UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED June 30, 2023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER: 000-21433
FORRESTER RESEARCH, INC.
(Exact name of registrant as specified in its charter)
Delaware
04-2797789
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
60 Acorn Park Drive
Cambridge, Massachusetts
02140
(Zip Code)
(Address of principal executive offices)
(617) 613-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, $.01 Par Value
FORR
Nasdaq Global Select Market
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 2, 2023, 19,212,000 shares of the registrant’s common stock were outstanding.
INDEX TO FORM 10-Q
Page
PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
3
Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022
Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022
4
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2023 and 2022
5
Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022
6
Notes to Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
30
Item 4.
Controls and Procedures
PART II
OTHER INFORMATION
Legal Proceedings
31
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
32
SIGNATURES
33
PART I.
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data, unaudited)
June 30,
December 31,
2023
2022
ASSETS
Current Assets:
Cash and cash equivalents
$
109,951
103,629
Marketable investments
13,664
19,688
Accounts receivable, net of allowance for expected credit losses of $578 and $560 as of June 30, 2023 and December 31, 2022, respectively
46,277
73,345
Deferred commissions
18,260
24,559
Prepaid expenses and other current assets
22,069
14,069
Total current assets
210,221
235,290
Property and equipment, net
20,707
23,208
Operating lease right-of-use assets
44,649
49,970
Goodwill
243,287
242,149
Intangible assets, net
43,406
49,504
Other assets
8,404
8,317
Total assets
570,674
608,438
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable
1,137
361
Accrued expenses and other current liabilities
62,779
91,007
Deferred revenue
179,613
178,021
Total current liabilities
243,529
269,389
Long-term debt
35,000
50,000
Non-current operating lease liabilities
44,831
50,751
Other non-current liabilities
15,669
16,642
Total liabilities
339,029
386,782
Commitments and contingencies (Note 5, 15)
Stockholders' Equity:
Preferred stock, $0.01 par value
Authorized - 500 shares; issued and outstanding - none
—
Common stock, $0.01 par value
Authorized - 125,000 shares
Issued - 24,512 and 24,367 shares as of June 30, 2023 and December 31, 2022, respectively
Outstanding - 19,180 and 19,062 shares as of June 30, 2023 and December 31, 2022, respectively
245
244
Additional paid-in capital
269,371
261,766
Retained earnings
175,860
174,631
Treasury stock - 5,332 and 5,305 shares as of June 30, 2023 and December 31, 2022, respectively
(207,887
)
(207,067
Accumulated other comprehensive loss
(5,944
(7,918
Total stockholders’ equity
231,645
221,656
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
Six Months Ended
Revenues:
Research
87,699
89,447
168,605
175,227
Consulting
29,970
39,262
61,720
77,693
Events
17,920
19,537
18,934
20,297
Total revenues
135,589
148,246
249,259
273,217
Operating expenses:
Cost of services and fulfillment
54,614
60,991
103,906
114,242
Selling and marketing
41,581
44,974
83,113
89,018
General and administrative
15,315
15,925
36,542
31,449
Depreciation
2,191
2,299
4,295
4,618
Amortization of intangible assets
3,068
3,354
6,134
6,716
Restructuring and related costs
10,532
12,121
Total operating expenses
127,301
127,543
246,111
246,043
Income from operations
8,288
20,703
3,148
27,174
Interest expense
(730
(535
(1,523
(1,148
Other income (expense), net
514
103
1,064
(154
Gain on investments, net
426
Income before income taxes
8,072
20,271
2,689
26,298
Income tax expense
2,768
6,397
1,460
8,276
Net income
5,304
13,874
1,229
18,022
Basic income per common share
0.28
0.74
0.06
0.95
Diluted income per common share
0.72
0.94
Basic weighted average common shares outstanding
19,193
18,871
19,151
18,929
Diluted weighted average common shares outstanding
19,258
19,173
19,214
19,218
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, unaudited)
Other comprehensive income (loss), net of tax:
Foreign currency translation
746
(4,528
1,952
(5,842
Net change in market value of investments
(11
(29
22
(93
Net change in market value of interest rate swap
68
264
Other comprehensive income (loss)
735
(4,489
1,974
(5,671
Comprehensive income
6,039
9,385
3,203
12,351
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Impairment of property and equipment
600
Net gains from investments
(426
Deferred income taxes
(1,479
(3,225
Stock-based compensation
7,025
7,131
Operating lease right-of-use assets amortization and impairments
6,691
5,384
Amortization of deferred financing fees
220
219
Amortization of (discount) premium on investments
(122
71
Foreign currency losses
39
80
Changes in assets and liabilities:
Accounts receivable
27,391
26,705
6,299
7,062
(7,122
(326
767
(734
Accrued expenses and other liabilities
(28,824
(30,680
318
Operating lease liabilities
(6,820
(6,180
Net cash provided by operating activities
15,788
34,755
Cash flows from investing activities:
Purchases of property and equipment
(2,664
(2,698
Purchases of marketable investments
(964
(12,028
Proceeds from maturities of marketable investments
7,138
10,955
Other investing activity
(66
179
Net cash provided by (used in) investing activities
3,444
(3,592
Cash flows from financing activities:
Payments on borrowings
(15,000
(25,000
Repurchases of common stock
(820
(15,112
Proceeds from issuance of common stock under employee equity incentive plans
1,840
2,077
Taxes paid related to net share settlements of stock-based compensation awards
(1,259
(255
Net cash used in financing activities
(15,239
(38,290
Effect of exchange rate changes on cash, cash equivalents and restricted cash
2,424
(5,645
Net change in cash, cash equivalents and restricted cash
6,417
(12,772
Cash, cash equivalents and restricted cash, beginning of period
105,654
118,031
Cash, cash equivalents and restricted cash, end of period
112,071
105,259
Supplemental disclosure of cash flow information:
Cash paid for interest
1,302
938
Cash paid for income taxes
9,729
4,189
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Interim Consolidated Financial Statements
Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. 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, 2022. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the financial position, results of operations, comprehensive income, and cash flows as of the dates and for the periods presented have been included. The results of operations for the three and six months ended June 30, 2023 may not be indicative of the results for the year ending December 31, 2023, or any other period.
Presentation of Restricted Cash
The following table summarizes the end-of-period cash and cash equivalents from the Company's Consolidated Balance Sheets and the total cash, cash equivalents and restricted cash as presented on the accompanying Consolidated Statements of Cash Flows (in thousands).
Six Months Ended June 30,
103,225
Restricted cash classified in other assets (1):
2,120
2,034
Cash, cash equivalents and restricted cash shown in statement of cash flows
Recent Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Finance Reporting. The new standard provides optional guidance for a limited period of time to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting due to the risk of cessation of the London Interbank Offered Rate (“LIBOR”). The updates apply to contracts, hedging relationships, and other transactions that reference LIBOR, or another reference rate expected to be discontinued because of reference rate reform, and as a result require a modification. In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The amendments in this update defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The amendments in this update apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. It is anticipated the standard will have no impact on the Company’s financial position or results of operations.
