Earnings Call Transcript - FORR Q2 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; Carrie Johnson, Forrester's Chief Research Officer; and Scott Chouinard, Forrester's Interim Chief Financial Officer and Treasurer. George will open the call. Carrie will follow George to provide a product update then Scott will discuss our financials. We will then open the call to Q&A. Kelley Hippler, Forrester's Chief Sales Officer will be joining the Q&A portion of the call. A replay of this call will be available until August 28, 2021, and can be accessed by dialing (855) 859-2056 or (404) 537-3406. Please reference the conference ID 7684089. Before we begin, I'd like to remind you that this call will contain forward-looking statements within the meanings 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 risk 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'll now like to hand the call over to George Colony.

George Colony, CEO

Welcome to Forrester's 2021 Q2 Investor Call. I am here with Carrie Johnson, Forrester's Chief Research and Product Officer, and Scott Chouinard, Forrester's Interim CFO. The three of us will give brief remarks. We will then be joined by Kelley Hippler, Forrester's Chief Sales Officer, and the four of us will take questions. The momentum of the last three quarters continued into Q2. Forrester is focused on growing contract value, and its customer-obsessed content is producing strong financial performance. In the second quarter, contract value grew $26 million to $320 million, with a 9% year-over-year growth rate. Revenue accelerated across research, consulting, and events. We generated $70 million of cash in the first half of 2021, which is more than the company has produced in any previous full year. We earned $0.66 in the quarter, beating the top end of guidance by $0.08, and revenue grew 30% to $128.7 million, exceeding the top end of our guidance. Our client count, wallet retention, and client retention all showed strong growth as we continue to win back clients lost during the pandemic. As a result of our performance in Q2 and the first half of the year, we are raising guidance for the second time this year, and Scott will go into more detail in his financial update. Forrester is building an economic model which will drive shareholder value. In this model, we are increasing contract value, which generates more cash, which we then invest in sales, product, and acquisitions. Improving our go-to-market structure and products will grow our contract value, repeating the cycle and driving the model forward. Several factors are contributing to the growth of contract value. Client retention rates are increasing, moving up to 77% for the quarter. That marks our third consecutive quarter of increase. Wallet retention moved to 96%, an increase of 7 points over Q1 of this year. New business showed strong growth in the quarter, bringing our client count to 2,940, which is an increase of 280 clients year-over-year. Additionally, price increases implemented in January are being realized. So contract value growth is contributing to the strong cash generation in the first half of 2021. More contract value equals more cash. We deployed some of that cash to increase training in our sales force in the second quarter, and it will fund the expansion of the sales force in the second half of the year, preparing the company for the 2022 plan. Furthermore, we have increased investments in marketing, extending our demand waterfall, advertising spend, and client experience programs. Our cash has also been allocated to improve our contract value products and to launch new products. Forrester’s research organization has focused on producing content to help companies advance on their customer-obsessed journey, which is even more important as the pandemic has intensified consumer demands. Key reports like the state of customer obsession help our clients understand their current state and provide best practices. We've also produced new frameworks, competitive benchmarks, and models to assist leaders and their teams in executing their vision. Notably, in our B2B Summit in May, we debuted our next-generation B2B revenue waterfall to help firms accelerate opportunities and revenue in their sales pipelines. We're utilizing our cash to launch Forrester Decisions. As I explained on the Q1 call, this new portfolio of 15 research services will serve functional leaders and their teams, bringing together the best of Forrester’s vision and strategy research, along with SiriusDecisions operational research. Our clients want a single research source that can help them both foresee the future and execute their strategy. We have dedicated more than a year working with our clients to design and build Forrester Decisions, which will evolve into our flagship research product over the next two years as clients transition from the legacy Forrester and SiriusDecisions portfolios. This new product will enable us to broaden our scope within existing client accounts and become stickier, ultimately leading to higher wallet retention. There's a lot of excitement within the company and our client base surrounding the launch of this new contract value product, and Carrie Johnson will share more details shortly. We are also investing in another contract value business, FeedbackNow, our startup offering for real-time customer experience measurement and operations. This technology targets retail, hospitality, infrastructure—primarily airports—and healthcare. Currently, we are installed in 70 airports globally, including New York Kennedy and the airports in Paris, Geneva, Milan, and Rome. We are rolling out our cutting-edge touchless devices and piloting FeedbackNow Factors, an open platform that combines real-time customer experience data with other data sources such as weather, traffic, flight delays, and foot traffic. FeedbackNow Factors will deploy AI technology to predict customer experience problems before they occur. The final use of cash is acquisitions. While there’s no news to report today, I can confirm that the company remains aggressive and active on the M&A front, with multiple targets on our radar. Our acquisitions focus on three areas: new contract value products, improved geographical coverage, and the ability to serve more personas within large companies. I see our growth engine accelerating, as our non-contract value businesses, consulting and events, are also thriving. These sectors are critical to contract value growth. Clients that consult with Forrester are 15% more likely to renew their contract value contracts, and prospects that attend events convert to clients at a 14% higher rate. Forrester’s consulting organization posted an exceptional quarter, with 22% growth year-over-year. Our international markets posted their highest bookings quarter ever. Among the exciting new engagements are a five-year deal with a global services firm to conduct a longitudinal market study in China and a contract with a European pharmaceutical firm to lead a full-scale customer experience transformation, which includes workstreams across customer experience, marketing, and technology. In Q2, we continued to see strong demand for our content marketing programs, which drive lead generation for tech companies. This service has expanded rapidly during the pandemic as B2B technology providers sought new marketing channels to replace events and in-person sales meetings. Turning to our events business, we held three virtual events in Q2: the B2B Summit North America, CX Asia Pacific, and CX North America. Both the B2B Summit and CX North America are the company's two largest events of the year. Despite being virtual, both sponsorship and attendance grew across the entire events portfolio. Growth in sponsorship is a vital indicator of the overall health of our events business. Sponsors are now more comfortable in a virtual setting and are prepared to allocate marketing dollars to connect with prospects digitally. This is a promising sign for hybrid events in Q4 and beyond. B2B seller revenue grew 32% year-over-year, and both sponsorship and attendance reflected strong performance, with our audience expanding by 40%. Before passing the call to Carrie, I want to discuss our commitment to advancing our environmental, social, and governance goals. Environmentally, we continue to manage our new office locations with recycled demolition materials, recycled build-outs, and furniture. While not all of our locations worldwide are LEED certified, we manage to the highest attainable standards given the locations. We are also aiming to operate with low environmental impact. For instance, our new anywhere work policies will reduce the number of commuters on the road, resulting in fewer CO2-emitting vehicles. Socially, we continue to progress, especially in diversity and inclusion. As a research firm, it is essential we incorporate diverse viewpoints and backgrounds. The quality of our work depends on a comprehensive perspective on society, business, sellers, and buyers. We’ve completed a diversity and inclusion assessment across our offices to determine areas of focus moving forward. Over the next few years, our key priority areas for investment in diversity and inclusion include enhancing representation across various demographics, as well as engaging employees through inclusion training. We are committed to making advancements in all aspects of ESG. As mentioned during our Q1 call, we've updated our website where you can find more detailed information on Forrester's ESG efforts. In conclusion, I want to express that this is a very exciting time at Forrester. Our contract value growth engine is ramping up, our financial performance is robust, we are increasing guidance for the year, and we are rolling out a new core research product that promises unprecedented value to our clients. I am incredibly proud of what the Forrester team has achieved over the past 18 months in the face of the pandemic. They have remained focused on clients, showcased resilience, leveraged technology for collaboration, and maintained agility to innovate. This has truly been our finest hour. With that, I'll turn the call over to Carrie Johnson, Forrester’s Chief Research and Product Officer.

