Q2 2023 Forrester Research Inc Earnings Call

Good afternoon, and thank you for standing by and welcome to first or second quarter 2023 conference call at.

At this time all participants are in a listen only mode.

The speakers presentation there'll be a question and answer session.

Please be advised that today's conference is being recorded.

I'll now like to turn the conference over to the Vice President of corporate development and Investor Relations at Bryce Morris. Please go ahead.

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

Earlier. This afternoon, we issued a press release for the second quarter of 2023, if you need a copy you can find one on our website in the investors section.

Here with us today to discuss our results are George Colony Forest, as Chief Executive Officer, and Chairman and Crispin Chief Financial Officer, Carrie Johnson, our Chief product Officer, and Nate Swan, Our Chief sales Officer are also here with us for the Q&A section 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 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 unadjusted basis is not in accordance with GAAP. We believe that reporting numbers on this adjusted basis provides.

A meaningful comparison and an appropriate basis broad discussion.

You can find a detailed list of items excluded from these adjusted results in our press release.

And with that I'll hand, it over to George.

Thank you for joining Foresters Q2, 2023 investor call.

As I noted in the Q1 call we are still navigating the dual issues of an uncertain economy and our product transition.

These two factors constitute persistent challenges, which will continue into 2024.

At the Midway point in the year I would like to cover five themes before I turn the call over to Christian for financial update.

Number one foresters second quarter performance and the macroeconomic environment.

Two an update on our events business.

Three the generative AI opportunity.

For enhancements to the Forrester decisions product and five our effort to move Forrester sales from good to great.

In Q2, Forrester continues to navigate the tech recession, and the generally uncertain macroeconomic environment.

With approximately half of our clients residing in the technology vertical we have been susceptible to the pullback in that industry, which began in the second half of 2022.

We have felt that most acutely in our non CV businesses in particular consulting in the sponsorship side of our events business.

While non television has been challenged we've seen our contract value business showed signs of stabilization.

In the second quarter, we secured a two year $5 billion Forrester decisions contract with a major financial services company and this is the largest deal of a new product to date.

Client retention for Forrester decisions did not increase in the quarter, but remains well above historical retention for our legacy research products.

In the quarter, we passed a major milestone in our transition with 51% of our contract value now enforcer decisions up from 44% at the end of Q1.

With the growth of Porsche decisions, we are focusing on selling two one b plus companies and lowering our mix of sub $50 million technology vendors.

As this transition continues we expect that our overall CV retention metrics will increase over time.

Unfortunately, two events I want to share an update on our guidance for the balance of the year.

We are issuing a more precise revenue range of 475 million to $485 million driven by continued stabilization of contract value coupled with the ongoing weakness in our non CV business.

These same dynamics have moved us to reduce both margin and EPS guidance for the full year and Chris will give more details in a few moments.

In Q2, we held four forums, including our two largest north American events, BTB summit and CX North America.

Events revenue for the quarter declined 8% year over year and attendance dropped 13% driven by the U S Tech recession.

In contrast, our forms in EMEA and APAC saw attendance grew by 51% and 36% respectively.

Across all events overall experience scores were up year over year. These franchises remain vital and continue to drive important value for our clients.

More C level executives are clients of force your decisions and this is boosting the seniority of attendees at our events.

C level executives comprised 30% of CX, North America attendees and 33% at BBB summit, both numbers are up from 2022.

Analysts one on ones a critical measure of engagement grew 10% year over year.

And finally, we saw strong sponsorship renewals at a beta beat North America in CX, North America events and.

This is a signal of recovery for this business.

At summit, we recognized several companies with our annual return on integration award. These firms boosted revenue growth by aligning marketing sales and product and.

And winners included IBM, Cisco and cart Dot com.

Best buy was the winner of our inaugural customer obsessed Enterprises Award announced at CX North America.

I want to say a few words about generative artificial intelligence and its impact on Forrester.

Firstly could generative AI replace Forrester.

Will it obviate the need for human generated research.

We believe the journey I posted the greatest threat to content Aggregators company that repackage existing or secondary data news images ideas in writing.

In contrast for sure is at the top of the content watershed. We create original primary research, which cannot be generated three large language model.

We see jet AI as an opportunity for Forrester not a threat to our business.

At the BTB form in CX, North America form in June I kicked off the events with a clearing call that companies must move now on generative AI.

Our clients businesses are going to be inexorably changed by this technology and they must begin to play in this change now.

Forrester was built for a moment like this the.