Note 2 — Marketable Investments
The following table summarizes the Company’s marketable investments (in thousands):
As of June 30, 2023
Gross
Amortized
Unrealized
Market
Cost
Gains
Losses
Value
Corporate obligations
11,846
(162
11,684
Federal agency obligations
1,999
(19
1,980
Total
13,845
(181
As of December 31, 2022
17,900
8
(205
17,703
(14
1,985
19,899
(219
Realized gains and losses on investments are included in earnings and are determined using the specific identification method. There were no realized gains or losses on marketable investments during the three and six months ended June 30, 2023 and 2022.
The following table summarizes the maturity periods of the marketable investments in the Company’s portfolio as of June 30, 2023 (in thousands).
FY 2023
FY 2024
FY 2025
5,953
3,832
1,899
5,812
The following table shows the gross unrealized losses and market value of the Company’s available-for-sale securities with unrealized losses that are not deemed to be other-than-temporary, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):
Less Than 12 Months
12 Months or Greater
7,280
85
4,403
77
19
9,260
104
9,619
139
8,084
66
14
11,604
153
Note 3 — Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair values of the tangible and identifiable intangible net assets acquired. Goodwill is not amortized; however, it is required to be tested for impairment annually, which requires assessment of the potential impairment at the reporting unit level. Reporting units are determined based on the components of the Company's operating segments that constitute a business for which discrete financial information is available and for which operating results are regularly reviewed by segment management. Testing for impairment is also required on an interim basis if an event or circumstance indicates it is more likely than not an impairment loss has been incurred.
The Company performed its annual impairment testing as of November 30, 2022 utilizing a qualitative assessment to determine if it was more likely than not that the fair values of each of its reporting units was less than their respective carrying values and concluded that no impairments existed. Subsequent to completing the annual test and through June 30, 2023, there were no events or circumstances that required an interim impairment test. Accordingly, as of June 30, 2023, the Company had no accumulated goodwill impairment losses. Approximately $8.2 million of goodwill is allocated to the Company’s Consulting reporting unit, which had a negative carrying value as of the date of the last test.
The change in the carrying amount of goodwill for the six months ended June 30, 2023 is summarized as follows (in thousands):
Balance at December 31, 2022
Translation adjustments
1,138
Balance at June 30, 2023
Finite-Lived Intangible Assets
The carrying values of finite-lived intangible assets are as follows (in thousands):
June 30, 2023
Net
Carrying
Accumulated
Amount
Amortization
Amortizable intangible assets:
Customer relationships
77,798
38,032
39,766
Technology
16,303
14,992
1,311
Trademarks
12,486
10,157
2,329
106,587
63,181
December 31, 2022
77,786
33,805
43,981
16,803
14,696
2,107
12,472
9,056
3,416
107,061
57,557
Estimated intangible asset amortization expense for each of the five succeeding years is as follows (in thousands):
2023 (remainder)
5,817
2024
9,916
2025
8,876
2026
8,392
2027
8,324
Thereafter
2,081
Note 4 — Debt
The Company has a credit facility that provides up to $150.0 million of revolving credit commitments and matures in December of 2026. The credit facility includes an expansion feature that permits the Company to increase the revolving credit commitments in an aggregate principal amount up to $50.0 million, subject to approval by the administrative agent and certain customary terms and conditions.
The credit facility contains certain customary restrictive loan covenants, including among others, financial covenants that apply a maximum leverage ratio, minimum interest coverage ratio, and maximum annual capital expenditures. The negative covenants limit, subject to various exceptions, the Company’s ability to incur additional indebtedness, create liens on assets, merge, consolidate, liquidate or dissolve any part of the Company, sell assets, change fiscal year, or enter into certain transactions with affiliates and subsidiaries. The Company was in full compliance with the covenants as of June 30, 2023.
The Company may voluntarily prepay revolving loans under the credit facility at any time and from time to time, without premium or penalty. No interim amortization payments are required to be made under the credit facility.
The credit facility provides that once LIBOR ceases to exist in 2023, the benchmark rate for the loans outstanding will automatically transfer from LIBOR to the Secured Overnight Financing Rate (SOFR). In April 2023, the Company executed a second amendment to the credit facility to facilitate the conversion from LIBOR to SOFR and to set the interest rate at SOFR plus 10 basis points.
Up to $5.0 million of the credit facility is available for the issuance of letters of credit, and any drawings under the letters of credit must be reimbursed within one business day. As of June 30, 2023, $0.6 million in letters of credit were issued under the credit facility.
Outstanding Borrowings
The following table summarizes the Company’s total outstanding borrowings as of the dates indicated (in thousands):
9
Description:
Credit facility
The contractual annualized interest rate as of June 30, 2023 was 6.452%, which consisted of SOFR of 5.102% plus a margin of 1.35%.
The Company had $114.4 million of available borrowing capacity on the credit facility (not including the expansion feature) as of June 30, 2023. The weighted average annual effective interest rate for the three and six months ended June 30, 2023, was 6.32% and 6.06%, respectively.
All obligations under the credit facility are unconditionally guaranteed by each of the Company’s existing and future, direct and indirect, material wholly-owned domestic subsidiaries, other than certain excluded subsidiaries, and are collateralized by a first priority lien on substantially all tangible and intangible assets, including intellectual property, and all of the capital stock of the Company's subsidiaries (limited to 65% of the voting equity of certain subsidiaries).
Note 5 — Leases
All of the Company’s leases are operating leases, the majority of which are for office space. Operating lease right-of-use (“ROU”) assets and non-current operating lease liabilities are included as individual line items in the Consolidated Balance Sheets, while short-term operating lease liabilities are recorded within accrued expenses and other current liabilities. Leases with an initial term of twelve months or less are not recorded in the Consolidated Balance Sheets and are not material.
The components of lease expense were as follows (in thousands):
For the Three Months Ended June 30,
Operating lease cost
3,240
3,600
Short-term lease cost
257
175
Variable lease cost
1,072
1,463
Sublease income
(130
(192
Total lease cost
4,439
5,046
For the Six Months Ended June 30,
6,554
7,252
518
312
1,857
3,013
(261
(383
8,668
10,194
Additional lease information is summarized in the following table (in thousands, except lease term and discount rate):
Cash paid for amounts included in the measurement of operating lease liabilities
6,820
6,180
Operating lease ROU assets obtained in exchange for lease obligations
1,110
172
Weighted-average remaining lease term - operating leases (years)
4.7
5.5
Weighted-average discount rate - operating leases
4.3
%
10
Future minimum lease payments under non-cancelable leases and estimated future sublease cash receipts from non-cancelable arrangements as of June 30, 2023 are as follows (in thousands):
Operating Lease
Sublease
Payments
Cash Receipts
8,133
307
16,184
624
13,920
12,336
5,713
8,913
Total lease payments and estimated sublease cash receipts
65,199
931
Less imputed interest
(6,225
Present value of lease liabilities
58,974
Lease balances as of June 30, 2023 are as follows (in thousands):
Operating lease ROU assets
Short-term operating lease liabilities (1)
14,143
Total operating lease liabilities
The Company’s leases do not contain residual value guarantees, material restrictions, or covenants.
