Forrester Research(FORR) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This part presents the unaudited consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures for the Company Item 1. Financial Statements (Unaudited) This section presents Forrester Research, Inc.'s unaudited consolidated financial statements for the three months ended March 31, 2020 and 2019, including balance sheets, statements of operations, comprehensive loss, and cash flows, along with detailed notes explaining accounting policies, significant transactions, and financial impacts, particularly concerning the COVID-19 pandemic Consolidated Balance Sheets Presents the company's financial position, detailing assets, liabilities, and equity as of March 31, 2020, and December 31, 2019 Consolidated Balance Sheet Highlights (in thousands): | Item | March 31, 2020 | December 31, 2019 | Change | % Change | | :-------------------------------- | :------------- | :---------------- | :----- | :------- | | Total current assets | $172,903 | $192,036 | $(19,133) | (10.0%) | | Total assets | $608,298 | $639,160 | $(30,862) | (4.8%) | | Total current liabilities | $257,357 | $268,931 | $(11,574) | (4.3%) | | Deferred revenue | $195,399 | $179,194 | $16,205 | 9.0% | | Total liabilities | $450,126 | $481,072 | $(30,946) | (6.4%) | | Total stockholders' equity | $158,172 | $158,088 | $84 | 0.1% | Consolidated Statements of Operations Details the company's revenues, expenses, and net loss for the three months ended March 31, 2020 and 2019 Consolidated Statements of Operations Highlights (Three Months Ended March 31, in thousands): | Item | 2020 | 2019 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :------- | | Total revenues | $106,345 | $100,649 | $5,696 | 5.7% | | Research services | $72,796 | $68,609 | $4,187 | 6.1% | | Advisory services and events | $33,549 | $32,040 | $1,509 | 4.7% | | Total operating expenses | $105,624 | $111,533 | $(5,909) | (5.3%) | | Income (loss) from operations | $721 | $(10,884) | $11,605 | 106.6% | | Net loss | $(513) | $(13,316) | $12,803 | 96.1% | | Basic loss per common share | $(0.03) | $(0.73) | $0.70 | 95.9% | | Diluted loss per common share | $(0.03) | $(0.73) | $0.70 | 95.9% | Consolidated Statements of Comprehensive Loss Reports the net loss and other comprehensive loss components for the three months ended March 31, 2020 and 2019 Consolidated Statements of Comprehensive Loss (Three Months Ended March 31, in thousands): | Item | 2020 | 2019 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :------- | | Net loss | $(513) | $(13,316) | $12,803 | 96.1% | | Other comprehensive loss | $(3,101) | $(430) | $(2,671) | (621.2%) | | Comprehensive loss | $(3,614) | $(13,746) | $10,132 | 73.7% | Consolidated Statements of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2020 and 2019 Consolidated Statements of Cash Flows Highlights (Three Months Ended March 31, in thousands): | Cash Flow Activity | 2020 | 2019 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :------- | | Net cash provided by operating activities | $21,823 | $25,988 | $(4,165) | (16.0%) | | Net cash used in investing activities | $(2,401) | $(241,715) | $239,314 | 99.0% | | Net cash provided by (used in) financing activities | $(15,291) | $151,361 | $(166,652) | (110.1%) | | Net change in cash, cash equivalents and restricted cash | $1,448 | $(63,928) | $65,376 | 102.3% | | Cash, cash equivalents and restricted cash, end of period | $70,640 | $76,368 | $(5,728) | (7.5%) | Notes to Consolidated Financial Statements Provides detailed explanations of the accounting policies, significant transactions, and financial impacts referenced in the financial statements Note 1 — Interim Consolidated Financial Statements Discusses the basis of presentation, impact of COVID-19, and recent accounting pronouncements - The COVID-19 pandemic began materially impacting the Company's business in March 2020, primarily affecting customer contract bookings and consulting project delivery[21][99] - The Company anticipates the most significant impact on operations in Q2 2020, with subsequent periods also negatively affected[21][99] - Cost-reduction measures have been implemented, including reductions in travel, new hiring, and employee incentive compensation programs, to mitigate the financial