FORR (2020 - Q2)

Good afternoon. Thank you for joining today’s call. With me today are George Colony, Forrester’s Chairman of the Board and CEO; Kelley Hippler, Forrester’s Chief Sales Officer; and Mike Doyle, Forrester’s Chief Financial Officer. George will open the call, Kelley will follow George to discuss sales and Mike Doyle will discuss our financials. Carrie Johnson, Forrester’s Chief Research Officer, will then join the presenters, and we will then open the call to Q&A. A replay of this call will be available until August 30, 2020 and can be accessed by dialing 855-859-2056 or 404-537-3406. Please reference the conference ID 7428859. 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 risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward-looking statements. Some of the important factors that could cause actual results to differ are discussed in our reports and filings with the Securities and Exchange Commission. The company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. I will now turn the call over to George Colony. George C

Thank you for joining the Forrester second quarter 2020 investor call. I will give a summary of the quarter and then Kelley Hippler, Forrester Chief Sales Officer, will update on sales. CFO, Mike Doyle, will conclude the financial review of the quarter. And then Kelley, Mike and I will be joined by Carrie Johnson, Chief Research Officer, for questions and answers. The pandemic is creating unprecedented challenges for Forrester and its clients. That said, we are moving forward with a definitive mindset. Number one, as a company, we will financially manage our way through these times whatever they may bring. Two, the pandemic is accelerating digital transformation across all industries, and this is directly in Forrester’s strike zone. And finally, three, Forrester will emerge stronger from this recession, given its expertise in customer experience, employee experience, digital transformation and building high-performing revenue engines. In Q2, we exceeded guidance for revenue and earnings per share, beating revenue by $5 million and EPS by $0.31. Much of this performance was driven by better-than-expected results in our reprints, consulting and events businesses. Given our Q2 performance, we are increasing revenue and EPS guidance for the full year. The pandemic is opening up what I call the golden age of research. In times of uncertainty, large organizations historically turn to research to help them find new ways of working, new tactics, new models and reformulated strategies. We are seeing increased engagement with our research, led by our reports on pandemic management, the future of work, digital execution and the alignment of sales, marketing and product. In June readership increased 13% year-over-year and for the full second quarter, readership was up 7% over Q2 of 2019. A note I received from a client last week sort of summed up the moment, and I will now quote from her. She said, I have referred to Forrester over the years in my prior roles at 2 large European consumer goods firms, and I now need Forrester more than ever as I embark on another digital transformation journey for a global U.S.-based CPG company. Forrester’s research leads our portfolio of contract value businesses, products that are continually used by our clients through the year and then renewed on an annual basis. We have recently enhanced the research product to include data forecast and insights. And this is – this gives clients now the ability to access more than 50 market-leading data forecasts covering consumer trends, digital marketing and e-commerce. These forecasts provide valuable data and insights to help clients make strategic planning decisions, and examples of these forecasts include our COVID-19 retail scenario planner, that is a global forecast, and the 2020 advertising forecast that’s U.S. only. In addition, we rolled out enhancements to our research portal in the second quarter, a new personalized homepage moves clients to the most relevant insights based on user preferences and activity. In our research portfolio, the SiriusDecisions product line showed improved progress relative to Q1. Companies are using the service to sharpen demand marketing and sales operation during the pandemic. As Forrester looks to grow its contract