During the six months ended June 30, 2023, the Company recorded ROU asset impairments of $0.8 million related to closing one floor of its offices located in San Francisco and one other smaller office location. The impairments are included in restructuring and related costs in the Consolidated Statements of Operations. As a result of the impairments, the ROU assets were required to be recorded at their estimated fair values as Level 3 non-financial assets. The fair values of the asset groups were determined using a discounted cash flow model, which required the use of estimates, including projected cash flows for the related assets, the selection of a discount rate used in the model, and regional real estate industry data.
Note 6 – Revenue and Related Matters
Disaggregated Revenue
The Company disaggregates revenue as set forth in the following tables (in thousands):
Revenue by Geography
Revenues: (1)
North America
112,006
124,177
204,677
226,487
Europe
15,564
15,871
29,276
30,343
Asia Pacific
6,137
6,445
11,519
13,118
Other
1,882
1,753
3,787
3,269
Contract Assets and Contract Liabilities
Accounts Receivable
Accounts receivable includes amounts billed and currently due from customers. Since the only condition for payment of the Company’s invoices is the passage of time, a receivable is recorded on the date an invoice is issued. Also included in accounts receivable are unbilled amounts resulting from revenue exceeding the amount billed to the customer, where the right to payment is unconditional. If the right to payment for services performed was conditional on something other than the passage of time, the unbilled amount would be recorded as a separate contract asset. There were no contract assets as of June 30, 2023 or 2022.
11
The majority of the Company’s contracts are non-cancelable. However, for contracts that are cancelable by the customer, the Company does not record a receivable when it issues an invoice. The Company records accounts receivable on these contracts only up to the amount of revenue earned but not yet collected.
In addition, since the majority of the Company’s contracts are invoiced for annual periods, and payment is expected within one year from the transfer of products and services, the Company does not adjust its receivables or transaction prices for the effects of a significant financing component.
Deferred Revenue
The Company refers to contract liabilities as deferred revenue in the Consolidated Balance Sheets. Payment terms in the Company’s customer contracts vary, but generally require payment in advance of fully satisfying the performance obligation(s). Deferred revenue consists of billings in excess of revenue recognized. Similar to accounts receivable, the Company does not record deferred revenue for unpaid invoices issued on a cancelable contract.
During the three months ended June 30, 2023 and 2022, the Company recognized $53.0 million and $58.4 million of revenue, respectively, related to its deferred revenue balances at the beginning of each such period. During the six months ended June 30, 2023 and 2022, the Company recognized $125.9 million and $139.3 million of revenue, respectively, related to its deferred revenue balance at January 1 of each such period.
Approximately $362.2 million of revenue is expected to be recognized during the next 24 months from remaining performance obligations as of June 30, 2023.
Reserves for Credit Losses
The allowance for expected credit losses on accounts receivable for the six months ended June 30, 2023 is summarized as follows (in thousands):
560
Provision for expected credit losses
315
Write-offs
(297
578
When evaluating the adequacy of the allowance for expected credit losses, the Company makes judgments regarding the collectability of accounts receivable based, in part, on the Company’s historical loss rate experience, customer concentrations, management’s expectations of future losses as informed by current economic conditions, and changes in customer payment terms. If the expected financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. If the expected financial condition of the Company’s customers were to improve, the allowances may be reduced accordingly.
Cost to Obtain Contracts
The Company capitalizes commissions paid to sales representatives and related fringe benefits costs that are incremental to obtaining customer contracts. These costs are included in deferred commissions in the Consolidated Balance Sheets. The Company accounts for these costs at a portfolio level as the Company’s contracts are similar in nature and the amortization model used closely matches the amortization expense that would be recognized on a contract-by-contract basis. Costs to obtain a contract are amortized to earnings over the initial contract term, which is the same period the related revenue is recognized. Amortization expense related to deferred commissions for the three months ended June 30, 2023 and 2022 was $10.4 million and $11.8 million, respectively. Amortization expense related to deferred commissions for the six months ended June 30, 2023 and 2022 was $19.0 million and $21.8 million, respectively. The Company evaluates the recoverability of deferred commissions at each balance sheet date and there were no impairments recorded during the six months ended June 30, 2023 and 2022.
Note 7 — Derivatives and Hedging
Interest Rate Swap
During 2019, the Company entered into a single interest rate swap contract that matured on December 31, 2022, with an initial notional amount of $95.0 million. The Company paid a base fixed rate of 1.65275% and in return received the greater of: (1) 1-month LIBOR, rounded up to the nearest 1/16 of a percent, or (2) 0.00%.
The swap was used to mitigate the cash flow risk associated with changes in interest rates on the Company’s variable rate debt (refer to Note 4 – Debt). The Company accounted for this derivative contract in accordance with FASB ASC Topic 815 – Derivatives
12
and Hedging (“Topic 815”), which requires all derivatives, including derivatives designated as accounting hedges, to be recorded on the balance sheet at fair value.
The swap had been designated and accounted for as a cash flow hedge of the forecasted interest payments on the Company’s debt. The swap was considered to be a highly effective hedge of the designated interest rate risk for the entire contract period and changes in the fair value of the swap were recorded in accumulated other comprehensive loss, a component of equity in the Consolidated Balance Sheets.
Foreign Currency Forwards
The Company enters into a limited number of foreign currency forward exchange contracts to mitigate the effects of adverse fluctuations in foreign currency exchange rates on transactions entered into in the normal course of business that are denominated in foreign currencies that differ from the local functional currency. These contracts generally have short durations and are recorded at fair value with both realized and unrealized gains and losses recorded in other income (expense), net in the Consolidated Statements of Operations because the Company does not designate these contracts as hedges for accounting purposes.
During the six months ended June 30, 2023, the Company entered into six foreign currency forward exchange contracts, all of which settled by June 30, 2023. Accordingly, as of June 30, 2023, there is no amount recorded in the Consolidated Balance Sheets for these contracts. During the six months ended June 30, 2022, the Company entered into eight foreign currency forward exchange contracts, all of which settled by June 30, 2022. Accordingly, as of June 30, 2022, there is no amount recorded in the Consolidated Balance Sheets for these contracts.
The Company’s derivative counterparties are investment grade financial institutions. The Company does not have any collateral arrangements with these counterparties and the derivative contracts do not contain credit risk related contingent features. The table below provides information regarding amounts recognized in the Consolidated Statements of Operations for the derivative contracts for the periods indicated (in thousands):
Amount recorded in:
Interest expense (1)
(50
(195
Other income (expense), net (2)
(176
(143
(371
Note 8 — Fair Value Measurements
The carrying amounts reflected in the Consolidated Balance Sheets for cash, accounts receivable, accounts payable, and accrued expenses approximate fair value due to their short-term maturities. The Company’s financial instruments also include its outstanding variable-rate borrowings (refer to Note 4 – Debt). The Company believes that the carrying amount of its variable-rate borrowings reasonably approximate their fair values because the rates of interest on those borrowings reflect current market rates of interest.
