Q2 2022 Forrester Research Inc Earnings Call

Thank you and Hello, everyone. Thanks for joining today's call.

Earlier. This afternoon, we issued our press release for the second quarter of 2020 two.

Need a copy you can find one on our website in the investors section.

I'm joined this afternoon by our chairman of the Board and CEO , George Colony, and Forester as Chief Financial Officer, Christopher <unk>.

Kelley Hippler, Chief sales officer, and Carrie Johnson, Chief product Officer will also join us for the Q&A portion of the call.

Before we begin I'd like to remind you that this call will contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

Words, such as expects believes anticipates intends plans estimates or similar expressions are intended to identify these forward looking statements.

These statements are based on the company's current plans and expectations and involve risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward looking statements.

Factors that could cause actual results to differ are discussed in our reports and filings with the Securities and Exchange Commission and the company undertakes no obligation to publicly update any forward looking statements, whether as a result of new information future events or otherwise.

Lastly, consistent with our previous calls today, we will be discussing our performance on an adjusted basis, which excludes items affecting comparability.

While reporting on an adjusted basis is not in accordance with GAAP, we believe that reporting numbers unless the adjusted basis provides a meaningful comparison and an appropriate basis for discussion you.

You can find a detailed list of items excluded from these adjusted numbers in our press release and with that I'll hand, it over to George.

Thank you for joining foresters Q2 investor call.

<unk> seen strong results across the business and while we remain confident we can deliver on our bottom line results the dynamic and changeable environment will impact our top line at mid year I would like to highlight three key themes in our business.

Number 140 decisions continues to stay on its fast growth track.

We are managing economic and product transition headwinds and three we continue to grow contract value at double digit rates.

I expect these dynamics to persist through 2022 into 2023.

In the second quarter, we achieved revenue growth of 15% exceeding the high end of our guidance.

This was led by double digit growth in our research business and a nearly 200% increase in events revenue.

The company reached a 19% operating margin exceeding guidance.

Earnings per share surpassed the high end of guidance by 24 cents.

We continued to generate strong cash flow part of which we used to pay down debt and to buy back company's stock.

We delivered our fourth consecutive quarter of double digit contract value growth now.

Now that said, our CV growth dropped to 10% in Q2 down from 15% in the previous quarter.

CV bookings growth slowed for three reasons, one higher than expected sales attrition in a slowness in hiring new sales reps to lower conversion rates, driven by geopolitical and economic conditions and three higher than normal seed holder turnover in our client accounts.

Despite these factors, we expect to ramp our quota carrying head count in the second half and remain optimistic that we will meet our full year guidance for CV growth EPS and profit margin.

Forester decisions, our new flagship research product continues on its growth path as we approach the one year anniversary of its launch.

We are seeing good enrichment deals in the quarter, a large U S Telecom company upgraded into forester decisions, a CV increased 55%.

We also gained a large contract with the department of the Canadian government for Forester decisions and this was our first win since Forester was added to the N M. S O standing offer preferred vendor agreement.

We are continuously improving the forester decisions platform.

In August we plan to expand at Forester decisions from 15 services to 16 services, adding the digital business and strategy persona to the portfolio.

We designed the service for digital leaders, primarily ability companies, who are responsible for building exceptional digital experiences and increasing loyalty.

In Q2, we added benchmarking to the platform.

Our clients expect to use benchmarks to pinpoint where they are lagging competitors, where they should target their future spending and where this should be trimming expense.

Our benchmarks include global averages as well as metrics for specific vertical markets.

The forester decisions platform offers a rich and diverse portfolio of research and here are a few examples that stood out in the quarter.

Our U S Tech labor market forecast revealed that there have been there's been a substantial migration of talent out in Silicon valley in northeastern Metro centers to southern States.

We released the 2022 North America customer experience index at 300 brands, revealing the largest drop in customer experience quality in the history of the benchmark.

The pandemic induced innovation in CX improvement decelerated and companies failed to keep pace with the heightened expectations of consumers.

Now this is important because small changes in CX index, scoring are an early indicator of revenue change for companies. As an example, a one point drop in the CX index score for a mass market auto manufacturer Presages, a 1.2 billion dollar loss in revenue.

We are diligently working to ensure that our research is relevant to our clients as they manage its supply chain imbalances inflationary pressures and threats of recession.

Disruption in digital challenges continue to make this the golden age of research.

Now as I mentioned earlier, our events business is recovering from the pandemic.

