Earnings Call Transcript - FORR Q3 2025

Operator, Operator

Good afternoon, and thank you for standing by. Welcome to Forrester's Third Quarter 2025 Conference Call. 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.

Edward 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 of 2025. 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, our Chief Sales Officer, are also here with us 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, and 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 adjusted 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 a 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

Good afternoon, and thank you for joining Forrester's 2025 Q3 Investor Call. Today, I'd like to cover the following topics: one, our Q3 performance; two, an update on our go-to-market approach; three, the launch of the new AI Access product; four, the research business in the age of AI; and five, feedback from our Board of clients. The macroeconomic environment continued to be challenging in Q3, highlighted by the rolling U.S. federal government pullback from consulting. Q3 is historically the largest bookings quarter for our government consulting business. We were well below our target and overall consulting revenue declined 8% from the prior year. In addition, research revenue declined 6% in the quarter, driven by bookings and challenges from previous quarters. Total revenue declined 8% from the prior year. Wallet retention was up 1 point to 86% and client retention held at 74% compared to Q2. Chris will give more detail on the quarter in a few moments. In the Q1 and Q2 calls, I noted that the final step in the product transition is transforming our sales engine to consistently sign new Forrester Decisions clients and grow existing accounts. We made progress in the quarter on several fronts. One, average time to hire reps is running at 55 days, improving on our goal of 60 days, and there is very good sales talent available in the market. Two, the sales force continues to adopt the Forrester Agile Sales Technique or FAST sales methodology. We ended the quarter with the highest percentage of reps certified and with all managers now qualified to run fast deal clinics. And three, our demand marketing engine continues to improve, driven by stronger alignment between our sales and marketing teams. The result has been increased prospect follow-up and a higher rate of opportunity creation from marketing efforts. Areas where we are focused in Q4 are: one, maintaining consistent sales activities; two, improving execution of our retention life cycle; and three, maintaining a rolling pipe of $550,000 per quota-bearing headcount. Moving now to product changes. We announced AI Access, a self-service AI offering on September 9. As you know, Izola, our generative AI model, launched over 2 years ago. Clients use Izola on the Forrester Decisions platform as an alternative to search, enabling them to quickly get answers and to create custom content from Forrester's proprietary model. Izola has become one of the primary ways that clients use our research. For clarity's sake, Izola is a model built by Forrester that yields answers based on Forrester's research. This content is not available in any other generative model, including the public large language models such as Claude from Anthropic, ChatGPT from OpenAI, and Gemini from Google. Unlike the public models, Forrester's private model is based on tens of thousands of Forrester Research artifacts, which include exclusive frameworks, ideas, data, product evaluations, best practices and benchmarks. The Forrester model yields answers that are proprietary and trusted. So where does AI Access fit in our product portfolio? The current Forrester Decisions portfolio includes three levels of research access: VIP, which is research plus a dedicated advisor; leader seats, which is research plus the ability to have unlimited guidance sessions with analysts; and team seats, which offer research plus the ability to attend leaders' guidance and inquiry sessions. Clients have told us that in addition to VIP leader and team users, they want more executives using Forrester's research without access to advisers, customer success or analysts. These executives are often part of the VIP or leaders' teams, but they don't yet need continuous guidance. So AI Access provides an entry level for executives within our client companies to use our research, accessing Forrester through an AI prompt and Izola homepage. We introduced the product for three reasons: one, to attract new clients. AI Access will widen our client base and enable more executives to use Forrester; two, enrichment, AI Access provides streamlined self-service in a fast, trusted way for clients to get answers; and three, win backs. We will use AI Access to reintroduce former clients to Forrester Decisions. With the advent of AI Access, we have widened the Forrester Decisions portfolio, enabling us to land and expand with a wider group of executives and helping them align their initiatives and thinking. We are democratizing access to our research, making it easier for larger teams to get the answers they need to make collective decisions. AI Access is our entry-level research product. Volume pricing is available based on the number of seats acquired. Since the mid-September launch, we have seen significant interest with a multimillion dollar fast-growing sales pipeline. In Q3, we secured one of the largest research