Additionally, the Company measures certain financial assets and liabilities at fair value on a recurring basis including cash equivalents and marketable investments. The fair values of these financial assets and liabilities have been classified as Level 1, 2, or 3 within the fair value hierarchy as described in the accounting standards for fair value measurements:
Level 1 — Fair value based on quoted prices in active markets for identical assets or liabilities.
Level 2 — Fair value based on inputs other than Level 1 inputs that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Fair value based on unobservable inputs that are supported by little or no market activity and such inputs are significant to the fair value of the assets or liabilities.
13
The following table represents the Company’s fair value hierarchy for its financial assets and liabilities that are measured at fair value on a recurring basis (in thousands):
Level 1
Level 2
Assets:
Money market funds (1)
5,360
Marketable investments (2)
Total Assets
19,024
5,800
25,488
During the six months ended June 30, 2023, the Company did not transfer assets or liabilities between levels of the fair value hierarchy. Additionally, there have been no changes to the valuation techniques for Level 2 assets and liabilities.
Note 9 — 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. Certain items such as changes in tax rates, tax benefits or expense related to settlements of share-based awards, and foreign currency gains or losses are treated as discrete items and are recorded in the period in which they arise.
Income tax expense for the six months ended June 30, 2023 was $1.5 million resulting in an effective tax rate of 54.3% for the period. Income tax expense for the six months ended June 30, 2022 was $8.3 million resulting in an effective tax rate of 31.5% for the period.
The increase in the effective tax rate during the 2023 period was primarily due to tax expense related to the settlement of share-based awards in 2023. The Company anticipates that its effective tax rate for the full year 2023 will be approximately 43%.
Note 10 — Accumulated Other Comprehensive Loss (“AOCL”)
The components of accumulated other comprehensive loss are as follows (net of tax, in thousands):
Marketable
Translation
Investments
Adjustment
Total AOCL
Balance at March 31, 2023
(126
(6,553
(6,679
Foreign currency translation (1)
Unrealized loss, net of tax of $4
(137
(5,807
Interest Rate
Swap
Balance at March 31, 2022
(89
(16
(4,266
(4,371
Unrealized gain (loss) before reclassification, net of tax of $(1)
Reclassification to income, net of tax of $(14) (2)
36
Balance at June 30, 2022
(118
52
(8,794
(8,860
(159
(7,759
Unrealized gain, net of tax of $(7)
Balance at December 31, 2021
(25
(212
(2,952
(3,189
Unrealized gain (loss) before reclassification, net of tax of $(16)
123
Reclassification to income, net of tax of $(54) (2)
141
Note 11 — Net Income Per Common Share
Basic net income per common share is computed by dividing net income by the basic weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the diluted weighted average number of common shares and common equivalent 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 equivalent shares consist of common stock issuable on the exercise of outstanding stock options and the vesting of restricted stock units.
Basic and diluted weighted average common shares are as follows (in thousands):
Weighted average common equivalent shares
65
302
63
289
Options and restricted stock units excluded from diluted weighted average share calculation as effect would have been anti-dilutive
706
23
657
15
Note 12 — Stockholders’ Equity
The components of stockholders’ equity are as follows (in thousands):
Three Months Ended June 30, 2023
Common Stock
Treasury Stock
NumberofShares
$0.01ParValue
AdditionalPaid-inCapital
RetainedEarnings
OtherComprehensiveIncome (Loss)
TotalStockholders'Equity
24,495
265,691
170,556
5,305
222,746
Issuance of common stock under stock plans, including tax effects
17
(180
27
Stock-based compensation expense
3,860
Net change in marketable investments, net of tax
24,512
5,332
Three Months Ended June 30, 2022
24,143
241
251,001
156,973
5,202
(201,414
202,430
16
1
99
100
(5,653
3,837
Net change in interest rate swap, net of tax
24,159
242
254,937
170,847
210,099
Six Months Ended June 30, 2023
24,367
145
580
581
Six Months Ended June 30, 2022
24,085
245,985
152,825
5,027
(191,955
203,907
74
1,821
1,822
278
Equity Plans
Restricted stock unit activity for the six months ended June 30, 2023 is presented below (in thousands, except per share data):
Weighted-
Average
Number of
Grant Date
Shares
Fair Value
Unvested at December 31, 2022
682
46.28
Granted
309
34.52
Vested
(117
50.70
Forfeited
(86
43.55
Unvested at June 30, 2023
788
41.32
Stock option activity for the six months ended June 30, 2023 is presented below (in thousands, except per share data and contractual term):
Weighted -
Exercise
Remaining
Aggregate
Number
Price Per
Contractual
Intrinsic
of Shares
Share
Term (in years)
Outstanding at December 31, 2022
89
35.58
144
33.04
Exercised
(2
34.37
(26
34.27
Outstanding at June 30, 2023
205
33.97
6.74
Exercisable at June 30, 2023
76
35.55
1.81
Vested and expected to vest at June 30, 2023
In May 2023, stockholders of the Company approved the amendment and restatement of the Forrester Research, Inc. Amended and Restated Equity Incentive Plan (the “Amended and Restated Equity Incentive Plan”), pursuant to which the number of shares available for purchase was increased by 3,500,000 shares.
Stock-Based Compensation
Forrester recognizes the fair value of stock-based compensation over the requisite service period of the individual grantee, which generally equals the vesting period. Stock-based compensation was recorded in the following expense categories in the Consolidated Statements of Operations (in thousands):
2,209
2,203
4,056
4,129
807
752
1,304
1,385
844
882
1,665
1,617
Forrester utilizes the Black-Scholes valuation model for estimating the fair value of options granted under the equity incentive plans and shares subject to purchase under the employee stock purchase plan, which were valued using the following assumptions:
Equity Incentive Plans
Employee Stock Purchase Plan
Average risk-free interest rate
4.27
5.00
0.86
Expected dividend yield
0.0
Expected life
4.75 Years
0.5 Years
Expected volatility
43
46
24
Weighted average fair value
14.24
9.47
11.02
As of June 30, 2023, Forrester’s Board of Directors had authorized an aggregate $585.0 million to purchase common stock under its stock repurchase program. The shares repurchased may be used, among other things, in connection with Forrester’s equity incentive and purchase plans. During the three and six months ended June 30, 2023, the Company repurchased approximately 27 thousand shares of common stock at an aggregate cost of approximately $0.8 million. During the three and six months ended June 30, 2022, the Company repurchased approximately 0.1 million shares and 0.3 million shares of common stock at an aggregate cost of approximately $5.7 million and $15.1 million, respectively. From the inception of the program through June 30, 2023, the Company repurchased 17.0 million shares of common stock at an aggregate cost of $510.9 million.