Carrie Johnson, Chief Research and Product Officer

Thank you, George. I'm excited today to share the incredible value that our new product portfolio, Forrester Decisions, will deliver to clients, and how we will accelerate our ability to deliver double-digit contract value growth for Forrester. Forrester Decisions is designed for our customers and by our customers. Following the acquisition of SiriusDecisions, we spoke with hundreds of Forrester and Sirius clients. What we heard is that they wanted a simpler way of purchasing from and engaging with us as they navigate their paths to customer obsession. As George mentioned, our clients desire one product that brings together Forrester's vision research and the execution frameworks of Sirius, in addition to valuable elements of Forrester’s other offerings, such as analytics and certification. These discussions led to the creation of Forrester Decisions, an entirely new unified product offering. Forrester Decisions is a portfolio of 15 standardized research services tailored to the critical priorities of senior leaders and their teams in technology, marketing, customer experience, sales, and product functions. With each Forrester Decisions service, customers get access to our bold vision research, curated tools and frameworks, and extended time with our analysts to apply research in their context. The Forrester Decisions services are filled with new, bold insights on future frameworks and models necessary for effective operations, alongside brand new benchmarking data. Plus, we are launching an entirely new digital platform for all Forrester’s customers that will revolutionize their ability to obtain personalized insights and speed up their return on investment with us. No other research firm offers this unique combination of vision, strategy, and execution. The product and platform will save our clients time and money, empowering them and their teams to achieve results. We believe this transformation will profoundly impact the dynamics of Forrester’s contract value business and propel our growth in three significant ways. First, pipeline velocity: The Forrester Decisions product will be significantly easier to both buy and sell. By customizing each service according to our key target audiences and their needs, our sales teams can more quickly guide customers to the right products, resulting in higher conversion rates in less time. Second, higher wallet retention: The frameworks and tools provided by Forrester Decisions will make it a sticky research offering. Our clients will rely on Forrester for their operations, making it challenging to sever those services. The availability of 15 services provides our account teams with a clear strategy for cross-selling growth within existing clients. Lastly, the expansion of multiyear contracts: The Forrester Decisions product's inherent value, wherein Forrester partners with clients to address their most critical priorities, will lead to more extended client contracts. Priorities entail commitments that span more than just a single year, and our sales team will focus on multiyear deals to guarantee substantial outcomes for our clients and their organizations. Forrester is fully aligned across all product, research, sales, technology, and marketing initiatives to deliver on Forrester Decisions. We have launched the product into the market with unparalleled speed and assurance. Our sales teams are excited to sell Forrester Decisions and have already received strong indicators of client interest. I am grateful to the Forrester teams who have dedicated the last 18 months to shaping the future for Forrester, our customers, and establishing a new model of excellence in the research industry. And of course, immense thanks to the clients who have supported this initiative.

Scott Chouinard, Interim CFO

Thanks, Carrie. I'll now review Forrester’s financial performance for the second quarter, our quarterly metrics, and our guidance for the third quarter and full year 2021. Please note that the income statement figures we discuss are non-GAAP results, which we refer to as adjusted results. We've provided a reconciliation of our GAAP results to our adjusted results in our press release issued today. As George mentioned, we had an excellent quarter with contract value growth of 9%. We delivered revenue, operating margin, and earnings per share that exceeded the upper end of our guidance. Revenue growth was impressive compared to Q2 last year, with overall revenues up 13%, driven by substantial revenue increases across research, our contract value business, consulting, and events. Currency rates enhanced our revenue growth by approximately 2 percentage points relative to the previous year. We continue to experience momentum in the business, evident from the 9% growth in contract value, with consulting revenues outperforming expectations and executing our two flagship events, the B2B Summit and CX North America, exceptionally well this quarter. We generated significant cash flow, recording $17 million in operating cash flow for the first six months of 2021, which is a record for any period in Forrester’s history. We invested $2.7 million of this cash into our share buyback program during the quarter. Overall, we have observed sustained momentum in the business during the second quarter, which gives us confidence in