 continued into the third quarter. Agreement value increased 8%, enrichment has moved to 100%, revenue is at the upper end of guidance, and EPS exceeded guidance for the quarter. We are on track to achieve our plan for the remainder of 2018.

Several factors are driving our performance. Our customer engagement model or CEM continues to yield positive results. Customer success managers are focused on understanding our clients' pain points and are delivering a tailored customer experience to our premiere clients. Clients with CSMs engage at higher rates as measured by document reads; attendance in forums; attendance in webinars; and participation in our inquiry services. Elevated engagement directly correlates with higher renewal rates. Solution partners are the sales executives in the CEM that match clients with a set of Forrester products, and their work is driving higher enrichment rates.

During this quarter, we've expanded our product line. As I talked about in the last call, we are developing the real-time customer experience cloud, a product that will enable clients to monitor and improve their experiences in real time. In simple terms, the cloud will gather feedback from multiple sources into a common data store, process that data through a common analytics engine and then feed relevant advice to multiple recipients within client organizations.

With the acquisition of FeedbackNow in July, the first version of the cloud is now operational in generating new clients. We had a number of wins in the quarter, increasing the client base to over 200 companies. The Port Authority of New York City has deployed the cloud at Newark, LaGuardia and Kennedy airports. Schiphol Airport in the Netherlands, this is the third largest airport in Europe, has rolled out FeedbackNow as part of its Internet of Things initiative, and it is recording over 25 taps or what we call feedbacks per day. And then finally, a national football league stadium in the Midwest has deployed the cloud to monitor and improve fan experience. This is our first large stadium win in the United States.

Our AI solutions team, formerly known as GlimpzIt, has designed a system to ingest social media data and correlate it to CX drivers. This will be an early feature of upcoming versions of the cloud.

In the second quarter, we introduced the customer experience certification program. Clients are using the digital courses to train CX skills and certify expertise. Customer experience remains a difficult discipline to master, and talent remains very scarce, hence the drive to develop these resources from within. To date, 73 clients have purchased CX certification.

Team access enables our most engaged audience, typically executive partners and leadership board members, to give their direct teams membership in Forrester's research streams. This solution helps business leaders increase the IQ of their working groups. We are matching our packaging to the way our clients work and organize, not forcing them into rigid deals and inflexible usage terms.

So to conclude, I want to say a few words about our tech coverage. As you know, Forrester focuses on those parts of business that increase revenue in the Age of the Customer. In the IT space, we specialize in business technology, the technology systems and processes that win, serve and retain customers.

In addition, we intensively cover those parts of back-office technology that enable companies to construct an effective BT portfolio. Companies really cannot have a great BT without great back-office tech. And Forrester advocates that both of these sets of technology must evolve quickly, what we call Fast Fast.

A critical element of IT that we cover in depth is security risk management and privacy. In September, I kicked off our security forum in Washington, D.C. 5 years ago, Forrester pioneered a new digital security philosophy that we called Zero Trust. This is an approach that requires verification of all users inside and outside the enterprise. Over the last 2 years, Zero Trust has become an accepted standard in the security space, governing the strategies of vendors like Google, IBM and large users like Netflix, WestJet and a number of U.S. federal agencies. Our newest research in this space, the cybersecurity and privacy playbook, has just launched, and this playbook includes a digital maturity assessment, enabling companies to benchmark themselves against other companies in their industries and against best-in-class.

So to conclude, we are very pleased with our position going into the fourth quarter. Momentum remains strong, the CEM is working well, we are launching new offerings, and we continue to cover critical IT technologies for our clients.

Thank you for being on the call. And now I'd like to hand it over to Kelley Hippler. Kelley?

Thank you, George. Q3 was another solid quarter for the Forrester sales organization. Both AV growth and enrichment had strong performances versus prior year. These metrics have been steadily increasing over the past 4 quarters. In addition, all geographic regions grew versus prior year. Q3 also marked the seventh consecutive quarter of improved ramp rep productivity. In Q4, we are going to continue accelerating growth through our team access offerings, market development teams and lead generation efforts.