impact of COVID-19[22][100] - The Company adopted ASU No. 2016-13 (Topic 326) on January 1, 2020, using the modified retrospective method, resulting in a $0.2 million decrease to retained earnings for expected credit losses[27] Allowance for Expected Credit Losses on Accounts Receivable (in thousands): | Item | Amount | | :------------------------------------ | :----- | | Balance at December 31, 2019 | $628 | | Cumulative effect adjustment of adopting Topic 326 | $218 | | Provision for expected credit losses | $433 | | Net write-offs | $(122) | | Translation adjustments | $(13) | | Balance at March 31, 2020 | $1,144 | Note 2 — Acquisitions Details the acquisition of SiriusDecisions, Inc. and related costs - On January 3, 2019, Forrester acquired 100% of SiriusDecisions, Inc. for $246.8 million at closing, aiming to cross-sell services, extend platforms, and accelerate growth[34][35][101] - The acquisition costs of $1.7 million for the three months ended March 31, 2019, were primarily for investment banker fees and professional services[37] Note 3 — Goodwill and Other Intangible Assets Provides carrying amounts and amortization schedules for goodwill and finite-lived intangible assets Goodwill Carrying Amount (in thousands): | Item | Amount | | :-------------------------- | :------- | | Balance at December 31, 2019 | $243,895 | | Translation adjustments | $(1,205) | | Balance at March 31, 2020 | $242,690 | Finite-Lived Intangible Assets (March 31, 2020, in thousands): | Asset Type | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | | :-------------------- | :-------------------- | :----------------------- | :------------------ | | Customer relationships | $109,608 | $42,100 | $67,508 | | Technology | $16,676 | $7,796 | $8,880 | | Backlog | $13,000 | $8,125 | $4,875 | | Trademarks | $12,453 | $1,061 | $11,392 | | Total | $151,737 | $59,082 | $92,655 | Estimated Intangible Asset Amortization Expense (in thousands): | Year | Amount | | :----------------- | :------- | | 2020 (remainder) | $14,133 | | 2021 | $12,344 | | 2022 | $11,005 | | 2023 | $10,830 | | 2024 | $9,721 | | Thereafter | $34,622 | | Total | $92,655 | Note 4 — Debt Outlines the Company's credit agreement, outstanding borrowings, and compliance with financial covenants - The Company entered into a $200.0 million Credit Agreement on January 3, 2019, comprising $125.0 million in Term Loans and a $75.0 million Revolving Credit Facility, primarily to finance the SiriusDecisions acquisition[42][136] Outstanding Borrowings (in thousands): | Description | March 31, 2020 | December 31, 2019 | | :-------------------------------- | :------------- | :---------------- | | Term loan facility | $116,406 | $118,750 | | Revolving credit facility | $— | $14,000 | | Principal amount outstanding | $116,406 | $132,750 | | Less: Deferred financing fees | $(2,048) | $(2,205) | | Net carrying amount | $114,358 | $130,545 | - As of March 31, 2020, the Company was in compliance with its financial covenants under the Credit Agreement and forecasts continued compliance for at least one year, considering COVID-19 cost-reduction measures[51][140] Note 5 — Leases Presents lease expenses, future minimum lease payments, and ROU asset impairments Lease Expense (Three Months Ended March 31, in thousands): | Item | 2020 | 2019 | | :-------------------- | :----- | :----- | | Operating lease cost | $3,991 | $3,569 | | Short-term lease cost | $81 | $255 | | Variable lease cost | $1,356 | $1,234 | | Sublease income | $(61) | $— | | Total lease cost | $5,367 | $5,058 | Future Minimum Lease Payments (as of March 31, 2020, in thousands): | Year | Amount | | :----------------- | :------- | | 2020 (remainder) | $11,828 | | 2021 | $14,022 | | 2022 | $13,505 | | 2023 | $12,974 | | 2024 | $12,619 | | Thereafter | $23,902 | | Total lease payments | $88,850 | | Less imputed interest | $(12,945) | | Present value of lease liabilities | $75,905 | - The Company incurred $1.4 million of ROU asset impairments during Q1 2020 related to facility leases from the SiriusDecisions acquisition[56] Note 6 – Contract Assets and Liabilities Details revenue recognition from deferred revenue, remaining performance obligations, and deferred commissions - The Company recognized $69.9 million and $58.1 million in revenue during the three