Forrester Research - 10-Q quarterly report FY

 

(MARK ONE)

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (617) 613 — 6000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No þ

As of November 3, 2008, 23,159,163 shares of the registrant’s common stock were outstanding.

 

FORRESTER RESEARCH, INC.
INDEX TO FORM 10-Q

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FORRESTER RESEARCH, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

The accompanying notes are an integral part of these consolidated financial statements.

FORRESTER RESEARCH, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

The accompanying notes are an integral part of these consolidated financial statements.

FORRESTER RESEARCH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

The accompanying notes are an integral part of these consolidated financial statements.

FORRESTER RESEARCH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. It is recommended that these financial statements be read in conjunction with the consolidated financial statements and related notes that appear in the Forrester Research, Inc. (“Forrester”) Annual Report on Form 10-K for the year ended December 31, 2007. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position, results of operations, and cash flows as of the dates and for the periods presented have been included. The results of operations for the nine months ended September 30, 2008 may not be indicative of the results for the year ended December 31, 2008, or any other period.

Fair Value

Effective January 1, 2008, Forrester Research, Inc. (“Forrester” or “the Company”) adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157”, which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

The adoption of this statement did not have a material impact on the Company’s consolidated results of operations or financial condition.

In accordance with SFAS 157, the following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and available-for-sale securities) measured at fair value on a recurring basis as of September 30, 2008 (in thousands):

Level 3 assets consist of auction rate securities (“ARS”) from various issuers collateralized by student loans and municipal debt. In February 2008, auctions began to fail for these securities and the majority of the auctions since then have failed. Based on the overall failure rate of these auctions, the frequency of the failures, the underlying maturities of the securities, and the fact that the funds associated with the ARS may not be accessible for in excess of 12 months, we have classified auction rate securities as long-term assets on our balance sheet. These investments were recorded at fair value as of September 30, 2008. For the majority of these securities, Forrester used a discounted cash flow methodology to determine fair value with the most significant input categorized as Level 3. Significant inputs that went into the model were the credit quality of the issuer, the percentage and types of guarantees (such as Federal Family Education Loan Program — FFELP), the probability of the auction succeeding or the security being called, and an illiquidity discount factor. The remainder of the securities were valued consistent with historical practices with the most significant input into the valuation being the probability of the security being called or of an auction succeeding.

Based on these inputs, the valuation of the securities ranged from par to a 28% discount from par with a weighted average discount across the portfolio of 4%. Changes in the assumptions of Forrester’s model based on dynamic market conditions could have a significant impact on the valuation of these securities, which may lead Forrester to record an impairment charge for these securities in the future.

The following table provides a summary of changes in fair value of the Company’s Level 3 financial assets as of September 30, 2008 (in thousands):

Stock-Based Compensation

     Forrester accounts for share-based payments under the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). All of Forrester’s stock-based compensation is accounted for as equity instruments and Forrester has five equity plans required to be evaluated under SFAS No. 123R: two equity incentive plans, two directors’ stock option plans and an employee stock purchase plan. Under the provisions of SFAS No. 123R, Forrester recognizes the fair value of stock-based compensation in net income over the requisite service period of the individual grantee, which generally equals the vesting period.

     Forrester recorded approximately $1.3 million and $1.4 million of stock-based compensation in the accompanying consolidated statements of income for the three months ended September 30, 2008 and 2007, respectively, and $4.0 million and $5.8 million for the nine months ended September 30, 2008 and 2007, respectively, included in the following expense categories (in thousands):

          On April 1, 2008, Forrester issued to its employees options to purchase 370,000 shares of common stock. These options are subject to performance criteria and will vest only if certain pro forma operating profit targets related to full year 2008 performance are achieved. The vesting of these options is over 24, 36 or 48 months, or the options could be forfeited, depending on the actual pro forma operating profit achieved for 2008. As of September 30, 2008, operating performance was expected to result in the options vesting over 48 months and expense was recognized assuming that vesting period for the three and nine month periods then ended. Based on historical exercise patterns for options with similar vesting and the expected vesting period at the time of grant, Forrester used an expected option term of 2 years for the year one vest, 3 years for the year two vest, 4 years for the year three vest and 5 years for the year four vest to value these options. The expense related to these options is being recognized on a graded basis.

