Earnings Call Transcript - FORR Q3 2024

Operator, Operator

Good afternoon and thank you for standing by. Welcome to Forrester's Third Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Vice President of Corporate Development and Investor Relations, Ed Bryce Morris. Please go ahead.

Ed Bryce Morris, Vice President of Corporate Development and Investor Relations

Thank you and hello, everyone. Thanks for joining today's call. Earlier this afternoon, we issued our press release for the third quarter 2024. If you need a copy, you can find one on our website in the Investors section. Here with us today to discuss our results are George Colony, Forrester's Chief Executive Officer and Chairman; and Chris Finn, Chief Financial Officer. Carrie Johnson, our Chief Product Officer; and Nate Swan, Chief Sales Officer, are also here for the Q&A section of the call. 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. 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 obligations to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Lastly, consistent with our previous calls, today we will be discussing our performance on an adjusted basis which excludes items affecting comparability. While reporting on an unadjusted basis is not in accordance with GAAP, we believe that reporting numbers on this adjusted basis provides a meaningful comparison and an appropriate basis for our discussion. You can find the detailed list of items excluded from these adjusted results in our press release. And with that, I'll hand it over to George.

George Colony, CEO and Chairman

Thank you, Ed. Good afternoon and thank you for joining Forrester's 2024 Q3 Investor Call. Today, I will be covering the following key topics: One, Forrester's third quarter performance; two, enhancements to the Forrester Decisions product and other research changes; three, an overview of our go-to-market strategy; and four, the Forrester Board of clients. We showed progress on several fronts in the third quarter, while challenges in other parts of the business persisted. We are ahead of schedule on the FD migration with 78% of contract value or CV now in FD. We are projecting that we will finish the year with over 80% of CV in Forrester Decisions. We will move into 2025 with a four-year migration journey substantially completed. That said, we continue to navigate through choppy economic waters with revenue declining 10% in the quarter and CV declining 5%. We now expect full year contract value to be flat to marginally down, a modest adjustment from our previous estimate of CV flat to slightly up by year-end. Other metrics have continued to stabilize. Our wallet retention is 89%, flat from the previous quarter, and client retention is up slightly, and Chris will go into more detail shortly. Despite the challenges, we saw good performance in Premier high-tech, International, and government. Large wins of the quarter included a $2.5 million two-year deal with a large multinational tech company in the Asia Pacific region, our second largest international deal of the year. We also migrated an agency of the U.S. government from a legacy research contract to a $1.6 million Forrester Decisions portfolio. Winning these deals and continuing to propel FD through the migration is the product's research and continuous guidance architecture, a model that provides clients with deep research to improve decision-making, plus periodic sessions with the analysts to help companies achieve their goals. Unlike research libraries, Forrester Decisions features direct access to analysts, and unlike consulting projects, we never leave our clients. We are there to consistently guide them through their evolving challenges. Forrester Decisions is unique in the market, and we continue to enhance the product. In response to the growing interest and demand in artificial intelligence, we launched the FD service for data, AI, and analytics leaders in the third quarter. This service will position executives, functional leaders, and their teams to pursue their most pressing priorities, including: one, activating effective data and AI strategies; two, architecting AI and modern data platforms and applications; three, developing safe governance for AI and data; four, driving decisions with business intelligence and data science; and finally, five, building adaptive data organization and culture. Now, on previous calls, I have talked about Izola, Forrester's generative AI research portal, and I want to give you a quick update here. Izola has been under development