Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
This Quarterly Report on Form 10-Q contains 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. Reference is made in particular to our statements about possible acquisitions, payments pursuant to existing acquisition agreements, acquisition and integration costs, future dividends, future share repurchases, future growth rates and operating income, future compliance with financial covenants under our credit facility, anticipated increases in, and productivity of, our sales force and headcount, and the adequacy of our cash and cash flows to satisfy our working capital and capital expenditures. These statements are based on our current plans and expectations and involve risks and uncertainties that could cause actual future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual future activities and results to differ include, among others, our ability to retain and enrich subscriptions to, and licenses of, our Research, Connect, and Analytics products, our ability to fulfill existing or generate new advisory and consulting engagements, our ability to generate and increase demand for the Events we host, technology spending, our ability to mitigate the adverse impact from the widespread outbreak of COVID-19 which could disrupt or restrict our ability to sell or fulfill, or reduce demand for, our products, services, and events, the risks and challenges inherent in international business activities including any impact of Brexit, our ability to offer new products and services, our dependence on key personnel, our ability to attract and retain qualified professional staff, our ability to respond to business and economic conditions and market trends, our ability to integrate the operations of acquired companies, the impact of our outstanding debt, the possibility of network disruptions and security breaches, competition and industry consolidation, our ability to enforce and protect our intellectual property rights, compliance with privacy laws, possible variations in our quarterly operating results, taxation risks, concentration of our stock ownership, and any weakness identified in our system of internal controls. These risks are described more completely in our Annual Report on Form 10-K for the year ended December 31, 2019 and in Item 1A of Part II of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2020. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.
The COVID-19 pandemic has significantly affected us beginning in March 2020 primarily through lower contract bookings and a reduction in revenues from the conversion of our events from in-person events to virtual events. We also announced that our events in the second half of 2020 will be held as virtual events. While the duration and severity of this pandemic is uncertain, we currently expect a reduction in our subscription Research, Connect and Analytics revenues during the second half of the 2020 due to reduced customer contract booking activity that began in March 2020, and which is expected to continue through at least the third quarter of 2020. The extent to which the COVID-19 pandemic ultimately impacts our business, financial condition, results of operations, cash flows, and liquidity may differ from our current estimates due to inherent uncertainties regarding the duration and further spread of the outbreak, its severity, actions taken to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.
We have implemented several cost-reduction measures that include reductions to travel, new hiring, and employee incentive compensation programs. We will continue to proactively respond to the situation and may take further actions that alter our business operations as may be required by governmental authorities, or that we determine are in the best interests of our employees and customers.
As previously noted, on January 3, 2019, we acquired 100% of the issued and outstanding shares of SiriusDecisions, Inc., a privately held company based in Wilton, Connecticut with approximately 350 employees globally. SiriusDecisions equips business-to-business (B2B) sales, marketing, and product leaders with the actionable research, frameworks, tools, operational benchmarks and expert advice to maximize performance and drive alignment. Pursuant to the terms of the merger agreement, we paid $246.8 million at closing. Net cash paid, which accounts for the cash acquired of $7.9 million and a subsequent working capital adjustment, was $237.7 million. We paid for the acquisition with $175.0 million of debt and cash on hand. See Note 2 - Acquisitions and Note 4 – Debt in the Notes to Consolidated Financial Statements for more information on the acquisition and related debt obligations.
23
We derive revenues from subscriptions to our Research, Connect and Analytics products and services, licensing electronic “reprints” of our Research, performing advisory services and consulting projects, and hosting Events. We offer contracts for our Research, Connect and Analytics products that are typically renewable annually and payable in advance. Subscription products are recognized as revenue ratably over the term of the contract. Accordingly, a substantial portion of our billings are initially recorded as deferred revenue. Reprints include an obligation to deliver a customer-selected research document and certain usage data provided through an on-line platform, which represents two performance obligations. We recognize revenue for the performance obligation for the data portion of the reprint ratably over the license term. We recognize revenue for the performance obligation for the research document at the time of providing access to the document. Billings for licensing of reprints are initially recorded as deferred revenue. Clients purchase advisory and consulting services independently and/or to supplement their access to our subscription-based products. Consulting project revenues, which generally are short-term in nature and based upon fixed-fee agreements, are recognized as the services are provided. Advisory service revenues, such as workshops, speeches and advisory days, are recognized when the service is complete or the customer receives the agreed upon deliverable. Billings attributable to advisory services and consulting projects are initially recorded as deferred revenue. Events revenues consist of ticket or sponsorship sales for a Forrester-hosted event. Billings for Events are also initially recorded as deferred revenue and are recognized as revenue upon completion of each Event.
