Q3 2022 Forrester Research Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Good day, and thank you for standing by and welcome to <unk> third quarter Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session. Please be advised that today's conference is being recorded I would now like to turn the conference over to Vice President of Investor Relations Tyson Seely. Please go ahead.
Thank you and Hello, everyone. Thanks for joining today's call earlier. This afternoon, we issued our press release for the third quarter of 2022.
If you 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, Enforcers, Chief Financial Officer, Chris Finn.
George will open the call this afternoon, and Chris will follow with a financial update we'll then go into Q&A.
We also have Carrie Johnson, Chief product officer, and our interim Chief sales Officer, Elizabeth Addles Burger with US today 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 their party 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 can find the 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 tighten and thanks to all of you for joining foresters Q3 investor call.
Today I want to cover two topics our performance in Q3, and our continued transition to the Forrester decisions research platform.
Across our business we saw good results in the quarter, we remain confident in our ability to deliver on our annual commitments to investors and a challenging macroeconomic and geopolitical environment.
In the third quarter for sure as revenue grew 8% year over year, which was impacted by a two point foreign currency headwinds.
Margin increased in earnings per share is up 39% year over year.
Wallet and client retention are at 97% and 75% respectively.
Net contract value increase or N. T V. I is up 7% overall down three percentage points compared to Q2.
The Ukraine more than energy uncertainty have contributed to a slowdown in our European business. It may had the slowest to N T V I growth of our three global regions.
Well overall in Tbi growth has slowed Forrester decision C. V continues to expand at healthy rates driven partially by a strong off cycle enrichment for this new product.
We are reiterating our revenue guidance for 2022.
Given ongoing expense management, we've raised margin and EPS guidance for the fourth quarter.
And we continue to drive free cash flow.
Chris will provide more details in a few moments.
Turning to our products.
Job one in 2022 has been transitioning clients to force your decisions and this effort is on plan.
The new platform has been available to our clients for 15 months and it is on pace to be one third of our C V by year end now.
Now there are four reasons why this transition is important.
Number one when clients move to Forrester decisions, they graduate to larger contracts.
Two wallet retention for Forrester decisions is running higher than legacy products.
With 16 different services it is a powerful enrichment engine.
Three clients perceive enhanced value enforcer decisions.
Through embedded benchmarks certification models frameworks and guidance sessions.
And finally for Forrester decisions includes vision strategy and execution research.
The latter will be highly relevant to companies as they look to sharpen their operations in uncertain economic times, making the product stickier.
So as an example of the strong execution focus of Porsche decisions. We released planning guide in the third quarter. These are specific recommendations to help each of the 16 different executives, we serve build their budgets for the upcoming year.
And here are some highlights.
Our surveys are showing that executives are overly optimistic about their proposed spending increases for 2023, and we are urging Morris trade and financial discipline.
While budgets will be generally curtailed spending in customer insight technology, cyber security and sales productivity tools should be protected.
Tech executives should use this opportunity to optimize their software contracts public cloud agreements and digital innovation outsourcing contracts.
And finally companies should continue to spend on select emerging tech exam.
Examples include edge intelligence.
Terry Bots, which optimized software development and customer privacy technology.
With the ongoing success of the new platform, we are accelerating transitions and will no longer be selling new legacy research contracts as of January one 2023.
The product continues to attract important new companies in the quarter, a leading U S sports brand a global software provider and a leading SaaS company all signed multimillion dollar multi year Forrester decisions contracts.
Turning now to our events business Q3 was headlined by our flagship technology and innovation North American form which reached record levels across all key metrics and was the largest technology event ever hosted by Forrester.
Overall revenue for the event was up 120% year over year in attendance was up 41%, including a tripling of our C level attendance numbers.
Event sponsorship grew 162% with strong renewals for the coming year.
Forrester events continue to recover from the pandemic and are on track to beat 2019 revenue.
So to conclude over a decades of operation for sure is managed through many recessions in economic downturns.
We have proven stewards of spending planted assets in difficult economic times and those disciplines will service well in this moment.
I have confidence that our people to once again cope with macroeconomic adversity and emerge from these challenging times in a position of strength.
Despite the market challenges, we will remain aggressive in the coming quarters.
At present, we are ramping a record number of sales reps, which will grow C V. In 'twenty 'twenty, three and 'twenty 'twenty four.
As I mentioned earlier fortunate decisions is helping us push deeper with existing clients. We believe that it will help us win new clients and our 80 billion dollar total available market.