for the last year. It went into beta test with a select group of clients late in 2023 and was made available to all Forrester Decisions clients in Q3 of 2024. Izola is a proprietary language model encompassing the full corpus of Forrester's research database. It enables clients to converse with our research with the answers generated from our reports, graphics, and waves. Unlike search, which yields access to specific reports, Izola generates synthetic answers drawing from all Forrester research sources. Izola has now become the third most used feature of the FD platform, and we expect it to pass search in the near future. Since the public launch, we have focused on ongoing improvements to Izola to make it even more useful to clients. We've improved vendor recommendations by grounding answers in the results of our Forrester Wave and landscape research, and this was a top use case for our clients and has led to improved feedback scores. Other enhancements include in-line citations to link Izola answers to our source research and improvements to usability and customization. In Q3, on a unique user basis, Izola prompts increased by 40% quarter-over-quarter. Now, I want to switch topics and say a few words about our go-to-market strategy. In very simple terms, our selling motion is driven by four elements: one, selling to C-level executives who have the budget and authority to apply our research; two, ensuring that our sales activities are standardized and consistently followed; three, applying our sales methodology, what we call FAST, to reduce the time to close business; and four, running our retention life cycle, a standard process for periodically checking in with the economic buyer of our research to ensure that value is being delivered. Forrester's Head of Sales, Nate Swan, is fond of saying that these four elements of Forrester sales are set, and we do not expect to change them next year or the year after. They are the fundamental building blocks of returning Forrester to growth and scaling research contract value at double digits on a consistent basis. Nate will be in the Q&A portion of this call, so you can go deeper with him if you have questions. Two weeks ago, Forrester's Board of clients convened in Cambridge. This is the 26th year of the Board, and it has had an enormous impact on the company's strategy, products, acquisitions, and operations over many years. Clients serve on the Board for three years, and it is currently represented by a distinguished group of companies, including Bank of America, Prudential, Citco, Lexmark, Bridgestone, Travelers, and a number of other organizations. These clients represent our future as they have all made the transition to Forrester Decisions, and we work with them at the C-level. Now I'm not going to go into great depth here on the findings of the meeting, but I thought that one set of comments could be helpful. I know that it is sometimes difficult for investors to grasp Forrester's value-first clients, while we sell is not software or a tangible product but rather better decision-making, operational excellence, and vision of the future. At the Board of Clients meeting, we asked the Board members a simple question. If your CFO came to you and wanted to cut the Forrester contract, what would you say? Here are a few of the responses: If you cut Forrester, I will have to bring in additional headcount to get the work done. Forrester augments my team. Another commented on the ROI benefits of Forrester, saying, compared to McKinsey, Bain, and other consultants, Forrester is affordable. The return on investment is very high. Another emphasized the value of Forrester's continuous guidance, saying, Forrester helps us get from here to there. Finally, a large U.S. federal government CIO said, we need Forrester to look out into the next five years and prepare us for that future. No one else in our organization can do that, and it's something that we desperately need to serve citizens better. During my remarks, I continue to be confident about our future. Our transition to Forrester Decisions is nearing completion; our sales system has been built; generative and predictive AI represent new challenges for our clients and, therefore, opportunities for Forrester; and technology change remains fast and challenging. As a company, we are clear in our priorities and the team is laser-focused on execution. We know the way forward. Thank you very much for being with us this afternoon. I will now turn the call over to Chris Finn, Forrester's CFO.