Our primary operating expenses consist of cost of services and fulfillment, selling and marketing expenses, and general and administrative expenses. Cost of services and fulfillment represents the costs associated with the production and delivery of our products and services, including salaries, bonuses, employee benefits and stock-based compensation expense for all personnel that produce and deliver our products and services, including all associated editorial, travel, and support services. Selling and marketing expenses include salaries, sales commissions, bonuses, employee benefits, stock-based compensation expense, travel expenses, promotional costs and other costs incurred in marketing and selling our products and services. General and administrative expenses include the costs of the technology, operations, finance, and human resources groups and our other administrative functions, including salaries, bonuses, employee benefits, and stock-based compensation expense. Overhead costs such as facilities and annual fees for cloud-based information technology systems are allocated to these categories according to the number of employees in each group.
Deferred revenue, agreement value, client retention, dollar retention, enrichment, and number of clients are metrics that we believe are important to understanding our business. We believe that the amount of deferred revenue, along with the agreement value of contracts, provide a significant measure of our business activity. We define these metrics as follows:
•
Deferred revenue — billings in advance of revenue recognition as of the measurement date.
•
Agreement value — the total revenues recognizable from all contracts to purchase our services in force at a given time (excluding contracts that consist solely of Consulting services and the value of Event sponsorships included in all contracts), without regard to how much revenue has already been recognized.
•
Client retention — the percentage of client companies (defined as all clients except those that only purchase web-based products such as individual reports, workshops and Event tickets) at the prior year measurement date that have active contracts at the current year measurement date.
•
Dollar retention — the percentage of the total dollar value of client companies’ active contracts at the prior year measurement date that have active contracts at the current year measurement date.
•
Enrichment — the dollar value of client companies’ active contracts at the current year measurement date compared to the dollar value of the corresponding client companies’ active contracts at the prior year measurement date.
•
Clients — we aggregate the various divisions and subsidiaries of a corporate parent as a single client and we also aggregate separate instrumentalities of the federal, state, and provincial governments as a single client. We include only clients that purchased subscription-based products in our definition of clients.
Client retention, dollar retention, and enrichment are not necessarily indicative of the rate of future retention of our revenue base. A summary of our key metrics is as follows (dollars in millions):
As of
Absolute
Percentage
June 30,
Increase
Increase
2020
2019
(Decrease)
(Decrease)
Deferred revenue
$
170.8
$
180.9
$
(10.1
)
(6
%)
Agreement value
$
339.4
$
348.9
$
(9.5
)
(3
%)
Client retention
66
%
73
%
(7
)
(10
%)
Dollar retention
88
%
90
%
(2
)
(2
%)
Enrichment
98
%
108
%
(10
)
(9
%)
Number of clients
2,679
2,875
(196
)
(7
%)
24
Deferred revenue and agreement value decreased 6% and 3% , respectively , at June 30, 2020 compared to the prior year , primarily due to a reduction in contract billing s during the six months ended June 30, 2020 as the economic effects of COVID-19 became widespread in Europe and North America . R etention and enrichment rate s decreased from the prior year as they were negatively affected by a decrease in contract bookings experienced in 2020.
Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our policies and estimates, including but not limited to, those related to our revenue recognition, leases, goodwill, intangible and other long-lived assets, and income taxes. Management bases its estimates on historical experience, data available at the time the estimates are made and various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are described in our Annual Report on Form 10-K for the year ended December 31, 2019.
Results of Operations
The following table sets forth our statement of operations as a percentage of total revenues for the periods indicated:
Three Months Ended
Six Months Ended
June 30,
June 30,
2020
2019
2020
2019
Revenues:
Research
64.8
%
59.5
%
66.6
%
63.3
%
Consulting
30.7
26.5
31.1
28.8
Events
4.5
14.0
2.3
7.9
Total revenues
100.0
100.0
100.0
100.0
Operating expenses:
Cost of services and fulfillment
38.7
44.1
39.7
44.4
Selling and marketing
34.5
34.3
36.1
37.6
General and administrative
10.1
10.3
10.7
11.5
Depreciation
2.2
1.8
2.2
1.9
Amortization of intangible assets
4.2
4.0
4.3
4.9
Acquisition and integration costs
0.4
1.9
1.6
2.4
Income (loss) from operations
9.9
3.6
5.4
(2.7
)
Interest expense
(1.2
)
(1.6
)
(1.3
)
(1.9
)
Other income (expense), net
(0.2
)
(0.1
)
0.1
(0.3
)
Gain (loss) on investments, net
2.1
—
1.1
—
Income (loss) before income taxes
10.6
1.9
5.3
(4.9
)
Income tax expense
0.2
0.7
0.2
0.2
Net income (loss)
10.4
%
1.2
%
5.1
%
(5.1
%)
Three and Six Months Ended June 30, 2020 and 2019
Revenues
Three Months Ended
Absolute
Percentage
June 30,
Increase
Increase
2020
2019
(Decrease)
(Decrease)
(dollars in millions)
Revenues
$
113.5
$
128.2
$
(14.7
)
(11
%)
Research
$
73.6
$
76.3
$
(2.7
)
(4
%)
Consulting
$
34.9
$
34.0
$
0.9
3
%
Events
$
5.0
$
17.9
$
(12.9
)
(72
%)
Revenues attributable to customers outside of the U.S.
