Earnings Call Transcript - FORR Q4 2021

Operator, Operator

Good afternoon. Thank you for joining today's call. With me today are George Colony, Forrester's Chairman of the Board and CEO, and Chris Finn, Forrester's Chief Financial Officer. George will open the call, followed by a financial update from Chris. We'll then open the call to Q&A. Kelley Hippler, Chief Sales Officer, and Carrie Johnson, Chief Product Officer, will join us for the Q&A portion of the call. A replay of this call will be available until March 10, 2022, and can be accessed by dialing 855-859-2056 or 404-537-3406. Please reference the meeting conference ID 36-19-245. Before we begin, I'd like to remind you that this call will contain 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. These statements are based on the company's current plans and expectations and involve risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward-looking statements. Some of the important factors that could cause actual results to differ are discussed in our reports and filings with the Securities and Exchange Commission. The company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. I will now hand the call over to George Colony.

George Colony, CEO

Welcome to Forrester's Q4 2021 investor call. Q4 capped off a very good year for Forrester as we delivered our sixth consecutive quarter of contract value growth. For the full year, contract value grew 15%, revenue increased 10%, earnings per share were up 31%, operating margin rose to 13%, and the company generated record cash flow of $107 million. We continue to improve across key metrics. Client retention increased to 78%, wallet retention reached 102%, and client count moved over 3000 companies. Against the backdrop of a continuing pandemic and challenging macroeconomic factors, Forrester took important steps forward in 2021, and we are well-positioned to sustain double-digit contract value growth in 2022 and beyond. The drivers for performing at these levels are threefold. 1. Clients are looking for ideas, guidance, advice, and data in times of uncertainty. It is a golden age of research. 2. We have simplified our business and centered on one goal, expanding contract value at double-digit rates. 3. We have remained committed since the pandemic hit two years ago, aggressively developing Forrester Decisions beginning in 2020 and bringing it to market in 2021. Starting with the SiriusDecisions acquisition in 2019, we have transformed to grow at double-digit rates and generate higher volumes of cash. And in 2021, this enabled the company to appreciably increase shareholder value. Now, before diving into Q4 results, I’d like to give a quick review of 2021. Forrester Decisions, which we launched in August as our flagship research product, performed better than planned levels as legacy Forrester and SiriusDecisions clients renewed into the new platform and it attracted new logos. As discussed on previous calls, Forrester Decisions combines the best of Forrester and SiriusDecisions research in a unified portfolio of 15 different research services built around business and technology personas and their critical priorities. The product gives a unified vision of how technology and business operate in synergy, not as separate disciplines or activities. This is a key advantage over competitive offerings. Forrester Decisions is a premium product that we consistently sell at full price. We've designed a thoughtful and methodical migration path for our clients, enabling them to transition at their own pace. Based on early results, we project Forrester Decisions bookings will overtake legacy sales in the back half of 2022. Sales, marketing, and product all worked in close alignment in 2021 to launch Forrester Decisions. In the first half of 2021, we trained our sales force to sell the new product. Our sales enablement team orchestrated a rigorous agenda that ran from April through August with a modular building block approach, capped off with certifications to test for full competency. In 2021, we significantly ramped up our investments in marketing to strengthen the Bold Network brand, increase our media presence, and build our demand at marketing waterfall infrastructure to generate sales leads. We set up a dedicated customer experience organization within marketing to continually monitor and respond to client requirements. We evolved the research staff to support the 15 personas of Forrester Decisions. The teams coalesced around the specific priorities of each persona, creating the iconic service model that will define success for those executives. Importantly, the company's product management group continued to grow and mature in 2021. Under the leadership of Carrie Johnson, it has quickly become a critical asset for the company, ensuring that we have the right products at the right time with the right features for our clients. Our digital development capabilities continue to expand, and this group has added more than 60 new features to the Forrester Decisions platform since its launch. These enhancements include upgraded search and improved personalization. Turning to Q4, I'd like to share a few recent sales highlights that demonstrate the value that business and technology leaders see in Forrester Decisions to help them tackle their biggest priorities and unlock growth. In the quarter, we secured a $250,000 contract with a U.S. energy company. This Forrester Decisions deal included access to several service lines, including those targeted at technology executives, security risk leaders, and technology architecture and delivery leaders. In another win, a U.S. banking client renewed into a multiyear Forrester Decisions solution for $475,000 annually. It was a very strong sales quarter as Forrester Decisions helped drive double-digit revenue growth for our research business. The new platform enables contract value growth in