our performance for the rest of the year. As such, we are raising our guidance for revenue, operating margin, and earnings per share, which I will detail in a few moments. As discussed on our previous call, we are reporting a new set of metrics this year, which I have published on our Investor Relations website back to the first quarter of 2019. Now let me explain these metrics briefly, with the overall concept being based on our contract value products. Contract value, or CV, measures the annualized value of our recurring research products, primarily our subscription research products. We also include reprint products in this measure, as they contain a subscription component and are utilized throughout the year by our clients. We present the CV metric on a currency-neutral basis. Wallet retention gauges how much of our contract value we retained from the prior year, considering both gains from deepening relationships with retained clients and losses from client attrition. Client count includes all clients purchasing contract value products, predominantly those with research subscriptions with us. Turning to our results for the quarter, research revenues increased by 8% compared to the second quarter of 2020. Our contract value growth stood at 9% compared to Q2 of last year. We have seen four consecutive quarters of sequential growth in contract value, with growth accelerating during the second quarter. Similar to contract value, we have also realized sequential improvements in wallet retention and client retention from a low in Q3 last year, while our client count has consistently increased since then. Consulting revenue contributed significantly to our revenue surpassing expectations this quarter with 22% growth compared to last year, showcasing strength in both content marketing and strategy consulting offerings. This marks three consecutive quarters of double-digit growth in consulting revenue. Event revenue rose 33% against Q2 of 2020, driven by increased sponsorship revenue, as sponsors recognized the value in our virtual events. Our operating expenses for the second quarter increased by 15% as we reinstated annual bonuses compared to the second quarter of 2020, raised merit increases, and managed higher professional services. Ending headcount was down 7% compared to the second quarter of 2020. Operating income increased by 3% to $19.7 million, representing 15.3% of revenue for the current quarter, compared to $19.2 million or 16.9% of revenue in Q2 last year. Interest expense for the quarter was $1.1 million compared to $1.3 million in Q2 of 2020 due to reduced debt levels. Furthermore, net income increased by 4%, and earnings per share rose by 2% compared to Q2 last year, with net income at $12.7 million and earnings per share at $0.66 for this quarter, compared to $12.2 million in net income and earnings per share of $0.65 in the second quarter of 2020. Cash flow from operating activities reached $29.5 million this quarter and $70.1 million in the first six months of 2021, marking a 180% increase from the prior period. Additionally, CapEx was $3.8 million for the quarter and $5.2 million for the six months, and we concluded the quarter with over $146 million in cash on the balance sheet. To summarize, we had an outstanding quarter with growth in contract value, revenue, and earnings that exceeded our expectations. Our client count and retention metrics continue to trend positively, while our cash flow reached record levels. Furthermore, we initiated share repurchases during the quarter and intend to continue this practice opportunistically as the year advances. Our product offerings and engagement models resonate well with our clients, and the launch of Forrester Decisions will deepen that relationship, leading to further increases in wallet retention and driving sustained double-digit contract value growth. While we face headwinds from the pandemic, attrition, and a challenging hiring environment, we feel confident in achieving our goals for 2021 and beyond. Regarding our 2021 guidance, let me expand on our expectations for the second half events. Q3 tends to be a lighter events quarter for us, and those events are planned to be virtual. The majority of our Q4 events will have a hybrid format, featuring both in-person and virtual experiences, depending on local conditions as we get closer to those events. We have raised our full-year revenue guidance by $12 million or 3%, along with our full-year EPS guidance by $0.17 or 10%. We provide guidance on a GAAP basis and have detailed the items excluded from our adjusted guidance in our press release and 8-K filed today. Our third-quarter guidance on an adjusted basis is as follows: revenues of $114 million to $118 million, operating margin of 6% to 8%, effective tax rate of 31%, and diluted earnings per share of $0.22 to $0.28. Our full-year 2021 guidance on an adjusted basis is as follows: revenues of $485 million to $495 million, operating margin of 11% to 12%, effective tax rate of 31%, and diluted earnings per share of $1.75 to $1.85. I am proud of the dedication shown by all of our employees throughout the pandemic, from passionately serving our clients to being supportive teammates, and for their efforts in developing and launching Forrester Decisions, which contributed to our strong financial performance reported today. Thank you.

