Forrester Research (FORR) Q1 2020 Earnings Call Transcript

Forrester Research (FORR -0.05%)
Q1 2020 Earnings Call
May 07, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and thank you for joining today's call. With me today are George Colony, Forrester's chairman of the board and CEO; and Carrie Johnson, Forrester's chief research officer; and Mike Doyle, Forrester's chief financial officer. George will open the call. Carrie will follow George to discuss the research, and Mike Doyle will discuss our financials.

Kelley Hippler, Forrester's chief sales officer, will join the presenters, and we will then open the call for Q&A. A replay of this call will be available until June 7, 2020, and can be accessed by dialing (855) 859-2056, (440) 453-73406. Please reference the conference ID 7788755. Before we begin, I'd like to remind you that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Words such as expect, believe, anticipate, intend, 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 obligations to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise.

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

George Colony -- Chairman of the Board and Chief Executive Officer

Thank you for listening in on the Forrester Q1 2020 call. We're going to switch it up for this call. I've invited Carrie Johnson, Forrester's chief research officer, to update investors on our product strategy. So I'm going to kick it off then hand the call over to Carrie for her remarks, and then we're going to hear from CFO Mike Doyle, who will give a financial review for the quarter.

Carrie, myself and Mike will be joined by Kelley Hippler, chief sales officer, for questions and answers. Now a few points to start. Number one, Forrester will manage its way through this economic moment, whatever it may bring; two, the pandemic will accelerate the need for all companies to build customer-obsessed digital capabilities, and that's Forester's focus; and finally, three, Forrester will emerge stronger from this recession given its expertise in customer experience, employee experience, digital transformation and building high-performing revenue engine. Now much has changed since our last quarterly call in February.

At that time, I reported that the year was launching as planned. However, the pandemic began to impact the economy in early March, changing the vector of Forrester's business for the quarter and for the year. We concluded the first quarter slightly below revenue guidance while still growing by 2% year over year. We dramatically exceeded our EPS target, but this was due primarily to cost reductions in March.

Forrester has been working remotely since mid-March, and I'm happy to report that we have made the transition quickly and seamlessly. Our technology stack has performed admirably, and our collaboration across the company and with clients has moved forward unimpeded. We feel very fortunate to be a company that can operate at near-peak levels while still being remote. Now that said, the pandemic and the economic downturn will impact Forrester in three ways: number one, revenue in our events business will be reduced by travel restriction; two, our clients in the hotel, airline, restaurant, automotive and physical retail sectors have cut budget; and three, some clients, including the technology sector, are reducing budgets because of the general economic slowdown.

So as a result, we have taken actions to keep expenses aligned with revenue, and these include removing the company bonus for 2020, reducing hiring and restricting nonessential travel. The company has weathered many economic moments in its history, a lot of turbulence in its history, including the 2000 dot-com crash, and most recently, the 2008 recession. And I can count at least five recessions that have occurred in Forrester's lifetime. Through all of them, we have flowed free cash, and our business model and market position was stronger as we moved into better economic times.

We are now organized into three groups: research, which includes all of our products which are sold at yearly contracts; consulting, which encompasses our project consulting and our content marketing businesses; and events. Our research business includes Forrester Research, SiriusDecisions research, analytics and community. Carrie Johnson runs research, and you're going to be hearing from her in a few moments. In times of turbulence and uncertainty, the need for research increases, and we can see this in our current engagement and readership metrics.

Change is the fuel that makes the research business go faster as we've seen often in technology shifts like the move to the Internet and also the move to cloud. We convened our board of clients several weeks ago, and the overriding message was that innovation was accelerating at their companies and the imperative to be more digital was front and center. You can see that historically as you compare online retailers that are thriving and the physical retailers who are, of course, shut down. The head of digital at a large New England bank commented that the projects that he couldn't get funded before the pandemic are now moving ahead at top speed.

