George Colony - Chairman and Chief Executive Officer Michael Morhardt - Forrester’s Chief Sales Officer Mike Doyle - Chief Financial Officer.
Tim McHugh - William Blair Allen Klee - Sidoti.
Good afternoon and thank you for joining today’s call. With me today are George Colony, Forrester’s Chairman of the Board and CEO; Michael Morhardt, Forrester’s Chief Sales Officer and Mike Doyle, Forrester’s Chief Financial Officer. George will open the call. Mike Morhardt will follow George to discuss sales.
Mike Doyle will then follow Mike Morhardt to discuss their financials. We’ll then open the call to Q&A. A replay of this call will be available until August 26, 2016 and can be accessed by dialing 1-888-843-7419, or internationally at 1-630-652-3042. Please reference the pass code 6414233 [ph].
Before we begin, I would like to remind you this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as expects, beliefs, anticipates, intend, 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’ll now hand the call over to George Colony..
Good afternoon and thanks for joining the call. I will give my analysis of the quarter and an update on the company’s progress. I will then hand the call to Mike Morhardt, who will give an update on sales and Mike Doyle will then give a financial analysis of the quarter and e are going to finish up with questions and answers.
I am pleased to report that the company showed positive financial performance in the quarter exceeding its EPS, margin and revenue guidance. Two and a half years into our strategy, the business continues to gradually strengthen.
This said there are still areas that remain in transition and that’s the reason we are not increasing our guidance for the second half of this year at this time. And Mike Doyle will have more commentary in his remarks. As you all know Forrester serves two broad sets of clients. Users of technology like FedEx and vendors of technology like Microsoft.
As we move forward we are looking to expand our user business at faster rates than the vendor business and we are pursuing this change for three reasons. Number one, the universe of one B+ [ph] users is much larger than vendors in this increases our potential market for new business.
Two, large users offer more opportunity for enrichments and finally three, large users renew at higher rates than the vendor base. Forrester’s top 20 users have an average tenure of 21 years. Our products are increasingly optimized around the challenges and opportunities of large user companies.
We work with these companies as they build a culture of customer recession and customer insight, improve their customer experience and that’s typically measured by our customer experience index and build out their business technology agenda. The effort to expand our user business involve many activities but I wanted to highlight two in this call.
The identification of our target market and the rollout of a new role in sales. As I talked about on the Q1 call we have methodically analyzed the universe of user companies and identified those industries that we believe are the best prospects.
Frank Cespedes, Professor at Harvard Business School published a book in 2014 which outlined how strategy in sales should be aligned and that book has become our Bible. He identified the importance of targeting your products and services at what he calls the ideal customer profile or ICP.
We have now completed extensive work to pinpoint our ICP and are now in the process of adjusting sales territories and our sales motion to best win companies in vertical markets in that cohort. As you might imagine our ICP is centered on those companies that are most impacted by the emergence of the age of the customer.
The second action we are taking to drive our business is the -- our user business is the addition of a client success manager or CSM to premier accounts. This role will ensure that our products are exposed to the right executives at the right time given the priority and sequencing of their internal projects.
The addition of this role ensures that we can continually drive engagement particularly in the first year that a company is a client and we found that high touch in those first twelve months significantly increases renewal rates and then moves the clients towards enrichment in their second and third years.
Turning to the company strategy for a few moments, I wanted to highlight how offerings are morphing from the theory of customer obsession to how our clients can now operate in new ways to achieve growth. Our customer experience forum held in New York City in June was quite different from past CX events.
It was highly focused on the best practises, operating principles and business imperatives of customer experience and construction. From a research we have found the successful companies in new age have four characteristics. One, they are customer centric; they make no decisions without analyzing the impact on their customers.
Two, they are inside focussed continually co-relating to big data to make decisions that will positively impact revenue. Three, they are fast, in business technology of course but also in IT.
And four they are collaborative ripping down internal walls and staying in the way of customer recession and externally linking to partners who can improve the customer experience. The era of theory is over, and the time of action is now.
At the forum an executive from Ford Motor Company talked about the voyage that that company is navigating to transform from products to delivering customer experience.
And from a stage she stated and I’m going to paraphrase here, When we began this journey and needed help improving and measuring our customer experience there was only one company in the world that we felt we could turn to and that company was Forrester. Now all this is happening against the tableau of changing customers.