I remain excited about the company's future driven by the many opportunities opened up by Forrester decisions and with that I will now turn the call over to Chris for a detailed financial update Chris.
Thanks, George and thank you everyone for joining us this afternoon.
As George discussed we had good third quarter financial results with revenue coming in line with our guidance and margins and EPS exceeding the guide from our last call.
Given the margin and EPS beat this quarter and our continued ability to manage costs in the P&L, we are raising our margin and bottom line targets for the balance of the year I'll discuss this in more detail in a few moments.
Our third quarter financial performance was good there are certainly areas. We continue to focus on to drive execution across the business through the end of the year and into the future.
Before getting into the specifics of the quarter, Let me touch quickly at a high level on what drove these results in the areas. We remain laser focused on going forward.
I'll start with the positives I want to reiterate George's comments that we are very pleased with the transition we are seeing a deforest the decisions through.
Through the third quarter Forrester decisions now makes up over 25% of our C V approaching $100 million of contribution given these numbers, we continue to be confident in having one third of C. V. In the forest of decisions platform by year end further we continue to make progress on hiring within the sales organization through the third quarter, our sales head count is up.
8% on a year over year basis.
Given these uncertain times the management team has done a terrific job of proactively managing the P&L I'd like to thank the entire Forrester team for their continued work to deliver on our financial commitments to all our stakeholders, while also delivering top tier research consulting and advisory services and event experiences to our clients.
With that said we are facing a few headwinds some of which are out of our control and some of which were addressing within our business.
We have seen declines from the previous quarter and our key metrics such as our CV growth rate client retention and wallet retention as we are seeing higher attrition in our legacy business. The turnover that is driving these numbers is largely in our smaller clients as our larger clients continue to embrace forester decisions for those clients who have transitioned we're seeing strong.
Or enrichment in their account spend however, given the difficult selling environment, where we're seeing longer sales cycles and budgetary constraints within clients. We continued to implement initiatives to combat. These issues. These include tighter alignment within customer success sales and marketing and additional resources within the sales force we have work to do to close out the year.
Air, but I'm confident in the Forrester team and the commitments we are putting out today.
Let me now turn to some of the specific results for the third quarter.
As previously mentioned, we delivered GV growth of 7% in the quarter and overall revenue growth of 8% driven by our research and events businesses, specifically for the total company, we generated $127.7 million in revenue compared to $118 $1 million in the prior year period, and 8% year over year increase as I just am.
Mentioned this includes an approximate two percentage point headwind from FX.
Research revenues increased 9% compared to the third quarter of 2021 as a result of the growth in C. V. However, as I mentioned previously client retention and wallet retention were down from the prior quarter, specifically client retention declined one point versus the prior quarter to 75% and wallet retention was down two points to 97%.
Regarding these declines which may continue in the short term there are three specific areas to call out one our sales head count continues to build as we mentioned last quarter. We exited Q2 with our highest number of ramping reps some of whom continue to ramp over the third quarter.
Two we continue to transition clients to foster decisions and this creates some churn in our legacy base as we've discussed before but as mentioned upfront. The clients every transition spend more with us three macroeconomic issues specifically the threat of a recession and the war in Europe had created a headwind for us as it has for many other companies.
Yeah.
With that said we are dealing with these challenges and while some of them may persist in the near term we have confidence in our long term growth potential that will be powered by the fars or decisions platform.
Our consulting business posted revenues of $37.4 million, which were flat compared to the prior year. As you mentioned last quarter. This continued to be driven by a combination of our analysts shifting a portion of their focus to delivering on our CV business and the overall macroeconomic environment.
And finally for our events business, although Q3 is traditionally a light quarter for us the business posted revenues of $3 $3 million, representing an increase of 276% compared to the third quarter of 2021. This growth was driven by continued hybrid approach to in person events with the additional option of virtual attendance.
Continuing down our P&L on an adjusted basis operating expenses for the third quarter increased by 6% Junior high head count and increased compensation costs, specifically on head count for the third quarter, we were up 14% compared to the same period in 2021.
Operating income increased by 25% to $15 $8 million or 12, 4% of revenue in the current quarter compared to $12 $7 million or 10, 7% of revenue in the third quarter of 2021.
Interest expense for the quarter was $6 million as compared to $1 $1 million in the third quarter of 2021. This reduction was driven by lower outstanding debt.
Finally, net income increased 38% and earnings per share increased 39% compared to Q3 of last year with net income at $10 $9 million and a P. S. At 57 cents for the current quarter compared with net income of $7 $9 million and earnings per share of 41 cents in the third quarter of 2021.
