Forrester Research Q4 and FY08 earnings – 2008 revenues up, 2009 guidance down

This analysis does not look at areas of interest to investors, but seeks to pull out insights that are relevant to clients and prospects of Forrester Research, the number two advisory analyst firm, as well as communications and IT vendor analyst relations (AR) teams. 

Forrester Research (NASDAQ: FORR) reported its Q4 and full-year 2008 earnings on February 11, 2009. See the end of the blog entry for a summary and link to the press release. 

Forrester’s prepared remarks and Q&A were similar in tone and substance to the Gartner earnings call: expected growth until the fourth quarter at which point sales weakened considerably and anticipating a very weak 2009 resulting in revenue guidance below 2008.

Q4 revenues were up 7.7% year-over-year to $62.9m. For 2008, revenues were up 13.6% year-over-year to $241m.

Cash and short term investments were $220 million, down $29 million year-over-year. This is not surprising as the July 2008 acquisition of JupiterResearch used ~ $22.4m in cash. What was interesting was that the “cash” component went from $53m to $129m. This gives Forrester great liquidly for any M&A activity and stock buybacks to keep investors reasonably satisfied.

Forrester’s 2009 guidance was for revenues of $215 m to $235 m, down 11% to 2% from 2008. Gartner’s guidance was for a decline from 2008 of 6% to 10% (f/x neutral). The two areas expected to be hit hardest for both firms were Consulting and Events with syndicated research relatively flat.

One surprising piece of news is that rather than cutting the number of events like Gartner (good bye 18 conferences), Forrester is keeping the previously announced 14 events and adding two. Part of the reason cited for not canceling events was the sunk cost would be lost. Even a reduced conference might produce a break even. Another reason is the strategic need to fill gaps for role-based events.  This positions Forrester to experience strong growth once the recession has ended. In addition, Forrester believes that the more “birds of a feature” nature of events now focused on job roles will enhance attendee traffic because participants will have more targeted content and peer interactions. Reading between the lines, this could mean some events are limping along with weak attendance. Vendor sponsors could find their sponsorships underperforming because there will be fewer attendees.

While the total number of client companies was up 175 over 2007 to 2643, the number was down 75 sequentially from Q3. Coupled with falling percentages of client company retention (73%, down 4% from Q3) and wallet retention (84%, down 3% from Q3) could be a sign of fewer end-clients and thus a decrease in the ability to directly influence vendor sales deals.

On pricing, the Forrester executives mentioned that their sales force has been disciplined about not providing discounts. During the Q&A, it was mentioned that because two major competitors, Giga and META, were eliminated since the last recession, the remaining players (i.e., Forrester and Gartner) were much more rational and mature when it came to resisting discount. However, we have heard from our clients that Forrester sales reps have been providing discounts when pushed.

Forrester’s sales force grew by 45 members, or 15%, to 353. The plan going forward is to keep the sales headcount flat, which means hiring to fill vacancies. Remember that one way an advisory firm can increase its influence in the tech buying community is simply by signing more enterprise clients. More clients using Forrester advice on purchasing decisions translates into more influence.

Acquisitions were mentioned by CEO George Colony as one of the ways Forrester can grab opportunity in a crisis. Forrester has plenty of cash and other assets to go shopping as prices of potential acquisitions go down. M&A targets would have research coverage to fill in gaps in existing role teams, add new roles, or bring in new client contracts. 

SageCircle has announced a SageCircle Special Webinar: Impact of the Recession on the Analysts and AR – Time for Ruthless Action. In this 90-minute webinar we will look at the last recession in comparison to this recession, the impact of this recession on the analyst ecosystem and what steps analyst relations (AR) programs need to take to ensure that their companies continue to work effectively with the IT and telecommunications analysts during this recession.

SageCircle Technique:

• Clients, whether end user or vendors, should drive a hard bargain in 1H09, even walk away from deals to obtain a better price
• AR should notify colleagues that manage event sponsorships about potential weakening attendance at Forrester events and a corresponding decrease in sponsorship value
• AR should inquire with Sales to see if the number of prospects and customers mentioning Forrester research is shrinking, growing, or staying the same to help determine Forrester’s continuing ability to influence vendor sales
• While cash rich, Forrester could still lay off additional employees including analysts, if the economic environment gets worse. AR needs to have a standard process in place to deal with unexpected departures of analysts 

Bottom Line: Forrester remains a strong company so far during this recession. The minor cuts in the work force do not signal anything other than conservative management. If Forrester does not dramatically cut its sales force or analyst team, and continues to keep acquiring enterprise clients then AR needs to continue its evaluation of Forrester analysts for outreach campaigns. However, Forrester analysts should never be considered an automatic “Tier 1” just because they work at Forrester. Forrester might be the number two advisory firm, but its penetration into large enterprises is still small.

Question: Have you been offered discounts by Forrester sales reps? If so, how big were those discounts and under what circumstances?

Summary from press release:

Fourth-Quarter Financial Performance

• Total revenues were $62.9 million, compared with $58.4 million for the fourth quarter of last year.
• On a GAAP-reported basis, which reflects an effective tax rate of 23 percent, Forrester reported net income of $9.2 million or $0.39 per diluted share, compared with net income of $5.6 million, which reflects an effective tax rate of 50 percent or $0.24 per diluted share, for the same period last year.  

Year Ended December 31, 2008 Financial Performance

• Total revenues were $240.9 million, compared with $212.1 million last year.
• On a GAAP-reported basis, which reflects an effective tax rate of 35 percent, Forrester reported net income of $29.2 million or $1.24 per diluted share for 2008, compared with net income of $18.9 million or $0.80 per diluted share for the same period last year, which reflects an effective tax rate of 37 percent. 

“The recession caused a slowdown in our business toward the end of 2008,” said George F. Colony, Forrester’s chairman of the board and chief executive officer. “The market conditions, however, did not prevent us from remaining profitable and achieving our EPS targets for the year. This is due in part to our role-based strategy, which resulted in a relatively strong retention of clients despite the tough economy.”

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