One of our most intellectual ports of the year describes the rise of the empowered customer that outlines the speed of customer change and the quick evolution in the new patterns of behaviour. One, customers are now far more experimental than they were three years ago. It will take our new technologies at much faster rates.
Two, they are highly device centric. Three, they have integrated the physical world with a digital world, four, they are far more information centric. Information centric, expertly swimming in large pools of data and finally five, they are self centered, they want to improve their lives quickly.
The dynamism and changeability of the customer are the waters that our clients must now swim in everyday. And the good news for Forrester’s business model is that this is not a one and done challenge of large companies, they can’t just say they can’t simply fix the problem and then move on.
Customer expectation is on a lowest low curve up into the right, ever changing and ever intensifying. Large corporations will need Forrester for the long and never ending journey of becoming customer obsessed.
So to conclude we are pleased with our position at midyear and as a company we are looking forward to executing throughout the third and fourth quarters. We certainly have our challenges as we move forward, but we believe that our strategy is resonant, the market is coming to us and we have the products to satisfy that market.
So I now like to pass the call over to Mike Morhardt who will give you the update on sales.
Mike?.
Thanks George. The Forrester sales organization continues to focus our efforts and our resources on the age of the customer market opportunity.
Q2 was a continuation of our strategy which includes targeting those clients and prospects that are most aligned to the age of the customer offerings, providing solutions that match the age of the customer client needs and refining our selling and delivery processes to drive better productivity.
As George mentioned, we are segmenting our clients based on their likelihood to align with our age of the customer offering. We created an ideal customer profile and since January of 2016 we are migrating these clients into our premier selling motion.
This selling motion represents resources and solution to cross the entire Forrester product and service portfolio. Q2 showed continued strong performance from our premier town organization. This is made up of our ideal customer profile clients which represent our largest users and vendors clients worldwide.
As part of our AOC strategy we will be growing this part of our sales organization as we continue to see outside performance from our largest clients. We also saw strong year-over-year growth from our European, Asia Pac and Partner businesses.
With the exception of a few areas like the Middle East, our international businesses are off to a strong start for the year. Leadership changes that we made in these regions have improved results and we continue to thoughtfully add resources across these regions.
Our strategic sales group formally the East and West user team struggled in Q2 on both the retention and enrichment front. We are actively identifying retention drivers and building targeted marketing and product campaigns to improve retention in pipeline growth in the second half.
Our core sales group has made up our smaller vendor accounts and our inside sales organisation. Our vendor sales organization showed moderate growth in Q2 but typically drives most of their growth in the second half of the year. Our inside sales organisation continue to exceed expectations both in headcount growth and in performance.
As I’ve mentioned on previous calls, part of our AOC strategy is to grow our inside sales presence. We started this process in 2015 and since the beginning of 2016 we have doubled their size. We will continue to increase the size of this group over the next 18 months. One of the highlights of the AOC strategy is the update of our AOC research offering.
As a reminder, this is research and leadership board offering allows clients to access both our BT and our M&S research. It is highly differentiated from any other research offering on the market. We released this offering in Q4 of 2015 and saw an immediate impact and that had continued through the first half of 2016.
Roughly one third of our renewable are migrating to this offering with an average uptick in spend of roughly 26% for Q2. We are roughly 15% penetrated in our existing client base and we will continue to aggressively position this highly differentiated product to our clients in prospects.
Finally as we continue to invest in our inside selling organization we have slowed our overall sales headcount for the first half of 2016.
We will continue to invest in the inside sales model in Q3 and we expect to ramp overall hiring in Q4 and in Q1 of 2017 with the intention of growing the sales organization at double digit rates coming out of 2016 and into 2017. With that I will turn it over to Mike Doyle for the financial update.
Mike?.
stock-based compensation expense, amortization of intangibles, reorganization costs and net gains and losses from investments. Also for 2016, we continue to utilize an effective tax rate of 40% for pro forma purposes. For the second quarter of 2016, Forrester exceeded revenue, pro forma operating margin and EPS guidance.
Results reflect strong revenue growth particularly in advisory and consulting and ongoing diligent cost control even as we continue to invest in product innovation and key technologies to improve our client experience.
As was the case in the first quarter most of our sales regions drove solid year-over-year bookings growth fuelled by resurging performance from a number of products that had challenges last year like events, strategy consulting and connect.
In addition, despite an interesting quarter for the foreign exchange markets FX did not have a material impact on our quarterly results. As George mentioned, we still have work to do, but we've made tremendous progress which is reflected in our financial results. Now let me turn to more detail review of our second quarter results.