Chris Finn, CFO

Thanks, George, and good afternoon, everyone. Our third quarter delivered mixed results. Although our CV bookings performed below plan, the Forrester Decisions migration remains on track. Retention metrics are stable, and we are maintaining our revenue margin and EPS guidance for the year. The fourth quarter is our largest bookings period, and we believe CV is continuing to stabilize and could end in a range of flat to slightly down. In addition, we divested our FeedbackNow product line in the third quarter. FeedbackNow was a real-time customer feedback product that we acquired six years ago and was considered non-core through a focus on driving growth in the Forrester Decisions platform. We received $6 million in cash from the sale during the quarter and a note for $9 million that is due in 2025. Furthermore, we retained a small equity stake in the new stand-alone business. Although this product line was not a material portion of the CV business, we have recast our historical CV, retention metrics, and client count for better comparability going forward, and the metrics discussed today reflect this update. CV declined 5% in Q3 to $315.2 million compared to the 4% decline in Q2. Overall, revenue decreased 10% on par with the prior quarter. For the total company, we generated $102.5 million in revenue compared to $113.4 million in the prior year period. In terms of our revenue breakdown for the quarter, research revenues decreased 4% compared to the third quarter of 2023, with revenue from our subscription research products down 1%, coupled with declines in our reprint and other smaller and discontinued products. Overall, client retention was 73%, up slightly compared to Q2, and wallet retention was 89%, flat to Q2. While Forrester Decisions specific client retention of 81% and wallet retention of 89% were flat and down slightly, respectively, versus the second quarter. As we complete the Forrester Decisions migration in 2024, we expect retention metrics to slowly improve into 2025. Although overall client count is down from the prior quarter, Forrester Decisions client count continues to grow, and Forrester Decisions client retention remains well above overall client retention by approximately 8 points. We remain on track for our Forrester Decisions migration plan and now have approximately $246 million of CV or 78% of total CV on the platform. We are targeting being greater than 80% of total CV on Forrester Decisions at year-end. The remaining CV primarily represents our reprint products, along with approximately 5% of CV remaining in our legacy research products. Our consulting business posted revenues of $23.4 million, which was down 17% compared to the prior year. However, we did see signs of stabilization with our bookings performance this quarter for both consulting and advisory, specifically seeing positive growth in our strategy consulting business with increased engagement across clients. Although performance has been uneven overall for consulting this year, we're encouraged by these early signs. Finally, regarding our events business, we held one event in the third quarter and posted revenues of $2.1 million, representing a decrease of 54% compared to the third quarter of 2023. The decline in revenue was driven in part by the decision to merge two of our events into a single event, as well as push another event into Q4. However, we continue to see softness with event sponsorship and attendance, which we are working to mitigate. Continuing down our P&L on an adjusted basis, operating expenses for the third quarter decreased by 7%, primarily driven by lower compensation and related costs, specifically on headcount, for the third quarter; we were down 8% compared to the same period in 2023. We continue to monitor headcount hiring and attrition very closely. Operating income decreased by 33% to $8.2 million, or 8% of revenue in the current quarter compared to $12.3 million, or 10.8% of revenue in the third quarter of 2023. Lower operating income and margin were primarily driven by the revenue declines in our consulting and events businesses. Interest expense for the quarter was $0.8 million, consistent with the third quarter of 2023. Finally, net income and earnings per share decreased 35% and 34%, respectively, compared to Q3 of last year, with net income at $5.6 million and earnings per share at $0.29 for the current quarter compared with net income of $8.6 million and earnings per share of $0.44 in the third quarter of 2023. Looking at our capital structure, year-to-date cash flow from operating activities was negative $2 million and capital expenditures were $2.7 million. Cash flows were negatively impacted by the payment of the litigation settlement earlier in the year, as well as severance payments incurred during the year. We had $114.9 million of cash and investments as we exited the quarter. We repurchased approximately $5 million worth of shares in the quarter. This leaves approximately $83 million of our stock repurchase authorization intact. As noted earlier, guidance for 2024 is unchanged. So let me provide some additional commentary on the remainder of the year. Revenue is still expected to be in the range of $425 million to $435 million. This guidance assumes the outlook for the Research business to be a mid-single-digit decline, a decline in our consulting business in the low 20s, and a decline in our events business in the low 30s for the year. Operating margins are still expected to be in the range of 8.5% to 9.5%. Interest expense is expected to be approximately $3 million for the year, and we are continuing to guide to a full-year tax rate of approximately 29%. Taking all this into account, we are maintaining earnings per share in the range of $1.37 to $1.57. As expected, 2024 has proven to be a challenging year as we finish the multi-year journey of the Forrester Decisions migration amid a troubled macroeconomic environment. We remain focused on finishing the year with a strong Q4 performance to set us up for a positive 2025. We continue to remain upbeat about the Forrester Decisions platform and its continuous guidance model, the ability of consulting events to support research, the importance of technology disruption as a demand driver, and the go-to-market improvements all fueling the long-term outlook for the business. Thank you all for taking the time today. And with that, I will hand the call back to George.