In our premier organization, we are seeing increased interest in team access, which better serves large organizations and dynamic project team. We continue to evolve our vertically aligned market development teams and have begun piloting solutions that are specific to the industries that we serve.

We have also invested in our sales development efforts in North America and Europe. Having resources dedicated to following up on inbound leads being generated by marketing is leading to improved pursuit rates and pipeline conversion. Our customer success team has enhanced the level of sophistication by which it operates, having moved from measuring client engagement at the order level to the individual level, with scores that now update dynamically in our CRM system.

We continue to evolve the way our core organization operates. And as part of a core 2.0 initiative, we introduced new pricing and packaging, we've also designed and launched engagement dashboards, which allow core reps to see their entire portfolio to help prioritize activity to drive client engagement. We've also introduced a series of battle cards to help newer reps ramp more quickly.

And as the volume of our new tech research increases to support CIOs and their teams, we are aligning our new vendor business efforts to those technologies. The above, combined with our ongoing territory optimization, are enabling us to grow bookings while improving our cost of sale and service.

With that, I'd like to turn the call over to Mike Doyle to review our Q3 financial results.

Thanks, Kelley. I will now begin my review of Forrester's financial performance for the third quarter of 2018, including a look at our financial results; the balance sheet at September 30; our third quarter metrics; and the outlook for the fourth quarter of 2018. Please note that the income statement numbers I'm reporting are pro forma and exclude the following items: stock-based compensation expense, amortization of intangibles, acquisition and integration costs and net gains and losses from investments.

For 2018, we're utilizing an effective tax rate of 31% for pro forma purposes. For the third quarter of 2018, Forrester delivered revenue and operating margin at the upper end of guidance and earnings per share that exceeded our guidance. Healthy revenue growth in both research services and in advisory and events was aided by a strong bookings quarter as well as high utilization in our consulting business. Additionally, expenses and operating margin were in line with expectations.

We have seen consistent improvement in agreement value and enrichment for the last 4 quarters, which is reflected in our results. As you heard from Kelley and George, we're making progress in a number of areas, driving better productivity while continuing to improve the value that our products bring to our clients.

Now let me turn to a more detailed review of our third quarter results. Forrester's third quarter revenue increased by 6% to $84.9 million from $80.4 million in the third quarter of 2017 on both and as reported and currency adjusted basis.

Third quarter research services revenue increased by 4% to $56.3 million from $54.2 million as reported and on a currency neutral basis. Research services revenue represented 66% of total revenue for the quarter.

Third quarter advisory services and event revenue increased by 9% to $28.6 million from $26.1 million in the third quarter of 2017 and increased by 10% with constant currency and represented 34% of total revenue for the quarter.

Our international revenue mix was 23%, down 1 point from 24% in the second quarter of 2017. With constant currency, the mix was 24% and flat to prior year.

And now I'd like to take you through the product activity behind our revenue, starting with Forrester Research. Forrester's published research and decision tools enable clients to better anticipate and capitalize on the disruptive forces affecting their businesses and organizations. We believe Forrester Research provides insights and frameworks to drive growth in a complex and dynamic market. In the third quarter of 2018, Forrester's research library included 47 playbooks, the addition of 323 new documents, and we hosted 35 webinars for our clients. Research revenue increased by 4% for the third quarter of 2018 as we continue to see gains in enrichment, driven by -- in part by our Age of the Customer and team access premium offerings.

Onto our Forrester Connect offerings, which encompass our leadership boards and Executive Programs. Forrester's Connect services are designed to help clients connect with peers and Forrester's products and professionals and to coach executives to lead far-reaching change within their organizations. As of September 30, 2018, Forrester Connect had a total of 1,446 members, up 1% compared to last year and up 2% to the second quarter of 2018. Connect revenue increased by 3% compared to the third quarter of 2017, driven by growth in our CIO and CMO Executive Programs as well as optimized pricing in our leadership board business.

Our analytics products and services are designed to provide fact-based customer insights to our clients. Clients can leverage our analytics products and services or choose to have us conduct custom data analysis on their behalf. For the third quarter, revenue increased by 1%, driven by our acquisition of FeedbackNow. Excluding the acquisition, revenue decreased by 6%, driven by decline in our custom data and Consumer Technographics products and partially offset by strong growth in our Business Technographics product.