Forrester's second quarter revenue increased by 6% to $87.8 million from $82.8 million in the second quarter of 2015, second quarter research services revenue increased 5% to $55 million from $52.6 million last year and represented 63% of total revenue for the quarter.
Second quarter advisory services and event revenue increased 9% to $32.8 million from 30.2 million in the second quarter of 2015 and represented 37% of total revenue for the quarter. International revenue mix was 23% for the period ending June 30, 2016, unchanged compared to the same quarter of last year.
I would now like to take you through the activity behind our revenue starting with Forrester research. Forrester’s published research and decision tools enable clients to better anticipate and capitalize on disruptive forces affecting their businesses and organizations.
We believe Forrester research provide insights and frameworks to drive growth in a complex and dynamic market. In the second quarter of 2016, Forrester’s research library included 58 playbooks, the addition of 393 new documents and we hosted 46 webinars for our clients.
As of June 30, 2016, the top three research roles were the CIO with 7,154 members, application development and delivery with 4,739 members and analyst relations with 4,518 members. On to our Forrester connect offerings, which encompass our leadership boards and executive programs.
The Forrester connect offerings are designed to help clients connect with peers and Forrester’s products and professionals and to coach executives to lead far reaching change within their organization. As of June 30, 2016, Forrester connect had a total of 1,460 members, down 4% compared to the same time last year.
Year-over-year membership comparisons reflect the rightsizing of several counsels to optimize client experience and attrition in traditional IT roles not aligned with their age of the customer strategy. Forrester data products and services are designed to provide fact based customer insights to our clients.
Clients can leverage our data products and services or choose to have us conduct custom data analysis on their behalf. For the second quarter revenue increased by 14% driven by continued strong demand for our custom data projects offerings including our customer experience index.
Forrester consulting which includes our advisory and consulting businesses, so our total revenue from the second quarter increased by 7% compared to the prior year. Year-over-year growth was driven by continued strength in our research advisory and content marketing segments.
This is partially offset by declines in our strategy consulting revenue which is the result of lower headcount versus prior year due to the restructuring earlier this year. Forrester events had its busiest quarter of the year in the second quarter holding seven events across the globe.
In Asia Pacific we held our Customer Experience and Marketing Forum in Sydney, and our Digital Transformation Forum in Mumbai. In London we held our Digital Transformation Forum and our forum for marketing leaders. And in the U.S.
we held our Signature Forum on Customer Experience and our forum for marketing leaders in New York, as well as our forum for Digital Transformation Forum in Orlando.
We continue to see bookings improvement in events and a very healthy rebound in sponsorships in particular as we evolve the content and focus on delivering a world class experience to our attendees. I will now highlight the expense and income portions of the income statement.
Operating expenses for the second quarter were $74.5 million, up 5% from $70.9 million in the prior year. Cost of services and fulfilment increased by 6% due to higher outsourced expenses related to consulting into our new digital reprints product, to higher headcount in our research and product organizations and annual merit increases.
Selling and marketing expenses increased by 3% compared to the same period last year related to higher headcount and sales as well as annual merit increases and higher travel and entertainment expense. General and administrative costs increased by 11%, due mainly to higher professional services expenses.
Overall headcount increased by 2% compared to the second quarter of 2015 and by 1% compared to our first quarter. At the end of the second quarter, we had a total staff of 1,336, including a research and consulting staff of 494 and a sales staff of 526.
Research and consulting headcount increased by 1% compared to the second quarter of 2015 and by 2% compared to the first quarter of 2016. Overall sales headcount increased by 1% versus prior year and by 2% compared to the first quarter of 2016. Sales rep headcount increased by 3% compared to the second quarter of 2015 and increase by 4% sequentially.
Operating income was $13.3 million, or 15.2% of revenue, compared with $11.9 million, or 14.3% of revenue in the second quarter of 2015. This is an increase of 12% year-over-year. Other income for the quarter was positive $473,000 compared to a negative $99,000 in the second quarter of 2015.
Net income for the second quarter was $8.3 million and earnings per share was $0.46 on diluted weighted average shares outstanding of 18.1 million, compared with net income of $7.3 million and earnings per share of $0.40 on 18.3 million diluted weighted average shares outstanding in the second quarter of last year.