value businesses in 2021, research will lead that effort. Our consulting business performed well in the second quarter. Our research business had a record quarter as vendors sought new ways of generating leads. Reprints grew 10% year-over-year. Our content marketing business grew 11% year-over-year, again, driven by the need of vendors to engage their customers digitally. And finally, certification grew 68% year-over-year. Companies are using this time of working from home to increase the aptitude and skills of employees, particularly in customer experience in B2B marketing. Our third business line, events was an important part of the second quarter story. Instead of canceling or delaying our events as our competitors did, we pivoted quickly to paid virtual events. The Forrester SiriusDecisions North America Summit attendance equaled 2019 levels. We had more than 115,000 views of our sessions, and by the end of the Summit, we had re-signed 35% of our sponsors for Summit 2021. CX North America had 57% more attendees than in 2019 and 22% more than the capacity that the physical venue would have allowed. While revenue was down considerably from 2019 due to reduced sponsor revenue, both CX North America and the North American Summit exceeded profit expectations. And perhaps, most surprising, attendees’ scores for the events showed strong performance across the value content experience in keynote speakers, averaging a score of 4.1 out of 5, and these are records for the company. We will run our second half events virtually. CX Asia and Summit Asia will feature sessions with simultaneous Mandarin translation, a way to expand our audience into Mainland China in a time of restricted travel. So to conclude on product performance, our research content is relevant and is driving higher client engagement. The consulting business is generating digital content, which is helping our vendor clients drive leads. And finally, we are innovating in events, attracting record audiences with relevant sessions and content. Going virtual has enabled the company to keep its flagship Summit inform brands activated and alive in 2020, and that sets the stage for expanded events in 2021. I would like to highlight a few client wins from the second quarter. The first is a large European bank, looking to drive customer centricity across its organization, and they’re going to be putting 1,000 of their employees through Forrester’s CX certification. The second client win, a large wealth management company in the U.S., is using Forrester to build and implement a customer segmentation program. We assembled a $250,000 multi-product solution across research, consulting and events for this client. Turning now to Forrester’s financial position, we continue to retire debt incurred with the SiriusDecisions acquisition. We have $68 million in cash. Year-to-date, we have generated $25 million in cash, and we expect to have positive cash flow for the year. While we are financially strong, we are still managing through widespread uncertainty in the worldwide economy. We are being directly impacted by three factors: one, revenue in our events business has been greatly reduced due to travel restrictions; two, 10% of Forrester’s clients are in industries that are directly impacted by the pandemic, hotel, airline, retail and automotive; and finally, general macroeconomic headwinds. So to conclude, I wanted to reiterate my earlier points, we will find a way to manage our way through this recession. Companies are accelerating digital transformation, and this is in Forrester’s sweet spot and we will come out of this recession in a stronger position. In particular, we will look to expand our contract value in 2021. Now none of this would be possible without the amazing people of Forrester, who have courageously adapted to working at home, juggling family care in their jobs and staying client connected using every channel available. And I’m very glad to report that our tech stack has been phenomenal, enabling all of us to work seamlessly and effectively, we all feel very fortunate that we can do our jobs even though we are all working from home. So I hope that you are all staying well and that your families are safe. I am now going to pass the call over to Kelley Hippler, Forrester’s Chief Sales Officer. Kelley?