deals in Forrester's history with a large government agency that is modernizing their organization and is pushing toward fully AI-enabled decision-making. Our ability to offer this client an enterprise-wide pricing model via AI Access was a key differentiator, enabling thousands of users to gain access to our research in that account. We are off to a great start with AI Access and believe that the product will quickly become an important part of the Forrester Decisions portfolio. Now before I leave the topic of AI, I want to say a few words about Forrester's place in the AI future. I know that there have been many questions about the value of research in a world in which public large language models are becoming more adept at answering questions. In that future, what will Forrester's role be? Generative AI is good at enabling people to converse with broad data sets. In the case of the public language models like ChatGPT, that data set is built from what is called the common crawl, publicly available information scraped from websites. But as you know, that information does not include private data from sources like Bloomberg, Dun & Bradstreet, or Forrester. And of course, the public models do not include information like your bank account. To converse with that data in the future, you'll have to go to a private AI model built by Bank of America or Barclays, as examples. Public AI will never be able to construct trusted data from thin air, just as it will not be able to conjure your bank balances without access to your bank. So in the age of AI, Forrester will be akin to a private research bank, creating and curating four proprietary assets: one, data. We will construct protected data sets and analyze them against longitudinal studies that the company has built over the last 3 decades; two, original ideas and frameworks like our Zero Trust security model; three, complex analysis that combines ideas and data. An example would be our total experience score that marries customer experience data with brand data; and four, proprietary information that forms the basis of the client Forrester relationship. Client priorities and initiatives would be an example. Of course, Forrester will leverage AI as we do with Izola to help our clients use these assets, but this information will not be available in public models. Also, while we believe that the future will be driven by AI, there will continue to be human intelligence, driving knowledge and thought in society. This is not a robot moment when the Androids arrived to take all of our jobs. It is rather an Ironman moment when humans will put on suits of Generative and Agentic AI and become more powerful for their customers. Yes, there's a lot of AI at work, but inside the suit, it's still a human being that is able to channel AI to deliver the highest value. That's exactly what Forrester is doing with Izola and AI Access, using AI to become more powerful and more useful to its clients and to the world while also offering access to the analysts that created the research in our model. The word hovering over any discussion of AI is the word trust. When executives are making important business and public policy decisions, they must trust the information to train the AI model, and that the model yields accurate answers backed by trusted data and trusted people. Forrester serves executives at some of the world's largest companies and government agencies. These clients are making decisions that will have long-term impacts on the futures of their organizations. Yes, they will use AI to make those decisions, but they will rely on trusted AI, and that is what Forrester provides. Forrester's executive team met with the company's Board of Clients in September. For many years, this Board has advised us on strategy, product and research direction. The members are trusted advisors to Forrester and Forrester is a trusted advisor to their companies. The Board is comprised of client executives who serve for 3 years. Current companies represented include Air France, AG Insurance, Ameritas, IBM, Nationwide, Travelers and SAP Concur. I'm not going to go through a full summary of the Board meeting, but I wanted to give you a few quotes from the members when we ask them, why do you use Forrester? Here are a few responses that I thought were illustrative of our value to clients. You challenge my thinking and help me define a new strategy. I use you for two things: knowledge of technical intricacies and bold advice. You give me backup and justification to move forward on projects. I love the benchmarks and associated future data mapping strategies that help me develop. You're in it with us, setting us up for success, helping us pressure test solutions, breaking down our company silos. As a final quote, "I don't make a major decision without checking in with Forrester. It's a privilege to work with you." The Board of clients was very supportive of the launch of AI Access, and much of the meeting was devoted to Board members guiding us on pricing, positioning and packaging of the new product. So to conclude, we continue to work through the economic moment by: one, staying focused on improving our go-to-market motion; two, improving the Forrester Decisions platform; and three, carefully controlling expenses. We are very excited to be introducing AI Access, and we look forward to using AI to democratize access to our research and to further establish Forrester as the AI research company.

