Forrester Research Inc

NASDAQ:FORR

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon, and thank you for standing by. Welcome to Forrester's First Quarter 2024 Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Vice President of Corporate Development and Investor Relations, Ed Bryce Morris. Please go ahead.

[Edward Morris, executive]

Thank you, and hello, everyone. Thanks for joining today's call. Earlier this afternoon, we issued our press release for the first quarter of 2024. 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, Forrester's Chief Executive Officer and Chairman; and Chris Fin, 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 and Litigation Reform Act of 1995. Words such as expects, believes, anticipates, intends, plans, estimates or similar expressions are intended to identify those 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 our 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 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 for our 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.

[George Colony, executive]

Thank you for joining Forrester's Q1 earnings call. With me today is Forrester's Chief Financial Officer, Chris Finn, who will provide a financial update following my remarks. We will then be joined by Carrie Johnson, our Chief Product Officer; and Nate Swan, our Chief Sales Officer, for the Q&A portion of the call. Today, I'd like to cover 5 key themes: number one, our financial performance in Q1; two, the Forrester Decisions migration; three, investments in Generative AI; four, improvements to our sales process and five, a preview of our Q2 events. In the first quarter, CV decreased 4% in alignment with our plan. Our key metrics have stabilized with wallet retention up slightly from the prior quarter at 88% and Forrester Decisions client retention at 82%, flat compared to Q4. Overall, Forrester Decisions client retention continued to outpace our legacy research products with retention of the new platform running 10 points better than its predecessors. As we complete our migration, we anticipate retention to improve, creating a base for a return to contract value growth, and Chris will provide more detail on our metrics shortly. While our CV business is stabilizing, we've continued to see challenges in our consulting business and effect it continues from 2023. The macroeconomic environment, especially within tech, remains difficult with many companies still adverse to spending for projects. We plan to drive this business forward in Q2 and beyond with more focused sales and marketing efforts. We are in the final year of our transition to Forrester Decisions, and I'm pleased to report that our migration efforts remain on track. Since launching our new platform in August of 2021, we have moved 70% of our contract value and are poised to hit our goal of 80% of our CV unforced decisions at year-end. We continue our evolution from a library model, one of which mid-level executives use research to build a reference center for answering one-off questions to a new engagement model is a more strategic, continuous research and advisory partner. This model enables Forrester to focus research on client problems and needs, enabling them to accelerate transformations, better align their functions and drive growth through customer obsession. Now how do we do this? At the onset of a Forrester Decisions relationship, we systematically collect the initiatives and outcomes of clients, the work that companies are engaged in and the results that they are looking to achieve from that work. At the end of Q1, we had recorded initiatives for 85% of Forrester Decisions leader seats, up from 80% in the prior quarter. We think of initiatives and outcomes as the golden thread, guiding the relationship through time, and we believe that this will lead to stickier multiyear engagements. Here's a quote from an IT client and a large multinational food processing company. When you introduce the Forester Decisions model, it really resonated with me that we could think through the initiative end-to-end and plan a series of engagements that help progress that initiative. We could bring a business case forward, put a project around it and then successfully deliver outcomes. Now it feels that with the Forrester Decisions model, you are partners in that endeavor. Forrester Decisions is helping us to expand our business with IT clients. Two research teams are currently resonating with CIOs and their staffs, Generative AI and high-performance IT. Now the world is in the first inning of Generative AI, so much of our research continues to be focused on early applications and sorted through the widening field of technologies and models. Unlike previous emerging technologies, Gen AI is going to touch all of our clients, whether they sell tires, insurance, software or banking services.It is the topic most in demand by our clients and over 50% of Forrester's analysts are directly engaged in Gen AI research. Unsurprisingly, it will be front and center at our 2 largest events of this quarter, B2B Summit in the CX Summit. Departing from traditional thinking, high-performance IT recognizes that there's no one-size-fits-all IT organizational structure. Counterintuitively, this stream of research shows that the best large companies are deploying several different styles of IT simultaneously, enabling them to respond to a multiplicity of diverse market conditions. This further complicates the lives of tech vendors who must gear up to create different solutions for different divisions of the same customer. In addition to the groundbreaking research of Forrester Decisions, we recently made our Generative AI tool Izola available to all of our approximately 1,500 Forrester Decisions accounts. Izola can rapidly synthesize our research, data and insights, shortcutting clients straight to solutions. We are very proud to be the first major tech research firm to deploy a proprietary Generative AI model for clients. Early Izola feedback has been quite positive with customers describing it as useful objective and fast. An executive at a cloud-based software company put it simply, and I quote, "it's absolutely critical for customers of research to have tools just like this." We are also using AI to increase productivity at Forrester. Employees are using Isola for knowledge discovery and topic alignment. We have also rolled out other predictive and Generative AI point solutions to automate work in the company. One of these tools, Scout was recently deployed with our customer success organization to quickly match client interactions with the appropriate analysts. I believe that expertise in Generative AI is a critical asset for all companies, and I'm very proud of how quickly we have built that expertise at Forrester. We continue to advance toward a high-performance sales culture. Under the leadership of Nate Swan, the Forrester sales force is focused on net contract value increase, or NCVI, calling higher and large organizations, operating using a standard process and methodology, selling more multiyear contracts and a culture of continuous coaching and improvement. Forrester sales executives are focused on increasing their insight into client accounts, becoming more influential with our clients, all in the cause of building trust. This enhanced sales motion is matched to the on-your-side and buyer side design at Forrester Decisions, a continuous engagement that enables clients to achieve their outcomes faster. And the strategy is progressing. The North American new business team, for example, is significantly outpacing its first half performance from a year ago. Important large renewals and migrations of existing business occurred in Q1, including a $1.6 million research contract with the technology services client and a $500,000 Forester Decisions in Richmond with a U.S. federal government agency. Before I turn the call over to Chris, I'd like to share a preview of our Q2 events. As we've stated before, events are a critical driver of contract value, bringing Forester's research to life for prospects and existing clients. In the second quarter, we will host 4 events globally, B2B Summit North America and CX Summit in the U.S., Europe and Asia. At B2B Summit, we will recognize Verizon business, DDI and ADP as winners of our return on integration honors for delivering impactful customer experiences through the alignment of marketing, sales and product. To complete my remarks, I want to reiterate my optimism about our long-term business. As I've said on previous calls, we are transitioning to a major new product in a time of general economic challenges and a retrenchment in the technology industry. These conditions have affected our financial performance, but we remain confident that we are making the right moves to set the company up for long-term health and CV growth. I will now turn the call over to Chris for our financial update. Chris?

