FORRESTER RESEARCH, INC. 10-Q

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, future dividends, future share repurchases, future growth rates, results from operations and tax rates, the launch of Forrester Decisions, future compliance with financial covenants under our credit facility, future interest expense, anticipated increases in, and productivity of, our sales force and headcount, the adequacy of our cash, and cash flows to satisfy our working capital and capital expenditures, and the anticipated impact of accounting standards. These statements are based on our current plans and expectations and involve risks and uncertainties. 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 products and services, our ability to fulfill existing or generate new consulting engagements and advisory services, 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, the impact of our outstanding debt, competition and industry consolidation, possible variations in our quarterly operating results, concentration of our stock ownership, the possibility of network disruptions and security breaches, our ability to enforce and protect our intellectual property rights, compliance with privacy laws, taxation risks, 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, 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 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. While the duration and severity of the pandemic is uncertain, we did experience a rebound in contract bookings beginning in the fourth quarter of 2020 and continuing through the first quarter of 2021. We expect that trend to continue in 2021. Our events business continues to be negatively affected by the pandemic. As we previously announced, all events in the first half of 2021 will be held as virtual events, including two of our flagship events, B2B Summit North America and CX North America. We hope to hold our events during the second half of 2021 as hybrid events, consisting of both in-person and virtual experiences. 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 derive revenues from subscriptions to our Research products and services, licensing electronic “reprints” of our Research, performing consulting projects and advisory services, and hosting Events. We offer contracts for our Research 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 consulting projects and advisory services independently and/or to supplement their access to our subscription-based products. Consulting project revenues, which are based upon fixed-fee agreements, are recognized as the services are provided. Advisory service revenues, such as speeches and advisory days, are recognized when the service is complete or the customer receives the agreed upon deliverable. Billings attributable to consulting projects and advisory services are initially recorded as deferred revenue. Events revenues consist of ticket and 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 19 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. Effective for the first quarter of 2021, we have modified our key metrics to focus on our contract value (“CV”) products (as described below) in comparison to our prior metrics which included measures of our broader product portfolio. For 2021, we have focused on increasing our CV product bookings and have modified our compensation programs and metrics accordingly. We are focusing on CV products as these products are our most profitable products and historically our contracts for CV products have renewed at high rates (as measured by our client retention and wallet retention metrics). Our CV products make up essentially all of our research revenues. We have included the historical calculation of the metrics below, dating back to the first quarter of 2019, on the investor relations section of our website. Contract value, client retention, wallet retention, and number of clients are metrics that we believe are important to understanding our research business. We define these metrics as follows: • Contract value (CV) — is defined as the value attributable to all of our recurring research-related contracts. Contract value is calculated as the annualized value of all contracts in effect at a specific point in time, without regard to how much revenue has already been recognized. Contract value primarily consists of subscription-based contracts for which revenue is recognized on a ratable basis, except for the entitlements embedded in our subscription products, such as event tickets and advisory sessions, for which the revenue is recognized when the item is utilized. Contract value also includes our reprint products, as these products are used throughout the year by our clients and are typically renewed. • Client retention — represents the percentage of client companies (defined as all clients that buy a CV product) at the prior year measurement date that have active contracts at the current year measurement date. • Wallet retention — represents a measure of the CV we have retained with clients over a twelve-month period. Wallet retention is calculated on a percentage basis by dividing the annualized contract value of our current clients, who were also clients a year ago, by the total annualized contract value from a year ago. • Clients — is calculated at the enterprise level as all clients that have an active CV contract. Client retention and wallet retention 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 March 31, Increase Increase 2021 2020 (Decrease) (Decrease) Contract value $ 307.3 $ 308.0 $ (0.7 ) — Client retention 75 % 74 % 1 1 % Wallet retention 89 % 90 % (1 ) (1 %) Number of clients 2,907 2,835 72 3 % Contract value and our retention metrics were essentially flat at March 31, 2021 compared to the prior year period. These metrics were at their lows during the second and third quarters of 2020 as contract booking declined during 2020 due to the pandemic. We have seen an improvement in these metrics from their lows in the middle of 2020 as contract bookings expanded during the second half of 2020 and the first quarter of 2021. 