Thank you, George. Q2 was one of the most challenging quarters for the Forrester sales organization in company history given the macroeconomic conditions stemming from the COVID-19 pandemic. With that said, we performed better than forecasted with a relatively strong close in June. I want to reiterate George’s sentiment in expressing our gratitude to Forresterites across the globe who have continued to put our clients first and have focused on helping them to navigate in these uncertain times. Not unexpectedly, we are seeing increased selling challenges in industries like retail, travel and hospitality that are the hardest hit by the pandemic. Smaller high-tech clients are also struggling financially. In addition to these industries in the U.S., we have seen some softness in some geographies like India, while others, including China, Singapore, Hong Kong, UK and Ireland and the Nordics are all performing in line with expectations. Given this challenging environment, we pivoted quickly in the following 4 ways that contributed to our relatively stronger close in Q2. Number one, we shifted focus to strongest market opportunities. In late March, we pivoted to shift new business and cross-sell focus, resources and headcount to markets and industries that are less impacted. High-tech and government are two examples that are performing stronger than other industries. We helped one of our premier high-tech clients build a lead generation program, using digital Forrester and SiriusDecisions content to replace pipeline that they had lost due to the cancellation of a major industry event. We continue to partner with multiple government agencies to assist with the modernization of their IT stack. In Q2, we won a consulting project to help support 1 of our government clients with its cybersecurity strategy. Number two, move to all virtual events. George has addressed the great success we had with moving our events to all virtual. Not only did this enable us to run profitable events in Q2, but it also gave us a platform to increase client engagement during these unprecedented times. Events play a central role in strengthening the overall relationship that clients have with Forrester. Our Q2 virtual events gave us the opportunity to connect with clients and showcase our thought leadership with positive results. Our events are accelerating pipeline building and helping to secure renewals. Number three, conducted more sales training. During Q2, we took advantage of the fact that our sales teams were not traveling to provide more training. We hosted best practice sessions twice a week for both new and existing sales team members. The result is that our teams are increasingly more sophisticated and their ability to demonstrate how the Forrester and SiriusDecisions portfolios deliver value to serve client needs is demonstrated by an increase in the number of deals cross-sold in Q2. And then finally, number four, we drank our own champagne. We have been making a concerted effort to leverage our research and frameworks to improve alignment across our organization. Aligned with our own models, Forrester has shifted to become more audience centric and has identified a number of key buying centers of personas that we serve. This has driven tighter alignment across sales, product and marketing, and it will make it easier to enable our sales force and to ramp new hires as we move forward. We have just conducted the SiriusDecisions sales activity study, which will provide insights into how we can make our sellers more productive and efficient. We are also leveraging the SiriusDecisions sales planning methodology as we begin to turn our attention to 2021 and have built a bottoms-up capacity model and are calculating lifetime value and client acquisition costs to guide us as we make future investments. Looking ahead to the remainder of the year, our key priority is client retention and protecting the base. Our core value proposition of helping business and technology leaders create customer-obsessed organizations that drive growth continues to resonate in this environment. Our own research shows that customer experience differentiation is the key to post-pandemic success, and we are helping our clients to build strategies and execute programs to differentiate their brands based on customer experience. With that, I will turn the call over to Mike Doyle.