three ways: 1. By improving sales pipeline velocity with a product that is simple for our sales force to explain and easy for our clients and prospects to understand, 2. By improving our wallet retention, primarily enrichment with a multi-service structure, and 3. By expanding our ability to close out multiyear deals with clients. In the quarter, Forrester Decisions continued to outperform the legacy research products in readership and engagement, with clients spending 12% more time on the site, viewing 59% more pages per session, and spending 31% more time engaging with research than legacy customers. Consulting capped off a strong 2021 with an excellent Q4. It exceeded plan and ended with 16% year-over-year bookings growth. All service lines performed well, led by our total economic impacts business. Finally, events revenue grew 28% in Q4. I'm very proud of all we've accomplished as a company in 2021. We will build on the year's momentum in 2022, working toward our long-term vision and strategy to be the dominant research company focused on helping business and technology leaders use customer obsession to accelerate growth. We will continue to build our contract value growth engine, improving sales and product to generate contract value and cash. Our five-year plan is to double contract value, and we are confident that the Forrester Decisions platform can get us to this goal. To support contract value growth, we are increasing our recruiting capability and hiring across the business with extra investments in analysts, sales, and international reach to achieve our growth plans. We will continue to build Forrester Decisions in 2022, adding new benchmarking and certification capabilities. By mid-year, we will add a 60th service. In 2022, we will strengthen the ability of consulting to drive our research business. Strategy consulting engagements will be tied directly to specific Forrester Decisions priorities, which will provide clients with a full end-to-end solution. We're planning to offer hybrid events in 2022, an onsite experience running concurrently with a digital virtual experience. We believe that this model will give us the capability to leverage content across wider audiences and consequently expand our events business while increasing margins. We want to begin testing the concept this year so we can roll out a perfected experience in 2023. Based on our surveys of event attendees and in-person registration trends, we're seeing a strong appetite for in-person events across the Americas, Europe, and Asia. In-person attendance will, of course, be dependent on local state and national regulations and infection rates. We have built scenarios for multiple contingencies. I want to finish up my remarks by talking about people, the most important Forrester asset, and to thank Forrester employees for driving our historic performance in 2021. As a company, we focused on finding great people to join the company, developing them, and retaining talent. This will be a major focus in 2022 as the business continues to grow. To this end, starting in Q3 of 2021, we began to build up our talent acquisition team, and we are now running at an unprecedented hiring pace. Forrester adopted an anywhere work model in Q4, and this is helping our hiring efforts. We had expected to return to the office in a 2-3 footprint: 2 days required in the office and 3 days of flexibility. However, after consulting our own research on the future of work and talking with a broad population of Forrester employees, we decided that we will return in full flexibility. Forrester’s research shows that employees are happier, more productive, and more creative working in this model. This is not just theory; Forrester has proven that it can run at high performance levels working from anywhere. Retaining Forrester employees has always been critical for the business. We believe that the strong culture of the company, something we spent a lot of time developing, helps us keep the best and the brightest. I am very happy to announce that Forrester is once again on the Glassdoor 100 Best Places to Work in the U.S. I am also pleased to share that 164 Forrester employees celebrated milestone work anniversaries of 5, 10, 15, 20, and 25 years with us in 2021. To drive retention, we have increased our promotions and merit raises in 2022, and we have moved our equity grant rounds from Q3 to Q1. Finally, we continue to invest in new internal systems to make work easier and more efficient for our people. These systems include a new cloud-based HR system, digital selling and productivity tools, a new configure price quote system, a procurement management system, and a new publishing system in research. In the war for talent, we believe we have the high ground: a healthy culture, a destination workplace, a business model that is performing, and work that is changing the direction and strategy of some of the largest organizations in the world. To conclude, 2021 was an excellent start to Forrester's voyage of doubling contract value. Forrester Decisions have been well received. The salesforce has pivoted to focus on contract value growth, consulting and events are reinforcing contract value retention in new business, and perhaps most importantly, the company's culture has shifted to a laser focus on contract value growth. I am very proud of the people of Forrester; they have not only weathered the pandemic but have excelled in very uncertain times. Before I turn the call over to Chris Finn for our financial update, I want to note that Chris has been a very welcome addition to the Forrester executive team. He has helped us pinpoint areas of the business that can be improved. He has brought a welcome urgency—some might call it constructive impatience—and his background in SaaS and annual recurring revenue models has been invaluable as we focus on contract value growth. Over to you, Chris.