Note 13 — Restructuring and Related Costs
In January 2023, the Company implemented a reduction in its workforce of approximately 4% of its employees across various geographies and functions to streamline operations. The Company recorded $4.3 million of severance and related costs for this action during the fourth quarter of 2022, and $0.6 million during the first quarter of 2023. The Company also recorded a restructuring charge of $5.0 million during the fourth quarter of 2022 related to closing one floor of its offices located at 150 Spear Street, San Francisco, California, of which $3.7 million related to an impairment of a right-of-use asset and $1.3 million related to an impairment of leasehold improvements. The Company expects the accrued restructuring and related costs as of June 30, 2023 to be fully paid by the end of 2023.
The following table rolls forward the activity in the restructuring accrual for the January 2023 action for the six months ended June 30, 2023 (in thousands):
Accrual at December 31, 2022
4,360
Additional restructuring and related costs
1,589
Non-cash charge (included above)
(1,002
Cash payments
(3,815
Accrual at June 30, 2023
1,132
In May 2023, the Company implemented a reduction of approximately 8% of its workforce across various geographies and functions to better align its cost structure and to streamline its sales and consulting organizations. The Company recorded $7.5 million of severance and related costs for this action during the second quarter of 2023. In addition, the Company closed certain of its smaller offices both inside and outside the U.S. in order to reduce facility costs and better match its facilities to its hybrid work strategy. As a result of closing the offices, the Company recorded restructuring costs of $2.3 million, which included $1.3 million related to right-of-use asset impairments and accelerated amortization and $0.6 million related to impairments of leasehold improvements. In addition, the Company incurred $0.7 million in contract termination costs. The Company expects the majority of the accrued restructuring and related costs as of June 30, 2023 to be fully paid by the end of 2023.
The following table rolls forward the activity in the restructuring accrual for the May 2023 action for the six months ended June 30, 2023 (in thousands):
18
(2,253
(3,299
4,980
Note 14 — Operating Segments
The Company's chief operating decision-maker (used in determining the Company's segments) is the chief executive officer and the chief financial officer. The Company operates in three segments: Research, Consulting, and Events. These segments, which are also the Company's reportable segments, are based on the management structure of the Company and how the chief operating decision maker uses financial information to evaluate performance and determine how to allocate resources. The Company’s products and services are delivered through each segment as described below.
The Research segment includes the revenues from all of the Company’s research products as well as consulting revenues from advisory services (such as speeches and advisory days) delivered by the Company’s research organization. Research segment costs include the cost of the organizations responsible for developing and delivering these products in addition to the costs of the product management organization responsible for product pricing and packaging, and the launch of new products.
The Consulting segment includes the revenues and the related costs of the Company’s project consulting organization. The project consulting organization delivers a majority of the Company’s project consulting revenue and certain advisory services.
The Events segment includes the revenues and the costs of the organization responsible for developing and hosting in-person and virtual events.
The Company evaluates reportable segment performance and allocates resources based on segment revenues and expenses. Segment expenses include the direct expenses of each segment organization and exclude selling and marketing expenses, general and administrative expenses, stock-based compensation expense, depreciation expense, adjustments to incentive bonus compensation from target amounts, amortization of intangible assets, restructuring and related costs, interest and other income (expense), and gains on investments. The accounting policies used by the segments are the same as those used in the consolidated financial statements.
The Company provides information by reportable segment in the tables below (in thousands):
Research Segment
Consulting Segment
Events Segment
Consolidated
Research revenues
Consulting revenues
7,003
22,967
Events revenues
Total segment revenues
94,702
Segment expenses
(32,536
(11,429
(10,524
(54,489
Selling, marketing, administrative and other expenses
(59,212
(3,068
(10,532
Interest expense, other income, and gains on investments
(216
10,921
28,341
100,368
(32,897
(14,059
(11,051
(58,007
(66,182
(3,354
(432
14,922
46,798
183,527
(68,043
(23,782
(12,155
(103,980
(123,876
(6,134
(12,121
(459
22,111
55,582
197,338
(67,077
(28,376
(12,802
(108,255
(131,072
(6,716
Interest expense, other expense, and gains on investments
(876
Note 15 — Contingencies
From time to time, the Company may be subject to legal proceedings and civil and regulatory claims that arise in the ordinary course of its business activities. It is the Company's policy to record accruals for legal contingencies to the extent that it has concluded that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated, and to expense costs associated with loss contingencies, including any related legal fees, as they are incurred. The Company reviews its loss contingencies at least quarterly and adjusts its accruals and/or disclosures to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, or other new information, as deemed necessary. Once established, a provision may change in the future due to new developments or changes in circumstances and could increase or decrease the Company’s earnings in the period that the changes are made. Following an April 2023 mediation in a wage-related matter that resulted in an agreement in principle, the Company accrued $4.8 million of expense in the quarter ended March 31, 2023 that is classified in general and administrative expense in the Consolidated Statement of Operations.
The Company believes that it has meritorious defenses in connection with its current legal proceedings and claims and intends to vigorously contest each of them. Regardless of the outcome, legal proceedings and claims can have a material adverse effect on the Company because of defense and settlement costs, diversion of management resources, and other factors.
In the opinion of the Company's management, based upon information currently available to the Company, while the outcome of these legal proceedings and claims is uncertain, the likely results of these legal proceedings and claims are not expected, either individually or in the aggregate, to have a material adverse effect on the Company's financial position, results of operations or cash flows, although the effect could be material to the Company's consolidated results of operations or consolidated cash flows for any interim reporting period.
20
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
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. Reference is made in particular to our statements about changing stakeholder expectations, migration of our clients into our Forrester Decisions products, product development, holding hybrid events, possible acquisitions, future dividends, future share repurchases, future growth rates, operating income and cash from operations, future deferred revenue, future compliance with financial covenants under our credit facility, future interest expense, anticipated increases in, and productivity of, our sales force and headcount, the adequacy of our cash, and cash flows to satisfy our working capital and capital expenditures, and the anticipated impact of accounting standards. These statements are based on our current plans and expectations and involve risks and uncertainties. Important factors that could cause actual future activities and results to differ include, among others, our ability to retain and enrich subscriptions to, and licenses of, our Research products and services, our ability to fulfill existing or generate new consulting engagements and advisory services, our ability to generate and increase demand for the Events we host, any adverse economic conditions that result in a reduction in technology spending or demand for our products and services, our international operations expose us to a variety of operational risks which could negatively impact us, our ability to offer new products and services, our dependence on key personnel, our ability to attract and retain qualified professional staff, our ability to respond to business and economic conditions and market trends, the impact of our outstanding debt, competition and industry consolidation, possible variations in our quarterly operating results, concentration of our stock ownership, the possibility of network disruptions and security breaches, our ability to enforce and protect our intellectual property rights, compliance with privacy laws, taxation risks, risks related to health epidemics that could adversely impact our business and any weakness identified in our system of internal controls. These risks are described more completely in our Annual Report on Form 10-K for the year ended December 31, 2022. 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 subscriptions to our Research products and services, licensing electronic “reprints” of our Research, performing consulting projects and advisory services, and hosting events. We offer contracts for our Research products that are typically renewable annually and payable in advance. Subscription products are recognized as revenue over the term of the contract. Accordingly, a substantial portion of our billings are initially recorded as deferred revenue. Reprints include an obligation to deliver a customer-selected research document and certain usage data provided through an on-line platform, which represents two performance obligations. We recognize revenue for the performance obligation for the data portion of the reprint ratably over the license term. We recognize revenue for the performance obligation for the research document at the time of providing access to the document. Billings for licensing of reprints are initially recorded as deferred revenue. Clients purchase consulting projects and advisory services independently and/or to supplement their access to our subscription-based products. Consulting project revenues, which are based upon fixed-fee agreements, are recognized as the services are provided. Advisory service revenues, such as speeches and advisory days, are recognized when the service is complete or the customer receives the agreed upon deliverable. Billings attributable to consulting projects and advisory services are initially recorded as deferred revenue. Events revenues consist of ticket and sponsorship sales for a Forrester-hosted event. Billings for events are also initially recorded as deferred revenue and are recognized as revenue upon completion of each event.
