Forrester Research Q3 2009 earnings call

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. 

This post is part one of two parts when it comes to an analysis of the Forrester Q3 earnings. This is because the 10-Q, which will come out within two weeks of the earnings call, has more detail than the currently available 8-K and the earnings call.  We will review that document when it is available. 

The key take away from Forrester’s Q3 2009 earnings announcement is that Forrester is weathering this economic downturn much better than the last recession. In that recession, Forrester saw revenues plunge ~34% and experienced a broad and deep reduction in staff. After three quarters in 2009, overall revenue is only down 3% with research revenues actually up 2%. Headcount is 960, down 8% from 2008 year end, but still 23% higher than YE2007. In addition, Forrester currently has 16 sales and 4 research openings so it is not simply reducing headcount, but selectively filling positions as well. Furthermore, CEO George Colony told the Wall Street analysts on today’s call that he plans on adding 10 to 20 sales headcount in the 4^th quarter (it is not clear if this expansion includes or is incremental to the current sales job openings on the website). This contrasts with the 51% reduction in staff from YE2000 to YE2002. Finally, at the end of Q3 2009 Forrester is sitting on $280m in cash and short term investments.

Why should this matter to enterprise clients and vendor analyst relations (AR) staff? Because Forrester is not in survival mode it has not had to slash sales or research headcount. Rather it has continued to keep the client–facing staff at a level that makes retaining existing and adding new enterprise clients relatively straightforward. This means that Forrester’s ability to maintain its research agenda and marketplace influence are not being seriously imperiled as 2009 comes to a close.

For AR teams this means that there is unlikely to be disruptive analyst turnover that would negatively impact analyst lists and interactions plans. Unfortunately, there is still the likelihood that sales representatives and analysts will be hitting the vendor community hard for incremental consulting/service units engagements and Roleview seats. Vendors should realize that not buying incremental services will not negatively impact analyst commentary about the company. However, there is the possibility that desperate sales representatives might imply that not increasing spending would result in the vendor dropping in research. If this happens to you, SageCircle recommends that you immediately notify Forrester Chief Research Officer Charles Rutstein. Of course, this possibility would be eliminated if Forrester adopted a Bill of Rights for vendor prospects.

This does not mean that Forrester did not experience pain in Q3. “Advisory services and other” (mainly consulting and events) revenues are down 22% from Q3 08. However, this is very typical for a recession and does not signal a significant threat to the company or its influence.

SageCircle Technique:

• While cash rich, Forrester could still lay off additional employees including analysts, especially if the economic environment goes into a “double dip recession” and its revenues take an unexpected hit. AR needs to have a standard process in place to deal with unexpected departures of relevant analysts 

Bottom Line: So far, Forrester remains a strong company during this recession. If Forrester does not dramatically cut its sales force or analyst team then AR needs to continue its evaluation of Forrester analysts for outreach campaigns.

Question: Enterprise clients and vendors clients – As the Great Recession of 2008-09 has progressed have you been offered discounts by Forrester sales reps? If so, how big were those discounts and under what circumstances?

Summary from press release:

Forrester Research Reports Third-Quarter Financial Results

CAMBRIDGE, Mass.– Oct. 29, 2009– Forrester Research, Inc. (Nasdaq: FORR) today announced its third-quarter ended September 30, 2009 financial results.

Third-Quarter Financial Performance

• Total revenues were $53.9 million, compared with $59.5 million for the third quarter of last year.
• On a GAAP-reported basis, Forrester reported net income of $4.3 million, or $0.19 per diluted share, compared with net income of $6.4 million, or $0.27 per diluted share, for the same period last year.
• On a pro forma basis, net income was $6.2 million, or $0.27 per diluted share, for the third quarter of 2009, which reflects a pro forma effective tax rate of 40 percent. Pro forma net income excludes stock-based compensation of $1.4 million, amortization of $439,000 of acquisition-related intangible assets, and impairments of non-marketable investments of $732,000. This compares with pro forma net income of $7.4 million, or $0.31 per diluted share, for the same period in 2008, which reflects a pro forma effective tax rate of 39 percent. Pro forma net income for the third quarter of 2008 excludes stock-based compensation of $1.3 million, amortization of $282,000 of acquisition-related intangible assets, net marketable and non-marketable investment gains of $26,000 and expenses related to the stock option investigation and restatement of the Company’s historical financial statements of $487,000.

“Given the sluggish economy, we are pleased with Forrester’s third-quarter performance,” said George F. Colony, Forrester’s chairman of the board and chief executive officer. “Deferred revenue was down at September 30, 2009, as expected; but client and dollar retention increased from last quarter, and our pro forma net income indicates that our expense control efforts are working. Overall, our results exceeded our guidance. As a result we are tightening our revenue range and raising our pro forma operating margin and diluted earnings per share guidance for the full year of 2009.”

Nine-Month Period Ended September 30, 2009, Financial Performance

• Total revenues were $171.9 million, compared with $178.0 million for the same period last year.
• On a GAAP-reported basis, Forrester reported net income of $13.1 million, or $0.57 per diluted share for the nine months ended September 30, 2009, compared with net income of $20.1 million or $0.85 per diluted share for the same period last year.
• On a pro forma basis, net income was $21.2 million or $0.92 per diluted share, for the nine months ended September 30, 2009, which reflects a pro forma effective tax rate of 40 percent. Pro forma net income excludes stock-based compensation of $4.9 million, amortization of $1.8 million of acquisition-related intangible assets, $3.1 million of reorganization costs, and impairments of non-marketable investments of $1.7 million. This compares with pro forma net income of $22.2 million, or $0.94 per diluted share, for the same period in 2008, which reflects a pro forma effective tax rate of 39 percent. Pro forma net income for the nine-month period ended September 30, 2008 excludes stock-based compensation of $4.0 million, amortization of $476,000 of acquisition-related intangible assets, net marketable and non-marketable investment gains of $2.1 million and expenses related to the stock option investigation and restatement of the Company’s historical financial statements of $1.1 million.

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