Chris Finn, CFO

Thanks, George, and good afternoon, everyone. The third quarter saw an exciting product launch with AI Access. We experienced immediate market validation with bookings and a landmark large enterprise deal incorporating this new product just weeks after its release. Although the ongoing dynamics in the marketplace continue to negatively impact all three lines of business, we delivered operating margin and EPS above consensus. And we continue to see stabilization in the research business with research revenue down 4%, excluding the divestiture of FeedbackNow, an improvement on the last quarter's performance. It is early in the sales cycle, but we are anticipating our new AI Access product to have a positive impact on Q4 and 2026 CV performance. Our Consulting and Events businesses continue to face headwinds in a tough selling environment. The consulting business has been meaningfully impacted by the cost-cutting measures enacted in the U.S. federal government, and we see these challenges continuing next year. The shift in the timing of one of our larger events negatively impacted results this quarter, and we see ongoing impediments for that business over the medium term as new leadership is evolving our offering and go-to-market motion. The fourth quarter is our largest bookings period, and we are positive about our pipeline. However, we are downward adjusting our revenue guidance based on the performance of Consulting and Events. This revenue adjustment flows through to a modestly lower margin and EPS guide for the year. Q3 saw a 7% CV decline. This is a continuation of the last 2 quarters' performance. We anticipate improved performance in the fourth quarter to come from the growing pipeline for the new AI Access product. Therefore, even with the continuing uncertainty in the market, we are expecting CV to improve to a low single-digit decline for the year. For the total company, we generated $94.3 million in revenue for the quarter compared to $102.5 million in the prior year period, which is an overall revenue decrease of 8%. In terms of our revenue breakdown for the quarter, research revenue was $72.7 million, down from $77.1 million in 2024. This was a decrease of 6% compared to the third quarter of 2024, with revenue from our subscription research products down 5%. Excluding the impact of FeedbackNow, which we divested last year, research revenue declined by 4% year-over-year. Client retention of 74% was flat from the prior quarter. However, wallet retention was up 1 point to 86%. As discussed in recent quarters, wallet retention is being affected by enrichment challenges. This trend directly reflects the uncertain budgetary and macroeconomic environment we are experiencing. Our Consulting business posted revenues of $21.5 million, which was down 8% compared to the prior year. We are continuing to see uneven performance in the business by each product line. This year, Strategy Consulting has been negatively impacted by its degrading government business, but advisory grew double digits this quarter. We are expecting this mixed performance to continue for the remainder of the year and into next year. And finally, regarding our events business, we shifted one of our three major North American events, technology innovation into Q4, which resulted in insignificant events revenue this quarter. As noted last quarter, the outlook for the events business remains challenged, specifically the outlook for sponsorship revenues. The events team continues its work in addressing these issues. Continuing down our P&L on an adjusted basis, operating expenses for the third quarter decreased by 11%, 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 2024. We continue to monitor costs very closely with particular attention focused on headcount, hiring, and attrition. Operating income increased by 21% to $9.9 million or 10.5% of revenue in the current quarter compared to $8.2 million or 8% of revenue in the third quarter of 2024. Higher operating income and margin were in part driven by the shift in event timing and also by very careful cost management in the quarter. Interest expense for the quarter was $0.7 million, down slightly from the $0.8 million in the third quarter of 2024. Finally, net income and earnings per share increased 30% and 28%, respectively, compared to Q3 of last year, with net income at $7.2 million and earnings per share of $0.37 for the current quarter compared with net income of $5.6 million and earnings per share of $0.29 in the third quarter of 2024. Looking at our capital structure, year-to-date cash flow from operating activities was $24.3 million and capital expenditures were $1.9 million. We did not pay down any debt in the quarter. We did repurchase approximately $2.4 million worth of shares in the period. We have over $77 million of our stock repurchase authorization intact. Our balance sheet remains strong with cash at the end of the quarter of approximately $132 million and debt of only $35 million. As mentioned earlier, we are modestly lowering our guidance range for the year. For 2025, we now expect revenue to be $395 million to $405 million or down 6% to 9% versus 2024. The reduction in the range by $5 million is driven by ongoing headwinds in the consulting and events businesses. The outlook for the Research business remains a mid-single-digit decline for the year. The consulting business is now a high single-digit to low double-digit decline and the Events business is now a decline in the high 20% range. We now expect our operating margins to be in the range of 7.5% to 8.5% for 2025, and interest expense is expected to be $2.7 million for the year, and we are guiding to a full year tax rate of 29%. Taking all of this into account, we now expect EPS to be in the range of $1.15 to $1.25 for the full year. This quarter, we took a significant step on our continuing journey with the AI research company. The release of the AI Access product and the first major contract win associated with the new offering has shown we have a differentiated product in the marketplace. As George discussed, we continue to believe Forrester will play a key role in the age of AI. Our research and analysts will offer trusted, proprietary, strategic and actionable advice. This type of trusted guidance is now ever more important in both an uncertain world and a world impacted by AI.