months ended March 31, 2020 and 2019, respectively, related to its deferred revenue balance at the beginning of each period[62] - Approximately $343.6 million of revenue is expected to be recognized from remaining performance obligations over the next 12 to 24 months as of March 31, 2020[63] - Amortization expense for deferred commissions was $8.1 million and $7.2 million for the three months ended March 31, 2020 and 2019, respectively[64] Note 7 — Derivatives and Hedging Describes the Company's interest rate swap contract, its fair value, and effectiveness as a cash flow hedge - As of March 31, 2020, the Company had an interest rate swap contract with a notional amount of $89.1 million, maturing in 2022, designated as a cash flow hedge[66] - The fair value of the interest rate swap was a liability of $1.8 million as of March 31, 2020, recorded in other non-current liabilities[66] - The swap was considered highly effective through March 31, 2020, with a $1.3 million net accumulated loss deferred in accumulated other comprehensive loss[68] Note 8 — Fair Value Measurements Presents the fair value hierarchy for financial instruments and changes in Level 3 contingent consideration Fair Value Hierarchy (as of March 31, 2020, in thousands): | Item | Level 1 | Level 2 | Level 3 | Total | | :-------------------------- | :------ | :------ | :------ | :------ | | Assets: | | | | | | Money market funds | $2,811 | $— | $— | $2,811 | | Liabilities: | | | | | | Contingent purchase price | $— | $— | $(2,524) | $(2,524) | | Interest rate swap | $— | $(1,787) | $— | $(1,787) | | Total Liabilities | $— | $(1,787) | $(2,524) | $(4,311) | Changes in Level 3 Contingent Consideration (Three Months Ended March 31, 2020, in thousands): | Item | Amount | | :------------------------------------ | :------- | | Balance at December 31, 2019 | $(2,511) | | Fair value adjustment of contingent purchase price | $(11) | | Foreign exchange effect | $(2) | | Balance at March 31, 2020 | $(2,524) | Note 9 — Income Taxes Reports income tax expense, effective tax rate, and the evaluation of the CARES Act Income Tax Expense (Benefit) (Three Months Ended March 31, in thousands): | Item | 2020 | 2019 | | :-------------------------- | :----- | :----- | | Income tax expense (benefit) | $19 | $(226) | | Effective tax rate | (3.8%) | 1.7% | - The Company anticipates an effective tax rate of approximately 10% to 15% for the full year 2020[79] - The Company is evaluating the potential impact of the Coronavirus Aid, Relief and Economic Security (CARES) Act enacted on March 27, 2020[80] Note 10 — Accumulated Other Comprehensive Loss Details the components of accumulated other comprehensive loss, including unrealized gains/losses and translation adjustments Components of Accumulated Other Comprehensive Loss (in thousands): | Item | Net Unrealized Gain (Loss) on Interest Rate Swap | Cumulative Translation Adjustment | Total Accumulated Other Comprehensive Loss | | :------------------------------------ | :--------------------------------------------- | :-------------------------------- | :----------------------------------------- | | Balance at December 31, 2019 | $(104) | $(4,753) | $(4,857) | | Foreign currency translation | $— | $(1,920) | $(1,920) | | Unrealized loss on interest rate swap, net of tax | $(1,181) | $— | $(1,181) | | Balance at March 31, 2020 | $(1,285) | $(6,673) | $(7,958) | Note 11 — Net Loss Per Common Share Provides basic and diluted weighted average common shares outstanding and anti-dilutive exclusions Basic and Diluted Weighted Average Common Shares (in thousands): | Item | March 31, 2020 | March 31, 2019 | | :------------------------------------ | :------------- | :------------- | | Basic weighted average common shares outstanding | 18,705 | 18,363 | | Diluted weighted average common shares outstanding | 18,705 | 18,363 | | Options and restricted stock units excluded (anti-dilutive) | 980 | 703 | Note 12 — Stockholders' Equity Summarizes changes in stockholders' equity, stock-based compensation, and dividend/repurchase programs Stockholders' Equity Changes (Three Months Ended March 31, 2020, in thousands): | Item | Common Stock ($0.01 Par Value) | Additional Paid-in Capital | Retained Earnings | Treasury Stock Cost | Accumulated Other Comprehensive Loss | Total Equity | | :------------------------------------ | :----------------------------- | :------------------------- | :---------------- | :------------------ | :----------------------------------- | :----------- | | Balance at Dec 31, 2019 | $233 | $216,454 | $118,147 | $(171,889) | $(4,857) | $158,088 | | Issuance of common stock under stock plans, net | $1 | $1,052 | $— | $— | $— | $1,053 | | Stock-based compensation expense | $— | $2,802 | $— | $— | $— | $2,802 | | Cumulative effect adjustment (Topic 326) | $— | $— | $(157) | $— | $— | $(157) | | Net loss | $— | $— | $(513) | $— | $— | $(513) | | Net change in interest rate swap, net of tax | $— | $— | $— | $— | $(1,181) | $(1,181) | | Foreign currency translation | $— | $— | $— | $— | $(1,920) | $(1,920) | | Balance at Mar 31, 2020 | $234 | $220,308 | $117,477 | $(171,889) | $(7,958) | $158,172 | Stock-Based Compensation Expense (Three Months Ended March 31, in thousands): | Expense Category | 2020 | 2019 | | :------------------------------------ | :----- | :----- | | Cost of services and fulfillment | $1,593 | $1,463 | | Selling and marketing | $362 | $440 | | General and administrative | $847 | $782 | | Total | $2,802 | $2,685 | - The Company suspended its dividends program in 2019 following the SiriusDecisions acquisition and related debt, declaring no dividends in Q1 2020 or Q1 2019[88] - No shares of common stock were repurchased in the three months ended March 31, 2020 or 2019, and the Company plans to substantially reduce or eliminate repurchases in 2020[89][156] Note 13 — Non-Marketable Investments Describes the carrying value and accounting method for non-marketable investments in private equity funds - The carrying value of non-marketable investments in technology-related private equity funds was $2.5 million as of March 31, 2020, accounted for using the equity method[90][91] Note 14 — Operating Segments Details the Company's segment realignment and financial performance for Products and Research segments - Effective January 1, 2020, the Company realigned its internal management and reporting into Products and Research segments, eliminating the SiriusDecisions segment[92][124] Total Segment Revenues and Expenses (Three Months Ended March 31, in millions): | Segment | 2020 Revenues | 2019 Revenues | YoY Revenue Change | 2020 Expenses | 2019 Expenses | YoY Expense Change | | :---------------- | :------------ | :------------ | :----------------- | :------------ | :------------ | :----------------- | | Products | $39,918 | $37,967 | 5% | $(19,378) | $(19,948) | (3%) | | Research | $66,427 | $62,682 | 6% | $(18,784) | $(20,397) | (8%) | | Consolidated | $106,345 | $100,649 | 6% | $(38,162) | $(40,345) | (5%) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, highlighting the impact of COVID-19, key business metrics, detailed revenue and expense analysis, segment performance, and liquidity Overview Discusses the impact of the COVID-19 pandemic on business operations, implemented cost-reduction measures, and key business metrics - The COVID-19 pandemic significantly impacted Q1 2020 business, primarily affecting March customer contract bookings and consulting project delivery[99][152] - Q2 2020 is expected to face the most significant impact, including a substantial reduction in revenues and profits from virtualized flagship events (SiriusDecisions Summit, CX North America) and cancelled smaller events[99][152] - The Company has implemented cost-reduction measures, including cuts to travel, new hiring, and employee incentive compensation, to proactively respond to the pandemic's effects[100][153] Key Business Metrics (as of March 31, dollars in millions): | Metric | 2020 | 2019 | Absolute Change | Percentage Change | | :-------------------- | :----- | :----- | :-------------- | :---------------- | | Deferred revenue | $195.4 | $191.6 | $3.8 | 2% | | Agreement value | $354.9 | $345.3 | $9.6 | 3% | | Client retention | 69% | 72% | (3) | (4%) | | Dollar retention | 89% | 90% | (1) | (1%) | | Enrichment | 102% | 106% | (4) | (4%) | | Number of clients | 2,805 | 2,850 | (45) | (2%) | - Retention and enrichment rates were negatively affected by decreased contract bookings in March 2020 due to the widespread economic effects of COVID-19[106] Results of Operations Analyzes revenue performance, operating