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FORRESTER RESEARCH, INC. (FORR)
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FORRESTER RESEARCH : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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05/10/2018 | 10:12pm CEST

Overview

This Quarterly Report on Form 10-Q contains 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.
Reference is made in particular to our statements about our plans for
anticipated increases in, and productivity of, our sales force and headcount,
future growth rates, future tax rates, future operating cash flows, future
dividends, future share repurchases and the adequacy of our cash, marketable
investments and cash flows to satisfy our working capital and capital
expenditures. These statements are based on our current plans and expectations
and involve risks and uncertainties that could cause actual future activities
and results of operations to be materially different from those set forth in the
forward-looking statements. Important factors that could cause actual future
activities and results to differ include, among others, our ability to retain
and enrich memberships for our research, connect and analytics services, our
ability to fulfill existing or generate new project consulting engagements, our
ability to realize anticipated benefits from internal reorganizations, the
impact of our evolving customer engagement model, technology spending, the risks
and challenges inherent in international business activities, our ability to
offer new products and services, our dependence on key personnel, the ability to
attract and retain qualified professional staff, our ability to respond to
business and economic conditions and market trends, the possibility of network
disruptions and security breaches, competition and industry consolidation, our
ability to enforce and protect our intellectual property rights, compliance with
privacy laws, possible variations in our quarterly operating results, taxation
risks, concentration of our stock ownership and any weakness identified in our
system of internal controls. These risks are described more completely in our
Annual Report on Form 10-K for the year ended December 31, 2017. We undertake no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events, or otherwise.

We derive revenues from memberships of our Research, Connect and Analytics
products and services, performing advisory services and consulting projects, and
hosting Events. We offer contracts for our Research, Connect and Analytics
products that are typically renewable annually and payable in advance.
Membership revenues are recognized as revenue ratably over the term of the
contract. Accordingly, a substantial portion of our billings are initially
recorded as deferred revenue. Clients purchase advisory services independently
and/or to supplement their memberships to our subscription-based products.
Billings attributable to advisory services and consulting projects are initially
recorded as deferred revenue. Advisory services revenues, such as workshops,
speeches and advisory days, are recognized when the customer receives the agreed
upon deliverable. Consulting project revenues, which generally are short-term in
nature and based upon fixed-fee agreements, are recognized as the services are
provided. Event billings are also initially recorded as deferred revenue and are
recognized as revenue upon completion of each Event.

Our primary operating expenses consist of cost of services and fulfillment,
selling and marketing expenses and general and administrative expenses. Cost of
services and fulfillment represents the costs associated with the production and
delivery of our products and services, including salaries, bonuses, employee
benefits and stock-based compensation expense for all personnel that produce and
deliver our products and services, including all associated editorial, travel,
and support services. Selling and marketing expenses include salaries, sales
commissions, bonuses, employee benefits, stock-based compensation expense,
travel expenses, promotional costs and other costs incurred in marketing and
selling our products and services. General and administrative expenses include
the costs of the technology, operations, finance, and human resources groups and
our other administrative functions, including salaries, bonuses, employee
benefits, and stock-based compensation expense. Overhead costs such as
facilities and annual fees for cloud-based information technology systems are
allocated to these categories according to the number of employees in each
group.

Deferred revenue, agreement value, client retention, dollar retention,
enrichment and number of clients are metrics that we believe are important to
understanding our business. We believe that the amount of deferred revenue,
along with the agreement value of contracts to purchase research and advisory
services, provide a significant measure of our business activity. We define
these metrics as follows:

• Deferred revenue - billings in advance of revenue recognition as of the

measurement date.

• Agreement value - the total revenues recognizable from all contracts in

force at a given time (but not including advisory-only and Events

contracts), without regard to how much revenue has already been recognized.

• Client retention - the percentage of client companies with memberships

expiring during the most recent twelve-month period that renewed one or more

of those memberships during that same period.

• Dollar retention - the total dollar value of client membership contracts

expiring during the most recent twelve-month period, which are renewed in

whole or in part, as a percentage of the dollar value of all expiring client

membership contracts during the same period.