Operator, Operator

Thank you. Please hold on while we prepare the Q&A roster. Our first question comes from Andrew Nicholas at William Blair. You may go ahead with your question.

Andrew Nicholas, Analyst

Hi, thank you for taking my questions. Good afternoon. The first question I had was just regarding Q2 results. Looking back, it sounds like consulting was the main area that surprised on the upside for you. If you could break that down a bit further into where you're seeing strength specifically within that line item and clarify if I misheard you on the amount of upside in Q2 specifically?

Scott Chouinard, Interim CFO

Hey, Andrew, this is Scott. Thanks for the question. Yes, you're right! We did surprise on the upside with consulting, and we observed strength across both our content marketing, which has performed well for some time, and we also saw solid strength from our strategy consulting offerings. So, it was a strong performance across the board from a geographic standpoint and also across our service offerings.

Andrew Nicholas, Analyst

Got it. Thank you. As a follow-up to that, looking at third-quarter expectations, given the strong CV growth relative to my expectations, I’m curious about your expectations for consulting and events in the third quarter. I am surprised that your third quarter revenue guidance is a little higher considering the sequential increase and the sixth consecutive rise in CV. Any additional factors you could share would be helpful.

Scott Chouinard, Interim CFO

Sure, when evaluating our revenue streams, Q3 is a lighter quarter for events with only two of our smaller events scheduled. Thus, revenue will step down significantly compared to Q2. For consulting, the summer months typically yield lower revenue quarters for us. We're anticipating a potential decline in consulting revenue during this time. In regard to research, while contract value growth is contributing to sequential revenue growth in Q3, some of our research revenue growth comes from event entitlements in our subscription product, which will decline due to fewer events in Q3.

Andrew Nicholas, Analyst

That makes sense. I appreciate that context. Additionally, can you comment on your capital allocation plans? You seem more active on the share repurchase front than in the past. Could you clarify the size of the repurchase activity in the quarter and how significant of a portion of your capital allocation plans this will be going forward?