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, 2020. 20 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 March 31, 2021 2020 Revenues: Research revenues 65.9 % 69.8 % Consulting revenues 33.9 30.1 Events revenues 0.2 0.1 Total revenues 100.0 100.0 Operating expenses: Cost of services and fulfillment 41.7 40.8 Selling and marketing 34.5 37.9 General and administrative 11.6 11.3 Depreciation 2.1 2.2 Amortization of intangible assets 3.4 4.4 Integration costs 0.1 2.7 Income from operations 6.6 0.7 Interest expense (1.0 ) (1.4 ) Other income (expense), net (0.4 ) 0.2 Gain on investments, net — — Income (loss) before income taxes 5.2 (0.5 ) Income tax expense 1.7 — Net income (loss) 3.5 % (0.5 %) Three Months Ended March 31, 2021 and 2020 Revenues Three Months Ended Absolute Percentage March 31, Increase Increase 2021 2020 (Decrease) (Decrease) (dollars in millions) Total revenues $ 113.8 $ 106.3 $ 7.4 7 % Research revenues $ 75.0 $ 74.3 $ 0.7 1 % Consulting revenues $ 38.6 $ 32.0 $ 6.6 21 % Events revenues $ 0.3 $ 0.1 $ 0.2 192 % Revenues attributable to customers outside of the U.S. $ 26.8 $ 21.4 $ 5.5 26 % Percentage of revenue attributable to customers outside of the U.S. 24 % 20 % 4 20 % Number of events — — — — Total revenues increased 7% during the three months ended March 31, 2021 compared to the prior year period, with 1% of the increase due to changes in foreign currencies. Revenues from customers outside the U.S. increased 25% during the three months ended March 31, 2021, due to an increase in revenues in the United Kingdom, Asia Pacific region, Europe and Canada. Approximately 7% of the increase was due to changes in foreign currencies. 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 increased 1% during the three months ended March 31, 2021 compared to the prior year period, which primarily resulted from flat contract value growth during this period. Consulting revenues increased 21% during the three months ended March 31, 2021 compared to the prior year period due to continued strong demand for our content marketing offerings and growth in our advisory services. Events revenues were insignificant and remained essentially consistent during the three months ended March 31, 2021 compared to the prior year period as no events took place during either period. Refer to the “Segments Results” section below for a discussion of revenues and expenses by segment. 21 Cost of Services and Fulfillment Three Months Ended Absolute Percentage March 31, Increase Increase 2021 2020 (Decrease) (Decrease) Cost of services and fulfillment (dollars in millions) $ 47.5 $ 43.4 $ 4.1 10 % Cost of services and fulfillment as a percentage of total revenues 41.7 % 40.8 % 0.9 2 % Service and fulfillment employees (at end of period) 760 786 (26 ) (3 %) Cost of services and fulfillment expenses increased 10% during the three months ended March 31, 2021 compared to the prior year period. The increase was primarily due to (1) a $4.0 million increase in compensation and benefit costs due to reinstating incentive bonus programs that were eliminated as part of the cost-reduction measures implemented in 2020 as a result of the impact of the COVID-19 pandemic, merit increases, and severance costs, and (2) a $2.3 million increase in professional services costs primarily due to increases in outsourced services related to revenue delivery and survey costs . These increases were partially offset by a $1.5 million decrease in travel and entertainment expenses due to reduced travel as a result of the COVID-19 pandemic. Selling and Marketing Three Months Ended Absolute Percentage March 31, Increase Increase 2021 2020 (Decrease) (Decrease) Selling and marketing expenses (dollars in millions) $ 39.3 $ 40.3 $ (1.0 ) (2 %) Selling and marketing expenses as a percentage of total revenues 34.5 % 37.9 % (3.4 ) (9 %) Selling and marketing employees (at end of period) 746 771 (25 ) (3 %) Selling and marketing expenses decreased 2% during the three months ended March 31, 2021 compared to the prior year period. The decrease was primarily due to (1) a $1.7 million decrease in travel and entertainment expenses due to reduced travel as a result of the COVID-19 pandemic, and (2) a $0.4 million decrease in bad debt expense. These decreases were partially offset by a $1.5 million increase in compensation and benefit costs due to reinstating incentive bonus programs that were eliminated as part of the cost-reduction measures implemented in 2020 as a result of the impact of the COVID-19 pandemic, an increase in commissions expense, and merit increases. General and Administrative Three Months Ended Absolute Percentage March 31, Increase Increase 2021 2020 (Decrease) (Decrease) General and administrative expenses (dollars in millions) $ 13.2 $ 12.0 $ 1.2 10 % General and administrative expenses as a percentage of total revenues 11.6 % 11.3 % 0.3 3 % General and administrative employees (at end of period) 243 237 6 3 % General and administrative expenses increased 10% during the three months ended March 31, 2021 compared to the prior year period. The increase was primarily due to a $1.3 million increase in compensation and benefit costs due to reinstating incentive bonus programs that were eliminated as part of the cost-reduction measures implemented in 2020 as a result of the impact of the COVID-19 pandemic and merit increases. Depreciation Depreciation expense during the three months ended March 31, 2021 was consistent with the prior year period. Amortization of Intangible Assets Amortization expense decreased by $0.8 million during the three months ended March 31, 2021 compared to the prior year period primarily due to a certain intangible asset becoming fully amortized in 2020. 