• Enrichment - the percentage of the dollar value of client membership

contracts renewed during the most recent twelve-month period to the dollar

      value of the corresponding expiring contracts.




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• Clients - we aggregate the various divisions and subsidiaries of a corporate

parent as a single client and we also aggregate separate instrumentalities

of the federal, state, and provincial governments as a single client.

Client retention, dollar retention, and enrichment are not necessarily indicative of the rate of future retention of our revenue base. A summary of our key metrics is as follows (dollars in millions):


                                     As of             Absolute        Percentage
                                   March 31,           Increase         Increase
                               2018        2017       (Decrease)       (Decrease)
          Deferred revenue    $ 155.4     $ 156.3     $      (0.9 )             (1 %)
          Agreement value     $ 246.4     $ 236.6     $       9.8                4 %
          Client retention         75 %        74 %             1                1 %
          Dollar retention         88 %        87 %             1                1 %
          Enrichment               98 %        94 %             4                4 %
          Number of clients     2,349       2,427             (78 )             (3 %)




Deferred revenue at March 31, 2018 decreased 1% compared to the prior year and
decreased 2% after adjusting for the effect of foreign currency fluctuations.
The decrease in deferred revenue resulted from the implementation of the new
revenue standard in the first quarter of 2018 that resulted in a 7% reduction in
deferred revenue at March 31, 2018 compared to the prior year. Excluding the
effect of the new revenue standard and foreign currency, deferred revenue would
have increased approximately 5% as contract billings exceeded revenue for the
period. Agreement value increased 4% at March 31, 2018 compared to the prior
year and foreign currency had an insignificant effect. The increase in agreement
value was due to both an increase in contract bookings and increased bundling of
consulting services with our Research and Connect products in our contracts.
Client retention rate and dollar retention rate both increased 1 percentage
point compared to the prior year period however client retention declined 1
percentage point from the prior quarter and dollar retention was flat with the
prior quarter. Enrichment rate increased 4 percentage points compared to the
prior year and increased 2 percentage points compared to the prior quarter.



Management's discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP"). The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate our policies and
estimates, including but not limited to, those related to our revenue
recognition, non-marketable investments, goodwill and other intangible assets,
and income taxes. Management bases its estimates on historical experience, data
available at the time the estimates are made and various other assumptions that
are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. Our other
critical accounting policies and estimates are described in our Annual Report on
Form 10-K for the year ended December 31, 2017.



                                       21

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Results of Operations

The following table sets forth our statement of income (loss) as a percentage of total revenues for the periods indicated:


                                                   Three Months Ended
                                                        March 31,
                                                   2018           2017
             Revenues:
             Research services                        66.5 %        67.0 %
             Advisory services and events             33.5          33.0
             Total revenues                          100.0         100.0
             Operating expenses:
             Cost of services and fulfillment         43.9          40.7
             Selling and marketing                    42.5          39.7
             General and administrative               13.8          13.2
             Depreciation                              2.5           2.1
             Amortization of intangible assets         0.2           0.2
             Income (loss) from operations            (2.9 )         4.1
             Other income (expense), net              (0.2 )           -
             Losses on investments, net                  -          (0.3 )
             Income (loss) before income taxes        (3.1 )         3.8
             Income tax benefit                       (0.9 )        (0.1 )
             Net income (loss)                        (2.2 %)        3.9 %



Three Months Ended March 31, 2018 and 2017

Revenues

                                                Three Months Ended             Absolute        Percentage
                                                     March 31,                 Increase         Increase
                                              2018               2017         (Decrease)       (Decrease)
                                               (dollars in millions)
Revenues                                   $      77.7        $     77.2     $        0.5                1 %
Revenues from research services            $      51.7        $     51.7     $          -                -
Revenues from advisory services and
events                                     $      26.0        $     25.5     $        0.5                2 %
Revenues attributable to customers
outside of the U.S.                        $      18.8        $     16.8     $        2.0               12 %
Percentage of revenue attributable to
customers
  outside of the U.S.                               24 %              22 %              2                9 %
Number of events                                     -                 -                -                -