Our primary operating expenses consist of cost of services and fulfillment, selling and marketing expenses, and general and administrative expenses. Cost of services and fulfillment represents the costs associated with the production and delivery of our products and services, including salaries, bonuses, employee benefits, and stock-based compensation expense for all personnel that produce and deliver our products and services, including all associated editorial, travel, and support services. Selling and marketing expenses include salaries, sales commissions, bonuses, employee benefits, stock-based compensation expense, travel expenses, promotional costs, 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 human resources groups and our other administrative functions, including salaries, bonuses, employee benefits, and stock-based compensation expense. Overhead costs such as facilities, net of sublease income, and annual fees for cloud-based information technology systems are allocated to these categories according to the number of employees in each group.
Our key metrics focus on our contract value ("CV") products. We are focusing on CV products as these products are our most profitable products and historically our contracts for CV products have renewed at high rates (as measured by our client retention and wallet retention metrics). Our CV products make up essentially all of our research revenues.
We calculate CV at the foreign currency rates used for internal planning purposes each year. For comparative purposes, we have recast historical CV at the current year foreign currency rates. We have included the recast CV metric below for the six months ended
June 30, 2022, and we have also provided recast CV amounts dating back to the second quarter of 2021, on the investor relations section of our website.
Contract value, client retention, wallet retention, and number of clients are metrics that we believe are important to understanding our research business. We define these metrics as follows:
Client retention and wallet retention are not necessarily indicative of the rate of future retention of our revenue base. A summary of our key metrics is as follows (dollars in millions):
As of
Absolute
Percentage
Increase
(Decrease)
Contract value
344.0
345.3
(1.3
(—
%)
Client retention
(2) points
Wallet retention
92
(7) points
Number of clients
2,604
2,928
(324
Contract value at June 30, 2023 was consistent with the prior year period. Client retention decreased by 2 percentage points and wallet retention decreased by 7 percentage points at June 30, 2023 compared to the prior year period, however the retention metrics were consistent with the prior quarter. The decrease in our retention rates and number of clients from the prior year period is primarily attributable to 1) macroeconomic conditions affecting our client base including a) funding and budget pressure on our smaller technology clients and the technology industry in general, and b) the uncertain economic conditions caused by high-inflation, increasing interest rates, geopolitical turbulence, and the threat of recession, and 2) the ongoing transition of our client base to our Forrester Decisions product platform that was launched in August 2021. The ongoing macroeconomic conditions and product transition are anticipated to pressure our key metrics through 2023.
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 generally accepted accounting principles 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 estimates, including but not limited to, those related to our revenue recognition, goodwill, intangible and other long-lived assets, and income taxes. Management bases its estimates on historical experience, data available at the time the estimates are made, and various 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. Our critical accounting estimates are described in our Annual Report on Form 10-K for the year ended December 31, 2022.
Results of Operations
The following table sets forth our statement of operations as a percentage of total revenues for the periods indicated:
64.7
60.3
67.6
64.1
22.1
26.5
24.8
28.4
13.2
7.6
7.5
100.0
40.3
41.1
41.7
41.8
30.7
30.3
33.3
32.6
11.3
10.7
14.7
11.5
1.5
1.6
1.7
2.3
2.5
7.8
4.9
6.1
14.0
1.3
9.9
(0.5
(0.4
(0.6
0.4
0.1
(0.1
0.2
6.0
13.7
1.1
9.6
2.1
0.6
3.0
3.9
9.4
0.5
6.6
Three and Six Months Ended June 30, 2023 and 2022
Revenues
(dollars in millions)
135.6
148.2
(12.7
(9
87.7
89.4
(1.7
30.0
39.3
(9.3
(24
17.9
19.5
(1.6
(8
Revenues attributable to customers outside of the U.S.
28.0
29.8
(1.8
(6
Percentage of revenue attributable to customers outside of the U.S.
1 point
249.3
273.2
(24.0
168.6
175.2
(6.6
(4
61.7
77.7
(16.0
(21
18.9
20.3
(1.4
(7
53.2
57.3
(4.1
Total revenues decreased 9% during both the three and six months ended June 30, 2023, compared to the prior year periods, and decreased by 8% for the six months ended June 30, 2023 when excluding the effect of changes in foreign currencies. Revenues from customers outside the U.S. decreased 6% and 7% during the three and six months ended June 30, 2023, respectively, and decreased by approximately 5% for the six months ended June 30, 2023 when excluding the effect of changes in foreign currencies.
Research revenues are recognized primarily on a ratable basis over the term of the contracts, which are generally 12 or 24-month periods. Research revenues decreased 2% and 4% during the three and six months ended June 30, 2023, respectively, compared to the prior year periods, and decreased by 3% for the six months ended June 30, 2023 when excluding the effect of changes in foreign currencies. The decrease in revenues during the periods was primarily due to flat CV growth, with revenue from subscription research products growing 2% during each of the periods, which was offset by a decline in revenue from our reprint product and our other smaller and discontinued products during both periods.
Consulting revenues decreased 24% and 21% during the three and six months ended June 30, 2023, respectively, compared to the prior year periods, and decreased by 20% for the six months ended June 30, 2023 when excluding the effect of changes in foreign currencies. The decrease in revenues during the three and six months ended June 30, 2023 was due to 1) a decrease in delivery of advisory services by our research analysts due primarily to lower client bookings for these services and 2) a decrease in delivery of consulting services by our consulting organization due to the macroeconomic environment and, based on our continued focus on contract value products, we have enacted a policy of only selling consulting to contract value clients, except in limited circumstances.