expenses, amortization, interest expense, and income tax for the period Revenue Performance (Three Months Ended March 31, in millions): | Revenue Category | 2020 | 2019 | Absolute Increase (Decrease) | Percentage Increase (Decrease) | | :------------------------------------ | :----- | :----- | :--------------------------- | :----------------------------- | | Total revenues | $106.3 | $100.6 | $5.7 | 6% | | Research services | $72.8 | $68.6 | $4.2 | 6% | | Advisory services and events | $33.5 | $32.0 | $1.5 | 5% | | Revenues from customers outside of the U.S. | $21.4 | $22.4 | $(1.0) | (4%) | - Total revenues increased 6% YoY, with approximately 4% of this growth attributed to the fair value adjustment of pre-acquisition deferred revenue in 2019[109] - Cost of services and fulfillment decreased 4% YoY, primarily due to a $2.6 million decrease in compensation and benefits (incentive bonuses) and a $0.6 million decrease in travel and entertainment, partially offset by increased professional services costs[112] - Selling and marketing expenses decreased 4% YoY, driven by a $1.1 million decrease in travel and entertainment and a $0.7 million decrease in compensation and benefits (incentive bonuses)[114] - General and administrative expenses decreased 9% YoY, mainly due to a $1.1 million decrease in compensation and benefits (incentive bonuses)[115] - Amortization of intangible assets decreased by $1.5 million YoY as certain technology intangible assets became fully amortized[117] - Interest expense decreased by $0.8 million YoY due to lower average outstanding borrowings and lower effective interest rates[119] Income Tax Expense (Benefit) (Three Months Ended March 31, in millions): | Item | 2020 | 2019 | Absolute Increase (Decrease) | Percentage Increase (Decrease) | | :------------------------------------ | :----- | :----- | :--------------------------- | :----------------------------- | | Provision (benefit) for income taxes | $0.0 | $(0.2) | $0.2 | 100% | | Effective tax rate | (3.8%) | 1.7% | (5.5) | (324%) | Segment Results Provides a detailed analysis of revenue and expense performance for the Product and Research segments - Product segment revenues increased 5% YoY, driven by a 2% increase in Connect revenues (executive program) and a 9% increase in Consulting revenues (strong consultant delivery)[129] - Product segment expenses decreased 3% YoY, primarily due to a $1.5 million decrease in compensation and benefits (incentive bonuses) and a $0.4 million decrease in travel and entertainment, partially offset by a $1.4 million increase in professional services[130] - Research segment revenues increased 6% YoY, driven by an 8% increase in the Research product line (reprint product), partially offset by a 1% decrease in Consulting revenues[131] - Research segment expenses decreased 8% YoY, mainly due to a $1.5 million decrease in compensation and benefits (incentive bonuses)[132] Liquidity and Capital Resources Examines cash flow activities, debt obligations, cash and cash equivalents, and contractual obligations - Net cash provided by operating activities decreased by $4.2 million YoY to $21.8 million for Q1 2020, primarily due to a $5.3 million reduction in cash from accounts receivable and deferred revenue from decreased contract bookings[133] - Net cash used in investing activities was $2.4 million in Q1 2020, primarily for property and equipment purchases, a significant decrease from $241.7 million in Q1 2019 (which included the SiriusDecisions acquisition)[134] - Net cash used in financing activities was $15.3 million in Q1 2020, mainly due to $16.3 million in debt repayments ($14.0 million discretionary on revolving credit, $2.3 million required on term loan)[135] - The Company expects to pay approximately $3.5 million in deferred acquisition purchase price in 2020 for the FeedbackNow acquisition[135] - As of March 31, 2020, cash and cash equivalents totaled $69.8 million, with $51.8 million held outside the U.S., which the Company intends to permanently reinvest[141] Contractual Obligations (as of March 31, 2020, in thousands): | Contractual Obligations | Total | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | | :---------------------- | :------ | :----- | :----- | :----- | :----- | :----- | :--------- | | Operating