$
22.0
$
25.1
$
(3.1
)
(12
%)
Percentage of revenue attributable to customers
outside of the U.S.
19
%
20
%
(1
)
(5
%)
Number of events
3
7
(4
)
(57
%)
25
Six Months Ended
Absolute
Percentage
June 30,
Increase
Increase
2020
2019
(Decrease)
(Decrease)
(dollars in millions)
Revenues
$
219.9
$
228.8
$
(8.9
)
(4
%)
Research
$
146.4
$
144.9
$
1.5
1
%
Consulting
$
68.4
$
65.8
$
2.6
4
%
Events
$
5.1
$
18.1
$
(13.0
)
(72
%)
Revenues attributable to customers outside of the U.S.
$
43.4
$
46.9
$
(3.5
)
(7
%)
Percentage of revenue attributable to customers outside of
the U.S.
20
%
20
%
—
—
Number of events
3
9
(6
)
(67
%)
Total revenues decreased 11% and 4% during the three and six months ended June 30, 2020, respectively, compared to the prior year periods and decreased 15% and 8%, respectively, after adjusting for the fair value adjustment of pre-acquisition deferred revenue that reduced revenues during the three and six months ended June 30, 2019. Revenues from customers outside the U.S. decreased 12% and 7% during the three and six months ended June 30, 2020, respectively, which was primarily due to a decrease in revenues in Canada and the United Kingdom.
Research revenues are recognized as revenue primarily on a ratable basis over the term of the contracts, which are generally twelve-month periods. Research revenues decreased 4% and increased 1% during the three and six months ended June 30, 2020, respectively, compared to the prior year periods and decreased 7% and 3%, respectively, after adjusting for the fair value adjustment of pre-acquisition deferred revenue that reduced revenues during the three and six months ended June 30, 2019. The decrease in Research revenues, after adjusting for the deferred revenue fair vale adjustment, was driven by reduced revenues for the Research, Connect, and Analytics products.
Consulting revenues increased 3% and 4% during the three and six months ended June 30, 2020, respectively, compared to the prior year periods primarily due to growth in project consulting.
Events revenues decreased 72% during both the three and six months ended June 30, 2020 compared to the prior year periods, and decreased 85% for both periods after adjusting for the fair value adjustment of pre-acquisition deferred revenue that reduced revenues during the three and six months ended June 30, 2019. The decrease in Events revenues was due to lower sponsorship revenues in 2020 compared to the prior year due primarily to the change to virtual events as a result of the COVID-19 pandemic, and, to a lesser extent, having six fewer events during the 2020 period.
Refer to the “Segments Results” section below for a discussion of revenues and expenses by segment.
Cost of Services and Fulfillment
Three Months Ended
Absolute
Percentage
June 30,
Increase
Increase
2020
2019
(Decrease)
(Decrease)
Cost of services and fulfillment (dollars in millions)
$
44.0
$
56.6
$
(12.6
)
(22
%)
Cost of services and fulfillment as a percentage of
total revenues
38.7
%
44.1
%
(5.4
)
(12
%)
Service and fulfillment employees
(at end of period)
800
761
39
5
%
Six Months Ended
Absolute
Percentage
June 30,
Increase
Increase
2020
2019
(Decrease)
(Decrease)
Cost of services and fulfillment (dollars in millions)
$
87.3
$
101.7
$
(14.4
)
(14
%)
Cost of services and fulfillment as a percentage of total
revenues
39.7
%
44.4
%
(4.7
)
(11
%)
Cost of services and fulfillment expenses decreased 22% during the three months ended June 30, 2020 compared to the prior year period. The decrease was primarily due to (1) a $7.6 million decrease in event expenses due to switching our two flagship events to virtual delivery and the cancellation of two smaller events, both as a result of the COVID-19 pandemic, (2) a $2.9 million decrease in compensation and benefit costs, resulting principally from a decrease in incentive bonuses and other related cost-reduction measures implemented as a result of the impact of the COVID-19 pandemic, partially offset by an increase in headcount and merit increases, (3) a $2.6 million decrease in travel and entertainment expenses due to reduced travel as a result of the COVID-19
26
pandemic , and (4) a $0.3 million decrease in stock compensation expense. These decreases were partially offset by a $1. 1 million increase in professional services costs primarily due to an increase in outsourced services related to revenue delivery .