     On April 2, 2007, Forrester issued to its employees options to purchase 293,600 shares of common stock. These options were subject to performance criteria and would vest only if certain pro forma operating margin percentage targets related to full year 2007 performance were achieved. The vesting of these options was over 24 or 36 months, or the options could be forfeited, depending on the actual pro forma operating margin achieved for 2007. During 2007, operating performance was expected to result in the options vesting over 36 months and expense was recognized assuming that vesting period for the interim reporting periods of 2007. Based on historical exercise patterns for options with similar vesting and the expected vesting period at the time of grant, Forrester used an expected option term of 2 years for the year one vest, 3 years for the year two vest and 4 years for the year three vest to value these options. The actual pro forma operating margin for 2007 resulted in the options vesting over 36 months and the expense related to these options was recognized on a graded basis.

     On April 3, 2006, Forrester issued to its employees options to purchase 587,500 shares of common stock. These options were subject to performance criteria and would vest only if certain pro forma operating margin targets related to full year 2006 performance were achieved. The vesting of these options was over 24 or 36 months, or the options could be forfeited, depending on the actual pro forma operating margin achieved for 2006. At the time of grant, operating performance was expected to result in the options vesting over 36 months. Based on historical exercise patterns for options with similar vesting and the expected vesting period at the time of grant, Forrester used an expected option term of 2 years for the year one vest, 3 years for the year two vest and 4 years for the year three vest to value these options. The actual pro forma operating margin for 2006 resulted in accelerated vesting of the options over 24 months and the expense related to these options was recognized on a graded basis.

Forrester utilized the Black-Scholes valuation model for estimating the fair value of the stock-based compensation granted after the adoption of SFAS No. 123R. The options granted under the stock option plans and shares subject to purchase under the employee stock purchase plan were valued using the following assumptions:

     The dividend yield of zero is based on the fact that Forrester has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based, in part, on the historical volatility of Forrester’s common stock as well as management’s expectations of future volatility over the expected term of the awards granted. The risk-free interest rate used is based on the U.S. Treasury Constant Maturity rate with an equivalent remaining term. Where the expected term of Forrester’s stock-based awards does not correspond with the terms for which the interest rates are quoted, Forrester uses the rate with the maturity closest to the award’s expected term. The expected term calculation is based upon using Forrester’s historical experience of exercise patterns.

     Based on Forrester’s historical experience as well as management’s expectations for the next year, a forfeiture rate of 10% was used to determine current period expense. Forrester evaluated various employee groups and determined that the forfeiture experience and expectations were not materially different amongst employee groups and therefore concluded that one forfeiture rate was appropriate. Forrester will record additional expense if the actual forfeiture rate is lower than estimated, and will record recovery of prior expense if the actual forfeiture rate is higher than estimated.

The following table summarizes stock option activity under all stock option plans for the nine months ended September 30, 2008 (in thousands, except per share and average life data):

The total intrinsic value of stock options exercised during the three and nine months ended September 30, 2008 was $3.4 and $10.1 million, respectively. The total intrinsic value of stock options exercised during the nine months ended September 30, 2007 was $462,000. There were no options exercised during the three months ended September 30, 2007. The unamortized fair value of stock options as of September 30, 2008 was $5.8 million, with a weighted average remaining recognition period of 1.46 years.

Income Taxes

Forrester provides for income taxes on an interim basis according to management’s estimate of the effective tax rate expected to be applicable for the full fiscal year ending December 31, 2008.

Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). As a result of the adoption of FIN 48, the Company recognized a $233,000 increase to reserves for income taxes for unrecognized tax benefits, with a corresponding decrease to retained earnings as of January 1, 2007. The Company classifies interest and penalties as a component of tax expense.