The CEO is now paying attention. So not to get too dramatic, but we believe we're entering the golden age of research in which the laggard companies will have to ramp up their digital customer experience to compete with the leaders. Our research organization has provided invaluable insights around the pandemic and will continue to deliver high value to clients through Forrester's breadth of coverage. We will look to drive double-digit growth from our research products moving forward in 2021.

Our second business, consulting, complements our research business. Companies that use Forrester's consulting renew at 17% higher rates than the mean. Consulting continues to be a strong performer in the Forrester organization, growing revenue by 10% year over year in the first quarter, led by the content marketing practice. Our third business, events, complements and showcases Forrester's research.

In the past, I had called events our Apple Store, the place where we directly interact with our clients, where they can experience our findings, ideas and data up close and personal. Events are important venues for technology vendors to showcase their products and efficiently generate leads in new business. Now as I previously mentioned, 2020 will be a challenging year for events. But unlike our larger competitors who have canceled most of their events, we have quickly moved to virtual events with really surprising results.

Our largest event of the year, the Forrester's SiriusDecisions Summit, concluded today with as many attendees as we had in Austin, Texas in May of 2019. So yes, they are not as profitable or as revenue-producing, but the virtual events are keeping the brand and community alive, and I'm very proud of our innovation and speed as we have made this pivot. In future calls, we will be analyzing the business in the three segments: research, consulting and events. I'd like to highlight a few client wins through the close of Q1.

Our largest growth deal in the quarter came from a $1.3 million enrichment with the National Oceanic and Atmospheric Administration. Our new business teams have shown surprisingly strong momentum as we enter Q2. An example of a $100,000 win was Fairview Health Services late in Q1. Growing our multiyear deals has become a key priority of our sales organization.

For example, Cognizant recently signed a multiyear deal for $1.2 million. And in the quarter, in Q1, we closed 45 different global deals with Microsoft for a total of $4.5 million. And as a final note, I wanted to talk about Forrester's financial position. We continue to retire debt incurred with the SiriusDecisions acquisition.

In Q1, we paid the remaining $14 million on our revolver while maintaining full access to the $75 million facility. We have $70 million in cash. In Q1, we generated $22 million in cash, and we expect to have positive cash flow for the year. So to conclude, I wanted to reiterate my earlier points.

One, we will manage our way through this pandemic and recession; two, companies are accelerating digital transformation, this is in Forrester's sweet spot; and three, the company will emerge in a stronger position. I hope that you and your families are staying healthy and well through these times. And now I'm going to pass the call over to Carrie Johnson, Forrester's chief research officer. Carrie?

Carrie Johnson -- Chief Research Officer

Thank you, George, and good afternoon, everyone. As a quick introduction to me, I'm coming up on 22 years at Forrester, where I've served nearly every role in the research organization, including 10 years as an analyst covering digital retailing. I then went on to lead research teams and the content portfolio for all of our research. I've been part of most strategic transformations of Forrester's business, and I've led many clients through them as well, pivoting Forrester's research products and services in response to customers' needs.

I'd like now to build on some of George's comments about engagement with our research. Although COVID-19 has negatively impacted businesses on a global scale, the pandemic has pushed many customers' test transformations and initiatives into the spotlight for our clients, from remote employee and call center activation to digital transformation acceleration. Customer obsession right now is critical to survival for firms. Here are some examples of how our research and our events products are delivering high value for clients and where we're seeing increased engagement levels.

First, our research product. As George mentioned, this is truly proving to be a golden age for research. Our research teams have had a fast, coordinated response to COVID-19, publishing our first guide to pandemic planning back in early March. Our security and risk team first wrote this pandemic research 10 years ago.

Our expertise and experience is very deep here. We also launched a first-of-its-kind employee experience survey that we feel that every two weeks to take the pulse of business employees worldwide as they cope with this pandemic. We've used our new digital platform as a hub to publish short-form content daily that help our clients respond thoughtfully and quickly in critical areas like leadership, business continuity, customer experience, collaboration tech, virtual care, and, yes, virtual events. We're demonstrating the value of research and insights embedded into our clients' operations.