Thanks very much, Kelley. I’m now going to review Forrester’s financial performance for the second quarter of 2020, including a look at our financial results, the balance sheet at June 30, our second quarter metrics and the outlook for the third quarter and full year 2020. Please note that the income statement figures we review on this call are our non-GAAP results, which we will refer to as adjusted results going forward and exclude those items as mentioned in our press release today. For the second quarter, Forrester delivered adjusted revenue, operating profit and earnings per share that significantly exceeded guidance. The strong performance was led by better-than-expected strategy consulting delivery, increased sales of reprints and content marketing and larger-than-expected attendance at our virtual events, as Kelley and George both mentioned. Despite the uncertain environment, we’re able to sustain healthy operating performance as our sales and operating teams work through the challenges of executing in a virtual environment. In addition, we’ve continued to keep a tight rein on expenses. Our expectation is that the current economic environment will remain uncertain, requiring us to remain flexible and creative in how we deliver value to our clients. The negative macroeconomic trends will put downward pressure on all businesses. However, the pandemic has highlighted the need for stronger digital business models to attract and support their customer interactions and sales. This creates opportunities for Forrester to help our clients accelerate their customer-obsessed transformation. We will remain agile in our approach to the market, looking to add value in areas of greatest need for our clients. For some, it is helping them solve near term issues. For others, it is helping them sustain progress on important strategic initiatives that will lead to success post pandemic, such as differentiating their brands through a compelling digital customer experience. Now, let me turn to a more detailed review of our second quarter results. Second quarter revenue decreased 15%, which is significantly better than we expected, given that the second quarter is the largest quarter for our events business. The segment most directly impacted by the pandemic. Compared to the second quarter of last year, research revenue declined by 6%, consulting revenue increased by 3% and events revenue decreased by 75%, operating expenses for the second quarter decreased by 16%, driven by lower events production costs resulting from our shift to virtual events and from eliminating our smallest in-quarter events, additional expense reductions were realized from the elimination of bonuses and reduced travel due to the pandemic. Overall, headcount increased 4% compared to the second quarter of 2019. Operating income was $19.2 million or 16.9% of revenue compared to $20 million or 15% of revenue in the second quarter of 2019. Interest expense for the quarter was $1.3 million as compared to $2.1 million in the second quarter of 2019 due to the pay down of our line of credit and reduced interest rates in the quarter. Net income for the quarter was $12.2 million and earnings per share, was $0.65 compared with net income of $12.3 million and earnings per share of $0.65 in the second quarter of 2019. Our business’ key metrics consistently reflect the challenging environment seen in the second quarter due to the COVID-19 pandemic. Agreement value, client count, retention and enrichment were all down compared to last year and compared to last quarter. We provided details in today’s earnings release. Now, I would like to review the balance sheet. Our cash at June 30, 2020, was $68.4 million, which is an increase of $500,000 from the end of 2019. Cash from operations was $3.2 million for the quarter as compared to $7.5 million in the second quarter of last year. For the first 6 months of 2020, we have generated $25 million in cash from operations, which we are pleased with in this economic environment. Debt payments were $2.3 million during the quarter and $18.7 million for the 6-month period, which includes $14 million of payments to fully pay down our line of credit. Property and equipment purchases were $2.7 million for the quarter compared to $1.9 million in the second quarter of last year. Accounts receivable at June 30, 2020, was $54.1 million, compared to $65.8 million as of June 30, 2019, with accounts receivable over 90 days at 4% at June 30, 2020, compared to 5% as of June 30, 2019. Deferred revenue at June 30, 2020, was $170.8 million, a decrease of 6% compared to June 30, 2019. In summary, we had a good quarter in a very difficult economic environment, both our top and bottom line performance exceeded expectations for the quarter. As Kelley and George have discussed, we have been innovative and agile in helping our clients deal with the challenges all businesses are facing. We have been able to maintain a healthy balance sheet by partnering with sales and working closely with our clients to maintain good cash flow in a difficult environment as evidenced by our receivable management performance in the quarter. I will move now to our guidance for Q3 and the full year 2020. On our last call, we said that we evaluated multiple scenarios in trying to assess the severity and duration of the impact of COVID-19 on our business. At that point, we reduced our full year guidance for revenue by 16% and earnings per share by 41%. Our working assumption was that the worst of the pandemic would be behind us by June 30, and that things will begin to improve at variant rates in the second half of 2020. That remains our current view, but significant uncertainty remains, creating challenges in forecasting the business. However, based on our performance in the second quarter and current outlook for 2020, we are fine-tuning our guidance for revenue and expect it will be towards the upper end of the revised guidance we provided on our Q1 call, and are raising revised guidance for operating margin and earnings per share for 2020. We have provided guidance on a GAAP basis and listed the items excluded from our adjusted guidance in our press release and 8-K filed today. Forrester is providing third quarter 2020 guidance on an adjusted basis as follows: revenues of $99 million to $104 million; operating margin of 3% to 5%; an effective tax rate of 31%; and diluted earnings per share of $0.06 to $0.12. Our full year 2020 guidance on an adjusted basis is as follows: revenues of $420 million to $430 million; operating margin of 8.5% to 10.5%; an effective tax rate of 31%; and diluted earnings per share of $1.15 to $1.40. Thanks very much. I am now going to turn the call over to the operator for the Q&A portion of the call.