As of September 30, 2008, the Company had total gross unrecognized tax benefits of approximately $872,000 compared with approximately $1.4 million as of December 31, 2007, representing a decrease of approximately $528,000 for the first nine months of fiscal 2008. Of the total gross unrecognized tax benefits, $634,000, if recognized, would reduce the effective tax rate in the period of recognition. The decrease in gross unrecognized tax benefit pertains primarily to the settlement of a UK audit which closed out the UK tax years of 2003 through 2005. In addition, the Company accrues interest and any associated penalties related to reserves for income taxes in provision for income taxes. The gross amount of penalties and interest accrued as of September 30, 2008 was $163,000.

The Company files income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions, and many foreign jurisdictions. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, the Company believes that its reserves for income taxes reflect the most probable outcome. The Company adjusts these reserves, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular tax position may require a cash payment. The resolution of a matter would be recognized as an adjustment to the Company’s provision for income taxes and its effective tax rate in the period of resolution.

The number of years with open tax audits varies depending on the tax jurisdiction. The Company’s major taxing jurisdictions include the U.S., the Netherlands, the United Kingdom and Germany.

NOTE 2 — ACQUISITION OF JUPITERRESEARCH

On July 31, 2008, Forrester acquired all of the outstanding capital stock of JUPR Holdings, Inc. (“JUPR Holdings”), the parent company of JupiterResearch, LLC (“JupiterResearch”), for $23.0 million in cash, subject to a working capital adjustment, plus assumed liabilities. JupiterResearch provides business professionals with syndicated research, analysis, and advice backed by proprietary data. The acquisition increased the number of client companies and research and sales personnel and is expected to strengthen the role-based strategy and add greater depth and breadth to the syndicated product offering. The aggregate purchase price was approximately $23.5 million and the preliminary purchase price allocation resulted in an allocation of $16.8 million to goodwill, $8.3 million to intangible assets and $1.6 million to the net liabilities acquired. The acquired intangible assets are being amortized according to the expected cash flows to be received from the underlying assets over their respective weighted average lives as follows:

The Company is currently finalizing the valuation of the assets and liabilities assumed therefore the preliminary purchase price allocation remains subject to potential adjustments. Forrester elected to treat the acquisition of JupiterResearch as a stock purchase for income tax purposes and, accordingly, the goodwill is not deductible for income tax purposes. The results of JupiterResearch’s operations have been included in Forrester’s consolidated financial statements since July 31, 2008 and the Company has not furnished pro forma financial information relating to the acquisition because such information is not material.

NOTE 3 — INTANGIBLE ASSETS

A summary of Forrester’s amortizable intangible assets as of September 30, 2008 is as follows:

Amortization expense related to identifiable intangible assets was approximately $282,000 and $293,000 during the three months ended September 30, 2008 and 2007, respectively, and $476,000 and $978,000 during the nine months ended September 30, 2008 and 2007, respectively. Estimated amortization expense related to identifiable intangible assets that will continue to be amortized is as follows:

NOTE 4 — NET INCOME PER COMMON SHARE

Basic net income per common share for the three and nine months ended September 30, 2008 and 2007 was computed by dividing net income by the basic weighted average number of common shares outstanding during the period. Diluted net income per common share for the three and nine months ended September 30, 2008 and 2007 was computed by dividing net income by the diluted weighted average number of common shares outstanding during the period. The weighted average number of common equivalent shares outstanding has been determined in accordance with the treasury-stock method. Common stock equivalents consist of common stock issuable on the exercise of outstanding options when dilutive. A reconciliation of basic to diluted weighted average shares outstanding is as follows:

NOTE 5 — COMPREHENSIVE INCOME

The components of total comprehensive income for the three and nine months ended September 30, 2008 and 2007 are as follows:

NOTE 6 — AVAILABLE-FOR-SALE SECURITIES

A summary of Forrester’s available-for-sale securities as of September 30, 2008 is as follows:

Included in accumulated other comprehensive loss in the accompanying consolidated balance sheets was $1.4 million of net unrealized losses on available-for-sale securities, net of tax, at September 30, 2008 and $2.1 million of net unrealized gains on available-for-sale securities, net of tax, at December 31, 2007.