The results have been higher-than-average engagement levels with our clients. What we're finding is that with clients at home, they're needing advice on working through this uncharted territory, and they're engaging with us at record levels. Here are some details. Site visits to read our research has increased year over year, and they continue to rise.

COVID-19 blog post have led to a 40% increase in blog traffic. Posts on communications and then one by George on the four phases of the pandemic have led to the highest-ever views in Forrester history. Demand for our time with our analysts has also increased. The pandemic has led to an increase in request for inquiry, which are our 30-minute calls with analysts.

And client attendance at our analyst-led webinars hit a record high in April. They're up over 100%. And finally, virtual sessions with our exclusive executive communities have seen a more than 50% increase in attendance. Now on to events.

Our two biggest events are in Q2. One is North American Summit, which George talked a bit about. This is the must-attend event for sales, marketing and product professionals. And the other is CX North America in June.

As George said, rather than canceling, we decided to be bold with customer stuff, and we pivoted fast to virtual events with innovative and immersive experiences. North American Summit concluded today, and the results are quite positive. George mentioned we matched the in-person attendance from 2019. The virtual North America Summit proved to be an engaging experience, hosting nearly 150 live-stream presentations, including keynotes by Brene Brown and also a concert series featuring Adam Levine.

We had a lively marketplace that had nearly 50 paid sponsors, many of which have already renewed their spot for our 2021 event. The virtual showroom floor saw 100,000 visits from attendees. Through this virtual marketplace and also our content marketing products, we've been able to enable clients to generate pipeline and replace demand that vendors, in particular, are losing when they've had to cancel their own in-person events. To summarize, Forrester clients need our help as they accelerate their customer-obsessed initiative, and they're highly engaged with us.

We believe that our Herculean efforts to be by our client side was timely, relevant, and actionable advice every day will position Forrester well in the future. With that, I'll turn the call over to Mike Doyle.

Mike Doyle -- Chief Financial Officer

Thanks, Carrie. I'm now going to review Forrester's financial performance for the first quarter of 2020, including a look at our financial results, the balance sheet at March 31, our first-quarter metrics and the outlook for the second quarter and full-year 2020. Please note that the income statement numbers are pro forma and exclude those items mentioned in our press release today. For the first quarter, Forrester delivered pro forma revenue below guidance.

However, operating profit and earnings per share exceeded guidance. Though below expectations, revenue grew slightly for the quarter despite headwinds from the impact of COVID-19. Expenses were favorable expectations as we move quickly to contain costs, making reductions in bonuses and travel expense, which more than offset the revenue shortfall. As both George and Carrie mentioned, we are entering a very dynamic and changing business landscape as a result of the pandemic.

Our clients are looking to us to help them navigate through these very challenging times. I do think this will create great opportunity for Forrester going forward. However, we will not be immune to the near-term macroeconomic impact of the pandemic. Many of our clients are feeling financial pressure on their businesses, and we see that in the form of deferred projects, reduced research due to the client layoffs and the impact of the pandemic on our events business.

Now let me turn to more detailed review of our first-quarter results. First-quarter revenue increased 2%, which was less than expected as we began to see the impact of COVID-19 on our business. We saw the impact begin earlier in the quarter in our Asia-Pac business and later in the quarter in our North America and EMEA businesses. Despite that, research services grew 1% driven mainly by reprints, and our advisory services and events grew 4% driven by strong performance from our content marketing group.

Operating expenses for the first quarter decreased by 4% as we eliminated our annual bonus program and reduced travel expenses in response to COVID 19. Overall, our headcount increased 1% compared to the first quarter of 2019. As a result of the operating expense reductions, operating income expanded to $11.3 million or 10.6% of revenue, compared to $4.9 million or 4.7% of revenue in the first quarter of 2019. Our interest expense for the quarter was $1.5 million as compared to $2.4 million in the first quarter of 2019, due both to the aggressive paydown of our line of credit and to reduced interest rates in the quarter.