Forrester Consulting, which includes our advisory and consulting services, saw total revenue for the third quarter increase 12% compared to prior year. We had an expectation as the deployment of our new customer engagement model would yield great benefits in driving enrichment with existing accounts. We're now seeing this play out for the third consecutive quarter as our consulting offerings continue to be bundled into solutions more and more through the work being done by our solution partners and consultants.

Forrester held 3 events in the third quarter of 2018. The third quarter revenue increased by 5% on a same event basis but decreased 14% overall, reflecting the shifting of events between quarters.

I will now highlight the expense and income portions of the income statement. Operating expenses for the third quarter increased by 7% as reported and 8% on a currency adjusted basis and were $76.4 million compared to $71.2 million the prior year.

Cost of services and fulfillment increased by 6% as reported and 7% with constant currency due to higher headcount and merit increases.

Selling and marketing expenses increased by 6% both as reported and with constant currency, driven by merit increases and a higher mix of higher-paying sales roles.

General and administrative costs increased by 13% on both and as reported and constant currency basis, driven by headcount, merit increases as well as severance.

Overall headcount increased 3% compared to the third quarter of 2017 and increased 1% compared to the second quarter of 2018. At the end of the third quarter, we had a total staff of 1,418, including products and advisory services staff of 542 and total sales force of 519. Products and advisory services headcount increased by 6% year-over-year and 1% sequentially. Total sales force decreased by 2% year-over-year and was flat sequentially.

Operating income was $8.4 million or 9.9% of revenue compared to $9.1 million or 11.4% of revenue in the third quarter of 2017. Other income for the quarter was $319,000 compared to $146,000 in the third quarter of 2017.

Net income for the quarter was $6 million, and earnings per share was $0.33 on diluted weighted average shares outstanding of $18.4 million compared with net income of $5.6 million and earnings per share of $0.31 on $18.1 million diluted weighted average shares outstanding in the third quarter of 2017.

Now I'll 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 was already been recognized. As of September 30, 2018, agreement value was $257.5 million, up 8% from the third quarter of 2017 and up 7% on a constant currency basis.

As of September 30, 2018, our total for client companies was 2,357, down 2% compared to last year and essentially flat to the last quarter. Client count, unlike our retention and enrichment metrics, is a point in time metric at the end of each quarter. Forrester's retention rate for client companies was 74% as of September 30, 2018, down 1 point to last quarter and down 2 points to last year. Our dollar retention rate was 88%, flat compared to last quarter and to last year. Our enrichment rate was 100% for the period ending September 30, 2018, up 1 point compared to last quarter and up 6 points compared to last year. As we've discussed, improvement in enrichment is one of the key outcomes expected from the customer engagement model, and 1 year in, we see compelling evidence that we got it right. 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.

Now I'd like to review the balance sheet. Our total cash and marketable securities at September 30, 2018, was $144.5 million, which is an increase of $10.4 million from $134.1 million at year-end 2017.

Cash from operations was $9.1 million for the quarter as compared to $10 million in the third quarter of last year. We received $7.5 million in cash from options exercised and our ESPP program for the quarter as compared to $9 million in the third quarter of last year.

We purchased approximately 300,000 of our stock during the quarter, and we paid a dividend of $3.6 million or $0.20 per share during the quarter.

Accounts receivable at September 30, 2018, was $38.6 million compared to $39.5 million as of September 30, 2017.

Our days sales outstanding at September 30, 2018, was 42 days compared to 45 days at September 30, 2017.

And accounts receivable over 90 days was 5% at September 30, 2018, compared to 6% at September 30, 2017.

Deferred revenue at September 30, 2018, was $128.4 million, a decrease of 3% compared to September 30, 2017. While we're adjusting for the effect of the new revenue rules, deferred revenue would have increased approximately 4%.

In closing, a very good quarter for the company. The integration of our recent acquisitions is going well, and they're already contributing to Forrester. Our revenue results and operating margin were at the upper end of expectations, and we had good bookings growth across all sales regions and products. We've seen consistent improvement in agreement value and enrichment over the past 4 quarters, indicating the changes we made to our selling model are taking hold. Earnings per share exceeded expectations for the quarter, and we're on target to deliver full year 2018 in line with the expectations we outlined at the beginning of the year.