The company exists to help its clients understand and incorporate new technologies in their quest to win serve and retain their customers.

In the 40 years of the company's history. We've done this many times from client server computing to the internet to cloud to mobile to social.

As with those technologies will help our clients form a gen AI vision create the right strategy and operate with execution models and frameworks.

It's a play we have run many many times in our history.

And here's how we see the opportunity one we're creating generative AI research for our clients.

We've covered the eye for more than a decade, and we have deep background and expertise in the space.

There are now 80 analysts and Forrester that are engaging with our clients on this topic across all the personas that we cover enforcer decisions.

Uniquely to Forrester, we're analyzing Jenny I, it's a technology that can drive our clients' businesses.

Showing them, how large language models can be used to improve customer experience and to generate new competitive advantage.

We are doing this in one integrated research product, unlike our competitors, who have separate and unconnected technology and business research services.

In the second quarter Forrester conducted over 370 inquiry and guidance sessions to answer clients most pressing questions around generative AI.

We have issued 40, Jenny I reports this year and more than 200 units of content addressing the topic in the past six months.

18% of our sessions at BTB Salmon and CX North America addressed Gen AI.

In the second quarter Forrester analyst for quoted in 175 generative AI articles in the business press.

In addition to focusing our research on generative AI, we are using the technology to improve the Forrester decisions platform.

We currently have two development projects underway that will enable our clients using generative AI to find research and answers faster when they visit our site.

As you might remember Forrester acquired glimpse at an AI startup in 2018, the acquisition bolstered our data science and AI development teams.

Finally, we will use general AI to operate the company more efficiently.

We are running a development project using open source large language model to enable our customer success managers to find data faster and put it in the hands of our clients faster.

We envision that this tax will enable TSMC to increased day to day client value, while expanding the VAT and the portfolio of clients that they can serve.

Technology changes like generative AI are the fuel that drives the Forrester business model forward.

Large companies turned to us to help them understand develop and implement new tech Gen. AI represents an extraordinary opportunity for the company.

I'd like to turn to Forrester decisions and update you on enhancements, we're making to the product.

In the second quarter, we made three changes the first was the introduction of Forrester decisions for revenue operations.

We designed the service to help BTB leaders aligned internal operations that maximize customer value and drive higher revenue and profitability.

Secondly, we continue to develop client outcomes, a new feature that identifies client initiatives and link them to Forrester decisions assets.

This actionable and measurable client engagement system will enable our clients to apply for sure decisions to achieve their business outcomes and more on this on the third quarter call.

And third we launched the Forrester take a weekly client email targeted BDC and tech leaders summarizing the most critical news of the week.

Clients requested this motive contact with Forrester, specifically on Friday mornings, when they often dedicate time to engaging with our content.

Open rates are high proportion or take and we are launching a version for BTB marketing clients.

The Forrester take it the first of three new I P types that we will launch this year in Forrester decisions.

The final topic I would like to address the improvements we are making in our sales force.

This work is being led by Nate Swan, our Chief sales officer.

This work is currently focused in three areas one upskilling sales management.

We are equipping leaders with the tools to execute a set of standard operating plays that will drive client growth cross sell and retention.

We are improving their coaching skills. So that they can continually enhance the performance of their teams.

To Upskilling sales associates.

We are rolling out workshops, and training sessions that will guide salespeople to more effectively build pipelines and increased pipeline velocity.

We're optimizing our Onboarding program, so that new talent can ramp up quickly and deliver results faster.

And then finally three strengthening sales operations.

We're enhancing our tech stack, simplifying enablement resources, and improving client and market data.

These changes will ensure that our sales and customer success associates are powerful tools to find the right buyers and deliver world class outcomes for our clients.

Nate has made significant strides in its first six months at Forrester, attracting talented newcomers and quickly building programs to move sales from good to great. We are very glad to have him leading the team.

Now before I turn the call over to Chris I wanted to discuss the results of our recent brand work.

Earlier this year, we commissioned a worldwide brand study conducted by third party firm to assess the health of the Forrester brand.

I'm very happy to report that Forrester ranked as one of the most recognizable research and advisory firms in the world.

While we do not compete directly with them, we were ranked but some August names, including Mckinsey Boston consulting group and band.

In a ranking of jumped into the top five since the last study was conducted three years ago.

I will now turn the call over to Chris Flynn for a full financial update Chris.

Thanks, George and good afternoon, everyone as George mentioned, our second quarter results were impacted by the ongoing business headwinds, we're experiencing with most metrics coming in lower than the prior year, but generally consistent with the prior quarter. We continue to operate in a volatile environment with macroeconomic uncertainty and weakness in our non CV.