George Colony, CEO

Thank you, Chris. To summarize, the company is excited to be introducing the AI Access product, and we are pleased with the early market reaction. It widens the Forrester Decisions portfolio, makes it easier for our clients to get trusted advice fast, and it democratizes access to our research. Thank you for joining the call, and we will now take questions.

Operator, Operator

Our first question comes from Andrew Nicholas from William Blair.

Thomas Roesch, Analyst

This is Tom Roesch on for Andrew Nicholas. I really appreciate the color you guys gave on AI during the prepared remarks. But I was just wondering if you could expand on your thoughts on the perceived disruption from AI, specifically as it relates to the research part of the business, like without the guide access and those types of licenses. And also, I'm just curious what the typical customer demographic is that chooses to go with just the research access and not the guide level? Or what is the reasoning usually behind it when that's kind of the sale that you do?

Nate Swan, Chief Sales Officer

It's probably a little bit too early, Tom, to make that call. I mean, AI Access has only been available for a couple of weeks. So I would expect the demographic to be lower, to be a younger demographic for AI Access, but it's really too early if that was your question. What I would say is if you don't have AI Access to your product, you're going to have a hard time attracting that younger demographic. So another good reason why we like having the product.

Thomas Roesch, Analyst

Got you. And then switching gears, I was wondering if you could kind of expand on what you're seeing in the sales pipeline in the fourth quarter. And then also, I believe last quarter, you had mentioned underperforming on conversion rates. So it sounds like you guys have been making strides in your go-to-market strategy. So I was wondering if you've seen any improvement on conversion as well.

Nate Swan, Chief Sales Officer

Yes, Tom, that's a great question. We're seeing some improvement, especially with our emerging tech team. We recently had a global call with our sales organization where we noted that their time to conversion has decreased by 27% year-over-year. They are experiencing very good conversion rates. They are implementing what we term a social contract, confirming with buyers early in the sales cycle that they are interested in evaluating Forrester. This method helps hold clients accountable, as well as ourselves, to follow the sales process, and we're seeing excellent progress from that. Specifically, the time to close for that team has reduced significantly from about 80 days to around 59 days. Other teams are still averaging around 80 days since they deal with larger clients, so we don't anticipate seeing the same dramatic improvements across the board. However, we expect some acceleration in our pipeline as our teams adopt this methodology to achieve quicker conversions. In terms of pipeline size, we are similar to last year, with a slight increase of a couple of percent, but the conversion rates are improving, which gives us hope that we will continue that trend into Q4. Additionally, AI Access is proving to be beneficial as it's prompting more clients to engage with us. Clients are looking for alternatives and ways to distribute research more broadly within their organizations. Not every member needs the same level of guidance, but having top-level access helps create alignment and has been well-received. This positive response isn't limited to our large government deal; our international team has also successfully won back clients who appreciate this model. We believe there's substantial momentum and are optimistic about what Q4 will bring for our business.