Events revenues decreased 8% and 7% during the three and six months ended June 30, 2023, respectively, compared to the prior year periods, and decreased by 6% for the six months ended June 30, 2023 when excluding the effect of changes in foreign currencies. The decrease in revenues during the three and six months ended June 30, 2023 was due to a decrease in sponsorship revenues and a decrease in event ticket revenue due to lower attendance.
Refer to the “Segments Results” section below for a discussion of revenues and expenses by segment.
Cost of Services and Fulfillment
Cost of services and fulfillment (dollars in millions)
54.6
61.0
(6.4
(10
Cost of services and fulfillment as a percentage of total revenues
40
41
(1) point
Service and fulfillment employees (at end of period)
812
879
(67
103.9
114.2
(10.3
42
Cost of services and fulfillment expenses decreased 10% during the three months ended June 30, 2023 compared to the prior year period. The decrease was primarily due to (1) a $3.8 million decrease in compensation and benefit costs due to a decrease in headcount, incentive bonus costs, and benefit costs, (2) a $1.8 million decrease in professional services costs primarily due to a decrease in contractor costs, outsourced expenses, and consulting fees, partially offset by an increase in survey costs, and (3) a $0.5 million decrease in facilities costs primarily due to a decrease in straight-line and variable lease expense.
Cost of service and fulfillment expenses decreased 9% during the six months ended June 30, 2023 compared to the prior year period, and decreased by 8% when excluding the effect of changes in foreign currencies. The decrease was primarily due to (1) a $4.8 million decrease in compensation and benefit costs due to a decrease in both incentive bonus costs and benefit costs (due to the introduction of the flexible vacation and personal paid time off policy in the United States), which were partially offset by an increase in salary costs due to an increase in average headcount, (2) a $4.5 million decrease in professional services costs primarily due to a decrease in contractor costs, outsourced expenses, and consulting fees, and (3) a $1.1 million decrease in facilities costs due to a decrease in straight-line and variable lease expense.
Selling and Marketing
Selling and marketing expenses (dollars in millions)
41.6
45.0
(3.4
Selling and marketing expenses as a percentage of total revenues
Selling and marketing employees (at end of period)
700
780
(80
83.1
89.0
(5.9
Selling and marketing expenses decreased 8% during the three months ended June 30, 2023 compared to the prior year period, and decreased by 7% when excluding the effect of changes in foreign currencies. The decrease was primarily due to a $3.1 million decrease in compensation and benefit costs due to a decrease in commissions expense, headcount, incentive bonus costs, and benefit costs and (2) a $0.4 million decrease in facilities costs primarily due to a decrease in straight-line and variable lease expense.
Selling and marketing expenses decreased 7% during the six months ended June 30, 2023 compared to the prior year period, and decreased by 6% when excluding the effect of changes in foreign currencies. The decrease was primarily due to (1) a $4.7 million decrease in compensation and benefit costs due a decrease in commissions expense, incentive bonus costs, and benefit costs (due to the introduction of the flexible vacation and personal paid time off policy in the United States) and (2) a $1.0 million decrease in facilities costs due to a decrease in straight-line and variable lease expense.
General and Administrative
General and administrative expenses (dollars in millions)
15.3
15.9
General and administrative expenses as a percentage of total revenues
General and administrative employees (at end of period)
281
286
(5
36.5
31.4
5.1
3 points
General and administrative expenses decreased 4% during the three months ended June 30, 2023 compared to the prior year period. The decrease was primarily due to a $0.7 million decrease in compensation and benefit costs due to a decrease in incentive bonus and benefit costs, partially offset by an increase in salaries due to an increase in average headcount.
General and administrative expenses increased 16% during the six months ended June 30, 2023 compared to the prior year period, and increased by 17% when excluding the effect of changes in foreign currencies. The increase was primarily due to a $5.7 million increase in legal costs, due primarily to a $4.8 million provision for a preliminary legal settlement for a wage-related matter and related legal services.
25
Depreciation expense was consistent during the three and six months ended June 30, 2023 compared to the prior year periods.
Amortization of Intangible Assets
Amortization expense decreased by $0.3 million and $0.6 million during the three and six months ended June 30, 2023, respectively, compared to the prior year periods due to a decrease in the amortization of a trademark intangible asset.
Restructuring and Related Costs
In January 2023, we implemented a reduction in our workforce of approximately 4% of our employees across various geographies and functions to streamline operations. We recorded $4.3 million of severance and related costs for this action during the fourth quarter of 2022, and $0.6 million during the first quarter of 2023. We recorded a restructuring charge of $5.0 million during the fourth quarter of 2022 related to closing one floor of our offices in California, of which $3.7 million related to an impairment of a right-of-use asset and $1.3 million related to an impairment of leasehold improvements. During the first quarter of 2023, we recorded an incremental $0.4 million impairment to our California office. We also recorded a $0.6 million charge during the first quarter of 2023 for the write-off of a previously capitalized software project. We expect all of the severance and related costs for this plan to be paid during 2023.
In May 2023, we implemented a reduction of approximately 8% of our workforce across various geographies and functions to better align our cost structure with our revised revenue outlook for the year, and to streamline our sales and consulting organizations to more efficiently go to market in support of driving contract value growth in the future. We recorded $7.5 million of severance and related costs for this action during the second quarter of 2023. In addition, we closed certain of our smaller offices both inside and outside the U.S. in order to reduce facility costs and better match our facilities to our hybrid work strategy. As a result of closing the offices, we recorded restructuring costs of $2.3 million, which included $1.3 million related to right-of-use asset impairments and accelerated amortization and $0.6 million related to impairments of leasehold improvements. We also incurred $0.7 million in contract termination costs. We expect the majority of the accrued restructuring and related costs as of June 30, 2023 to be fully paid by the end of 2023.
Interest Expense
Interest expense consists of interest on our borrowings and in 2022 also included realized gains and losses on the related interest rate swap. Interest expense increased by $0.2 million and $0.4 million during the three and six months ended June 30, 2023, respectively, compared to the prior year periods due to an increase in the annualized interest rate on our borrowing partially offset by lower average outstanding borrowings.
Other Income (Expense), Net
Other income (expense), net primarily consists of gains and losses on foreign currency, gains and losses on foreign currency forward contracts, and interest income. Other income (expense), net increased $0.4 million and $1.2 million during the three and six months ended June 30, 2023, respectively, compared to the prior year periods primarily due to an increase in interest income.
Gain on Investments, Net
Gain on investments, net primarily represents our share of equity method investment gains and losses from our technology-related investment funds. Gain on investments, net decreased $0.4 million during the six months ended June 30, 2023 compared to the prior year period. The decrease was due to a decrease in investment gains generated by the underlying funds.
Income Tax Expense
Provision for income taxes (dollars in millions)
2.8
6.4
(3.6
(57
Effective tax rate
34
2 points
8.3
(6.8
(82
54
23 points
26
Income tax expense decreased by $6.8 million during the six months ended June 30, 2023 compared to the prior year period primarily due to the decrease in income from operations. The increase in the effective tax rate during the 2023 period was primarily due to tax expense related to the settlement of share-based awards in 2023. For the full year 2023, we anticipate that our effective tax rate will be approximately 43%.