Business, specifically with consulting and events that we expect to continue as the year unfolds. This has led us to tightened the high end of our revenue guidance and update our margin and EPS outlook for the year.

Uncertainty around the non CV business has impacted our outlook. However, we have confidence in our ability to continue managing costs, while creating a solid foundation to improve performance.

As George mentioned, we had flat CV in the quarter and overall revenue decreased 9% driven largely by our consulting business.

Pacifically for the total company, we generated $135 $6 million in revenue compared to $148 $2 million in the prior year period, a 9% year over year decrease as I just mentioned in terms of segment results for the quarter.

Research revenues decreased 2% compared to the second quarter 2022 with revenue from our subscription research products growing 2%, but being offset by declines in our reprint product and our other smaller and discontinued products.

Overall client and wallet retention were both flat to Q1 at 74% and 92% respectively. While Forrester decision specific client and wallet retention were down slightly versus the first quarter by approximately one point H at 86% and 92% respectively.

Although overall client count is down from the prior quarter Forest and decisions client count continues to grow and foster decisions client retention remains well above overall client retention by approximately 12 points.

We have seen that our clients, particularly technology clients are continuing to experience delays in making buying decisions given the macroeconomic headwinds they're facing as we noted previously we expect continued noise around our client count and retention rates as we migrate our legacy base to the fashion decision platform.

With all that said we remain on track for FRC decisions migration plan and were confident in hitting or exceeding our targets of two thirds of total CV on forest and decisions by the end of the year.

The quarter provided further encourage rent regarding the platform with a number of enhancements rolled out the largest forest decisions user contract booked in our history, which was a conversion from legacy products to the new platform and our ability to penetrate the technology family of buyers showing improvement.

Our consulting business posted revenues of $30 million, which was down 24% compared to the prior year and this was due to two factors. One we are focusing on using consulting as a lever to increase C V by increasing engagement and identifying cross sell opportunities within our CV client base as such except in limited circumstances.

We've enacted a policy of only selling consult any customers who have a CV relationship with Forrester to due to the uncertain economic environment clients are limiting discretionary spending on consulting projects. This was evident across all of our consulting lines of business, including content marketing strategy and advisory we saw conditions worsening.

Consulting from our prior outlook and we're being cautious with our revised outlook for the remainder of the year, which is the primary driver of the adjustment to our guidance. This quarter overtime, we expect consulting to be a smaller overall portion of our business.

And finally, our events business posted revenues of $17 $9 million, representing a decrease of 8% compared to the second quarter of 2022.

This decline was impacted by both Laura attendance and fewer sponsorship dollars for both the larger North American events. These dual impacts were driven by macro factors influencing technology vendor clients and budget constraints evident at many of our clients. Despite these results client engagement sales engagement and attendee engagement with our analysts.

Were high at every event for example, there are approximately 700 analysts one on one meetings at the events are critical engage in point, which is a 10% increase year on year also as George mentioned more C level executives are clients of ours and decisions and this is driving up the seniority of attendees at our events.

C level executives comprise 30% of CX, North America attendees and 33% at BTB summit, both numbers up from 2022.

Continuing down our P&L on an adjusted basis operating expenses for the second quarter decreased by 9% driven by the restructuring plan, we announced during our Q1 call specifically on head count for the second quarter, we were down 8% compared to the same period in 2022, we plan to keep a close eye on head count hiring and attrition throughout the remainder of the year.

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Operating income decreased by 8% to $25 $7 million or 19% of revenue in the current quarter compared to $27.9 million or 18, four 8% of revenue in the second quarter of 2022.

We continue to manage our margins and remain committed to aligning our cost structure with our revenue outlook.

Interest expense for the quarter was point $7 million as compared to point $5 million in the second quarter of 2022. This increase was driven by higher interest rates compared to a year ago.

Finally, net income and earnings per share decreased 6% compared to Q2 of last year with net income at $18 $1 million and earnings per share at 94 cents for the current quarter compared with net income of $19 $2 million and earnings per share of a dollar in the second quarter of 2022 looking at our capital structure during the first half of two.

<unk> thousand and 23 cash flow from operating activities was $15 $4 million and capital expenditures were $2 $3 million and we had $123.6 million of cash and investments as we exited the quarter, we did not pay down any debt during the second quarter. However, we did repurchase approximately $800000 worth of shares in the quarter.

Leaving us with approximately $74 million of our stock repurchase authorization intact.