Cost of services and fulfillment expenses decreased 14% during the six months ended June 30, 2020 compared to the prior year period. The decrease was primarily due to (1) a $7.8 million decrease in event expenses due to switching our two flagship events to virtual delivery and the cancellation of two smaller events, both as a result of the COVID-19 pandemic, (2) a $5.6 million decrease in compensation and benefit costs, resulting principally from a decrease in incentive bonuses and other related cost-reduction measures implemented as a result of the impact of the COVID-19 pandemic, partially offset by an increase in headcount and merit increases, (3) a $3.2 million decrease in travel and entertainment expenses due to reduced travel as a result of the COVID-19 pandemic, and (4) a $0.2 million decrease in stock compensation expense. These decreases were partially offset by a $2.6 million increase in professional services costs primarily due to an increase in outsourced services related to revenue delivery, survey costs, and product enhancements .
Selling and Marketing
Three Months Ended
Absolute
Percentage
June 30,
Increase
Increase
2020
2019
(Decrease)
(Decrease)
Selling and marketing expenses (dollars in millions)
$
39.1
$
44.0
$
(4.9
)
(11
%)
Selling and marketing expenses as a percentage of
total revenues
34.5
%
34.3
%
0.2
1
%
Selling and marketing employees (at end of period)
806
772
34
4
%
Six Months Ended
Absolute
Percentage
June 30,
Increase
Increase
2020
2019
(Decrease)
(Decrease)
Selling and marketing expenses (dollars in millions)
$
79.4
$
86.1
$
(6.7
)
(8
%)
Selling and marketing expenses as a percentage of total
revenues
36.1
%
37.6
%
(1.5
)
(4
%)
Selling and marketing expenses decreased 11% during the three months ended June 30, 2020 compared to the prior year period. The decrease was primarily due to (1) a $2.5 million decrease in travel and entertainment expenses due to reduced travel as a result of the COVID-19 pandemic, (2) a $1.7 million decrease in compensation and benefit costs, resulting principally from a decrease in incentive bonuses and other related cost-reduction measures implemented as a result of the impact of the COVID-19 pandemic as well as a decrease in commissions expense, partially offset by an increase in headcount and merit increases, (3) a $0.3 million decrease in bad debt expense, and (4) a $0.2 million decrease in marketing costs as a result of moving our events to virtual delivery.
Selling and marketing expenses decreased 8% during the six months ended June 30, 2020 compared to the prior year period. The decrease was primarily due to (1) a $3.6 million decrease in travel and entertainment expenses due to reduced travel and other related cost reduction measures as a result of the COVID-19 pandemic, (2) a $2.4 million decrease in compensation and benefit costs, resulting principally from a decrease in incentive bonuses and other related cost-reduction measures implemented as a result of the impact of the COVID-19 pandemic, as well as a decrease in commissions expense, partially offset by an increase in headcount and merit increases, and (3) a $0.4 million decrease in marketing and training costs as a result of moving our events to virtual delivery.
General and Administrative
Three Months Ended
Absolute
Percentage
June 30,
Increase
Increase
2020
2019
(Decrease)
(Decrease)
General and administrative expenses (dollars in millions)
$
11.5
$
13.2
$
(1.7
)
(13
%)
General and administrative expenses as a percentage of
total revenues
10.1
%
10.3
%
(0.2
)
(2
%)
General and administrative employees (at end of period)
237
245
(8
)
(3
%)
Six Months Ended
Absolute
Percentage
June 30,
Increase
Increase
2020
2019
(Decrease)
(Decrease)
General and administrative expenses (dollars in millions)
$
23.5
$
26.4
$
(2.9
)
(11
%)
General and administrative expenses as a percentage of
total revenues
10.7
%
11.5
%
(0.8
)
(7
%)
27
General and administrative expenses decreased 13% during the three months ended June 30, 2020 compared to the prior year period . The decrease was primarily due to (1) a $ 1 . 2 million decrease in compensation and benefit costs, resulting principally from a decrease in incentive bonuses and other related cost-reduction measures implemented as a result of the impact of the COVID-19 pandemic , as well as a decrease in headcount, and (2) a $0.3 million decrease in travel and entertainment expenses due to reduced travel as a result of the COVID-19 pandemic .
General and administrative expenses decreased 11% during the six months ended June 30, 2020 compared to the prior year period. The decrease was primarily due to (1) a $2.6 million decrease in compensation and benefit costs, resulting principally from a decrease in incentive bonuses and other related cost-reduction measures implemented as a result of the impact of the COVID-19 pandemic, and (2) a $0.3 million decrease in travel and entertainment expenses due to reduced travel as a result of the COVID-19 pandemic.
Depreciation
Depreciation expense increased by $0.3 million and $0.7 million during the three and six months ended June 30, 2020, respectively, compared to the prior year periods due primarily to additional leasehold improvements being put into service.