In the case of the ARS, the unrealized losses were due principally to illiquidity in the marketplace (see Note 1 for further discussion of fair value). The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because Forrester has the ability and the intent to hold these investments until a recovery of market value, Forrester does not consider these investments to be other-than-temporarily impaired at September 30, 2008.

The following table summarizes the maturity periods of the available-for-sale securities in the Company’s portfolio as of September 30, 2008. As previously discussed, Forrester is now classifying auction rate securities (“ARS”) as long-term investments. The total amount of securities containing auction reset features as of September 30, 2008 was $45.9 million and the following table reflects these investments at their current maturity dates. The actual contractual maturities of these investments were they not to reset would occur at various dates between 2009 and 2041 with $1.2 million maturing in one to five years, $1.1 million maturing in five to ten years and $43.6 million maturing after ten years.

     In February 2008, certain ARSs that Forrester holds experienced failed auctions that limited the liquidity of these securities. Based on current market conditions, it is likely that auction failures will continue that could result in either temporary or other-than-temporary impairments of the ARS holdings, which totaled $45.9 million. The Company has the ability and intent to hold these securities until a successful auction occurs and the ARSs are liquidated at par value. If in the future it is determined that any decline in values of the ARSs is other-than-temporary, the Company would have to recognize the loss in the statement of operations, which could have a material impact on the operating results in the period it is recognized. Further, as the funds associated with the ARSs may not be accessible for in excess of twelve months because of continued failed auctions or the inability to find a buyer outside of the auction process, these securities were classified as long-term assets in the consolidated balance sheet as of September 30, 2008.

     In 2007, Forrester owned an approximately 1.2% ownership interest in comScore, Inc. (“comScore”), a provider of infrastructure services which utilizes proprietary technology to accumulate comprehensive information on consumer buying behavior. In June 2007, comScore (NASDAQ: SCOR) completed an initial public offering in which Forrester’s ownership interest was converted to approximately 126,000 shares. In December 2007, Forrester sold approximately 20,000 shares and as of December 31, 2007, the investment of approximately $3.5 million was included in available-for-sale securities in the accompanying consolidated balance sheet, stated at fair market value with any unrealized gains and losses reported as a component of other comprehensive income. At December 31, 2007, approximately $3.2 million of unrealized gain was recorded as a component of other comprehensive income. In February 2008, Forrester sold an additional 20,000 shares and the remaining 86,000 shares were sold in May 2008 resulting in gains of approximately $387,000 and $1.7 million, respectively.

NOTE 7— NON-MARKETABLE INVESTMENTS

     In June 2000, Forrester committed to invest $20.0 million in two technology-related private equity investment funds with capital contributions required to be funded over an expected period of five years. During the three months ended September 30, 2008, Forrester contributed approximately $13,000 to these investment funds. No contributions were made during the three months ended September 30, 2007. During the nine months ended September 30, 2008 and 2007, Forrester contributed approximately $38,000 and $113,000 to these investment funds, respectively, resulting in total cumulative contributions of approximately $19.5 million to date. One of these investments is being accounted for using the cost method and, accordingly, is valued at cost unless an other than temporary impairment in its value occurs or the investment is liquidated. The other investment is being accounted for using the equity method as the investment is a limited partnership and Forrester has an ownership interest in the limited partnership in excess of 5% and, accordingly, Forrester records its share of the investee’s operating results each period. During the three months ended September 30, 2008 and 2007, gross distributions of approximately $38,000 and $175,000 respectively, were recorded and resulted in gains of approximately $26,000 and $98,000, respectively in the consolidated statements of income. During the nine months ended September 30, 2008 and 2007, gross distributions of $288,000 and $788,000, respectively, were recorded and resulted in gains of $160,000 and $469,000, respectively in the consolidated statements of income. During the three months ended September 30, 2008 and 2007 there were no impairments recorded. During the nine months ended September 30, 2008 and 2007, the Company recorded impairments of $74,000 and $2.0 million, respectively. During each of the three and nine months ended September 30, 2008 and 2007, fund management charges of approximately $84,000 and $252,000, respectively were included in other income, net in the consolidated statements of income. Fund management charges are recorded as a reduction of the investment’s carrying value.