Net income for the quarter was $6.9 million, and earnings per share was $0.37, compared with net income of $1.6 million and earnings per share of $0.08 in the first quarter of 2019. Now turning to the key metrics, where we began to see a more pronounced impact of the COVID-19 pandemic with client count, retention and enrichment all down versus prior year and sequentially. We provided details in today's earnings release. Agreement value was up 3% from the first quarter of 2019, primarily due to more bundling of consulting services with renewable contracts.

Now I'd like to review the balance sheet. Our cash at March 31, 2020, was $69.8 million, which is an increase of $1.9 million from the end of 2019. Cash from operations was $21.8 million for the quarter as compared to $26 million in the first quarter of last year. Debt payments were $16.3 million during the quarter, which included $14 million of payments to fully pay down our line of credit.

Property and equipment purchases were $2.4 million for the quarter, compared to $2.8 million for the first quarter of last year. Accounts receivables as of March 31, 2020, was $59.5 million, compared to $69.1 million as of March 31, 2019, with accounts receivable over 90 days at 9% at March 31, 2020, compared to 4% as of March 31, 2019. Deferred revenue at March 31, 2020, was $195.4 million, an increase of 2%, compared to March 31, 2019. 4 points of the deferred revenue growth reflects the fair value adjustment to acquire deferred revenue in the prior period.

I'll move now to our guidance for the second quarter and full year of 2020. In trying to assess the severity and duration of the impact of COVID-19 on our business, we evaluated multiple scenarios. Our assumption is that the worst of the pandemic is behind us by the end of June and that things begin to improve at varying rates in the second half of 2020. This is reflected in a wider-than-normal range in our annual guidance.

Based on those scenarios, we brought our 2020 revenue guidance down approximately 16% from our previous guidance. Our events business, which represents approximately 6% of our total revenue, accounted for 25% of the revision downward. As Carrie discussed, we've moved quickly to virtual events, which result in significantly less revenue than in-person event but are still profitable for Forrester. We expect the broader macroeconomic impact of the recession will reflect in near-term softness in our consulting and advisory business and our research services business.

It is, of course, difficult to predict how COVID-19 will impact the economy in our business. We are currently staffed to be opportunistic as the company rebounds to ensure we get back to healthy growth in 2021. We will be constantly surveying the business climate and checking that against our assumption. If we see a change, we revise our actions and guidance accordingly.

We've provided guidance on a GAAP basis and listed the items excluded from our pro forma guidance in our press release and 8-K filed today. Forrester providing second-quarter 2020 pro forma guidance as follows: revenues of $103 million to $108 million; operating margins of 8% to 10%; and effective tax rate of 31%; diluted earnings per share of $0.26 to $0.34. Our full-year 2020 pro forma guidance is as follows: revenues of $410 million to $430 million; operating margins of 7% to 9%; and effective tax rate of 31%; and diluted earnings per share of between $0.90 to $1.20. As I conclude my prepared remarks, I want to reiterate what George and Carrie have mentioned.

Forrester will manage our way through this. We move swiftly to enact expense reductions, which will help offset anticipated revenue softness in 2020. Pandemic will accelerate customer-obsessed digital innovation. As was mentioned by Carrie and George, we are leading by example here and will continue to help our customers do the same.

Forrester will be even stronger coming out of this pandemic. I agree with Carrie and George that Forrester products and services will be in greater demand as a result of the impact of the pandemic on companies whose business models are proving to be inadequate for the new normal. Thanks very much, and now I'm going to turn the call back over to the operator for the Q&A portion.

Questions & Answers:

Operator

[Operator instructions] Your first question is from the line of Andrew Nicholas.

Andrew Nicholas -- Analyst

Hi. Good afternoon. Hope everyone's safe and healthy. Just wanted to start with a little bit more detail on the guidance.