Looking at our capital structure year to date cash flow in operating activities was $37.8 million and capital expenditures were $4 $2 million, resulting in a $118 $7 million of cash and investments as we exited the third quarter.
There were no debt payments or stock buybacks this quarter, leaving us with $50 million of outstanding debt and approximately $75 million of our stock repurchase authorization intact.
I'll now walk you through what we're expecting over the final quarter of the year as well as some high level thoughts as we start to look at 2023, let me start with the fourth quarter.
Starting with the top line for fourth quarter revenue, we continue to expect that FX will be an approximately 1% to 2% headwind for the business with an insignificant effect on operating margin.
And our research business for the fourth quarter, we now expect flat to low single digit growth given the slowdown in C. V that we have seen this should lead to full year growth in the business of high single digits.
For our consulting business, we expect revenue growth to be essentially flat in both the fourth quarter and for the full year finally for our events business, we expect fourth quarter revenues to increase by approximately 30% to 40% compared to the previous year and we expect event revenues for the full year to increase by approximately 130% to 140% compared to 2020.
One.
Putting all those factors together for the full business, we expect total revenue of approximately $134 million to $144 million in the fourth quarter and for the full year. We continue to expect total revenue to be $535 million to $545 million.
In terms of other guidance in the fourth quarter of 2022, we expect our operating margin to be 6% to 8% and have raised our full year operating margin by 50 basis points to be 12% to 13% given ongoing cost controls.
We continue to expect interest expense of two and a half billion dollars for the year.
In the fourth quarter and for the full year of 2022, we continue to expect an effective tax rate of 30%.
Finally for the fourth quarter, we expect our adjusted EPS to be in a range of 28 to 38 cents given the upside on our EPS in the third quarter and our ability to manage the P&L. We now expect full year adjusted EPS to be in the range of $2 30.
To $2.40, which is an increase of five cents on both the top and bottom end of the range compared to our previous guide.
Looking beyond Q4 and into 2023, we continue to expect many of the macroeconomic headwinds to remain. These include continued concerns about COVID-19 <unk> impact as we head into the winter months, the ongoing war in Europe, and increased interest rate environment and currency headwinds given all these factors. We believe there is a strong likelihood of a recession.
In 2023.
Despite these challenges the increase in our sales head count and the success, we're seeing with the FRC decisions platform gives us optimism in our long term growth expectations, we have confidence in our foster decisions product and the value. It can help drive for our clients, which has led us to accelerate the migration plans for our legacy products deforested decisions and his jaw.
George mentioned, we have announced the end of sale dates for our legacy products. This acceleration may cause some additional pressure on our key metrics in the coming quarters. However, we strongly believe that a faster transition of our client base. So far some decisions platform will enhance our growth in the long term.
To summarize while we are likely to see uneven performance in our P&L due to the combination of the macroeconomic environment and our accelerated transition of clients to our new product platform. We remain confident in the long term value, we will drive to our customers and shareholders. We will provide more commentary on our outlook for 2023 on our Q4 earnings.
Finally, while we have provided quarterly guidance for some time this will be our last quarter doing so when we report our Q4 results and our outlook for 2023, we will pivot to only providing guidance on a yearly basis. This is meant to match our long term focus on running the business with that said, we will continue to provide commentary on anything.
We're seeing that may affect upcoming quarters with that I'll hand, the call back over to George for closing remarks.
Thanks, Chris.
As Chris and Ive discussed in this call the transition to Forrester decisions remains on track and the company is ready to manage through the recession.
And as a side note there is unparalleled to interest in the Chief sales officer position and we are excited about finding a leader who can take the company into its next era of growth.
Since you won't have another earnings call until next year I'd like to take this moment to wish all of you and your families safe and happy holidays. I also want to thank the entire Forrester team for their hard work and passion.
Forrester rates are dedicated to our clients and that means that our clients are dedicated to Forrester. Thank you for listening to the call and we will now take questions.
Ladies and gentlemen, if you have a question or a comment at this time. Please press star one one on your Touchtone telephone, we will pause for him them, while we compile the Q&A roster.
Yes.
Okay.
Our first question comes from Andrew Nicholas with William Blair. Your line is open.
Hi, good afternoon.
Last quarter you.
Hi last quarter you you cited a few different reasons for Stevie growth slowing.