George Colony, CEO and Chairman

Thank you, Chris. As you know, Q4 is a very busy time at Forrester. We booked close to 40% of our business in the quarter. I'm glad to report that the entire company is focused on using the quarter to build a strong platform for 2025 and to make the final push on transitioning our legacy clients over to Forrester Decisions. Thank you for being on the call, and I will now turn the call back to the operator for questions and answers.

Operator, Operator

And I show our first question comes from the line of Andrew Nicholas from William Blair.

Andrew Nicholas, Analyst

I wanted to start by asking on kind of end market health broadly. It sounds like CV bookings were a bit below plan. Just curious if that's primarily an end market issue, if there's anything from an execution standpoint that you'd point to. Maybe we start there?

Nate Swan, Chief Sales Officer

Sure, Andrew, it's Nate Swan. Thanks for the question. So we saw really good performances across several sectors, and we had some weakness in one particular group where we were not necessarily executing as well as we thought we should be. We've actually made some slight changes in that group and feel like we're on track and, based on the forecast for Q4 from a bookings standpoint, I think Chris and I are pretty comfortable with where we're headed. So we're seeing some really good progress. All progress doesn't happen at the exact same time. So we feel like we are still on track.

Andrew Nicholas, Analyst

Great. And then maybe just from a bigger picture level, do you have a sense or an early sense of what budgets of your clients kind of look like for 2025 compared to maybe what you've seen in the past couple of years?

Carrie Johnson, Chief Product Officer

Andrew, it's Carrie Johnson. Sure. We are actually, both according to our research and from what we're seeing, know that tech budgets are increasing in 2025, which plays very nicely to, of course, Forrester's strategy, and also our biggest opportunity here is with the technology executives and their teams, which is where we are seeing the most growth right now. So that's the early read.

George Colony, CEO and Chairman

Also feels like the vendor world is stabilizing. As you know, there have been about 1 million layoffs in tech in the U.S. in the last 18 months. It feels like that world is stabilizing.

Andrew Nicholas, Analyst

Great. And then maybe if I could just ask one more for Nate or I guess, George, feel free to answer it as well. But there's all these different things that you've implemented, you feel very confident about kind of all the different procedures in place; these are multiyear kind of platforms for execution. I just wanted to ask about kind of how you measure traction of those go-to-market motions in an environment that's a little bit more challenging. Does it make it harder to know what's working and what's not? And if there's any other color you could give on maybe the top one or two metrics that are top of mind for you on a daily basis?

Nate Swan, Chief Sales Officer

Yes, sure. Great question. So we look at really our progress quarter-over-quarter in a variety of areas. We look at our pipelines, we look at our retention, and we look at how we're executing various components of what George referred to as our retention life cycle. That's a newer motion for Forrester, and we are really involved in rolling that out across the sales organization. So I look at it in a couple of ways. Number one, are they happening? And they are happening. They're not happening as frequently as we would like them to, but they are definitely happening, and we're getting really good anecdotal feedback from both our clients as well as internal stakeholders at Forrester. Both our sales and customer success teams like the way it is organized and how it helps them stay on track with the right tasks at the right time. And we're finding that, while we may have some gaps in how we've been working with things, it's identifying those gaps really quickly. Overall, I would say the message is these are new motions for a lot of Forrester folks and new for our clients. Our clients and our Forrester stakeholders are responding really well. We're getting great ecosystem support from across the organization, so our analyst community is leaning in to help us understand what's working at our clients. So we'll look at retention and we'll look at the execution metrics and see where we're doing well and then see how the results fall from there.