Just wondering, what are you implying for the events business? I know that you said it was 25% of the guidance reduction, but are you expecting the rest of the year to be virtual? And if you could make any comment on what that profitability looks like, that would be helpful.

George Colony -- Chairman of the Board and Chief Executive Officer

Yes. This is -- Andrew, this is George. Kelley, you want to take that?

Mike Doyle -- Chief Financial Officer

Yes. George, I'll tackle the profitability aspect of it and the guidance aspect of it, which may be better. Kelley?

George Colony -- Chairman of the Board and Chief Executive Officer

OK.

Kelley Hippler -- Chief Sales Officer

Sure. Thank you, Andrew, and thank you, George. So we are prepared to make a pivot to digital if we need to. As of right now, we do still have our full roster of events on the calendar, and we're going to continue to monitor the situation.

But having built out this capability, we do now have the option. So I know, as Mike had alluded to, and I'll let him follow up, we have a couple of different scenarios that we've modeled out. So I'll let him address specifically what is built into the revised guidance. So Mike, I'll throw it over to you.

Mike Doyle -- Chief Financial Officer

Thanks. And thanks for the question, Andrew. The low end of our guidance reflects all of our events going virtual for the full year. And to give you some perspective on that, from a revenue standpoint, that drops revenue -- probably we get about 20% -- $0.20 on the dollar from a revenue perspective on that when we go virtual.

And again, we're still learning this. To the points that Carrie made, we had a very strong showing with our virtual event and summit, and we're seeing the same as we come up on CX New York. So low end reflects all virtual profitability on that. It compresses a significant amount.

Particularly, the summit is a very high-margin piece of business for us, and I would say it probably shrinks our margins down to about maybe the 10% range on the virtual events, but again, still profitable. And more importantly, I think George made the point. It keeps the brand in front of our clients, and it continues to build and helps us build for 2021.

Andrew Nicholas -- Analyst

Great. That's helpful. And then you mentioned it in your prepared remarks, but retention and enrichment metrics ticked down a bit year over year and sequentially. Just wondering if you could give a bit more color on what drove those declines, basically how much you might attribute to the pandemic or a slowdown in March specifically.

And then if I can squeeze one more on top of that, if there's any material change to those metrics in terms of how they're trending in April.

Mike Doyle -- Chief Financial Officer

Well, I'll give you the -- sort of the number side of it. I'll let Kelley give some more color to it. I think -- and this was -- we saw this in the last recession, particularly with smaller vendors, both in our business, but, in particular, with the legacy SD business we inherit. That absolutely impacts client count.

Small vendors and actually small business create -- tend to move very quickly out of contracts that they're in because, frankly, they're getting squeezed. So I think we're seeing churn in small clients, and that's accounting for it. And we're going to see those retention metrics because they're trailing 12 months, probably come down more before they start moving back up. So that's my quick and dirty perspective.

Kelley, I don't know if you have more to add there.

Kelley Hippler -- Chief Sales Officer

Yes. No. I would agree with that, Mike. Thank you.

And I would say, from a timing perspective, Andrew, a lot of it was the back end of March, so probably not much of a surprise that the bulk of it was COVID related. And pipeline had been trending up in late February. And then with the shelter in place across Europe and then into North America about the middle of March, that definitely impacted the renewal retention rate, specifically in March, in particular.

Andrew Nicholas -- Analyst

Awesome. And then if you wouldn't mind, just one more. I think, George, you mentioned in terms of revenue impact, there are clients in certain sectors that have had to cut budget, perhaps, in some cases, pretty significantly. Is there any way for us to kind of size up your industry exposure, particularly as it relates to industries that are more directly challenged in this environment: hospitality, travel, recreation, that sort of thing?

George Colony -- Chairman of the Board and Chief Executive Officer

Yes. And good question, Andrew. Yes. It's about 10%, Andrew, in the most vulnerable category.

That would be -- the list I gave you with air, hotel, etc., about 10%.