Now let me take you through the specifics of our guidance for the fourth quarter and full year 2018. As a reminder, our guidance excludes the following: amortization of intangible assets, which we expect to be $400,000 to $500,000 for the fourth quarter and $1.2 million to $1.3 million for full year 2018; stock-based compensation expense of $2.1 million to $2.3 million for the fourth quarter and $8.3 million to $8.5 million for full year 2018; acquisition and integration costs of $500,000 to $700,000 for the fourth quarter and $1.8 million to $2 million for the full year 2018; and any investment gains and losses.

Forrester is providing fourth quarter 2018 financial guidance as follows: total revenues of approximately $95 million to $98 million; pro forma operating margin of approximately 13% to 15%; pro forma effective tax rate of 31%; pro forma diluted earnings per share of approximately $0.49 to $0.52.

We're updating our full year 2018 guidance as follows: total revenues of approximately $354 million to $357 million; pro forma operating margin of approximately 9.5% to 10.5%; pro forma effective tax rate, 31%; pro forma diluted earnings per share of approximately $1.33 to $1.36.

We provided guidance on a GAAP basis for the fourth quarter and full year 2018 in our press release and 8-K filed today.

Thanks very much. And I'm now going to turn the call back over to the operator for the Q&A portion of our call.

(Operator Instructions) And our first question comes from Tim McHugh.

First, I guess, on agreement value. Can you help us think about the growth rate in the research portion of that? And then maybe also thinking about the research revenue here, I guess, how -- I'm not sure, just to clarify, was -- were the acquisitions contributing at all to the growth rate of that piece? Or is that an organic kind of clean number when we look at it?

Tim, it's Mike. Sorry about that. So the -- I would say that it's -- we've gotten really good growth on AV and it's -- and we're starting to see more and more bundling. And so I think you're seeing the lift that's coming more on the advisory and consulting side as we bundle that in. I would say our core research is around 5 points in terms of thinking about growth in AV. So it lags a bit, the other side of our business, which we expected as we started the year. It's been fully accelerating, which is good. So we're gotten -- we're getting the right kinds of momentum, but we -- it's -- we're still driven, I think, primarily more by consulting and advisory that's bundled in with us.

Okay. How should we think about -- recognizing you're not giving guidance for next year but thinking about margins from this point because, I guess, if I look, the sales force hasn't really grown a lot lately. So at some point, you'll need to grow that to keep growing. You talked about -- I think there was a comment about utilization being very high in the consulting business. Can you kind of -- or margins are still probably -- EBITDA margins guided to be down this year. So how do we think about the next 2 years? And given -- it would seem like you'd have to add more consultants and more salespeople to drive the growth, given those prior 2 comments you had made on the call.

Yes, I would -- look, I would say that we -- while we haven't given guidance for next year, Tim, our expectation is that we are going to guide to margin expansion. This year was very much about really getting the model completed. And I will say, I mean, you can't share internal numbers, but we are getting cost of sale improvement as a result. We are seeing real productivity out of the model. So the expectation as we move into next year is that, that will get an annualized effect on that. And yes, we will be adding more head next year, but our expectation is that we plan to expand margins as well. So I think our view is that the declining margin concept is over. A lot of the costs incurred in terms of getting CM in place will be behind us, and we'll look to leverage that. That said, we'll always have ongoing technology investments that were going to occur, but I think you're going to see margin lift primarily from sales. But we're going to start to leverage acquisitions in the consulting business and advisory businesses. The margins there have been healthy. And yes, if we add consultants, typically, the expectation is we will get a return relatively quickly there. So I'll have Kelley give any color she'd like.

Yes, no, just to reinforce what you stated, Mike. Tim, we do plan on starting to add additional sales headcount next year, probably in the low single-digit range because we don't feel like we'd be at max out the productivity from our existing folks. So by continuing to focus on productivity and adding in some heads, we expect to be able to continue to drive growth while continuing to lower cost of sales and service.