[Chris Finn, executive]

Thanks, George, and good afternoon, everyone. Our first quarter results were mixed as our CV Research business performed in line with our expectations, while the consulting business underperformed as it continues to be impacted by a challenging budgetary environment and the broader issues affecting the tech market. Despite these uneven results, we saw some positive green shoots in Q1, including reaching the 70% threshold of CV and Forrester Decisions, an uptick in new business supported by interest in our high-performance IT and Gen AI content, the stabilization of our key retention metrics and the expanded rollout of our AI tool, Izola. Q1 saw a 4% CV decline in the quarter and overall revenue decreased 12%. For the total company, we generated $100.1 million in revenue compared to $113.7 million in the prior year period. As we noted on our prior call, we expected revenue decline this year due to the impact from the decline in bookings during 2023. The revenue decline in the first quarter was higher than expected, though, by approximately 4 points, largely driven by our advisory and consulting businesses. We continue to believe that macro headwinds will perpetuate throughout 2024, and this is causing our clients to put off buying decisions or modestly shrinking their overall research budgets. This is significantly impacting our consulting business and to a lesser extent, our research and events businesses. And although we expect to return to bookings growth in the second half of 2024, the revenue impact will be muted this year. In terms of our revenue breakdown for the quarter, Research revenues decreased 5% compared to the first quarter of 2023, with revenue from our subscription research products, down 3%, coupled with declines in our reprint and other small and discontinued products. Overall client retention of 72% was flat and wallet retention of 88% improved slightly compared to Q4. While Forrester Decision specific client retention of 82% was flat and wallet retention of 88% improved versus the fourth quarter. Although overall client count is down from the prior quarter, Forrester Decisions client count continues to grow, and Forrester Decisions client retention remains well above overall client retention by approximately 10 points. As we complete the Forrester Decisions migration in 2024, we expect retention metrics to steadily improve throughout the year. We remain on track for our Forrester Decisions migration plan, and we now have approximately $225 million of CV or 70% of total CV on the platform. Our consulting business posted revenues of $23.1 million, which was down 27% compared to the prior year. Both consulting and advisory product lines had a challenging quarter, and we expect these challenges to continue throughout 2024. And finally, regarding our events business, we do not hold any events in the first quarter and posted revenues of $0.4 million, representing a decrease of 65% compared to the first quarter of 2023. Continuing down our P&L on an adjusted basis, operating expenses for the first quarter decreased by 9%, primarily driven by lower compensation and related costs. Specifically on head count for the first quarter, we were down 14% compared to the same period in 2023. We continue to monitor headcount, hiring and attrition very closely, and we are encouraged that attrition has remained very low throughout 2023 and into 2024. Operating income decreased by 54% to $3.4 million or 3.4% of revenue in the current quarter compared to $7.5 million or 6.6% of revenue in the first quarter of 2023. Lower operating income and margin were primarily driven by declines in our consulting business, coupled with seasonal trends, which impact the business in Q1, including traditionally not holding events during the first quarter. Interest expense for the quarter was $0.8 million, consistent with the first quarter of 2023. Finally, net income and earnings per share decreased 46% and 48%, respectively, compared to Q1 of last year. With net income of $2.8 million in earnings per share at $0.14 for the current quarter compared with net income of $5.1 million and earnings per share of $0.27 in the first quarter of 2023. Looking at our capital structure. First quarter cash flow from operating activities was $0.6 