Mike Doyle -- Chief Financial Officer

And Andrew, a little color there. The challenge and the opportunity here is how many of those are going to -- because they're so distressed they're going to migrate away, how many because they are and who desperately need a digital model will stick with us and find the funds. And I think that's what we'll -- as the year progresses, we'll look to see how that plays out.

Andrew Nicholas -- Analyst

Makes sense. Thank you.

Operator

Our next question is from a Anja Soderstrom.

Anja Soderstrom -- Analyst

I hope you're all doing well. Thanks for taking my question. A lot of my questions were already asked. But you mentioned the headcount is up, but I noticed the sales force is shrinking.

Could you give some context around that?

George Colony -- Chairman of the Board and Chief Executive Officer

Kelley, do you want to take that?

Kelley Hippler -- Chief Sales Officer

Sure.

George Colony -- Chairman of the Board and Chief Executive Officer

I'll let Kelley give -- go ahead, Kelley, jump in.

Kelley Hippler -- Chief Sales Officer

OK. Anja, I hope that you're doing well. I think what you're seeing in the Q1 numbers is the impact from the attrition that we had back in 2019. So yes, in Q1, the headcount was down.

What I'm pleased to say is given the active recruiting that we've been doing, we've actually added more capacity to the sales force, and that will start to ramp as we get further into the year here. So those numbers will be going up sequentially as we have individuals coming off of ramp. Right now we have 94% capacity on our open territories, which is the highest it's been in over a year.

Mike Doyle -- Chief Financial Officer

And one other thing, Anja, because, yes, it was up. And I will say that we took a number of measures to reduce costs, some of which we've identified. We also froze a lot of open headcount, but we have consciously chosen to continue to invest in sales. And to some degree, the analyst headcount, in part, because, frankly, we see that -- we think there's going to be -- we're going to come out of this, and we need to be prepared as the second half of the year starts getting better to be able to capitalize on that.

So we've consciously not cut headcount in the sales organization, the analyst area.

Anja Soderstrom -- Analyst

OK. And in terms of the hiring salespeople, has the current environment sort of impacted that in either positive or negative way?

Kelley Hippler -- Chief Sales Officer

So I would say in the current environment, we have been able to fill positions a little bit more quickly than we have been throughout the course of 2019. And I'm glad to say that we're close to full capacity right now and are focused on ramping up our new hires.

Anja Soderstrom -- Analyst

OK. Thank you. That's all for me. Thank you.

Operator

I'm showing no further questions at this time. I will now turn the call back to Mr. Doyle.

Mike Doyle -- Chief Financial Officer

George, do you want to have some closing comments here?

George Colony -- Chairman of the Board and Chief Executive Officer

No. Go ahead.

Mike Doyle -- Chief Financial Officer

OK. First, thanks, everyone, for joining the call. We do hope that you are safe and healthy. We plan to be out there in the markets virtually.

And if I could reinforce our major points here. We're going to manage our way through this. We've been through this before. I've been through some of the recessions with George, not the entire pieces, but we're going to find our way through this.

I think we know how to do this. We know how to move quickly. We've positioned ourselves to be ready as the economy bounces back. We think the pandemic has exposed a lot of very weak digital models, which we are, frankly, we think, in the best position to maintain, and we're going to come out stronger.

We've got a great and very talented employee base, all of whom we've retained, and we're pretty excited about that. So we're looking forward to working through these challenges with our clients. So thanks very much.

George Colony -- Chairman of the Board and Chief Executive Officer

And I would say that -- George here, guys. Anyone out there who wants to meet with us via Zoom or Webex, we'd love to meet with you. And thank you for being on the call. And everyone, stay safe.

Thank you.

Duration: 33 minutes

Call participants:

George Colony -- Chairman of the Board and Chief Executive Officer

Carrie Johnson -- Chief Research Officer

Mike Doyle -- Chief Financial Officer

Andrew Nicholas -- Analyst

Kelley Hippler -- Chief Sales Officer

Anja Soderstrom -- Analyst

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