We returned it to a hybrid format in Q2 with their two biggest events of the year. The BTB North America summit and customer experience North America, and two global events see actually man and CX Asia Pacific.

C level attendance grew 20% for the BTB summit and 30% for CX North America.

Attendees ticket selling prices grew 25% from 2021 to 2022 and we recorded high attendee satisfaction scores in all regions and in all events in the second quarter.

Average sponsor renewals for next year's events grew 35% and global sponsor deals are up 100% for next year.

And my personal favorite part of our Q2 events was the six time Grammy nominee Black Puma concert in Austin, It was wonderful to see our clients celebrating being together and celebrating a return to normalcy.

Now before I conclude I would like to take a moment to provide a quick update enforcers ESG initiatives.

As noted on our previous call forester aimed to cut carbon emissions, 50% by 2025.

Our anywhere work strategy will help us achieve this goal and we are also assessing our travel policies that are migrating more of our tech platforms and services to the cloud to further reduce emissions.

I will now turn the call over to Chris Finn Forester, CFO , who will give you a financial update Chris. Thanks.

Thanks, George and thanks, again to everyone for joining us as George mentioned, our second quarter results were strong with revenue margins and EPS coming in ahead of the high end of our guidance. We continue to operate in a volatile environment with macroeconomic uncertainty and FX headwinds that we expect to continue as the year unfolds.

This has led us to bring down our top line guidance, but keep our margin and EPS outlook constant given the confidence in our ability to control the P&L, while creating a solid foundation from which we can grow in 2023 and beyond.

Following up on George's remarks, there are many bright spots that have led to our year to date results that we've reported thus far we continue to be pleased with the market reception in pricing that we are achieving with the new forester decisions platform and we're excited to see people at our in person events.

Let me start by focusing on the highlights from the second quarter.

As George mentioned, we delivered CV growth of 10% in the quarter and overall revenue growth of 15% driven by research and events businesses spur.

Specifically for the total company, we generated $148 $2 million in revenue compared to $128 $7 million in the prior year period or 15% year over year increase as I just mentioned.

This includes an approximate one percentage point headwind from FX.

In terms of segment results for the quarter research revenues increased 10% compared to the second quarter of 2021 as a result of the double digit growth in CV.

Client retention client count and wallet retention were down from prior quarter, driven by a combination of an elongated sales cycle lower conversion rates and sales capacity constraints, which were largely driven by lower ramp sales head count based on higher attrition and an ongoing challenging hiring environment.

This resulted in a slow start to our bookings performance in the quarter, Although we realized improved momentum coming out of Q2 with a stronger June performance.

We have also seen that our clients are continuing to experience delays in making buying decisions given the macroeconomic headwinds they're facing.

As we noted last period, we expect continued noise around our client count and retention rates as we migrate our legacy base to the forest and decisions platform with all that said we remain on track for our forester decisions bookings plan and were confident in hitting our CV plan for the year.

Our consulting business posted revenues of $39 $3 million, which were down 4% compared to the prior year due to a combination of our analysts continuing to shift a portion of their focus to delivering on our CV business along with some of our clients delaying scheduled projects.

And finally, our events business posted revenues of $19 $5 million, representing an increase of 191% compared to the second quarter of 2021. This growth was driven by the return to in person events. This year and we were very happy to see people back in person.

Continuing down our P&L on an adjusted basis operating expenses for the second quarter increased by 10% driven by increased expenses related to the move to in person events as well as higher head count and increased compensation costs.

Specifically on head count for the second quarter, we were up 13% compared to the same period in 2021. This was below our hiring expectations leading to additional savings in the period.

Operating income increased by 42% to $27 9 million or 18, 8% of revenue in the current quarter compared to $19.7 million or 15, 3% of revenue in the second quarter of 2021.

Interest expense for the quarter was point $5 million as compared to $1.1 million in the second quarter of 2021. This reduction was driven by lower outstanding debt.

Finally, net income increased 51% and earnings per share increased 52% compared to Q2 of last year with net income at $19.2 million and E. P. S. At one dollar for the current quarter compared with net income of $12 $7 million and earnings per share of <unk> 66 cents in the second quarter of two <unk>.

'twenty one.

Looking at our capital structure during the first half of 2022 cash flow from operating activities was $34.8 million and capital expenditures were $2 $7 million, resulting in a $122.6 million of cash and investments as we exited the quarter.