     Forrester has adopted a cash bonus plan to pay bonuses, after the return of invested capital, measured by the proceeds of a portion of its share of net profits from these investments, if any, to certain key employees, subject to the terms and conditions of the plan. The payment of such bonuses would result in compensation expense with respect to the amounts so paid. To date, no bonuses have been paid under this plan. The principal purpose of this cash bonus plan was to retain key employees by allowing them to participate in a portion of the potential return from Forrester’s technology-related investments if they remained employed by the Company. The plan was established at

a time when technology and internet companies were growing significantly, and providing incentives to retain key employees during that time was important.

     In December 2003, Forrester committed to invest an additional $2.0 million over an expected capital contribution period of 2 years in an annex fund of one of the two private equity investment funds. The annex fund investment is outside of the scope of the previously mentioned bonus plan. As of September 30, 2008, Forrester had contributed $2.0 million to this fund. This investment is being accounted for using the equity method as the investment is a limited partnership and Forrester has an ownership interest in the limited partnership in excess of 5% and, accordingly, Forrester records its share of the investee’s operating results each period. During the three months ended September 30, 2008 and 2007 there were no impairments recorded. During the nine months ended September 30, 2008 and 2007, Forrester recorded impairments of approximately $4,000 and $123,000, respectively, which were included in the consolidated statements of income. During the nine months ended September 30, 2007, Forrester received a distribution of $39,000 which was accounted for as a return of capital.

     The timing of the recognition of future gains or losses from these investment funds is beyond Forrester’s control. As a result, it is not possible to predict when Forrester will recognize any gains or losses, if Forrester will award cash bonuses based on the net profit from such investments, or when Forrester will incur compensation expense in connection with the payment of such bonuses. If the investment funds realize large gains or losses on their investments, Forrester could experience significant variations in its quarterly results unrelated to its business operations. These variations could be due to significant gains or losses or to significant compensation expenses. While gains may offset compensation expenses in a particular quarter, there can be no assurance that related gains and compensation expenses will occur in the same quarters.

NOTE 8 — STOCK REPURCHASE

Through 2008, the Board of Directors authorized an aggregate $150 million to purchase common stock under the stock repurchase program. The shares repurchased were used, among other things, in connection with Forrester’s employee stock option and purchase plans. As of September 30, 2008, Forrester had repurchased approximately 5.9 million shares of common stock at an aggregate cost of approximately $116.5 million.

NOTE 9 — OPERATING SEGMENT AND ENTERPRISE WIDE REPORTING

Forrester manages its business within three principal client groups (“Client Groups”), with each client group responsible for writing relevant research for the roles within the client organizations on a worldwide basis. The three client groups are: Information Technology Client Group (“IT”), Technology Industry Client Group (“TI”), and the Marketing and Strategy Client Group (“M&S”). All of the Client Groups generate revenues through sales of similar research and advisory and other service offerings targeted at specific roles within their targeted clients. Each of the Client Groups consists of a sales force responsible for selling to clients located within the Client Group’s target client base and research personnel focused primarily on issues relevant to particular roles and to the day-to-day responsibilities of persons within the roles. The results of JupiterResearch (see Note 2) are included in the M&S Client Group. Amounts included in the “Other” segment relate to the operations of the events sales and production departments. Revenue reported in the “Other” operating segment consists primarily of sponsorships and event tickets to Forrester events. As of January 1, 2008, the European sales force was integrated into the Client Groups. As a result, expenses related to the European sales force were reclassified from corporate expenses to the Client Groups for 2007, in order to conform with the current year presentation.