I think it was sales attrition and some slowness in hiring new reps. It seems like correct me, if I'm wrong, but it seems like that has abated, a little bit and you're on plan in terms of quota carrying head count, but I also just wanted to ask any other two you talked about lower conversion rates in a bit higher than normal seat holder turnover.
Those dynamics moderated at all are there any worse today than they were last quarter. They improved just trying to get a sense for.
What's going on under the Hood on those three.
Aspects.
Yes, Thanks, Andrew.
To your question.
Yes in terms of the slowdown in key metrics.
The prepared remarks.
Presumably a clarification why retention.
They are going to continue to decline in the short term due to those macro economic issues, along with accelerated transition of the legacy <unk> platform, but we expect retention to remain in the low seven days.
Nathan was challenged in the near term or the long term targets, you'll obviously be percentage.
And then finally, we expect to carry through the largest part of the project issue by the end of 'twenty three with at least two thirds of our CD platform as the age of 24.
You're right on the sales head count front I think we are through the bulk of those.
Capacity constraint issues with the hiring.
We are right now at about 85%.
Our sales force is essentially ramped to resolve some ramped reps from going through the bulk of it and so.
It's really been around the client transition over to FTE that machine issued along with some of the macroeconomic challenges, where we've seen elongated sales cycles.
And especially in Europe , as well as SEDAR switches or pressure that market certainly internationally.
Sure.
Understood. Thank you.
In terms of our third quarter results, obviously, and even full year guidance. It looks like despite maintaining revenue outlook you are coming in a bit higher on margins. It seems like I think in your release you talked about your ability to manage costs can you speak a bit to the primary areas of cost.
Savings relative to your expectations heading into the quarter I just wanted to get a sense for.
Where were you are cutting back and whether or not you have any concerns about that impeding growth in future years.
Yes, it's a good question.
We are essentially since Q2.
We have started to tighten our belt here.
Outlook on the economy, and then some of the slowdown in key metrics, obviously its been around areas like <unk>.
Also on a non.
Critical head count as well, we pull back on hiring.
Great year for us, including we're still making investments in areas and scale the business for the long term.
We've been able to tighten our belt.
In the areas in order to control the margins, obviously, EPS and checking and be able to continue.
Throw off cash and profitability.
And look we'll continue to do that and we're going to monitor the outlook on the economy and we're going to continue to monitor our expense base very closely as we move forward.
John .
Top line.
Great. Thank you and then if I could add one more question and then I'll get back in the queue in terms of client retention or even a wallet retention or are there any industries in particular that are.
Underperforming the rest or others that are standouts.
Just interested there and then I think you mentioned.
Europe being the primary drag in terms of geographical dispersion in performance, but if theres any other color. There that you can provide that'd be helpful too. Thank you.
Yes.
I'll make a comment and then maybe Terry chime in as well, but it's really been around the small tech clients.
Where we've seen some of that pressure around retention rates and obviously lot of attention, but once again just to emphasize larger clients and transitioned over to that we've.
We've seen improved retention rates and obviously, a great enrichment as well so that's been working excellent, Florida trademark and commentary, yes, I'll just say.
Hey, Andrew it's Terry just to sort of echo that it is.
Sort of a tale of two retentions on that front when customers convert the rates are actually higher than we expected. They are running what we would want to see it as really appealing room for us to then yes.
Some of the smaller tech maybe similar products connected customers too tough economic times or funding dried up in the interim challenges there.
Yes, Hello, the private equity and venture funded.
In particular.
Yes.
Understood. Thanks, a lot.
One moment for our next question.
Our next question comes from Anja Soderstrom with Sidoti Your line is open.
Alright, Thank you for taking my questions and congratulations on the quarter.
Okay.
And just a follow up on the client retention is just like you are.
Having an easier time, retaining the larger clients in the smaller area that it was smaller tech clients that they saw higher Ann.
Did we have this thing and.
Do you have better and then an expansion opportunity with the larger ones.
It is high on that Gary. Thanks for the question that is the primary strategy around enforced or send them to give us the platform of <unk> services to enrich our contract base and then again very pleased with the results here already at the mid year contract enrichment as we see customers get into the fall.
So jumping quickly start adding new seats for their teams and for their peers. So yes to answer your question that is where we're seeing the growth and also we have a lot of growth in front of us there.
<unk> converted customers to the new platform, yes, and I'd just add.
Sure.
We've done it as we've talked about in our remarks, we're approaching 100 million contribution.
Each day.
Yes.
This was the design of the product for us to actually take advantage of the cross sell up sell opportunities.
The product is designed and.
Across the box.