Chris Finn, CFO

Thank you, George, and thanks again to everyone for joining us. I'll now review Forrester's financial performance for the fourth quarter and full year, along with our guidance for the first quarter and full year 2022. Please note that the income statement figures we review on this call are non-GAAP results, which we refer to as adjusted results. We have provided a reconciliation of our GAAP results to our adjusted results in our press release that we issued today. As George mentioned, we had historic 2021 results, headlined by our record contract value growth of 15% for the year, double-digit revenue growth, along with significant improvement in all our client metrics. For the quarter, we achieved double-digit revenue growth for the research revenue, growing 15% year-over-year and strong free cash flow generation. We delivered revenue, operating margin, and earnings per share that were in line with our expectations. We expect to sustain double-digit contract value growth, and as our 2022 guidance highlights, we expect to achieve double-digit revenue growth for the full year ahead. Turning to the detailed results for the quarter, total revenue increased 11% compared to Q4 last year, driven by revenue growth of 15% in our research business. We continue to see strong demand for our research products, specifically within our new product portfolio, Forrester Decisions. Operating income was $17.8 million, up 61% year-over-year for the period. Earnings per share was $0.59, an increase of 69%, and free cash flow in the quarter was a robust $21.2 million. For the full year 2021, total revenue increased 10%, and operating income increased by 29% to $64.2 million, with operating margins increasing 190 basis points to 13%. Earnings per share was $2.09, and we generated record operating cash flow for the year of approximately $107 million, which we deployed with over $20 million of stock buybacks, as well as $34 million of debt payments, bringing our debt level down to $75 million at year-end. We will continue to use our significant cash position to enhance earnings per share growth in 2022. Research revenues were up 15% compared to Q4 of 2020 and grew 8% on a full-year basis for 2021. Our contract value growth was 15% compared to Q4 of 2020, and we have seen six straight quarters of sequential growth in contract value. Similar to contract value, we have also experienced six straight quarters of sequential growth in wallet retention, and client count has increased steadily from Q3 of last year. Our trailing three-month client retention rate is up six points from Q4 of last year and is flat with the prior quarter at 78%. Our wallet retention is up 16 points from Q4 last year at 102%. The selling environment remained strong through Q4 as we maintained our laser focus on meeting clients’ expectations and growing our contract value business. The value of our newly launched platform, Forrester Decisions, continues to resonate with clients; they see value in the outcome-oriented approach and in a unified platform combined with using Forrester services to help align multiple functions across their organization. Now turning to our consulting business. For the full year, revenue grew by 14% compared to 2020. For the fourth quarter, consulting revenue growth slowed, increasing 1% compared to the prior year, as ongoing strong delivery by our consulting organization was partially offset by a decline in advisory services delivered by our analysts who shifted a portion of their focus to delivering on our fast-growing contract value business. In our events business, revenue increased 29% compared to Q4 of 2020, due primarily to the shift of events into the fourth quarter. For the full year, events revenue grew by 27%. Currency rates did not have a material impact on revenue in Q4 compared to the prior year, but did lift revenue by 1% for the full year. Operating expenses for Q4 increased by 6%, and for the full year grew by 8%, with the full-year growth driven by increased professional services, higher bonuses, and sales commissions. Operating expenses as a percentage of revenue were down by 190 basis points year-over-year. Our ending headcount was down 1% compared to Q4 of 2020. Operating income increased by 61% to $17.8 million or 13.3% of revenue in the current quarter, compared to $11.1 million or 9.2% of revenue in the fourth quarter of 2020. For the full year, operating income was $64.2 million or 13% of revenue, an increase of 190 basis points year-over-year. Interest expense for the quarter was $1 million compared to $1.2 million in Q4 of 2020 due to reduced debt levels. For the full year, interest expense was $4.2 million compared to $5.3 million in 2020. Net income increased by 71%, and earnings per share increased by 69% compared to Q4 of last year, with net income coming in at $11.4 million and EPS at $0.59 for the current quarter, compared with net income of $6.6 million and earnings per share of $0.35 in Q4 of 2020. Net income increased by 33% to $40.5 million, and EPS grew by 31% to $2.09 on a year-over-year basis for 2021. Cash flow from operating activities was $22.1 million for the quarter and $107.1 million for the full year 2021. The $107 million