Amortization of Intangible Assets
Amortization expense decreased by $0.4 million and $1.9 million during the three and six months ended June 30, 2020, respectively, compared to the prior year periods due to certain technology intangible assets becoming fully amortized.
Acquisition and Integration Costs
The Company did not have any acquisitions in 2020 and had one acquisition, SiriusDecisions, at the beginning of 2019. Acquisition and integration costs consist of direct and incremental costs to acquire and integrate acquired companies and primarily consist of certain fair value adjustments, consulting, severance, accounting and tax professional fees, and lease expense for unused facilities.
Acquisition and integration costs decreased by $1.9 million during the three months ended June 30, 2020 compared to the prior year period primarily due to a decrease in professional service fees, partially offset by an increase related to the benefit of recording deferred commissions for SiriusDecisions in the year of the acquisition.
Acquisition and integration costs decreased by $2.0 million during the six months ended June 30, 2020 compared to the prior year period primarily due to (1) a $4.1 million decrease in professional service fees and transaction costs, and (2) a $1.4 million decrease in severance. These decreases were offset by (1) a $1.9 million ROU asset impairment recognized in the 2020 period, and (2) a $1.8 million increase related to the benefit of recording deferred commissions for SiriusDecisions in the year of the acquisition.
We expect to incur integration costs in a range of $4.3 million to $4.7 million for the year ending December 31, 2020.
Interest Expense
Interest expense consists of interest on our borrowings used to finance the previous acquisition of SiriusDecisions and realized gains (losses) on the related interest rate swap. Interest expense decreased by $0.8 million and $1.6 million during the three and six months ended June 30, 2020, respectively, compared to the prior year periods. These decreases were due to lower average outstanding borrowings and lower effective interest rates.
Other Income (Expense), Net
Other income (expense), net primarily consists of gains (losses) on foreign currency, gains (losses) on foreign currency forward contracts, and interest income. Other income (expense), net remained essentially consistent during the three months ended June 30, 2020 compared to the prior year period. The increase in other income (expense), net of $0.5 million during the six months ended June 30, 2020 compared to the prior year period was primarily due to a decrease in foreign currency losses.
Gain (Loss) on Investments, Net
Gain (loss) on investments, net primarily represents our share of equity method investment gains and losses from our technology-related investment funds. Gain (loss) on investments, net increased by $2.4 million during both the three and six months ended June 30, 2020 compared to the prior year periods due to an increase in investment gains generated by the underlying funds.
28
Income Tax Expense
Three Months Ended
Absolute
Percentage
June 30,
Increase
Increase
2020
2019
(Decrease)
(Decrease)
Provision for income taxes (dollars in millions)
$
0.2
$
0.9
$
(0.7
)
(78
%)
Effective tax rate
2.0
%
36.3
%
(34.3
)
(94
%)
Six Months Ended
Absolute
Percentage
June 30,
Increase
Increase
2020
2019
(Decrease)
(Decrease)
Provision for income taxes (dollars in millions)
$
0.3
$
0.7
$
(0.4
)
(57
%)
Effective tax rate
2.2
%
(6.0
%)
8.2
137
%
Income tax expense decreased by $0.4 million during the six months ended June 30, 2020 compared to the prior year period due to the release of a U.S. valuation allowance on capital loss carryforwards. For the full year 2020, we anticipate that our effective tax rate will be approximately 1%.
Segment Results
As described in the Form 8-K filed on April 2, 2020, our Chief Product Officer resigned effective April 17, 2020. Subsequently, the Chief Product Officer position was eliminated and we reorganized our operations to reflect three lines of business: Research, Consulting, and Events. As a result of these changes, during the three months ended June 30, 2020, we realigned our internal reporting into Research, Consulting, and Events. The realignment eliminated the Products segment as the product lines and organizations supporting the related revenues began operating under separate management structures. The prior period amounts have been revised to conform to the current presentation.
The Research segment includes the revenues of the Research, Connect and Analytics products and the cost of the organizations responsible for developing and delivering our Research, Connect and Analytics products. In addition, this segment includes Consulting revenues from the delivery of advisory services (such as workshops, speeches and advisory days) delivered by our research and analytics analysts. The costs of the product management organization that is responsible for product pricing and packaging and the launch of new products is included in this segment.
The Consulting segment includes the revenues and the related costs of our project consulting organization. The project consulting organization delivers a majority of our project consulting revenue and certain advisory services.
The Events segment includes the revenues and the costs of the organization responsible for developing and hosting in-person and virtual events.