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 however, we remain focused on the elements of the business we can control.

Pacifically, we're prioritizing the following areas over the remainder of 2023 and into 2024.

One continued focus on C V with alignment for our product sales consulting and events teams all focused on driving CV growth, we shall see V begin to stabilize as we exited the quarter.

Two we expect ongoing weakness associated with a non CV lines of business, specifically consulting and events and we expect this will continue into the back half of the year for consulting we're developing pre packaged offerings that can be sold specifically alongside forrester decisions, helping to drive more efficient implementation of client initiatives we.

We expect the launch of these pre packaged offerings, which were based on key initiatives. Our clients are focused on will lead to increased client success, and therefore improve client engagement and retention.

For events, we continue to improve the experience as evidenced by the well received launch of our new digital platform.

Three as noted earlier in the call. We continue to work to elevate our go to market strategy and sales force. These changes will improve our focus on selling to vertical markets, new business growth and selling higher in the organization.

In addition, forrester decisions as a premium product and we remain resolute in our discipline around pricing and discounting.

Let me provide some additional color for the balance of the year.

Revenue is now expected to be in the range of 475 million to $485 million. This guidance assumes a slight positive improvement in our outlook for the research business to a mid single digit decline a more cautious outlook driving declines in our consulting business in the low twenties and a decline in our events business in the mid to high single digits for the year.

Operating margins are now expected to be in the range of 10, five to 11, 5% down from our previous guidance of 11, five to 12, 5% based on the weaker outlook and consulting and events interest expense is expected to be approximately $3 million for the year and we're continuing to guide to a full year tax rate of approximately 29%.

Taking all this into account earnings per share is now expected to be in a range of $1 80 to $2 down from our previous guidance of $2 to $2.20.

We remain cautiously optimistic about the months ahead, while there are still many macro headwinds we're seeing some green shoots of recovery around our core research business that being said, we're seeing protracted weakness in our consulting and events businesses, which we expect to continue into the second half of 2023 on balance.

We are confident in our product strategy and our ability to manage expenses going forward. We have a lot of work ahead of us, but I'm encouraged with the ongoing execution on a transformation in a tough environment. We're focused on improving our long term performance and capitalizing on the growth potential of future opportunities, including cross sell and upsell of our forest the decisions client base.

And the client demand driven by generative AI.

Thank you all for taking the time today and with that I'll hand, the call back to George.

Thank you Chris.

This month it for sure is celebrating its 40th year.

Across its four decades of operation Forrester has weathered many economic storms and that's been at the forefront of every major technology Revolution.

The company has proven to be a highly resilient business through changing and uncertain times.

We remain well positioned for long term success and I want to thank for sure as employees customers and investors for their continued support for our important mission.

And with that I'm going to hand, the call back to the operator, and we will now take questions.

Thank you Sir.

As a reminder to ask a question you would need to press star one one on your telephone to withdraw your question. Please press star one again.

Please standby, while we compile the Q&A roster.

And I show our first question comes from the line of.

<unk> soda stream from Sidoti. Please go ahead.

Hi, and thank you for taking my question.

So first I'm just curious in terms of that the Chinese seeing in declines at.

Well, what what kind of clients is that democracy craft behalf.

Yeah, Hi, it's Trish, yeah from a client churn perspective.

It's really continues to be in the small vendor clients that we've discussed before but.

But based on that churn as we go forward, we continue to see that as a smaller percentage of the business and the growth that we continue to see an F D.

The larger 1 billion plus client base and enterprise continues to grow.

B.

Very positive.

A lot of value realizing a lot of value on FTE as a platform.

Okay and the parking tier.

No I was just going to follow up this is carey.

We've talked in the past about FTE being targeted at a $1 billion company as Chris mentioned, and we do see more than 70% of FTE booking then.

Current client base in that segment. So this is a sort of shifting dynamics of the business that we have been very intentionally setting out to do.

Okay that sounds encouraging and then you haven't quite upselling and cross selling opportunities with them.

Larger.

Yeah.

Correct exactly.

Thank you and then in terms of the events are they still are.

They are this is Gary again, we continue to offer both a in.

In person and digital event I think as you know.

Our ability to do that as we transition to digital so quickly and then well known playbook for us at this point and clients.

Experience, both and we also are seeing an increased use of our member tickets for our events.

So attendance coming from act from Forrester decision member clients because of that digital capability as well.

And do you see that right now.

Dan.

Not far off people more profitable today and personnel.

And it is it is going up.