of cash flow represents an increase of 224% from the prior year. Capital expenditures were $0.9 million for the quarter and $10.7 million for the full year 2021. We ended the quarter with over $134 million of cash and investments on the balance sheet. From a capital structure standpoint, we refinanced our credit facility in Q4, which converted our term loan to a revolver and doubled our revolver capacity to $150 million, extended the term by approximately three years, and reduced our interest spread by 50 basis points. We also paid down $25 million of the revolver during the quarter, leaving us with just $75 million of outstanding debt. We repurchased over $20 million of our stock during 2021 and have $90 million remaining on our stock repurchase authorization at year-end. We intend to remain aggressive with our stock repurchase program in 2022. In summary, we had a great quarter and finish for 2021 with contract value growth of 15%, research revenue growth of 15% for the quarter, and overall revenue growth of 10% for the full year. We continue to experience momentum in our business since the second half of 2020 and feel confident that we have a great product in Forrester Decisions, a compelling go-to-market and engagement model, and a revenue engine that is aligned and functioning at a high level, all of which we expect to bolster momentum into 2022. There are still headwinds that we face with the pandemic and a challenging hiring environment. However, we feel confident in achieving our goals for 2022 and beyond. Now, turning to our first-quarter and full-year 2022 outlook, let me provide some context on our guidance. We expect foreign exchange headwinds to reduce revenue growth by approximately 1%, with an insignificant effect on operating margins. For research services revenue, we are forecasting double-digit revenue growth for the full year and high single-digit to low double-digit growth in the first quarter based on the strength of our contract value growth in 2021 and our projected contract value bookings for 2022. As we've discussed in prior calls, a portion of our research revenue is recognized as we deliver it, such as our reprint product and the advisory and event tickets that are included in certain of our research subscriptions. This portion of our research revenue can be uneven during the year. For consulting revenue, similar to what we saw in 2021 with revenue growth of double digits in the first three quarters of the year, and low single digits in the fourth quarter, revenue growth can be lumpy during the year. We are projecting low single-digit revenue growth in the first quarter of 2022 and high single-digit to low double-digit growth for the full year. Our guidance for events revenue includes the presumption that we will be able to hold hybrid events during the year, which is highly dependent on local conditions in each of the jurisdictions where we hold events. Hybrid events include both in-person and digital experiences. Operationally, we are planning to hold our large hybrid events in the second quarter with smaller events in the third and fourth quarter. We will not have any events in the first quarter, thus we expect event revenues to be higher than they were in 2021, but lower than pre-pandemic levels in 2019. As we move through the year, we will revisit the events revenue outlook based on changing macro environment conditions. For operating margin, as a reminder, we raised our operating margin guidance by 200 basis points during 2021 and ultimately improved operating margins by 190 basis points year-over-year in 2021. We plan to continue investing in the business to sustain our momentum and scale across sales and marketing, product and technology areas. There will also be cost challenges as we face an inflationary environment along with cost increases due to having realized lower-than-planned spending in areas such as headcount, travel, and facilities during 2021. We project an approximate 100 basis point decline in our operating margins in 2022 due to investments. However, we expect to achieve operating margin expansion as we move into the back half of 2023 and beyond. Finally, with cash flow, we achieved a record amount of operating cash flow in 2021. While we don't guide specifically on cash flow, we would expect cash flow to return to more historic levels as a percentage of adjusted earnings in 2022, primarily due to an increase in incentive compensation payments in 2022 and other working capital items. Our first quarter 2022 guidance on an adjusted basis is as follows: Revenues of $119 million to $123 million, operating margin of 79%, an effective tax rate of 30%, and diluted earnings per share of $0.28 to $0.34. Our full year 2022 guidance on an adjusted basis is as follows: Revenues of $550 million to $560 million, operating margin of 11.5% to 12.5%, an effective tax rate of 30%, and diluted earnings per share of $2.25 to $2.35. I want to thank all of our employees for their efforts in achieving historic performance in 2021 for Forrester, and I look forward to working together to make 2022 just as successful. Thank you for joining us today, and I will now turn the call over to the Operator for the Q&A portion of the call.