Forrester evaluates reportable segment performance and allocates resources based on direct margin. Direct margin, as presented below, is defined as operating income excluding certain selling and marketing expenses, client services, non-cash stock-based compensation expense, general and administrative expenses, depreciation expense and amortization of intangibles. The accounting policies used by the reportable segments are the same as those used in the consolidated financial statements.

Forrester does not identify or allocate assets, including capital expenditures, by operating segment. Accordingly, assets are not being reported by segment because the information is not available by segment and is not reviewed in the evaluation of performance or in making decisions on the allocation of resources.

The following tables present information about reportable segments.

Revenues by geographic client location and as a percentage of total revenues are as follows:

NOTE 10 — STOCK OPTION INVESTIGATION: RESTATEMENT OF HISTORICAL FINANCIAL STATEMENTS

During the three months ended September 30, 2008 and 2007, the Company incurred expenses of $487,000 and $808,000 related to the stock option investigation and restatement of the Company’s historical financial statements, respectively, which have been recorded in the caption General and Administrative Expense. During the nine months ended September 30, 2008 and 2007, the Company incurred expenses of $1.1 million and $3.6 million related to the stock option investigation and restatement of the Company’s historical financial statements, respectively, which have been recorded in the caption General and Administrative Expense.

NOTE 11 — RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS 141 (revised), “Business Combinations,” (“SFAS 141R”). The standard changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. SFAS 141R is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company expects to adopt SFAS 141R for any business combinations entered into beginning in fiscal 2009. The Company is evaluating the impact, if any, that SFAS 141R may have on its consolidated financial statements.

In May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 has an objective to identify accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States (the GAAP hierarchy). The statement was issued to provide companies with guidance regarding the hierarchy of the accounting promulgation when researching the accounting treatment for a transaction or event. The Statement will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company is evaluating the impact, if any, that SFAS 162 may have on its consolidated financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains 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 include, but are not limited to, statements about the adequacy of our liquidity and capital resources and the success of and demand for our research and advisory products and services. These statements are based on our current plans and expectations and involve risks and uncertainties that could cause actual future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual future activities and results to differ include, among others, our ability to anticipate trends in technology spending in the marketplace and business and economic conditions, market trends, competition, the ability to attract and retain professional staff, possible variations in our quarterly operating results, risks associated with our ability to offer new products and services and our dependence on renewals of our membership-based research services and on key personnel. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

We derive revenues from memberships to our research product offerings and from our advisory services and events available through what we refer to as Research, Data, Consulting, and Community offerings. We offer contracts for our research products that are typically renewable annually and payable in advance. Research revenues are recognized as revenue ratably over the term of the contract. Accordingly, a substantial portion of our billings are initially recorded as deferred revenue. Clients purchase advisory services offered through our Data, Consulting and Community products and services to supplement their memberships to our research. Billings attributable to advisory services are initially recorded as deferred revenue and are recognized as revenue when the services are performed. Event billings are also initially recorded as deferred revenue and are recognized as revenue upon completion of each event. Consequently, changes in the number and value of client contracts, both net decreases as well as net increases, impact our revenues and other results over a period of several months.

Our primary operating expenses consist of cost of services and fulfillment, selling and marketing expenses, general and administrative expenses, depreciation, and amortization of intangible assets. Cost of services and fulfillment represents the costs associated with the production and delivery of our products and services, and it includes the costs of salaries, bonuses, and related benefits for research personnel, non-cash stock-based compensation expense and all associated editorial, travel, and support services. Selling and marketing expenses include salaries, employee benefits, travel expenses, non-cash stock-based compensation expense, promotional costs, sales commissions, and other costs incurred in marketing and selling our products and services. General and administrative expenses include the costs of the technology, operations, finance, and strategy groups and our other administrative functions, including salaries, bonuses, employee benefits and non-cash stock-based compensation expense. Overhead costs are allocated over these categories according to the number of employees in each group. Amortization of intangible assets represents the cost of amortizing acquired intangible assets such as customer relationships.