22 Integration Costs Integration costs consist of direct and incremental costs to integrate acquired companies and in 2020 primarily consisted of certain fair value adjustments, consulting, severance, accounting and tax professional fees, and expenses related to unused lease facilities. Integration costs decreased by $2.8 million during the three months ended March 31, 2021 compared to the prior year period due to the substantial completion of the integration of SiriusDecisions, Inc. (acquired at the beginning of 2019) during 2020. Integration costs in 2021 relate to unused lease facilities from the SiriusDecisions acquisition. We expect to incur integration costs in a range of $0.3 million to $0.5 million for the year ending December 31, 2021. Interest Expense Interest expense consists of interest on our borrowings and realized gains (losses) on the related interest rate swap. Interest expense decreased by $0.4 million during the three months ended March 31, 2021 compared to the prior year period due to lower average outstanding borrowings and a lower effective interest rate. Other Income (Expense), Net Other income (expense), net primarily consists of gains (losses) on foreign currency and interest income. The decrease in other income (expense), net of $0.8 million during the three months ended March 31, 2021 compared to the prior year period was primarily due to an increase in foreign currency losses. Gain on Investments, Net Gain on investments, net primarily represents our share of equity method investment gains and losses from our technology-related investment funds. Gain on investments, net remained consistent during the three months ended March 31, 2021 compared to the prior year period. Income Tax Expense Three Months Ended Absolute Percentage March 31, Increase Increase 2021 2020 (Decrease) (Decrease) Provision for income taxes (dollars in millions) $ 2.0 $ — $ 2.0 100 % Effective tax rate 33.4 % (3.8 %) 37.2 968 % Income tax expense increased by $2.0 million during the three months ended March 31, 2021 compared to the prior year period primarily due to the increase in overall U.S. profitability. For the full year 2021, we anticipate that our effective tax rate will be approximately 32%. Segment Results Our operations are grouped into three segments: Research, Consulting, and Events. These segments are based on our management structure and how management uses financial information to evaluate performance and determine how to allocate resources. Our products and services are delivered through each segment as described below. Additionally, the tables below include the reclassification of revenues for the components of our CV subscription research products, as described further in Note 1: Interim Consolidated Financial Statements in the Notes to Consolidated Financial Statements . The Research segment includes the revenues from all of our research products as well as consulting revenues from advisory services (such as speeches and advisory days) delivered by our research organization. Research segment costs include the cost of the organizations responsible for developing and delivering these products in addition to the cost of the product management organization that is responsible for product pricing and packaging and the launch of new products. In May 2021, we announced the launch of a new research portfolio called Forrester Decisions, anticipated to be available in August 2021. This new portfolio of products will help executives, functional leaders, and their teams, across technology, marketing, customer experience, sales, and product management, plan ​and pursue their initiatives for driving growth. The Forrester Decisions product combines the research, frameworks, models, and methodologies of our Forrester Research and SiriusDecisions Research product offerings, as well as features of our Connect and Analytics products. 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. 23 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 on investments. The accounting policies used by the segments are the same as those used in the consolidated financial statements. Research Segment Consulting Segment Events Segment Consolidated (dollars in thousands) Three Months Ended March 31, 2021 Research revenues $ 74,968 $ — $ — $ 74,968 Consulting revenues 12,731 25,819 — 38,550 Events revenues — — 263 263 Total segment revenues 87,699 25,819 263 113,781 Segment expenses (30,717 ) (12,325 ) (714 ) (43,756 ) Year over year revenue change 1 % 33 % 192 % 7 % Year over year expense change 12 % 23 % 5 % 15 % Research Segment Consulting Segment Events Segment Consolidated (dollars in thousands) Three Months Ended March 31, 2020 Research revenues $ 74,267 $ — $ — $ 74,267 Consulting revenues 12,582 19,406 — 31,988 Events revenues — — 90 90 Total segment revenues 86,849 19,406 90 106,345 Segment expenses (27,464 ) (10,021 ) (677 ) (38,162 ) Research segment revenues increased 1% during the three months ended March 31, 2021 compared to the prior year period. Research revenues within this segment increased 1% which primarily resulted from flat contract value growth during this