Scott Chouinard, Interim CFO

Certainly. We repurchased $2.7 million during the quarter. As we mentioned, we plan to remain opportunistic with future repurchases. We conducted our Board meeting recently, and there's significant ongoing discussion about future capital allocation. However, there’s a commitment towards a certain level of repurchases in the future, again, being strategic in relation to stock price. At present, we have over $50 million remaining in our repurchase authorization, so there’s available capacity there, as well as with our covenants. We have several options for the second half of the year. We need to evaluate these strategically based on our objectives regarding acquisitions, debt payments, and potential future purchases.

George Colony, CEO

Andrew, George here. We believe we're undervalued as a company. We will be opportunistic in buybacks as a priority. Our foremost objective for capital is to grow the business, particularly by enhancing the contract value growth engine. Therefore, internal investment will remain our top priority.

Andrew Nicholas, Analyst

Thank you.

Operator, Operator

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

Vincent Colicchio, Analyst

Congrats on a good quarter, guys. A few questions for me. Did bookings on the contract value side improve as the quarter progressed? Can you provide a sense for momentum regarding that? Also, has the sales pipeline on the contract value side increased compared to the beginning of the quarter?

Kelley Hippler, Chief Sales Officer

Thanks, Vincent. This is Kelley Hippler here. Regarding bookings momentum, we had a strong quarter, consistently throughout all three months. We began seeing momentum pick up last December, and it's continued to increase significantly, leading to the results we achieved in Q2. While we are early in the quarter, we are encouraged by the Q3 pipeline, especially with the launch of Forrester Decisions, which we believe will lead to strong pipeline growth in this quarter and in Q4.

Vincent Colicchio, Analyst

George, you mentioned that new clients and returning clients have contributed to your quarter's growth. How does that break down regarding client growth between returning and new clients?

George Colony, CEO

Yes, I'll give an imprecise answer, then Kelley will provide more specific details. It’s broadly half Forrester and half SiriusDecisions, but there’s likely a slight skew towards the SiriusDecisions side. Kelley, I’ll pass it on to you.

Kelley Hippler, Chief Sales Officer

Thank you, George. We have ongoing win-back initiatives through both our premier user organization and core selling organization. The results are indeed split about 50/50. However, I'm excited to see larger retailers and automotive companies that we lost last year during the pandemic starting to re-engage now that their business is returning, which is highly promising. Our premier user program has already met its target that we set for the year, so we’ve doubled expectations for the second half. With the forthcoming launch of Forrester Decisions, I believe we'll see more clients re-engaging with us.

Vincent Colicchio, Analyst

It looks like you're impacted by the tight labor market. Do you expect this will alter your initial goal for the number of salespeople expected by the end of the year? Additionally, how do you foresee wage inflation affecting this in the second half?

Kelley Hippler, Chief Sales Officer

Vincent, like many companies, we are facing challenges in talent acquisition and retention, yet we are aggressively hiring and working to fill positions to ensure we are prepared for next year. We’ve been broadening the geographies we target for our employee base, which is helping to maintain wages in line with our expectations. We expect to see an increase in attrition due to pent-up demand from last year. Nevertheless, this shouldn't hinder our ability to reach our goals for 2021. We aim to keep hiring actively so we can meet our targets for 2022. This situation is also prompting us to invest in technologies that can enhance our existing sales force's productivity. We’ve executed this strategy of simultaneously investing in our sales team while building infrastructure to help them perform better, and we'll continue to pursue this balanced approach heading into 2022.

Vincent Colicchio, Analyst

I will go back in the queue. Again, nice quarter!

Kelley Hippler, Chief Sales Officer

Thank you.

George Colony, CEO

Thank you, Vincent. I'll answer a bit more regarding the last question. We have two main advantages. First, our technology has proved efficient for employees working anywhere, and, as Kelley stated, we can hire from anywhere. Secondly, our flexible work model, which allows for a mix of remote and in-office work, is significantly aiding our efforts in the labor market. Nonetheless, it is indeed a very complex labor market. Thank you for your questions.

Vincent Colicchio, Analyst

You're welcome.

Operator, Operator

Thank you. Please hold on while we prepare the Q&A list. I am not seeing any additional questions at this moment. I will now hand the call back to Scott Chouinard for any closing comments.

Scott Chouinard, Interim CFO

Thank you. I want to thank everyone for joining us on the call today. We look forward to updating everyone on our progress during our third-quarter call. Thank you.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.