George Colony, CEO and Chairman

Yes, it's still early days, Andrew. We're aiming for $500,000 of rolling pipe per quota-bearing headcount, and we came close to that in Q3. However, upon closer examination of the opportunities, we found they weren't as solid as we had hoped. So, as the next step, we're using a methodology to thoroughly analyze all the opportunities to ensure the $500,000 of pipe is robust and feasible. Our systems are established and starting to function effectively, and we're optimistic about our progress.

Nate Swan, Chief Sales Officer

Yes, we believe, as George mentioned earlier, that this strategy is consistent quarter-over-quarter and year-over-year. This is our plan moving forward, and we are committed to following it. The sales organization understands this, and the rest of the organization is aware as well. We are not going to introduce multiple new initiatives at the start of next year and change our direction. We have a clear plan, and we expect to execute it effectively, ensuring a high level of activity, utilizing our sales methodology, and managing the retention life cycle.

Operator, Operator

And I show our next question comes from the line of Anja Soderstrom from Sidoti.

Anja Soderstrom, Analyst

With the new guidance for the contract value bookings, how should we think about the revenue growth for next year?

Chris Finn, CFO

Anja, it's Chris. Did you mention the conferences or contract value?

Anja Soderstrom, Analyst

On a contract value.

Chris Finn, CFO

On contract value, yes, yes, for next year, sure. Yes. So we're not necessarily providing '25 outlook on the call. I mean, as you know, the fourth quarter, it's our largest bookings quarter of the year. December is by far the largest bookings month for us. What I can say is we're encouraged by the ongoing stabilization in CV and our retention metrics. We're very confident in the FD platform as we go forward here and all the go-to-market initiatives that we're implementing. I'd say we have to see where the election goes and where the economy goes in the next year. But we do expect that, based on the signs we're seeing, CV will continue to be stable and grow as we move through the year, combined with improving consulting and events bookings performance off of the lows that we've seen. We already talked a little bit about some of the bright spots in consulting. So I'd say for '25, the results will certainly improve from the double-digit revenue declines that we're seeing in this year in '24. But I don't expect significant material growth on revenue just based on how we're going to ramp bookings through the year. And then obviously, we'll provide more detail on the call in February. But I think we're maintaining our positive outlook as far as stabilization is concerned, and then we have to get into next year and really get through this quarter. This is a big quarter for us. I can tell you that October looked well. We hit our plan in October, which was a great sign. And we've got a big November and December in front of us. We just talked about the pipeline building. I think Nate and the sales organization feel pretty confident about landing on the quarter. We have to see how we get through the rest of the period, and then we'll give a more detailed guide for next year. But in general, sort of that's what I see for CV performance next year as we ramp and then just a general sense of kind of revenue direction.

Anja Soderstrom, Analyst

Okay. And you've been sort of shedding the smaller clients; when do you think you will be done with that, and we will start seeing the client count go up?

Nate Swan, Chief Sales Officer

Yes, I'll start, and maybe Carrie and Chris might want to jump in. It's Nate. We're experiencing a much smaller impact from that group, and we anticipate that it will continue to be small in 2025. We've addressed most of the issues; there are really two factors at play. One is the migration journey, and the other involves the smaller clients that we are no longer viewing as specific buying opportunities. As a result, we're observing less and less impact. Our emerging tech team is performing quite well this year, especially considering the current tech market. We have a strong sense of confidence in the leadership of that group and their initiatives. I believe that next year, this team will be on a very positive trajectory, and we are nearing the end of the challenges we’ve faced.

George Colony, CEO and Chairman

Yes, Anja, as you know, the emerging tech sales group sells to vendors over $50 million in size. So we're not playing below $50 million at this point.

Chris Finn, CFO

Anja, I was just going to add on the sub-50%. I mean, at this juncture, we're going to exit the year, that's going to be less than 60% of the overall base.

Anja Soderstrom, Analyst

Okay, that was helpful. In terms of the sales team, is it fully operational now, or are they still in training? How do you assess the current state of your sales team? When do you think it will really start to take off?