We also paid down $10 million of our revolver during the second quarter, leaving us with $50 million of outstanding debt.

We repurchased $5 $7 million of our common stock, leaving us with approximately $75 million of our stock repurchase authorization as of June 30th.

I'll now walk you through what we're expecting over the remainder of the year and provide additional commentary.

As I stated upfront the macroeconomic headwinds remain many of which such as the new Covid variant the ongoing war in Europe , and the potential for a recession along with currency headwinds are out of our control specifically, we see the drivers of top line results going forward as follows one the strengthening dollar will.

Continue to put pressure on our top line too.

<unk> as mentioned, we do have head count challenges that are affecting our top line results as well we have a strong pipeline of talent, but are finding our lead time to hire new employees longer than expected largely driven by what continues to be a tight labor market.

Further while attrition has improved from the highs of last year it remains elevated.

Three our sales cycle, given the environment, our clients find themselves in specifically our European clients, we are seeing longer sales cycles, and lower conversion, which is also adding pressure to our topline.

With that said, we've made progress on our sales resource hiring and currently have a record number of ramping sales had this period as we increase our ramp sales head count in the second half we fully believe we can execute and deliver on double digit CV growth. This year as planned however, given the slow start in our Q2 bookings.

And the pacing of bookings in the second half as head count ramps, we expect revenue recognition to be delayed commensurately with bookings. In addition, as I already mentioned FX in the macroeconomic landscape are also likely to pressure our top line results in the second half.

But despite our guide down on the top line, we remain confident in our ability to manage the P&L and deliver on our margin and EPS guidance that we issued at the beginning of the year.

Let me provide some additional color for the third quarter and balance of the year, starting with the top line.

For the full year, we continue to expect that FX will be approximately a 1% to 2% headwind to the business with an insignificant effect on operating margin.

In our research business for the third quarter, we expect mid to high single digit revenue growth and for the full year, we expect high single to low double digit growth based on our projected CV bookings for 2022.

For our consulting business, we expect revenue to be low to mid single digit growth for the third quarter and low single digits for the full year.

Finally for our events business. Our revenue guidance continues to include the assumption that we will be able to hold hybrid events during the year, which is highly dependent on local conditions in each of the cities, where we hold events across the globe.

We are carefully monitoring the new covert variant and will adjust as necessary, but the events. We have held thus far this year have been very successful given all of this we expect third quarter revenues to increase by 190% to 200% compared to prior year and we expect the rent revenues for the full year to approximately double our results from two.

In 'twenty one.

Putting all those factors together for the full business. We would now expect total revenue of approximately 125 million to $129 million in the third quarter and for the full year. We expect total revenue to be 535 million to $545 million.

In terms of other guidance in the third quarter of 2022, we expect our operating margin to be 8% to 10%. We continued to expect our full year operating margin to be 11, five to 12, 5% given additional cost controls and focused investment initiatives.

We also continue to expect interest expense at two and a half million dollars for the year as our lower debt balance should offset expected increases in rates.

In the third quarter and for the full year of 2022, we continue to expect an effective tax rate of 30%.

Finally for the third quarter, we expect our EPS to be in a range of 35 to 41 cents and we continue to hold our guidance for the full year in the range of $2.25 to $2 35.

We remain cautiously optimistic about the months ahead, while there are still many macro headwinds both geopolitical and economic we are confident in what we have laid out today and the shareholder value, we look to create going forward.

With that let me hand, it back to George for some concluding remarks before Q&A.

Thanks, Chris.

Let me provide a quick summary, before we go to Q&A.

To sum up our year to date results and outlook there are three key points.

One for sure will continue to grow and improve forester decisions.

Two we will navigate our economic and transition headwinds and three we expect to continue to grow CV at double digit rates.

Forrester has encountered a number of recessions and economic disruptions over decades of operation and I am confident that the company will manage whatever conditions that developed over the coming months.

And our company meeting last week, we talked about doubling down on our client focus.

You too are forester teams for being on the side and by the side of our clients. This is even more critical in challenging times.

Thank you for listening to the call and I will now turn the call over to the operator for questions.

If you'd like to ask a question. Please press star one on your telephone.

That is star one if you'd like to ask a question.

Our first question comes from Andrew Nicholas with William Blair. Your line is now open.

Yeah.

Hi, Good afternoon. This is actually Trevor on for Brian .

Andrew Thanks, Thanks, so much for taking the questions.