million and capital expenditures were $1.4 million. Cash flows were negatively impacted by the payment of the litigation settlement this quarter as well as severance payments under our restructuring plans. We had $118.5 million of cash and investments as we exited the quarter. We did not pay down any debt during the first quarter. However, we did repurchase approximately $4.1 million worth of shares in the period. In addition, the Board just approved a $25 million increase to the repurchase program, bringing the remaining authorization to $89 million. Guidance for 2024 remains unchanged. So let me provide some additional comments on the outlook for the year. Revenue is still expected to be in the range of $430 million to $450 million. This guidance assumes the outlook for the Research business to be a mid-single-digit decline, a decline in our consulting business in the mid- to high teens and a decline in our events business in the high single digits for the year. Operating margins are still expected to be in the range of 9.5% to 10.5%. Interest expense is expected to be approximately $3 million for the year, and we are continuing to guide to a full year tax rate of approximately 29%. Taking all this into account, we are maintaining earnings per share in the range of $1.50 to $1.70. As expected, 2024 will be a challenging year as we complete the Forrester Decisions migration and continue the evolution of our go-to-market team. We believe we will start to see momentum gather as we progress through the year and into 2025. Our focus is on returning to CV growth driven by flagship Forrester Decisions product. We expect to see ongoing headwinds from the non-CV businesses, specifically in our consulting business. Despite these challenges, we believe Forrester's research has never been more relevant or needed in the marketplace. The expanded rollout this quarter of our Gen AI tool Izola is a testament to our ability to stay at the forefront of technology trends. Furthermore, we believe these technology disruptions will be the fuel to drive future demand for our products. Thank you all for taking the time today. And with that, I will hand the call back to George.

[George Colony, executive]

Thank you, Chris. Before we open up the call for Q&A, I want to reiterate the fundamentals of our business. Large corporations continue to need research and advice to navigate tech changes and shifts in customer behavior. The dynamics that drive long-term demand for Forrester services are not abating, and force decisions is the research platform that allows us to seize this expanding opportunity.I'm now going to hand the call back to the operator, and we will now take questions.

[Operator]

Thank you, sir. [Operator Instructions]. Please stand by while we compile the Q&A roster. And I show our first question comes from the line of Andrew Nicholas from William Blair.

[Thomas Roesch, analyst]

This is Tom Roesch on for Andrew Nicolas. I wanted to ask about what kind of selling environment you saw during the quarter and how it progressed relative to your expectations as well as the fourth quarter?

[George Colony, executive]

Just to clarify, you said what type of selling environment are we seeing? I want to make sure I heard that clearly. By the way.

[Thomas Roesch, analyst]

Yes, the selling.

[George Colony, executive]

Great. So, the selling environment, certainly, we remain very confident in selling to senior executives. We saw with our new business teams, especially that we really increased year-over-year on that new business motion up very significantly, and we see that as a big opportunity in Q2 as well to continue. On the high-tech side, we saw really great progress on our ideal customer profile. So really staying focused there, and that actually is turning in some really good results. But certainly, challenges in other parts of the business in the high-tech side of the business with some of the retention challenges that you would see with the tech recession that is out there. We're seeing really good results in certain sectors like the government sector, we're seeing some good results around the world. So, I feel confident in the selling environment and facing some of the same challenges that I think others face in selling to vendors right now.