Areas 16, plus personas.
We're very happy with the enrichment that machine and our expectation is that.
We're going to continue to take advantage of that as we go forward and grow that base.
Yes, as you know.
Our primary clients are what we call lumpy plus companies companies with $100 million of revenue reasonably go there is because they have all 16 of those executives on staff. So again, that's where the ratio will be.
Okay. Thank you and also in terms of hiring a new head of sales how do you how is that coming along and what opportunities do you see then sort of.
Maybe what that person brings on that Kelly didn't have that that might be a positive for you.
Yes, Thanks Ryan.
Joe.
The process around the CFO search.
We've seen that Joe as you noted in the remarks.
Great interest from the market.
And then came into really spoken to so far are really good.
We're focused on cadence and how specific experience growing CV IRR models, managing the scale valvoline businesses.
Dollars.
Clearly, it's going to work for us.
The party organization as we look to unlock the full potential of the Forex changes by phone in the marketplace and get to that two thirds of our CV.
By the end of next year and so we do anticipate to have somewhat of the role by Q1 or in Q1, rather and issue is behind us there will be.
That's it.
I think what we're looking for someone who essentially has scaled businesses.
Like ours with experience specifically in are our models <unk> models.
They understand our market they understand how our cross sell upsell. It works they understand how to do solution selling and are really focused on driving our wellness.
Sales organization, driven by metrics and cyber.
Kelly was excellent she got us here.
Looking for someone to take it to the next phase of growth were to double the size of the Salesforce. The next four years. So this is this is where we're going into a new territory for us.
And again very a lot of interest from.
In the job is a very good candidates. So we're excited about this.
Okay, and how do you think just in general given.
On the hiring spree.
The environment.
I know that has it in stock.
The environment for hiring you are asking.
Yeah Yeah.
Yes.
Okay.
Yes, yes, yes.
Our attrition rates are down to 13%.
Are you seeing better candidate flow and yes, we are definitely improving.
Hi.
Our time to hire just you're getting better as well.
Okay. Thank you that was all for me.
Thank you good morning.
Number four our next question.
Our next question comes from Vincent Colicchio with Barrington. Your line is open is open.
Yes.
Good quarter guys.
Curious any sense for.
<unk>.
Your exposure to small tech clients I assume there's some overlap with new economy clients.
If we look at it.
New economy, and small tech clients together sort of how large is your exposure there.
How concerned should we be about funding issues on that side.
But he said small tech companies and what.
I'm, saying that.
I'm curious how.
Much exposure you have two new economy type of clients you know VC funded companies I assume there's some overlap with small tax. So if you combine those two groups together how large is your exposure.
Yes.
Yes, so we certainly have exposure there I wouldn't I wouldn't characterize it as material anyway.
Certainly in a small clients.
From <unk> perspective, there's definitely some exposure there and we're seeing that.
You had a contract with gel organization, where we're kind of losing some some goodness but.
I wouldn't characterize it.
Material.
Georgia.
Don't have a lot of fringe crypto.
The companies in our portfolio or even even infringe fin techs I mean this is.
There are companies, who are building technology for large corporations.
Again, there are a few that are sure but this is it's mainly small tech companies.
Could you frame.
At this point, maybe a range for sales force growth expectations for 'twenty three.
Yes, Joe.
Let's start with this year, we're going to grow double digits. This year.
Quota carrying reps and going into next year, but we're in the process.
Our planning scenarios and I would expect that we will have sales growth next year.
Guarantee that it's in the double digit range react to see our scenario play out and get through this quarter.
She'd how the macroeconomic situations, but we will definitely be growing this year.
Sure for sure I think the new.
Head of sales Vince will have a lot of opportunity to improve productivity.
Yes, and so I think.
We have some very good capacity, there, which we can tap into we will definitely grow next year, but probably not at the same rate, yes, yes, that's correct.
And then on the sales cycles slowing would you say, it's a meaningful change versus last quarter and I am curious.
Did it worsen as the quarter progressed by month.
I think that's been a long term.
Really the three quarter trend yes.
Pop up in Q3. This is this has been ongoing.
Throughout the year.
Okay. Thanks.
Thanks, gentlemen, nice quarter.
Okay. Thanks, Thank you.
And I'm not showing any further question at this time I would like to turn the call back to management for any closing remarks.
Thanks, everyone.
For joining us this evening on the call.
Myself and Chris and the team can be available for follow up calls. So please reach out to me.
Thank you for calling in today.
Ladies.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
Okay.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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