period. Consulting revenues increased 1% within this segment due to increased delivery of advisory services. Research segment expenses increased 12% during the three months ended March 31, 2021 compared to the prior year period. The increase in expenses during the three months ended March 31, 2021 was primarily due to (1) a $3.6 million increase in compensation and benefit costs primarily due to reinstating incentive bonus programs that were eliminated as part of the cost-reduction measures implemented in 2020 as a result of the impact of the COVID-19 pandemic, merit increases, and severance costs and (2) a $0.9 million increase in professional services costs due to an increase in survey costs and new product development. These increases were partially offset by a $1.1 million decrease in travel and entertainment expenses due to reduced travel as a result of the COVID-19 pandemic. Consulting segment revenues increased 33% during the three months ended March 31, 2021 compared to the prior year period driven by continued strong demand for our content marketing offerings. Consulting segment expenses increased 23% during the three months ended March 31, 2021 compared to the prior year period. The increase in expenses during the three months ended March 31, 2021 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 (2) a $1.1 million increase in compensation and benefit costs primarily due to reinstating incentive bonus programs that were eliminated as part of the cost-reduction measures implemented in 2020 as a result of the impact of the COVID-19 pandemic . Event segment revenues and expenses remained essentially consistent during the three months ended March 31, 2021 compared to the prior year period. No events were held during either period. Liquidity and Capital Resources We have historically financed our operations primarily through funds generated from operations. Research revenues, which constituted approximately 66% of our revenues during the three months ended March 31, 2021, are generally renewable annually and are typically payable in advance. We generated cash from operating activities of $40.6 million and $21.8 million during the three months ended March 31, 2021 and 2020, respectively. The $18.8 million increase in cash provided from operations for the three months ended March 31, 2021 compared to the prior year period was primarily due to a $10.8 million reduction in cash used for working capital (excluding accounts receivable and deferred revenue) and an $8.6 million increase in cash generated from accounts receivable and deferred revenue due to an increase in contract bookings and strong collections activity. 24 During the three months ended March 31, 2021 , we used cash in investing a cti vities of $ 1. 5 million for purchases of property and equipment , primarily consisting of computer software and equipment . During the three months ended March 31, 2020 , we used cash in investing activities of $2.4 million for purchases of property and equipment, primarily consisting of computer software and leasehold improvements. We used $1.0 million of cash from financing activities during the three months ended March 31, 2021 primarily due to $3.1 million of repayments of our term loan , partially offset by $2.1 million of net proceeds from the issuance of common stock under our stock-based incentive plans. We used $15.3 million of cash in financing activities during the three months ended March 31, 2020 primarily due to $16.3 million of repayments of debt that included $14.0 million of discretionary payments on our revolving credit facility. We entered into a $200.0 million credit agreement on January 3, 2019. 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” and, together with the Term Loans, the “Facilities”). Additional information is provided in Note 3 – Debt in the Notes to Consolidated Financial Statements. The Facilities mature on January 3, 2024. As of March 31, 2021, we had remaining principal payments on the Facilities totaling $106.3 million, contractually due as follows: $9.4 million in 2021, $28.1 million within 2022 and 2023, and $68.8 million in 2024 . We were in full compliance with the covenants as of March 31, 2021 and expect to continue to be in compliance through the next 12 months. The Facilities contain 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 the Company, sell assets, pay dividends or other payments in respect to capital stock, change fiscal year, or enter into certain transactions with affiliates and subsidiaries. Additional future contractual cash obligations extending over the next 12 months and beyond primarily consist of operating lease payments. We lease office space under non-cancellable operating lease agreements (refer to Note 4 – Leases in the Notes to Consolidated Financial Statements for additional information). The remaining duration of non-cancellable office space leases ranges from less than 1 year to 11 years. As of March 31, 2021, remaining non-cancelable lease payments are due as follows: $11.6 million in 2021, $33.2 million within 2022 and 2023, $30.4 million within 2024 and 2025, and $27.1 million beyond 2025. In addition to the contractual cash commitments included above, we have other payables and liabilities that may be legally enforceable but are not considered contractual commitments. As of March 31, 2021, we had cash and cash equivalents of $125.6 million. This balance includes $60.2 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. Recent Accounting Pronouncements Refer to 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. 25 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, 2020.