And our next question comes from Vincent Colicchio from [1965].

Yes, Mike, a follow-up on the sales side. You're clearly seeing a couple of quarters of improvement here with the new model. Do you want to like perhaps frame how much you may grow the sales force in the next year? And then also, are you any -- is there any concern with the tight labor market that is going to be difficult to fund the right people?

I'll let Kelley talk to the tight labor market. And I think we haven't gone out to guide to what we think in terms of growth in sales headcount. I don't think in the past, people have -- to get double digit, we'd say we're going to increase headcount double digit. That's not going to be our model. I would say, it's probably low to mid-single digits, best case. For Kelley to get the improvement she's gotten this year with essentially flat headcount but nice productivity increases, that's encouraging. I mean, it really -- it is. And I think the new model allows for greater productivity. I'll let Kelley talk to sales talent. Yes, it's hard to get. I think that she's selective appropriately, given what we're doing with our selling model, but I think we've gotten some fantastic talent. But I'll let her cover that.

Sure. In terms of the overall sales talent, we find our dates-to-hire are still holding. So we haven't seen an uptick there. We have a very strong employee referral program, which allows us to find folks who are good cultural fit and are able to make their way into Forrester pretty quickly. That couples with the various markets in which we serve, also gives us flexibility. So we don't expect that to be an inhibitor for us but always something that we want to keep in mind as we look to expand. But not seeing any pressure there right now.

And Vince, remember that Nashville helps us a lot here as well, as far as labor market goes.

Yes. I mean, we're finding very talented folks down in the Nashville market, which is certainly helping us in our efforts to expand. And just having multiple geographies just gives us a lot of different options in terms of finding the best talent to deliver what it is that we provide to our clients, which is very customized experience.

And George, could you give us some color on the new CX product, the real-time CX product? It sounds like you're off to a really nice start, 200 clients. Just curious what the pipeline looks like. Is it Fortune 1000 companies? Is it specific verticals? Just any color will be helpful.

Yes. So those 200 clients are -- those are clients who came to us either from FeedbackNow or they were new business in Q3. Just -- I'll ramble here a little bit on this product. What you're going to see, Vince, is that it is starting in its physical form, which is -- we call it physical FeedbackNow because of the physical buttons. But as the cloud continues to roll as we go through version 2, 3 and 4, you're going to add digital, you're going to add partner data, you're going to add that more powerful analytics engine that I talked about. So it's going to be one of those products which is just going to get enhanced kind of quarter by quarter. The next big enhancement you're going to see is -- will likely be for Q3 of next year. And who is this for? It does tend -- if you look at the FeedbackNow clients and you look at our -- what we call the ICPs or the ideal client profiles, they do tend to overlay pretty nicely on top of our ICPs, the accounts, the vertical markets that we are, in fact, pursuing. So -- but this is large companies, right, Fortune 1000 companies, a lot of retail, a lot of financial services. So a good overlay. So that's what it's going to look like. Again, you're going to see it roll out in waves. It's going to be in -- within our ICPs.

Why don't I let Kelley describe what the CX certification product that also has just rolled out because -- and that was probably the other one you were going to be asking about, so I'll let Kelley tackle that one.

Sure. So the CX certification product is a very exciting one for us because one of the things we see is that all of our clients across the board, whether it be some of the smaller vendors that we have or the large multinationals, all need to level set with their employees about what it means to deliver great customer experience. And this tool is a great snackable way to do that across their organization. So we've actually seen across those 73 clients, literally every region we've had, clients come to us and in every one of our sales team. So we think it is very broad-based application, and this is really just the start of this particular product. We are sort of starting off with the 101, and we will just be developing master classes as we move forward so that as our CX professionals and their practices become more sophisticated, we'll have additional offerings for them to help them grow and scale their teams as well.

And this concludes our question/answer session. I'll now turn the call back over to Mike Doyle for final remarks.

Great. Thanks, everyone, for listening in. And we're excited both about where we've been for the first 9 months in the journey, but we'll be out on the road talking about how we plan to finish out the year and what next year's going to look like. So we look forward to getting out with everyone soon. Thanks very much.

Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.