Thomas Roesch, Analyst

If I could just ask a quick follow-up. Regarding large language models, have they been mentioned in your customer conversations? Have you received any feedback or pushback from clients trying to use a public version or a different type of large language model?

Nate Swan, Chief Sales Officer

Yes, absolutely. I think a lot of customers bring it up and say, I can use things like ChatGPT or Claude, et cetera, and I get really good answers. And while I say they get really good answers, do you really trust where they're coming from? I am certainly not an analyst. I'd let George and Carrie probably answer more on that. But a lot of that information is not coming from reliable sources that have models, data and research that Forrester has. In fact, none of them have what Forrester has. So just to be clear about that, they're not backed by those things. And so if you're going to make million dollar, multimillion or $100 million decisions, going out there and trusting ChatGPT or other sources, while that is good information to get, I really don't think that's a reliable way to make a decision for your business model. And so you're going to need a trusted source like Forrester to be able to do that.

Carrie Fanlo, Chief Product Officer

If I could add one thing to Nate's comments. For every pushback or client or prospect conversation that we have asking to compare us to the public models, we have more than that asking to actually put our data and insights into their employee environment where they're getting trusted insights to empower their employees. That's actually where most of our conversations are happening, where they're seeing this opportunity to say, 'We've been tasked with providing a world-class set of insights to our employees to make decisions, to go win deals. How can we make sure that Forrester data and insights are in our protected environments because we don't want our employees relying on the public models to make business decisions?' So more opportunity than threat on this front because we think that companies understand the impact and the importance of trusted data sources.

Nate Swan, Chief Sales Officer

Just to add to what Carrie said, she raised an excellent point. I've participated in several discussions, and I know Carrie and George have as well, with clients who are eager to implement these insights. They are thrilled when they see the benefits of the previous Izola feature and now AI Access. The feedback has been fantastic. I've been in a meeting with a Chief Digital Officer from a large brand agency who expressed an immediate desire to start commercials upon seeing this. We are getting very positive reactions from clients, which excites us. There will be significant use of AI, reminiscent of 2002 when people claimed they didn't need Forrester anymore because they would rely on Google. My response was always that it was great they had that plan, but making a $100 million technology decision based on Google research would be a tough sell at a board meeting. While Internet search is beneficial, AI search will also be advantageous. Ultimately, for critical decisions that demand reliable and trusted data, Forrester will play a vital role in this future.

Operator, Operator

And I show our next question comes from the line of Michael Mathison from Sidoti & Company.

Michael Mathison, Analyst

My first question is whether there are any particular verticals or industries where you're seeing better success at gaining new clients or deepening client relationships?

Nate Swan, Chief Sales Officer

Well, yes, absolutely. So number one, while it's been a challenging opportunity in the government, we actually think there's a massive opportunity in the U.S. federal government. So retention challenges this year as agencies were having those come in and cut budgets. But the response to how Forrester is making our offerings available to people and the support that we've gotten from Forrester to go out in front of the government and talk about what we're doing specifically with AI Access, we've had a number of agencies very interested in what we're doing. So we've seen really good success there in the U.S. Again, coming back to the international markets, we're seeing really good success in the international markets on the end-user side. So growing that end-user business, which is really our goal is to grow the end-user business even stronger. We're seeing great success in the international markets, capturing clients from the CPG industry, manufacturing, financial services. So lots of success there. And we're starting to see some breakthroughs as well as some manufacturing opportunities in North America as well. Our end-user new business team really struggled for about 6 months, starting to see some rays of sunshine from them as they go into the fourth quarter. We're seeing some net new logo opportunities in financial services as well as manufacturing and CPG.

Michael Mathison, Analyst

Okay. Great. Second question, your effort to increase the contract value per client is a major strategic goal. You were still down here a couple of percent this quarter. Can you comment on when you feel like that effort would bear a little bit more fruit?