Just wanted to see if you could kind of elaborate a bit more on the macro uncertainty piece I know you mentioned kind of lower conversion rates in some sales cycles extending.

And are you seeing any signs of clients actually starting to kind of actively pulled back or cancel subscriptions at this point or is it kind of just those factors and are any of those dynamics kind of concentrated in a particular customer segment or is it kind of a fairly broad based across the across the customer base.

Hi, Kevin It's Kelley Hippler here and thank you for the question.

So in terms of the.

<unk>.

Softness that we're seeing a lot of it has been centralized a little bit more so in Europe than in other places.

So we did not.

Given the war that is going on over there and then the drop in conversion rate as.

Chris alluded to we are seeing some longer sales cycle, but are confident that a lot of that business. We will still win during the course of the year.

Okay, great. Thank you and then.

I know you mentioned you still expect to hit the CV growth target for the year. Just wondering if you go a bit deeper there since there was a bit of deceleration relative to that.

Past few quarters.

Wondering if you could kind of talk about some of the factors like new logos new seats per client in pricing or anything else.

Those kind of decelerated a bit this quarter and.

How would you expect that to play out the rest of the year, we would expect to hit the double digit growth even if the macro does get worse from here. Thank you.

Sure Trevor Kelly again here and what I would say is I think our biggest challenge from a performance perspective was just the number of ramp reps that we had out in the field. So we have a record number of sales reps are going to be coming off of ramp in this quarter and so a lot of what we thought from a metrics perspective was just driven by.

Not having as many folks out in the field as we were anticipating we continue to see good wallet retention on the forester decisions portfolio and still continue to see a little bit of noise with some of our legacy products.

And Trevor George here, I'd say much of our confidence comes from the velocity, we're seeing in forester decisions.

It is on track on plan.

This product is performing well.

Okay got it that is good to hear alright, well. Thank you very much I appreciate it.

Thanks, Jamie sure.

Okay.

Our next question comes from the line of Vincent Colicchio with Bernstein.

Yes.

I'm curious.

What's your CV pipeline, you had mentioned that the bookings for CV improved in June .

Curious what your pipeline looks like right now versus this period last quarter.

Hi, Ben sure Kelly here I'll take that one.

So in terms of pipeline for Q3, we are starting Q3 from a better position than we started in Q2 as part of that as well has been our strategy with forester decisions.

Decisions to sign multi year deals.

You might recall, we launched that product last August and from there forward about 70% of the <unk> deals that we sold were a multiyear deal. So the good news as we walk into Q3 and Q4 with more of our business already booked.

Previously and then in addition to that we've got ramping reps. So our pipeline is in better shape going into Q3 that it was going into Q2.

And did I hear that.

You're on track for your previously communicated sales growth goal.

And if so are you assuming.

Christian levels decline from where they are currently.

In the next two quarters.

So we are on pace.

When we get to our original targets for 2022, but we've actually started to proactively hire for 2023 to help make up some of the ground from the attrition that we saw in Q2. So we expect to add double digit head count throughout the course of the year. So not only help us get to our goals for 2022, but to keep double digit C.

<unk> growth as we head into 2023.

And.

The attrition was at.

Highly concentrated.

More senior people one of the distribution look like.

Sure.

So in terms of the distribution I would say it was some of our more senior reps.

Decided to Ah.

Got it forester with some of the change in strategy, coupled with a very hot job market that made it lucrative for them to do so but the good news is for those folks who are joining for us or theyre coming into foreign Sir.

We're standing and knowing about our change in strategy to focus on CV, how we wanted to be working with our clients on their side and by their side.

The new hires are fully bought into the model and where we're going and how that's going to help add more value for our clients moving forward.

And I think last quarter, you had talked about improving the ramp time for new reps.

You indicated you would reduce it from one year to nine months are you at that are you seeing that.

We are on pace for that which again given some of the delays that we saw in hiring will put some of this production capacity at the backend of Q3 and into Q4, but we are definitely seeing that the fourth circuit decision portfolio makes it much easier to get a followed by a disqualify potential opportunities for the sales force.

<unk>.

So we do expect to see ramp time continue to come down.

Thanks for answering my questions. Thank.

Thank you Ben Thanks, guys.

Okay.

That concludes today's question and answer session I would like to turn the call back to management for closing remarks.

Thank you everyone for joining us today. This is Tyson I won't be around in the coming weeks. If there are any follow up questions. I hope everyone has a great rest of their summer. Thank you.

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

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Okay.