[Operator Instructions] Our first question or comment comes from the line of Anja Soderstrom from Sidoti. Your line is open.

Hi, everyone. Can you hear me? Hello?

Yes, madam.

Okay. Congratulations on a good quarter amidst a challenging backdrop. So the first question is to Kelley, you alluded to June being sort of the strongest month, I believe. What are you seeing going into July as COVID is flaring up in a lot of regions. Is that noticeable in your business or it’s not really coming through yet?

Thank you for the question, Anja. So as of right now, we have not seen some of the recent spikes impacting Q3 pipeline, and we see some of the momentum from Q2 carrying over. However, we do continue to watch this on a daily basis as things are shifting quite a bit. But thus far, we are seeing that momentum for June continue, which is very encouraging, but certainly something we are keeping a very close eye on.

Okay, thank you. And in terms of the client drops, can you give some color on that? Is it predominantly in the 10% bucket of the more hard hit sectors? Or is there anything else to note there?

Sure. That’s a great question. I would say the two main areas that we are seeing are some of those industries. So to your point, retail, travel, and then we also, from a number of client perspective, we did lose some smaller vendor clients, who tend to be cash constrained during these types of economic situations. We do expect to win some of that business back as things start to improve, but I would say those are the two buckets.

Okay. And then just one last one, so this virtual events, you are getting a lot – much wider reach or attendance for. So – and I think alluded to that helping your pipeline. Can you maybe give some more color on that? And how that might be helpful in terms of selling other services to these people that might be new to you?

Sure. I think part of what’s been great and different about the virtual events than the physical. And of course, it’s always great to have a physical event where you can meet with folks, and they can go down to the marketplace. But with the virtual events, we have a number of different ways that we can interact with clients. What’s also great is that clients can go back and they can review the content. So if they have multiple track sessions going on at the same time that they want to attend. In the past, they used to have to choose where they were going to go. Now they have options to still go back 90 days after and leverage that content, which is leading to some really great follow-up conversations and discussions that we see happening post-event more so than maybe we would have with face-to-face. So it’s definitely opening up more opportunities for us to engage with our clients and to expose them to more of the IP that we are conveying at the event than we have been able to do with a strictly physical event.

Okay, great. Thank you. That was informative. And that was all for me. Thank you.

Great. Thank you.

Thank you. Our next question or comment comes from the line of Vincent Colicchio from Barrington Research. Your line is open.

Yes. I was curious, I don’t know if this is for George or Mike, reprints and consulting were a strong spot in the quarter. Can you talk to maybe what the outlook is – for those businesses is in the second half?

Yes, Vince, good question. And I think both reprints and content and marketing are tremendous vehicles in the midst of this pandemic, right? It’s – people are looking for ways to market and present their story, and it’s something that this can move quickly it’s a good use of marketing dollars. It tends to have a great ROI for our clients. And when other avenues of marketing are limited, it works really well. I think that right now, our outlook for the balance of the year is still looking at these businesses as continuing to be strong. So that’s good news. Reprints, in particular, is very high-margin for us, so we are pretty excited about it. And it’s what we expected. We just didn’t expect it to be that strong. So that’s a good thing.

And then consulting, what are your thoughts, if any, on that business?

I will give you my perspective. Kelley can jump in. We – particularly, in North America, we had a really performance up versus a year ago, which we are pretty excited about. I think there’s very real need out there, and I credit the consulting organization to be able to do a lot of their work virtually. Right now, we have a pretty good backlog. So I think we are feeling good about the balance of the year. I think the challenge is when are people going to do the work? And that’s just a little bit of the variable that we don’t control 100%. But I will let Kelley give her view. She’s much closer to sort of what’s going on out there.

Yes. No, Mike, I would concur with your points there. I think we are definitely seeing strong demand on the end user side and some of the areas around digital transformation, customer experience and loyalty programs as well as some of our clients who are trying to figure out how to get out of some of the old technologies they have and pay down that technical debt so they can pivot to more customer-focused technology. So we are still seeing a lot of energy there as well as for the content marketing products that are leveraged for the lead generation on the high-tech side.

And how would you compare overall client sentiment and sales cycles now versus where we were in the last earnings call?

Sure. What’s really interesting is a lot of the timing around the sales cycle really depends upon who we are working with within an organization. So in many cases, when a C-level sponsor is involved in a project, we are actually seeing a reduction in our days to close. Interestingly, our conversion rates of our pipeline in Q2 were just down 1 point over prior year, which was very encouraging for us that overall, our conversion rates are holding and cycle time is pretty much in line with what we have experienced historically, but definitely more outliers. Some going more quickly, others perhaps taking a little bit longer if we are not high enough within the organization or how the CFOs are sometimes getting involved in the buying process and slowing things down?

We tend to be thoughtful and methodical, Vince. We eventually get to the right answer.

Got it. Thank you.

Okay.

Thank you.

[Operator Instructions] I am showing no additional questions in the queue at this time. I would like to turn the conference back over to Mr. Mike Doyle for any closing comments.

Yes. First, thanks, everyone, for joining the call, and hopefully everyone is staying healthy. We are going to be presenting at a couple of virtual events in the third quarter, and we will also be looking to schedule a number of virtual roadshow calls. So we will work with everyone to get that on track, but looking forward, frankly, to an exciting third quarter and an exciting balance of the year. Thanks again everyone and we will sign off.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day. Stay safe.