And now I will review Forrester’s second quarter metrics to provide more perspective on the operating results for the quarter. Agreement value, this represents the total value of all contracts for research and advisory services in place without regard to the amount of revenue that has already been recognized.
As of June 30, 2016, agreement value was $241.8 million, up 4% from the second quarter of 2015 and up 5% on a constant currency basis. As of June 30, 2016 our total for client companies was 2,481, up four from March 31, 2016 and down one compared to the second quarter of 2015.
Client count, unlike our retention and enrichment metrics, is a point in time metric at the end of each quarter. Forrester’s retention rate for client companies was 76% as of June 30, 2016, down from 77% the prior quarter and down four points compared to the last year.
Our dollar retention rate remained unchanged compared to the prior quarter, and decreased by two points compared to last year. Our enrichment rate was 96% for the period ending June 30, 2016, down 1% compared to the prior quarter and down 1% compared to the second quarter of last year.
We calculate client and dollar retention rates and enrichment rates on a rolling 12-month basis due to the fluctuations, which can occur between quarters with deals that close early or slip into the next quarter. The rolling 12-month methodology captures the proper trend information. Now, I’d like to review the balance sheet.
Our total cash and marketable securities at June 30 was $126.5 million, which is an increase of $25.4 million from a $101.1 at year end 2015. Cash from operations was $9.1 million for the quarter, as compared to $8.5 million in the second quarter of last year.
We received 3 million in cash from options exercised for the quarter, as compared to $600,000 in the second quarter of last year. We also paid a dividend in the second quarter, which amounted to $3.2 million or $0.18 per share. Accounts receivable at June 30, 2016 was $42.7 million, which consistent with the amount as of June 30, 2015.
Our days sales outstanding at June 30, 2016 was 44 days compared to 47 days at June 30, 2015. An account receivable over 90 days was 4% at June 30, 2016 compared to 3% at June 30, 2015. Deferred revenue at June 30, 2016 was $138.6 million, an increase of 2% compared to June 30, 2015 and 3% on a constant currency basis.
In closing, we had a very strong quarter comfortably beating guidance for revenue, operating margin and earnings per share. Advisory and consulting revenue delivered by our research and consulting organizations performed better than expected.
Operating income and earnings per share benefited from this strong revenue performance and continued focus on operating expense management. For the first six months of 2016, operating income has increased 14% versus last year and ahead of expectations.
As a result we've brought up the lower end of our full year guidance for both pro forma revenue and earnings per share. However we're leaving the upper end of our guidance unchanged at this point. We're being somewhat conservative on consulting and advisory revenue as our new leader of consulting settles into the organization.
On the expense front we expect to increase our investment in sales to bring in additional headcount in existing and new sales roles like the CSM role described by George as the year progresses. In summary as George mentioned in his comment our clients responded positively to our strategy.
It's resonating in the marketplace and we expect it will continue to increase demand for our services going forward. Now, let me take you through these specifics of our guidance for the third quarter and full year 2016.
As a reminder, our guidance excludes the following; amortization of intangible assets, which we expect to be approximately $200,000 for the third quarter and approximately $800,000 for the full year of 2016, stock-based compensation expense of $2 million to $2.2 million for the third quarter, and $8.1 million to $8.6 million for the full-year 2016.
Reorganization cost of $1 million for the full year 2016, and any investment gains and losses.
Forrester is providing third quarter 2016 financial guidance as follows; total revenues of approximately $78.5 million to $81.5 million, pro forma operating margin of approximately 11% to 12%, pro forma effective tax rate of 40%, pro forma diluted earnings per share of approximately $0.26 to $0.31.
Our full year 2016 guidance which reflects an in the low end of both revenue and EPS is as follows; total revenues of approximately $324 million to $330 million, pro forma operating margin of approximately 10.5% to 11.5%, pro forma effective tax rate of 40%, pro forma diluted earnings per share of approximately $1.16 to $1.22.
We’ve provided guidance on a GAAP basis for the third quarter and full year 2016 in our press release and 8-K filed today. Thanks very much. And I’m now going to turn the call back over to the operator for the Q&A portion of our call..
Thank you. We'll now begin the question and answer session. [Operator Instructions] And we have Tim McHugh from William Blair in line with the questions. Please go ahead..
Yes. Thanks. Maybe just first on I guess, I know you won't give us guidance for 2017, but can you help us think about the number of sales people I guess and the comment that you're going to – it's basically going to take you sometime to ramp backup the sales productivity level.