We evaluate reportable segment performance and allocate resources based on segment revenues and expenses. Segment expenses include the direct expenses of each segment organization and exclude selling and marketing expenses, general and administrative expenses, stock-based compensation expense, depreciation expense, adjustments to incentive bonus compensation from target amounts, amortization of intangible assets, interest and other expense, and gains (losses) on investments. The accounting policies used by the segments are the same as those used in the consolidated financial statements.
Research
Consulting
Events
Consolidated
(dollars in thousands)
Three Months Ended June 30, 2020
Research revenues
Research
$
55,358
$
—
$
—
$
55,358
Connect
13,078
—
—
13,078
Analytics
5,185
—
—
5,185
Total research revenues
73,621
—
—
73,621
Consulting
13,351
21,537
—
34,888
Events
—
—
5,032
5,032
Total segment revenues
86,972
21,537
5,032
113,541
Segment expenses
(25,870
)
(10,099
)
(3,206
)
(39,175
)
Year over year revenue change
(5
%)
13
%
(72
%)
(11
%)
Year over year expense change
(17
%)
7
%
(70
%)
(24
%)
29
Research
Consulting
Events
Consolidated
(dollars in thousands)
Three Months Ended June 30, 2019
Research revenues
Research
$
56,305
$
—
$
—
$
56,305
Connect
14,067
—
—
14,067
Analytics
5,907
—
—
5,907
Total research revenues
76,279
—
—
76,279
Consulting
15,024
18,993
—
34,017
Events
—
—
17,887
17,887
Total segment revenues
91,303
18,993
17,887
128,183
Segment expenses
(31,209
)
(9,474
)
(10,693
)
(51,376
)
Research
Consulting
Events
Consolidated
(dollars in thousands)
Six Months Ended June 30, 2020
Research revenues
Research
$
108,964
$
—
$
—
$
108,964
Connect
26,967
—
—
26,967
Analytics
10,486
—
—
10,486
Total research revenues
146,417
—
—
146,417
Consulting
27,377
40,970
—
68,347
Events
—
—
5,122
5,122
Total segment revenues
173,794
40,970
5,122
219,886
Segment expenses
(53,334
)
(20,120
)
(3,883
)
(77,337
)
Year over year revenue change
—
13
%
(72
%)
(4
%)
Year over year expense change
(13
%)
6
%
(67
%)
(16
%)
Research
Consulting
Events
Consolidated
(dollars in thousands)
Six Months Ended June 30, 2019
Research revenues
Research
$
106,085
$
—
$
—
$
106,085
Connect
27,638
—
—
27,638
Analytics
11,165
—
—
11,165
Total research revenues
144,888
—
—
144,888
Consulting
29,411
36,392
—
65,803
Events
—
—
18,141
18,141
Total segment revenues
174,299
36,392
18,141
228,832
Segment expenses
(61,148
)
(18,908
)
(11,665
)
(91,721
)
30
Research segment revenues decreased 5% and remained essentially consistent during the three and six months ended June 30, 2020, respectively, compared to the prior year periods , and decreased 7% and 4%, respectively, after adjusting for the fair value adjustment of pre-acquisition deferred revenue that reduced revenues during the three and six months ended June 30, 2019. The decrease in segment revenues, after adjusting for the deferred revenue fair value adjustment, was due to (1) a decrease in Research product line revenues due to a decrease in our subscription revenues that was partially offset by an increase in reprint product revenues, (2) a decrease in Connect product revenues due primarily to a decrease in the leadership board product, (3) a decrease in our Analytics products, and (4) a decrease in Consulting product revenues due to a decrease in advisory delivery during the period.
Research segment expenses decreased 17% and 13% during the three and six months ended June 30, 2020, respectively, compared to the prior year periods. The decrease in expenses during the three months ended June 30, 2020 was primarily due to a (1) a $3.0 million decrease in compensation and benefit costs resulting principally from a decrease in incentive bonuses and other cost-reduction measures implemented as a result of the impact of the COVID-19 pandemic, partially offset by an increase in headcount and merit increases, and (2) a $1.9 million decrease in travel and entertainment expenses due to reduced travel as a result of the COVID-19 pandemic. The decrease in expenses during the six months ended June 30, 2020 was primarily due to (1) a $5.9 million decrease in compensation and benefit costs resulting principally from a decrease in incentive bonuses and other related cost-reduction measures implemented as a result of the impact of the COVID-19 pandemic, partially offset by an increase in headcount and merit increases, and (2) a $1.8 million decrease in travel and entertainment expenses due to reduced travel as a result of the COVID-19 pandemic.
Consulting segment revenues increased 13% during the three and six months ended June 30, 2020, respectively, compared to the prior year periods driven by strong consulting delivery.