We also offer the ability to post to that.

10 sessions, what we call for them in a box, which is actually very strong little products for us showing that it's a mix of both kind of as you see in the rest of the world right folks are excited to be back in person and this capability expands our audience.

Okay. Thank you and in terms of that the longer sales cycle. You said, there's some economic concerns and budgetary constraints among some of your customers.

And are you seeing that eastern up have they got more clarity as we set up the two quarters here are.

What are you seeing in terms of that from new customers.

Sure Anya this is Nate thanks for the question we are seeing.

Pipelines are starting to grow and we're seeing customers really starting to engage with us more one of the things. We're working on is upscaling, our account executives and account managers to have better conversations with them, they're really moving up the stack and higher in the organization, which is a little bit different kind of conversation there.

And they're used to but they are responding really well to that and leaning into the coaching and development that we're giving them.

<unk> second half workshops coming up over the next couple of weeks on how to better engage with them and make sure that we're engaging in the right.

Sales activities.

And getting the right deals in place so that we're focused on the on the right opportunities that can move quicker through the pipeline.

But it definitely feels like a little bit a little bit of unfreezing going on right now.

Okay. Thank you for that I'll get back in the queue.

Thanks Tanya.

Thank you.

Thank you.

And I show. Our next question comes from the line of Vince Colicchio from Barrington Research. Please go ahead.

Yes, Hello, guys and gals.

It was nice to see the the contract values stabilized in the quarter, Chris and your expectations are you assuming contract value stays flattish in Q3 and Q4.

Yes, thanks for answering the question shall we'd have to do a guide on CV growth, but.

We said in the past, we should expect those metrics to be a little bit lumpy as we go through.

Ongoing product transition with ft, especially in light of the macroeconomic backdrop sort of next few quarters reduced sort of expect to see CV growth move up and down a few points, but be relatively flat with that being said, we continue to get positive feedback on F. D and we're very encouraged by the stabilization in Aero.

While client wallet retention metrics.

That combined with improvements that Nate and his team are making to the sales organization gives us a lot of confidence at meaningful CV growth will turn as we get further lockdown this product transition that we've been talking about.

And the ending sales force number.

It was down quite a bit could you remind me.

How much of that was.

Restructuring or.

What was driving that.

The attrition to pick up.

Yes, Joe It's Chris again, no attrition did not pick up our attrition has been very stable and low that really is from the restructuring that we did in.

In the prior quarter.

And maybe there was it was good to hear that the sea level.

Participation at the events is up.

And maybe George can chime in here too.

Were those numbers.

As expected or did you.

Could you think about can we talk about it in those terms.

And also are you seeing more success selling.

Selling Hyatt how did you perform in terms of selling higher in the organization this quarter in terms of actual sales versus expectations.

Great question, Vince on the first one.

The engage I may have missed it a little bit the engaging at the event might be a little better for carry but I can tell you that from a from a sales standpoint, where we are.

Where we are engaging at more senior levels. So our big win that we talked about earlier in the quarter. Some of the most senior levels in the organization really engaged there.

Showing tons of value to to those senior executives and they in turn sponsored us with senior executives throughout the organization. So that is that as a blueprint for us for the rest of the organization to follow and we're doing a lot of training and activity on that and we are tracking how well art.

Salespeople are doing where they're calling.

Levels in the organization and we should be able to get pretty good metrics in the next quarter on one year, calling higher youre getting a better return to date, we arent able to see those metrics because it's something that we just put into our systems, but we should see feedback on that at the end of Q3.

I can add color.

Yes go ahead of the.

The car to the sea level question out events.

We raised our expectations for C level attendees that event very deliberately.

Bigger focus on what we call our Majestic program, which is getting prospects too.

The event, which is a tighter sales and events playbook.

To get those prospects there at the right level. So that was in fact higher than prior years, but as it as we had hoped and hit our goals for because we had such a deliberate program there the other metric that we're tracking.

In terms of C level.

Penetration against goals as the number of seats that we have per account in ft in particular and.

And that continues I cant talk about those numbers, but that continues to rise very nicely.

As expected and as the platform is meant to do quarter over quarter.

Those are good data points. Thank you I'll go back in the queue.

Thanks Vince.

Yeah.

Thank you.

I'm showing no further questions in the queue at this time I'll like to turn the call back over to Chris <unk> CFO for closing remarks.

Thank you all for joining us. This evening, please reach out to add brush Marsh. If you have any questions or when I follow up conversations the days and weeks ahead. Thank you very much.

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

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