Total revenues increased 1% during the three months ended March 31, 2018
compared to the prior year period. After adjusting for the effect of foreign
currency fluctuations, revenues decreased 1%. Adjustments of $2.3 million
resulting from new revenue guidance had the effect of reducing revenues by 3%
compared to the prior year period. Revenues from customers outside the U.S.
increased 12% during the three months ended March 31, 2018 compared to the prior
year period and increased 4% after adjusting for the effects of foreign currency
fluctuations. Revenues from customers outside of the U.S. represented 24% of
total revenues for the three months ended March 31, 2018 and after adjusting for
the effect of foreign currency fluctuations, represented 23% of total revenues
compared to 22% in the prior year period. The increase in the percentage of
revenues attributable to customers outside of the U.S. during the three months
ended March 31, 2018 was principally due to an increase in revenues in the Asia
Pacific region.

Research services revenues are recognized as revenue primarily on a ratable
basis over the term of the contracts, which are generally twelve-month periods.
Research services revenues were essentially flat during the three months ended
March 31, 2018 compared to the prior year period and after adjusting for the
effect of foreign currency fluctuations, decreased 2%. A decrease in revenues
for our Research and Analytics products was essentially offset by an increase in
revenues for our Connect products. Adjustments of $1.7 million resulting from
new revenue guidance had the effect of reducing research services revenue by 3%
compared to the prior year period.

Revenues from advisory services and events increased 2% during the three months
ended March 31, 2018 compared to the prior year period and increased 1% after
adjusting for the effect of foreign currency fluctuations. The increase in
revenues for the three months



                                       22
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ended March 31, 2018 was principally due to increases in both advisory and consulting revenues, that was partially offset by a decline in Analytics services revenues. Adjustments of $0.5 million resulting from new revenue guidance had the effect of reducing advisory services and events revenue by 2% compared to the prior year period.

Please refer to the "Segments Results" section below for a discussion of revenues and expenses by segment.

Cost of Services and Fulfillment

                                               Three Months Ended            Absolute        Percentage
                                                    March 31,                Increase         Increase
                                              2018             2017         (Decrease)       (Decrease)
Cost of services and fulfillment
(dollars in millions)                      $     34.1       $     31.4     $        2.7                 9 %
Cost of services and fulfillment as a
percentage of
  total revenues                                 43.9 %           40.7 %            3.2                 8 %

Service and fulfillment employees

  (at end of period)                              610              595               15                 3 %




Cost of services and fulfillment expenses increased 9% during the three months
ended March 31, 2018 compared to the prior year period and after adjusting for
the effect of foreign currency fluctuations, increased 6%. The increase in
dollars was primarily due to (1) a $1.7 million increase in compensation and
benefit costs, resulting principally from an increase in employees compared to
the prior year period and annual merit increases, (2) a $0.7 million increase in
professional services costs due to an increase in outsourced fees related to
consulting projects delivered, an increase in fees related to the delivery of
reprints on our digital reprint platform, and an increase in costs for the
digitization of our Analytics products, and (3) a $0.3 million increase in
facilities and software services costs.

Selling and Marketing

                                               Three Months Ended            Absolute        Percentage
                                                    March 31,                Increase         Increase
                                              2018             2017         (Decrease)       (Decrease)
Selling and marketing expenses (dollars
in millions)                               $     33.0       $     30.6     $        2.4                8 %
Selling and marketing expenses as a
percentage of
  total revenues                                 42.5 %           39.7 %            2.8                7 %
Selling and marketing employees (at end
of period)                                        577              588              (11 )             (2 %)






Selling and marketing expenses increased 8% during the three months ended
March 31, 2018 compared to the prior year period and after adjusting for the
effect of foreign currency fluctuations, increased 6%. The increase in dollars
was primarily due to (1) a $1.1 million increase in compensation and benefit
costs due to an increase in the average cost per employee and annual merit
increases, (2) a $0.5 million increase in travel and entertainment expenses
primarily resulting from an increase in expense for our annual sales conference,
and (3) multiple small increases including an increase in the allowance for
doubtful accounts, an increase in facilities and software services costs and an
increase in professional services costs.