Operator, Operator

Thank you. Our first question comes from Andrew Nicholas with William Blair. You may proceed with your question.

Trevor Romeo, Analyst

Hi. Thank you. This is actually Trevor Romeo in for Andrew. I appreciate you taking the question, and congratulations on the nice contract value growth results in the quarter. First, I just wanted to start there with contract value growth. Just wondering if you could break down that contract value growth between new logos, new seats per client, and pricing, or any other factors there? It seems like contract value per client is growing at a pretty nice clip, I think 7% by our math. So just what's driving that uptick, and can that continue?

Kelley Hippler, Chief Sales Officer

Hi Trevor, it's Kelley Hippler. Thank you for the question. One of the great things about the results we had in 2021 is, as we look across the levers that we have for growing our contract value business, we have client acquisition, client retention, as well as upsell and cross-sell. One of the pleasant surprises was that we overachieved our expectations across the board. We had great new logo acquisition across our new business teams, both within the U.S. and across our international teams. But what's really driving the contract value, as alluded to by both George and Chris, is that impact to retention and share of wallet, primarily driven by the migration of clients to the Forrester Decisions portfolio. We are continuing to manage across all four of those dimensions and have lots of opportunity as we go forward and execute our sales plan in 2022.

Trevor Romeo, Analyst

Thank you. And then I think George had mentioned increasing recruiting and hiring capability in his remarks. Just wondering what level of headcount growth you're expecting in 2022? I know that headcount had declined in 2021, so how challenging is it to find people right now, and how confident are you in hitting the desired level of growth?

Chris Finn, CFO

This is Chris. Thanks for the question. We're confident based on some of the momentum that we have coming out of Q4. We did see attrition in most areas of the business start to pull back a little bit. We had some great success hiring, and going into the year, we're looking at approximately 15% to 17% growth overall for headcount on a net basis. From a sales capacity standpoint, we're looking at double-digit growth.

Trevor Romeo, Analyst

Great. Thank you very much. Appreciate all the color.

Operator, Operator

Thank you. Our next question comes from Vincent Colicchio with Barrington Research. You may proceed with your question.