Nate Swan, Chief Sales Officer

Yes. Great question, Anja. So the sales organization spent a lot of time on training and development, upscaling. We're targeting our senior executives, as we mentioned. To do that, we've worked on our sales methodology, trying to really understand how to work better with those senior executives and connect to their initiatives that they're looking for. We will continually do ongoing support for the sales organization to make sure that they can call high and that they can build out those team solutions as well as winning the organization solutions, so we can sell across the whole organization and make sure that we can penetrate. That kind of change will never stop; it's continuous development. But the heavy lift of a new sales methodology was rolled out really from the April timeframe until the mid-June, July timeframe. Now it's refreshing, doing clinics and making sure that people are up to speed, and then obviously, they'll have new hires that will be joining the organization and that we'll be continuing to ramp them up to join. So the sales organization has been great, really leaning into all these changes around building pipeline, working on the sales methodology and implementing this retention life cycle. I'm really happy with how they've responded to that. I think they see how it helps them do their job better, and they want to continually get better. People want to be successful in their roles, and so they're really leaning in to do that.

Operator, Operator

And I show our next question comes from the line of Vincent Colicchio from Barrington Research.

Vincent Colicchio, Analyst

Yes. Nate, you had mentioned selling hiring organizations. And the question I'd like to ask you is if you're hitting your ability to penetrate senior people and organizations is meeting your expectations?

Nate Swan, Chief Sales Officer

Well, Vincent, I think we would all love to go faster in being able to get to more senior executives and make sure that we're selling Forrester to the most senior people we can in every part of the organization. I think the progress that we've made is good progress. Would I love to go faster? Of course, I'd love to go faster because I think that would mean we would be selling more. But the team has been very responsive. They really like the sales methodology that they're using. The managers are coaching it, and we're using deal clinics that are working really well. So I think we're going to continue to see progress. We know that when we're at the most senior levels of organizations, we get great buy-in from them, we get the buy-in from their teams, and then we start to cross-sell in the organization. So people know that's the key to being successful. It's not an overnight journey to be able to say, 'Hey, now I'm going to start calling high.' But that's the journey we're on right now. So I feel good.

Vincent Colicchio, Analyst

And then to be clear, the decline in clients was relatively high this quarter. Was that due to small clients?

Chris Finn, CFO

Yes, Vincent. This is Chris. So I think you're seeing that. It was a combination of all small clients, but also we restated the client numbers for the removal of the divestiture of FeedbackNow. So we restated those client numbers. So that's also part of the reason why you're seeing it come down.

George Colony, CEO and Chairman

So 250 clients.

Chris Finn, CFO

Yes, yes.

Vincent Colicchio, Analyst

Does that make sense, Vincent? Yes, yes.

Nate Swan, Chief Sales Officer

Both those FeedbackNow clients were small.

Vincent Colicchio, Analyst

Okay. And then, Nate, what's the most common pushback you're hearing from clients that are slow to expand FD seats?

Nate Swan, Chief Sales Officer

The most common pushback we hear is that budget is a continual challenge. However, we in sales understand that when budget is mentioned as a challenge, we need to better demonstrate our value. Budget serves as an easy way for a client to push back. If we align ourselves with the most critical initiatives of our clients, we represent only a small fraction of what it costs to engage firms like Bain and McKinsey for similar challenges, and we are confident in our ability to deliver results. By effectively demonstrating our value and illustrating how we can continuously assist them, we have experienced significant successes. In the last quarter, we achieved impressive wins by developing larger solutions for clients that addressed the priorities of their top leaders.

Operator, Operator

That concludes our Q&A session. At this time, I would like to turn the conference back to Chris Finn, CFO, for closing remarks.

Chris Finn, CFO

Yes. Thanks for joining us today, everyone. Any follow-up questions, please call myself or Ed Bryce Morris. Thank you.

George Colony, CEO and Chairman

Thank you very much.

Operator, Operator

Thank you. This concludes today's conference call. Thank you for attending. You may all disconnect.