Consulting segment expenses increased 7% and 6% during the three and six months ended June 30, 2020, respectively, compared to the prior year periods. The increase in expenses during the three months ended June 30, 2020 was primarily due to (1) a $0.8 million increase in professional services primarily due to an increase in outsourced services related to revenue delivery and an increase in survey costs, (2) a $0.3 million increase in compensation and benefit costs due to an increase in headcount and merit increases, partially offset by a decrease in incentive bonuses due to the cost-reduction measures implemented as a result of the impact of the COVID-19 pandemic, and (3) a $0.4 million decrease in travel and entertainment expenses due to reduced travel as a result of the COVID-19 pandemic. The increase in expenses during the six months ended June 30, 2020 was primarily due to (1) a $1.5 million increase in professional services primarily due to an increase in outsourced services related to revenue delivery and an increase in survey costs, (2) a $0.3 million increase in compensation and benefit costs due to an increase in headcount and merit increases, partially offset by a decrease in incentive bonuses due to the cost-reduction measures implemented as a result of the impact of the COVID-19 pandemic, and (3) a $0.6 million decrease in travel and entertainment expenses due to reduced travel as a result of the COVID-19 pandemic.
Event segment revenues decreased 72% during both the three and six months ended June 30, 2020 compared to the prior year periods and decreased 85% for both periods after adjusting for the fair value adjustment of pre-acquisition deferred revenue that reduced revenues during the three and six months ended June 30, 2019. The decrease in Events revenues was due to lower sponsorship revenues in 2020 compared to the prior year due primarily to the change to virtual events as a result of the COVID-19 pandemic, and, to a lesser extent, having six fewer events during the 2020 period.
Event segment expenses decreased 70% and 67% during the three and six months ended June 30, 2020, respectively, compared to the prior year periods. The decrease in expenses during the three months ended June 30, 2020 was primarily due to (1) a $7.3 million decrease in event expenses due primarily to the change to virtual events as a result of the COVID-19 pandemic, and, to a lesser extent, having six fewer events during the 2020 period, and (2) a $0.2 million decrease in travel and entertainment expenses due to reduced travel as a result of the COVID-19 pandemic. The decrease in expenses during the six months ended June 30, 2020 was primarily due to (1) a $7.4 million decrease in event expenses due primarily to the change to virtual events as a result of the COVID-19 pandemic, and, to a lesser extent, having six fewer events during the 2020 period, and (2) a $0.3 million decrease in travel and entertainment expenses due to reduced travel as a result of the COVID-19 pandemic.
Liquidity and Capital Resources
We have historically financed our operations primarily through funds generated from operations. Research revenues, which constituted approximately 67% of our revenues during the six months ended June 30, 2020, are generally renewable annually and are typically payable in advance. We generated cash from operating activities of $25.0 million and $33.5 million during the six months ended June 30, 2020 and 2019, respectively. The $8.5 million decrease in cash provided from operations for the six months ended June 30, 2020 was primarily due to an $18.2 million reduction in cash generated from accounts receivable and deferred revenue due to a reduction in contract bookings for the period, partially offset by the combination of an increase in net income for the period with an increases in cash used for working capital.
During the six months ended June 30, 2020, we used cash in investing activities of $5.1 million for purchases of property and equipment, primarily consisting of software and leasehold improvements . During the six months ended June 30, 2019, we used cash in
31
investing activities of $24 3 . 6 million, consisting primarily of $238.9 million for the acquisition of SiriusDecisions, net of cash acquired, and $ 4 . 7 million in purchases of property and equipment , consist ing primarily of software and leasehold improvements.
We used $17.6 million of cash from financing activities during the six months ended June 30, 2020 primarily due to $18.7 million of repayments of debt that consisted of $14.0 million of discretionary payments on our revolving credit facility and $4.7 million of required repayments of our term loan. We generated $140.7 million of cash in financing activities during the six months ended June 30, 2019 primarily due to $171.3 million of borrowings, which reflects the face value of debt of $175.0 million less $3.7 million that was netted against the proceeds to pay debt issuance costs. This was partially offset by $33.1 million of repayments of debt that consisted of $30.0 million of discretionary payments on our revolving credit facility and $3.1 million of required repayments of our term loan. During the remainder of 2020, we anticipate paying approximately $3.6 million of deferred acquisition purchase price (which consists of up to $2.6 million for a contingent consideration agreement (refer to Note 8 – Fair Value Measurements in the Notes to Consolidated Financial Statements) and $1.0 million of an indemnity holdback) for the FeedbackNow acquisition that occurred in 2018.
In connection with the acquisition of SiriusDecisions, we entered into a $200.0 million credit agreement on January 3, 2019 (the “Credit Agreement”). The Credit Agreement provides for: (1) senior secured term loans in an aggregate principal amount of $125.0 million (the “ Term Loans ”) and (2) a senior secured revolving credit facility in an aggregate principal amount of $75.0 million (the “ Revolving Credit Facility ”). We utilized the full $125.0 million of the Term Loans and $50.0 million of the Revolving Credit Facility to finance a portion of the acquisition of SiriusDecisions and to pay certain fees, costs and expenses incurred in connection with the Term Loans and Revolving Credit Facility. Additional information is provided in Note 4 – Debt in the Notes to Consolidated Financial Statements .