Chris Finn, CFO

Yes. Thanks for the question. This is Chris. Yes, look, I think as we move forward here, we're seeing some traction, obviously, with the new product in AI Access and a stabilization of retention rates. And so I think as we move forward, our expectation is we've got a big quarter in front of us in Q4. But as we get into next year, we should start to see some improvement there in the first half, especially as the new product gains traction, and we continue to see stabilization on retention.

Nate Swan, Chief Sales Officer

Average CV per client has increased by 5% this year. Did you get that, Michael? So average CV per client is up 5% this year.

Operator, Operator

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

Vincent Colicchio, Analyst

Yes, Nate, on the better conversion this quarter, can you attribute that to something in particular? Or is that too difficult to do?

Nate Swan, Chief Sales Officer

No. As I mentioned, this emerging tech team has been working on what we call our social contract for about nine months, and they are beginning to see success. I believe the team is gaining confidence in it, Vince. When you first started, you might have felt a little awkward going through a sales process. However, now the team is really clicking and consistently getting it right. Whenever they engage with a new prospect, they convey that there is genuine interest and express their ability to help. This outlines what the process will look like in the next six to eight weeks. Is this something you would be interested in pursuing? This would require an investment in Forrester, and typically, the budgets for something like this range from X to Y, although we don't want to set a limit on it. Are you interested, and can you provide access to your team who can execute the initiatives that align with your business priorities? If you are interested, we are eager to collaborate and see if it works. You can opt out at any time; there is no commitment to purchase. I believe the team has become very proficient at this pitch. Earlier today, we had a global call encouraging the team to continue this approach, as it is proving to be successful. They are not only improving their close won rate but also addressing their close lost rate. Even when a client agrees to participate in a social contract, we do not achieve 100% conversion of our Stage 1 opportunities, as we are just entering the pipeline. It represents a commitment to engage, allowing the sales representative and the client to hold each other accountable, as well as Forrester. We have seen positive results with this, and I believe we will continue to see more. When combined with our Forrester Agile selling technique, we emphasize the importance of understanding the value sweet spot we seek from our clients and ensuring alignment. Ultimately, neither party wants to waste time, and we believe we can significantly improve conversion rates. Reducing our close lost average from 130 days to about 105 days is a noteworthy achievement, as it minimizes time spent on opportunities that are unlikely to close.

Vincent Colicchio, Analyst

George, what are your thoughts on the Carahsoft partnership? When do you expect it to start contributing? And what makes you optimistic?

Nate Swan, Chief Sales Officer

Yes, I'll step in for George. One of my sales leaders for the government team, Dana Barnes, has done an excellent job working with Carahsoft in the past. This partnership enables us to open new markets and helps with marketing and accessing contract vehicles that we otherwise might struggle to access. We have just begun this collaboration and are already seeing significant traction in the government sector. Although the government market has been challenging, we recently had a major win and have engaged with over 200 buyers.

Chris Finn, CFO

I think through Carahsoft.

Nate Swan, Chief Sales Officer

Not through Carahsoft, but through an event called FedTalk that we were at when our CTO was there. And Carahsoft is getting us into states that we haven't been doing business in and agencies that we haven't been doing business in. So we haven't seen a return yet, but I expect that we will relatively soon. That was signed in the middle of Q3.

Vincent Colicchio, Analyst

Are there other partnerships like this that may be useful to other parts of your business?

Nate Swan, Chief Sales Officer

It's a great question. We want to understand what success looks like. In regions where Forrester does not have a direct presence, we have our IVD model, and we have engaged partners there. That business has been quite successful in markets where Forrester is not, such as Latin America and other countries like those in the Middle East. We've had notable success in that area, and I believe we could look into other partnerships. Initially, we thought Carahsoft would be a good fit for us, and they have been very responsive to our needs.

Operator, Operator

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

Chris Finn, CFO

Yes. Thanks, everyone, for joining today. As always, if you have any questions or follow-up, please reach out to Ed or myself. Thank you.

Nate Swan, Chief Sales Officer

Thank you very much.

Operator, Operator

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