[Chris Finn, executive]

Europe and Asia, I think feels stronger than the U.S.

[Thomas Roesch, analyst]

Great. And then for my follow-up, I was wondering what feedback on Izola so far? And kind of what kind of benefits you're expecting as we go through the year, whether it be on retention or maybe new sales?

[Carrie Fanlo, executive]

Sure. I'll start with that. This is Carrie. Client feedback on Izola has been incredibly strong. Part of the reason here is that we have developed this sort of side by side with clients, taking small groups and expanding them in terms of access and really starting to understand the context of a question. So Generative AI can certainly produce some nonsensical results. And we have worked really hard to make sure that the answers are from our trusted research only, and that is what clients have been responding to that it's really helping them get fast answers from across our trusted set of longitudinal research and also then inform the conversations that they're having with our experts more. So, they're getting a leg up in the conversations that are coming to the table with part of the answer, and then we're having deeper conversations with our analysts. I'll let Nate talk a little bit about the Izola as a competitive differentiation and the selling environment, Izola's only available to Forrester Decisions clients, which is a big selling point, we believe, for the new portfolio as we look to both migrate customers and also from a new business perspective. And it's also quite appealing to leaders who are looking for their teams to get up to speed quickly on key initiatives.

[Edward Morris, executive]

Although some legacy clients want Izola, right?

[Carrie Fanlo, executive]

They do. And it's only available to Forrester to [indiscernible].

[Nate Swan, executive]

Yes. And as far as in the selling environment, it certainly makes it easier. You're getting to answers quicker. So clients are looking for answers. They're looking for answers quickly. And so, if we can help save them time, it is certainly well received. So, our existing clients and our prospects have given us great feedback that it is a great time saving effort and has given them really good answers.

[George Colony, executive]

It's also saving time on the Forrester side because CSM don't have to get involved. With those questions.

[Chris Finn, executive]

Yes.

[George Colony, executive]

And I'd also just add one more thing, too, just around -- from a sales perspective. It is opening doors for us, and we're having the conversations, obviously, and that's been helpful. Good question.

[Operator]

And I show our next question comes from the line of Anja Soderstrom from Sidoti.

[Anja Soderstrom, analyst]

I have a follow-up on the Izola solution. You mentioned some legacy clients wants to use -- has it been a driver for them to transition to the Forrest Decision platform or still [indiscernible] there?

[George Colony, executive]

Yes. I think both Carrie and I can comment on that. Forrester Decisions is where we're making the investment into our products. We're not planning on bringing Izola to our legacy products. And so that is another reason to make that migration. It is a difference maker for people. As Chris stated earlier, we're on our path to getting to 80% by the end of the year, and that is one of the big drivers is making it easier for people to do their jobs. So, I think it really is a differentiator for us, and it shows that we're out front in the market and living what we talk about all the time, which is putting something into action that can really help your business.

[Anja Soderstrom, analyst]

Okay. And then in terms of the client's sort of shedding of smaller clients and stick with the land and grab clients. I want to anticipate that to stabilize and we should see client count increase again?

[George Colony, executive]

Yes, it's a good question, Anja. I think as we talked about with CV, we're approaching 80% at the end of this year. That's the target. We're certainly on track to get there. And we've said we will start to see CV growth stabilize this year as we get into the back half and then start to grow slightly flat to slightly up as we exit the year. So, our expectation is that we should start to see client growth move in a positive direction as we exit the year along with CV. I'd also note, just on from a legacy perspective, where we have left for CV, it's approximately $50 million that are in the heritage products. We expect about half of that actually migrate successfully. And I do expect the conversations around Izola to be part of those migration discussions. And then the other half, we expect it to either migrate but at lower overall spend or likely not renew at all. And that's obviously built into our expectations and our guide for the year.

[Anja Soderstrom, analyst]

Okay. And in terms of the larger clients that you are remaining, are you able to measure the expansion opportunity with them and set targets there and also the target for sort of wallet retention.