lease payments | $106,026 | $12,046 | $15,777 | $15,387 | $14,872 | $14,534 | $33,410 | | Purchase commitments | $8,372 | $6,632 | $870 | $870 | $— | $— | $— | | Total | $114,398 | $18,678 | $16,647 | $16,257 | $14,872 | $14,534 | $33,410 | - Purchase commitments were reduced by $2.1 million due to the cancellation of event venue contracts as flagship events moved to a virtual format and smaller events were cancelled due to COVID-19[145] Off-Balance Sheet Arrangements Confirms the absence of any off-balance sheet financing arrangements - The Company does not maintain any off-balance sheet financing arrangements[144] Recent Accounting Pronouncements Refers to Note 1 for a comprehensive description of recent accounting pronouncements - Refer to Note 1 – Interim Consolidated Financial Statements for a full description of recent accounting pronouncements[145] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no material changes in the Company's assessment of its sensitivity to market risk since the last annual report - No material changes in the assessment of market risk sensitivity since the Annual Report on Form 10-K for the year ended December 31, 2019[146] Item 4. Controls and Procedures This section details the evaluation of the Company's disclosure controls and procedures and reports on any changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures Concludes on the effectiveness of the Company's disclosure controls and procedures as of March 31, 2020 - Management, including the principal executive and financial officers, concluded that the Company's disclosure controls and procedures were effective as of March 31, 2020, providing reasonable assurance[147] Changes in Internal Control Over Financial Reporting Reports on the absence of material changes in internal control over financial reporting during Q1 2020 - No material changes in internal control over financial reporting occurred during Q1 2020, despite modifications to control procedures due to employees working remotely in response to COVID-19[148] PART II. OTHER INFORMATION This part includes information on legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section confirms that the Company is not currently involved in any material legal proceedings - The Company is not currently a party to any material legal proceedings[150] Item 1A. Risk Factors This section updates the Company's risk factors, specifically emphasizing the adverse impact of health epidemics like COVID-19 on business operations, financial condition, and the ability to comply with financial covenants - The risk factor regarding health epidemics has been updated to reflect the adverse impact of COVID-19, which is expected to significantly affect Q2 2020 results and subsequent periods[151][152] - The pandemic could disrupt or restrict the Company's ability to sell or fulfill products/services, reduce demand, and impact financial condition, results of operations, cash flows, and liquidity[152] - Despite cost-reduction measures, a more severe impact from COVID-19 than currently forecasted could affect the Company's ability to comply with financial covenants, potentially having a material adverse effect[153][154] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on the Company's stock repurchase program, noting no repurchases during the first quarter of 2020 and future plans to reduce or eliminate such activities - No shares of common stock were repurchased under the stock repurchase program during the quarter ended March 31, 2020[156] - The Company anticipates continuing to substantially reduce or eliminate repurchases of common stock during 2020 following the SiriusDecisions acquisition[156] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including organizational documents, certifications, and XBRL data files - The exhibits include Restated Certificate of Incorporation, Amended and Restated By-Laws, Specimen Certificate for Common Stock, Certifications of Principal Executive and Financial Officers (31.1, 31.2, 32.1, 32.2), and XBRL Instance Document and Taxonomy Extensions[162] SIGNATURES This section contains the official signatures for the Form 10-Q filing, confirming its submission by authorized personnel - The report was signed by Michael A. Doyle, Chief Financial Officer, on May 11, 2020[165]