Subject to the business environment, we expect our sales headcount growth to be
flat to low single digits in 2018 as compared to the year ended December 31,
2017.

General and Administrative

                                               Three Months Ended            Absolute        Percentage
                                                    March 31,                Increase         Increase
                                              2018             2017         (Decrease)       (Decrease)
General and administrative expenses
(dollars in millions)                      $     10.7       $     10.2     $        0.5                 6 %
General and administrative expenses as a
percentage of
  total revenues                                 13.8 %           13.2 %            0.6                 5 %
General and administrative employees (at
end of period)                                    192              192                -                 -




General and administrative expenses increased 6% during the three months ended
March 31, 2018 compared to the prior year period and after adjusting for the
effect of foreign currency fluctuations, increased 3%. The increase in dollars
was primarily due to a $0.4 million increase in compensation and benefits costs
resulting from annual merit increases.



                                       23

--------------------------------------------------------------------------------

Depreciation

Depreciation expense increased by $0.3 million during the three months ended
March 31, 2018 compared to the prior year period primarily due to additional
software assets being put into service.

Amortization of Intangible Assets

Amortization expense remained essentially consistent during the three months ended March 31, 2018 compared to the prior year period.

Other Income (Expense), Net

Other income (expense), net primarily consists of interest income on our
investments as well as gains and losses on foreign currency. The decrease in
other income (expense), net of $0.1 million during the three months ended March
31, 2018 compared to the prior year period was primarily due to an increase in
foreign currency losses.



Losses on Investments, Net

Losses on investments, net primarily represents our share of equity method
investment gains and losses from our technology-related investment funds. The
decrease in investment losses during the three months ended March 31, 2018 was
due to a decrease in investment losses incurred by the underlying funds as
compared to the prior year periods.

Income Tax Benefit

                                               Three Months Ended            Absolute        Percentage
                                                    March 31,                Increase         Increase
                                              2018             2017         (Decrease)       (Decrease)
Income tax benefit (dollars in millions)   $      0.7       $      0.1      $       0.6              693 %
Effective tax rate                               28.7 %           (3.0 %)          31.7           (1,060 %)






Income tax benefit for the three months ended March 31, 2018 was $0.7 million
resulting in an effective tax rate of 28.7% for the period. The increase in the
effective tax rate during the three months ended March 31, 2018 compared to the
prior year period was due primarily to the recognition of a $1.3 million benefit
from the settlement of a tax audit in the first quarter of 2017. For the full
year 2018, we anticipate that our effective tax rate will be approximately 31%.



Segment Results

The Product segment includes the costs of the product management organization
that is responsible for pricing, packaging and the launch of new products. In
addition, this segment includes the costs of our Analytics, Connect and Events
organizations. Revenue in this segment includes all of our revenue (including
Research and Connect) except for revenue from advisory services and project
consulting services that are delivered by personnel in the Research and Project
Consulting segments.

The Research segment includes the costs of our research personnel who are
responsible for writing the research and performing the webinars and inquiries
for our Research and Connect products. In addition, the research personnel
deliver advisory services (such as workshops, speeches and advisory days) and a
portion of our project consulting services. Revenue in this segment includes
only revenue from advisory services and project consulting services that are
delivered by the research personnel in this segment.

The Project Consulting segment includes the costs of the consultants that
deliver the majority of our project consulting services. Revenue in this segment
includes the project consulting revenue delivered by the consultants in this
segment.

We evaluate reportable segment performance and allocate resources based on
segment revenues and expenses. Segment expenses include the direct expenses of
each segment organization and exclude selling and marketing expenses, general
and administrative expenses, stock-based compensation expense, depreciation
expense, adjustments to incentive bonus compensation from target amounts,
amortization of intangible assets, other income (expense) and losses on
investments. The accounting policies used by the segments are the same as those
used in the consolidated financial statements.







                                       24

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© Edgar Online, source Glimpses

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NameTitle
George F. Colony Chairman, President & Chief Executive Officer
Michael A. Doyle Chief Financial Officer
Steven P. Peltzman Chief Business Technology Officer
Robert M. Galford Independent Director
Gretchen G. Teichgraeber Independent Director
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