Borrowings under the Credit Agreement can be repaid early, in part or in whole, at any time and from time to time, without premium or penalty, other than customary breakage reimbursement requirements for the London Interbank Offering Rate (“ LIBOR” ) based loans. The Term Loans must be prepaid with net cash proceeds of (i) certain debt incurred or issued by us and our restricted subsidiaries and (ii) certain asset sales and condemnation or casualty events, subject to certain reinvestment rights.
Amounts borrowed under the Credit Agreement bear interest, at our option, at a rate per annum equal to either (i) LIBOR for the applicable interest period plus a margin that is between 1.75% and 2.50% based on our consolidated total leverage ratio or (ii) the alternate base rate plus a margin that is between 0.75% and 1.50% based on our consolidated total leverage ratio. In addition, we will pay a commitment fee that is between 0.25% and 0.35% per annum, based on our consolidated total leverage ratio, on the average daily unused portion of the Revolving Credit Facility, payable quarterly, in arrears. During 2019, we entered into an interest rate swap contract to effectively convert the floating base interest rate to a fixed rate on a majority of the outstanding Term Loan principal balance. Additional information is provided in Note 7 – Derivatives and Hedging in the Notes to the Consolidated Financial Statements.
The Credit Agreement contains certain customary restrictive loan covenants, including among others, financial covenants that apply a maximum leverage ratio and minimum fixed charge coverage ratio. The negative covenants limit, subject to various exceptions, our ability to incur additional indebtedness, create liens on assets, merge, consolidate, liquidate or dissolve any part of Forrester, sell assets, pay dividends or other payments in respect to capital stock, change fiscal year, or enter into certain transactions with affiliates and subsidiaries. The Credit Agreement also contains customary events of default, representations, and warranties.
As of June 30, 2020, we were in compliance with our financial covenants under the Credit Agreement. We currently forecast that we will be in compliance with our financial covenants for at least one year from the issuance of these interim financial statements, after taking into consideration the cost cutting measures implemented during the first half of the year. If the impact of COVID-19 is more severe than currently forecasted this may impact our ability to comply with our financial covenants which could have a material adverse effect on our business.
As of June 30, 2020, we had cash and cash equivalents of $68.4 million. This balance includes $52.4 million held outside of the U.S. If the cash outside of the U.S. is needed for operations in the U.S., we would be required to accrue and pay U.S. state taxes and may be required to pay withholding taxes to foreign jurisdictions to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate these funds for our U.S. operations. We believe that our current cash balance and cash flows from operations will satisfy working capital, financing activities, and capital expenditure requirements for the next twelve months.
32
Contractual Obligations
Our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 included a material change to the operating lease payments and purchase commitment lines of the contractual obligations table as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019. As of March 31, 2020, we had the following updated contractual obligations (in thousands):
Contractual Obligations
Total
2020
2021
2022
2023
2024
Thereafter
Operating lease payments (1)
$
104,638
$
7,872
$
15,957
$
15,988
$
15,485
$
15,130
$
34,206
Purchase commitments (2)
8,372
6,632
870
870
—
—
—
$
113,010
$
14,504
$
16,827
$
16,858
$
15,485
$
15,130
$
34,206
(1)
We primarily lease office space under non-cancellable operating lease agreements. During the three months ended March 31, 2020, we entered into several operating leases that commence later in 2020. These leases require us to make $17.2 million of lease payments over the terms of the leases, which are up to ten years. This additional amount is reflected in the table above. Refer to Note 5 - Leases in the Notes to the Consolidated Financial Statements.
(2)
Purchase commitments principally consist of contractual commitments for software, outsourced research services and Event venues. Due to the impact of COVID-19, we moved our two flagship events during the second quarter, the SiriusDecisions Summit and CX North America, to a virtual format, and we cancelled two smaller everts originally scheduled to take place during the same period. As a result of these changes, during the three months ended March 31, 2020 we were able to cancel contracts for event venues, reducing our previously disclosed purchase commitments amounts by a total of $2.1 million.
During the three months ended June 30, 2020, there were no additional material changes to our contractual obligations.
Other than as noted above, the Contractual Obligations section in our Annual Report on Form 10-K for the year ended December 31, 2019 remains current in all material respects.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet financing arrangements.
Recent Accounting Pronouncements
See Note 1 – Interim Consolidated Financial Statements in the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements including the expected dates of adoption and effects on results of operations and financial condition.
33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our assessment of our sensitivity to market risk since our presentation set forth in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2019.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.