Deferred revenue, agreement value, client retention, dollar retention and enrichment are metrics we believe are important to understanding our business. We believe that the amount of deferred revenue, along with the agreement value of contracts to purchase research and advisory services, provide a significant measure of our business activity. Deferred revenue reflects billings in advance of revenue recognition as of the measurement date. We calculate agreement value as the total revenues recognizable from all research and advisory service contracts in force at a given time (but not including advisory-only contracts), without regard to how much revenue has already been recognized. No single client accounted for more than 2% of agreement value at September 30, 2008 or 2007. We calculate client retention as the number of client companies who renewed with memberships during the most recent twelve-month period as a percentage of those that would have expired during the same period. We calculate dollar retention as a percentage of the dollar value of all client membership contracts renewed during the most recent twelve-month period to the total dollar value of all client membership contracts that expired during the period. We calculate enrichment as a percentage of the dollar value of client membership contracts renewed during the period to the dollar value of the corresponding expiring contracts. Client retention, dollar retention, and enrichment are not necessarily indicative of the rate of future retention of our revenue base. A summary of our key metrics is as follows:

The increase in deferred revenue and agreement value from September 30, 2007 to September 30, 2008 is primarily due to increases in the number of clients and in the average contract size of research only contracts as well as to the acquisition of JupiterResearch in July 2008 which accounted for $3.7 million of deferred revenue, $14.2 million of agreement value and 130 net new clients at September 30, 2008. The average contract size for annual memberships for research only contracts at September 30, 2008 was approximately $45,400, an increase of 6% from $43,000 at September 30, 2007. Client retention, dollar retention and enrichment all increased year over year primarily due to increased demand for our products, reduced discounting and increased prices.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our policies and estimates, including but not limited to, those related to our revenue recognition, non-cash stock-based compensation, allowance for doubtful accounts, non-marketable investments, goodwill and other intangible assets, taxes and valuation and impairment of available for sale securities. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We consider the following accounting policies to be those that require the most subjective judgment or those most important to the portrayal of our financial condition and results of operations. If actual results differ significantly from management’s estimates and projections, there could be a material effect on our financial statements. This is not a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. For further discussion of the application of these and our other accounting policies, see Management’s Discussion and Analysis of Financial Condition and Results of Operations and the notes to consolidated financial statements in our 2007 10-K.

RESULTS OF OPERATIONS

The following table sets forth selected items in our statement of income as a percentage of total revenues for the periods indicated:

THREE MONTHS ENDED SEPTEMBER 30, 2008 AND SEPTEMBER 30, 2007

REVENUES.

The increase in total revenues, in research services revenues and in international revenues is primarily due to an increase in the number of clients, which resulted primarily from an increase in sales personnel, reduced discounting and increased prices. The acquisition of JupiterResearch closed on July 31, 2008 and, as such, JupiterResearch’s operations have been included in the consolidated financial statements since July 31, 2008 resulting in additional

total revenues of $1.8 million during the three months ended September 30, 2008. No single client company accounted for more than 2% of revenues during the three months ended September 30, 2008 or 2007.

The increase in advisory services and other revenues is primarily attributable to increased research personnel available to deliver advisory services. The decrease in advisory services and other revenues as a percentage of total revenues is primarily attributable to our focus on increasing sales of research services.

The decrease in international revenues as a percentage of total revenues is primarily attributable to demand for our products and services growing at a faster rate domestically than internationally.

COST OF SERVICES AND FULFILLMENT.

The increase in cost of services and fulfillment in dollars as well as a percentage of revenues is primarily attributable to increased compensation and benefits costs resulting from an increase in the number of research and fulfillment employees, including as a result of the acquisition of JupiterResearch.