How does that impact? How we think about bookings and revenue growth? Basically, is there enough room just to drive productivity or does this transition in the sales force kind of push up growth at all a bit?.
I would say the intent -- Tim, this is Mike Doyle. The intent is not to push up growth. So the intent is that we're -- you know clearly all along we've talked about trying to drive sales productivity but also we are going to be increasing our sales headcount.
So it's going to be a combination of both of those factors to drive the expected growth numbers. So, we're not walking away from growth at all. I think we'll build combination of sales productivity and sales headcount. I'll let Mike to add color..
Tim, this is Mike Morhardt. As I mentioned the focus has been pretty much on the insight model and starting to build that out. That's going to continue in be ongoing. As we did that we slowed down our kind of field based sales headcount growth, and as we migrated some of the accounts in to this ideal client profile, and some into the insight model.
We're doing this very, very thoughtfully, meaning we're taking our time and its post renewal so we don't wanted to affect retention or existing pipeline.
So, we expect strong productivity improvement and we're seeing some of those already in the insight model, but hopefully even better productivity improvements as we institute some of things that George mentioned with their customer success manager which will help both our retention rates and also get our sales people out in front of our clients even more and less focused on kind of the day-to-day activities that the client needs.
So, no, they shouldn't takeaway. We're going to be looking at both growth and productivity..
Okay, great. And can you elaborate -- you mentioned your I guess you're kind of looking into the ways of your help, improve client retention and I think it was mainly the U.S.
part of the business, I guess, do you any more color I guess and what's impacting it and is it right to think of it is mainly kind of concentrated in part of the business?.
It is. We've been doing a lot of analytics, Tim, on trying to understand what drives great retention. And through the data analysis that we've done, we able to get down to four, five things that if we do done well with the clients specific engagement, specific activities that the client does, it leads to great retention.
And so, part of our delivery for example in research is doing inquiry with an analyst. It doesn't mean doing 50 inquiries. It means doing two or three inquiries and it's trying to determine that right balance. And so we're focusing our service organization and our sales organization on those specific activities that lead to great retention.
So, we're implementing that. We'll be implementing that in the second half of this year. It did effect parts of our user business in strategic as I mentioned. But those are some of the drivers that we're putting in place as we look at the second half.
The good news about it is that we already have the signals based on the current client engagement of where we need to focus, so now it just question of getting those clients engaged..
Okay. And then I guess the -- I'm sorry, Mike if I missed it.
But the events, did you tell us -- what was the growth rate for the events part of the business?.
Yes. I think I just put that for you. Let me pull it up for you Tim. Events, actually I don't know if we got specific about events growth. We really did – we had a high number of events in the quarter. The overall bucket of growth, basically it’s a 9% I think for the category..
Okay..
So, we got events growth that's going to be obviously a little bit higher than that. So, we didn't publish that, but….
And how many events were there? And I guess you said a high number?.
Yes. They were. I think we had seven events during the course of the quarter..
Okay. Thank you..
Thanks..
And the next question comes from Allen Klee from Sidoti. Please go ahead..
Yes. Hi. I was very impress with your margins, and I was just trying to understand – I know the revenues were higher than we originally thought and there's probably some operating leverage.
But is there any thoughts of sustainability of higher margins or how do you think of that?.
It's Mike Doyle. I mean this is -- I think they are sustainable if we continue to drive great revenue numbers. The model has always been very kind to margin once that happens.
So we're beginning to see and clearly we want to accelerate that as when you start getting into revenue numbers that in our business even get north of 6%, 7%, 8% you're going to get leverage in margin and that's what we're seeing.
And so, I think that as I think as a sort of put into our guidance, we're taking up the bottom end of revenue but we’ve left unchanged top end on revenue and EPS and I think part of that is you know we’ve got a number of things going on including a new head of consulting who I think is come in and he has landed very well but we are being cautious with our guidance and clearly our intent is to beat it and the margin in EPS you know I like Q3 and Q4 to look like Q2 we’d all be extremely happy.
What we have seen is leverage and that’s natural in this model, when we get good revenue numbers it all falls into place..
That’s great.
And then were there any buybacks in the quarter?.
No..
Okay. Okay, that’s it from me. Thank you..
Thanks..
I would now turn the call back over for final comments..
Okay. Thanks everyone for joining our call. We are happy with the results that we reported and we look forward to seeing as we get out on the road. So thanks again..
Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating and you may now disconnect..