Vincent Colicchio, Analyst

Chris, as far as your outlook for 2022, to what extent will increased wage costs impact margin?

Chris Finn, CFO

Thanks, Vince. Good question. From an inflationary standpoint, certainly, we're seeing some impacts on the wage side. We've been making some significant investments in people. The merit raises and promotions, as George mentioned, have certainly increased higher than our normal years. It's probably at least 2 or 3 points higher than our normal run rate has been in the past.

Vincent Colicchio, Analyst

Thank you. And then it was mentioned that 60 new features were added to Forrester Decisions since launch. That sounds like a lot. Is there a pipeline for new features to add, and how important have these new features been to gaining the momentum you have?

Carrie Johnson, Chief Product Officer

Hi, Vince. It's Carrie. I'm happy to answer that question. We set out to launch Forrester Decisions with the goal of having this product improve constantly for our customers. It is a platform product portfolio by which we're investing many of our resources. Features in this case include things like new certification courses and upgrades to the site, which we're making constantly based on customer feedback. We have a very rich pipeline, based on that philosophy of improvements and enhancements that we roll out every few weeks, constantly improving the product for Forrester's customers.

Vincent Colicchio, Analyst

Okay. And what does your current pipeline look like today for salespeople? Obviously, Kelley, I see you're confident in terms of hiring new salespeople, but I'm just wondering what the pipeline looks like today?

Carrie Johnson, Chief Product Officer

Sure, thank you, Vince. As Chris mentioned, we are going to be adding low double-digit growth to the sales force. We had our largest hiring class in company history join us in January and expect to carry that forward into 2022 and also look ahead for 2023. We're finding some great talent out there, and I think some of the moves we've made with things like our ‘Anywhere Work' model are allowing us to cast a wider net for finding the best and the brightest to help us introduce Forrester Decisions to our clients and prospects.

Vincent Colicchio, Analyst

Thanks for answering my question, and great quarter.

Carrie Johnson, Chief Product Officer

Thank you, Vince.

Chris Finn, CFO

Thanks, Vince.

Operator, Operator

Thank you. Our next question comes from Anja Soderstrom with Sidoti. You may proceed with your question.

Anja Soderstrom, Analyst

Hi. Thank you for taking my question, and congratulations on the great quarter and year. Just talk about the sales force. You had the largest class in January. How fast do you think they will ramp, and have you made any changes to the training for your new hires that might accelerate their productivity?

Kelley Hippler, Chief Sales Officer

Hi Anja. It's Kelley, and thank you so much for the question. One of the great things about the Forrester Decisions migration is that we feel very strongly that it will allow us to ramp new representatives more quickly. It makes it really easy to discern when you're working with clients and prospects exactly who you need to be speaking with and what priorities we can help them with. We have retooled our onboarding and expanded our sales enablement team to ensure that our new hires are getting the coaching they need to ramp more quickly than we've seen historically. I think this, coupled with the Forrester Decisions portfolio, will help us see some acceleration as we get into the back half of 2022.

Anja Soderstrom, Analyst

Thank you. And then also, given how much cash you're generating, you're paying down debts, but what are your other capital allocation priorities?

Chris Finn, CFO

I would say that investing back in the business is our top priority. This is a significant year for investments in people, systems, and products. In addition, we are consistently exploring mergers and acquisitions. It's been three years since this year's Decisions acquisition, which may create opportunities as the year progresses. We don’t have any announcements to make at this time, but we are definitely moving in that direction. Finally, we have share buybacks. Those will be our three main priorities, with investing back in the business being the foremost, as we are a growth business with many opportunities to pursue.

Anja Soderstrom, Analyst

Okay. Thank you. That was all for me.

Chris Finn, CFO

Thanks, Anja.

Operator, Operator

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Chris Finn for any further remarks.

Chris Finn, CFO

Well, thanks everyone for joining us today. We appreciate your participation on the call and the questions, and we look forward to joining you for our next call in Q1.

Operator, Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.