[Nate Swan, executive]

Yes. So, there's probably multiple ones of us that can make comments here. I would say from a sales perspective, we are always doing our account planning exercises. The nice thing is that we at Forrester have multiple personas in multiple areas that we can go into. Typically, we believe our biggest opportunity is that growth through account expansion into these accounts. We are typically in 1 to 2 buying centers and have another 3 to 4 that we feel we can comfortably go after. And so, as we do our account modeling our account planning, we look at where is the next most logical place to go based on where we're currently at.

[George Colony, executive]

As you know, Forrester Decision was designed for expansion and wallet retention. Nate put a lot of focus on that in the sales force this year.

[Anja Soderstrom, analyst]

Okay. And then I have one question about your share buybacks, my expansion there. Given where you're trading now and this being a transition, do you think you're going to be more aggressive or what's your post buybacks?

[Nate Swan, executive]

Yes. I think as we've discussed this in the past, on we obviously evaluate best uses of cash, including keeping positive drive for optionality. And I think we, along with the Board felt there was a good opportunity to purchase shares in the first quarter, and we're comfortable with the current volume. And we're going to continue to look at it and be opportunistic as we move forward in the year.

[George Colony, executive]

That's why the Board expanded the buyback.

[Nate Swan, executive]

Exactly.

[Operator]

And next and last question comes from the line of Vincent Colicchio from Barrington Research.

[Vincent Colicchio, analyst]

Yes. Curious, how would you characterize the sequential change in the CV business pipeline from last quarter?

[Nate Swan, executive]

CV pipeline is growing. So we put a major focus on it, really [indiscernible] look at the sales organization, the big priorities for us are upscaling so that we can call on those more senior executives now that we're in the middle of that process. We are expecting people to make more calls to higher level executives. So therefore, we expect to generate more pipeline. Sales game is a math game, how much retention do you have? How much growth can you build to start going forward?And so, we are very focused on driving more pipeline in the sales organization. The sales organization is responding really well. They're excited about it. They believe that they have opportunity. And so we believe that the pipeline growth will continue, and we're measuring that on a weekly basis.

[Vincent Colicchio, analyst]

And Nate, is the progress towards selling to more senior people meeting your expectations?

[Nate Swan, executive]

Yes, I think so. I think the sales organization is really leaned in. We are moving from this enterprise access to Forrester Decisions. They're excited about that. That's where our analyst community spends their time. That's where they want to be. They've really embraced the methodology change that we've gone to. We're in the midst of that rollout right now. And so, I think they're very excited because salespeople, they want to be successful in their roles, and they know this is how they're going to be successful.

[George Colony, executive]

And the methodology change is really focused on helping salespeople be more influential and have more insight on the client, and Nate is very relevant for calling high.

[Vincent Colicchio, analyst]

And was consulting weak across the board? Or are there any pockets of strength, such as perhaps Generative AI projects?

[Carrie Fanlo, executive]

We did. Vince, it's Carrie. We did see interest in projects like Generative AI. And of course, they're in these times, clients also come to us to do some cost optimization type of work just looking at their, say, legacy IT portfolio as an example, right, things like that. We do mix our consulting business as a mix of what I would call what we call strategic consulting and then there's some demand Gen work that we do like our TEI. And as you can imagine, in the demand Gen space is where we're heavily dependent on the tech high-tech area, that's where we saw some weaknesses in some of those types of products.

[Vincent Colicchio, analyst]

And Chris, any help on the cadence of revenue and earnings through the balance of the year. Q2 is usually a good strong quarter. But just wondering if we should see any pattern different from seasonal trends in the past we've seen in the past?

[Chris Finn, executive]

Yes. Look, I think, Vince, as we talked about from a revenue perspective, we do expect to continue to see declines this year from a top line perspective. I think on the research services line, I think you should start to see that abate. Certainly, as CV stabilizes and we get through the year, and we do expect that slight flat to slightly up by the end of the year, ending Q4. So, you'll start to see that decline start to slow. I think on the consulting business side, I think we're going to remain challenged there for the rest of the year. And then on events, I'd say it's probably the same story as the research line should start to see that those declines start to abate and get better and slower as we get through the end of the year.

[Operator]

Thank you. That concludes our Q&A session. At this time, I'd like to turn the call back to Mr. Chris Finn, CFO, for closing remarks.

[Chris Finn, executive]

Yes. Thanks, everybody, for joining the call today. It was just talking to everyone. If you have any questions, please follow up with myself or Ed. Thank you.

[Operator]

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