SELLING AND MARKETING.

The increase in selling and marketing expenses in dollars is primarily attributable to increased compensation and benefits costs resulting from an increase in the number of selling and marketing employees, including as a result of the acquisition of JupiterResearch. The decrease in selling and marketing expenses as a percentage of total revenues is primarily attributable to an increased revenue base.

GENERAL AND ADMINISTRATIVE.

The increase in general and administrative expenses in dollars is primarily attributable to increased compensation and benefits costs resulting from an increase in the number of general and administrative employees, including as a result of the acquisition of JupiterResearch. The decrease in general and administrative expenses as a percentage of total revenues is primarily attributable to an increased revenue base.

DEPRECIATION. Depreciation expense remained consistent at $1.0 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.

AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets decreased 4% to $282,000 in the three months ended September 30, 2008 from $293,000 in the three months ended September 30, 2007. The decrease in amortization expense is attributable to the accelerated method we are using to amortize our acquired intangible assets according to the expected cash flows to be received from these assets offset by an increase in amortization expense as a result of the amortization of intangible assets from the acquisition of JupiterResearch on July 31, 2008.

OTHER INCOME, NET. Other income, net, consisting primarily of interest income, decreased 33% to $1.4 million in the three months ended September 30, 2008 from $2.2 million in the three months ended September 30, 2007. The decrease is primarily due to lower returns on invested capital.

GAINS (IMPAIRMENTS) FROM SECURITIES AND NON-MARKETABLE INVESTMENTS, NET. Gains on distributions from non-marketable investments totaled $26,000 and $98,000 in the three months ended September 30, 2008 and 2007, respectively.

PROVISION FOR INCOME TAXES. During the three months ended September 30, 2008, we recorded an income tax provision of approximately $3.7 million, which reflected an effective tax rate of 37%. During the three months ended September 30, 2007, we recorded an income tax provision of approximately $1.7 million, which reflected an effective tax rate of 20%. The increase in our effective tax rate for fiscal year 2008 resulted primarily from a decrease in tax exempt interest income as a percentage of total pre-tax income, an increase in state taxes, and an increase in foreign taxes in 2008 as compared to 2007.

NINE MONTHS ENDED SEPTEMBER 30, 2008 AND SEPTEMBER 30, 2007

The increase in total revenues and in research services revenues is primarily due to an increase in the number of clients, which resulted primarily from an increase in sales personnel, favorable exchange rates, reduced discounting and increased prices. Excluding the impact of exchange rates, revenues would have increased by 14%. The acquisition of JupiterResearch closed on July 31, 2008 and, as such, JupiterResearch’s operations have been included in the consolidated financial statements since July 31, 2008 resulting in additional total revenues of $1.8 million in 2008. No single client company accounted for more than 2% of revenues during the nine months ended September 30, 2008 or 2007.

The increase in advisory services and other revenues is primarily attributable to increased research personnel available to deliver advisory services as well as to an increase in event sponsorship and attendance. The decrease in advisory services and other revenues as a percentage of total revenues is primarily attributable to our focus on increasing sales of research services.

The increase in international revenues is primarily due to favorable exchange rates. The decrease in international revenues as a percentage of total revenues is primarily attributable to demand for our products and services growing at a faster rate domestically than internationally.

COST OF SERVICES AND FULFILLMENT.

The increase in cost of services and fulfillment in dollars is primarily attributable to increased compensation and benefits costs resulting from an increase in the number of research and fulfillment employees, including as a result of the acquisition of JupiterResearch. The decrease in cost of services and fulfillment as a percentage of total revenues is primarily attributable to an increased revenue base.

SELLING AND MARKETING.

The increase in selling and marketing expenses in dollars is primarily attributable to increased compensation and benefits costs resulting from an increase in the number of selling and marketing employees, including as a result of the acquisition of JupiterResearch.

GENERAL AND ADMINISTRATIVE.