Segment Results
We operate in three segments: Research, Consulting, and Events. These segments, which are also our reportable segments, are based on our management structure and how management uses financial information to evaluate performance and determine how to allocate resources. Our products and services are delivered through each segment as described below.
The Research segment includes the revenues from all of our research products as well as consulting revenues from advisory services (such as speeches and advisory days) delivered by our research organization. Research segment costs include the cost of the organizations responsible for developing and delivering these products in addition to the cost of the product management organization that is responsible for product pricing and packaging and the launch of new products.
The Consulting segment includes the revenues and the related costs of our project consulting organization. The project consulting organization delivers a majority of our project consulting revenue and certain advisory services.
We evaluate reportable segment performance and allocate resources based on segment revenues and expenses. Segment expenses include the direct expenses of each segment organization and exclude selling and marketing expenses, general and administrative expenses, stock-based compensation expense, depreciation expense, adjustments to incentive bonus compensation from target amounts, amortization of intangible assets, restructuring and related costs, interest and other income (expense), and gains on investments. The accounting policies used by the segments are the same as those used in the consolidated financial statements.
(dollars in thousands)
Year over year revenue change
Year over year expense change
(1
Research segment revenues decreased 6% and 7% during the three and six months ended June 30, 2023, respectively, compared to the prior year periods. For the three and six months ended June 30, 2023, research product revenues within this segment decreased 2% and 4%, respectively, which was primarily due to flat CV growth, with revenue from our subscription research products growing 2% for both periods, offset by a decline in revenue from our reprint product and our other smaller and discontinued products during the periods. For the three and six months ended June 30, 2023, consulting product revenues within this segment decreased 36% and 33%, respectively, primarily due to decreased delivery of consulting and advisory services by our research analysts due primarily to lower client bookings for these services.
Research segment expenses decreased 1% and increased 1% during the three and six months ended June 30, 2023, respectively, compared to the prior year periods. The decrease in expenses during the three months ended June 30, 2023 was primarily due to a decrease in compensation and benefit costs primarily due to a decrease in headcount and benefit costs. The increase in expenses during the six months ended June 30, 2023 was primarily due to (1) a $1.7 million increase in compensation and benefit costs primarily due to an increase in average headcount, partially offset by (2) a $1.0 million decrease in professional services due to a decrease in contractor costs and consulting fees.
Consulting segment revenues decreased 19% and 16% during the three and six months ended June 30, 2023, respectively, compared to the prior year periods. The decrease in revenues during the three and six months ended June 30, 2023 was primarily due to a decrease in delivery of consulting services due to the macroeconomic environment and, based on our continued focus on contract value products, we have enacted a policy of only selling consulting to contract value clients, except in limited circumstances.
Consulting segment expenses decreased 19% and 16% during the three and six months ended June 30, 2023, respectively, compared to the prior year periods. The decrease in expenses during the three months ended June 30, 2023 was primarily due to (1) a $1.2 million decrease in professional services primarily due to a decrease in contractor costs and consulting fees, (2) a $0.7 million decrease in outsourced expenses, and (3) a $0.7 million decrease in compensation and benefit costs primarily due to a decrease in headcount and benefit costs. The decrease in expenses during the six months ended June 30, 2023 was primarily due to (1) a 2.5 million decrease in professional services primarily due to a decrease in contractor costs and consulting fees, (2) a $1.3 million decrease in outsourced expenses, and (3) a $0.8 million decrease in compensation and benefit costs primarily due to a decrease in benefit costs.
Event segment revenues decreased 8% and 7% during the three and six months ended June 30, 2023, respectively, compared to the prior year periods. The decrease in revenues was due to a decrease in sponsorship revenues and a decrease in event ticket revenue due to lower attendance.
Event segment expenses decreased 5% for both the three and six months ended June 30, 2023, respectively, compared to the prior year periods. The decrease in expenses during the three and six months ended June 30, 2023 was primarily due to a decrease in compensation and benefit costs.
Liquidity and Capital Resources
The amounts reported in our earnings release and Form 8-K filed on July 27, 2023 for net cash provided by operating activities and purchases of property and equipment of $15.4 million and $(2.3) million, respectively, have been adjusted in this Form 10-Q to $15.8 million and $(2.7) million, respectively.
We have historically financed our operations primarily through funds generated from operations. Research revenues, which constituted approximately 68% of our revenues during the six months ended June 30, 2023, are generally renewable annually and are typically payable in advance. We generated cash from operating activities of $15.8 million and $34.8 million during the six months ended June 30, 2023 and 2022, respectively. The $19.0 million decrease in cash provided from operations for the six months ended June 30, 2023 compared to the prior year period was primarily due to a $16.8 million decrease in net income, the timing of certain benefit payments, and an increase in income tax payments.
During the six months ended June 30, 2023, we generated cash from investing activities of $3.4 million primarily from $6.2 million in net maturities of marketable investments partially offset by $2.7 million of purchases of property and equipment, primarily
28
consisting of computer software. During the six months ended June 30, 2022, we used cash in investing activities of $3.6 million primarily for $2.7 million for purchases of property and equipment, primarily consisting of computer software and equipment, and $1.1 million in net purchases of marketable investments.
We used $15.2 million of cash from financing activities during the six months ended June 30, 2023 primarily due to $15.0 million of discretionary repayments of our revolving credit facility, $1.3 million in taxes paid related to net share settlements of restricted stock units, and $0.8 million for purchases of our common stock, partially offset by $1.8 million of net proceeds from the issuance of common stock under our stock-based incentive plans. We used $38.3 million of cash in financing activities during the six months ended June 30, 2022 primarily due to $25.0 million of discretionary repayments of our revolving credit facility and $15.1 million for purchases of our common stock, partially offset by $2.1 million of net proceeds from the issuance of common stock under our stock-based incentive plans. As of June 30, 2023, our remaining stock repurchase authorization was approximately $74.1 million.
The Company has a credit facility that provides up to $150.0 million of revolving credit commitments. The credit facility has a balance of $35.0 million at June 30, 2023 and matures in December of 2026. The credit facility permits the Company to increase the revolving credit commitments in an aggregate principal amount up to $50.0 million, subject to approval by the administrative agent and certain customary terms and conditions.
The credit facility contains certain customary restrictive loan covenants, including among others, financial covenants that apply a maximum leverage ratio, minimum interest coverage ratio, and maximum annual capital expenditures. The negative covenants limit, subject to various exceptions, our ability to incur additional indebtedness, create liens on assets, merge, consolidate, liquidate or dissolve any part of the company, sell assets, change fiscal year, or enter into certain transactions with affiliates and subsidiaries. We were in full compliance with the covenants as of June 30, 2023 and expect to continue to be in compliance through the next 12 months.
Additional future contractual cash obligations extending over the next 12 months and beyond primarily consist of operating lease payments. We lease office space under non-cancelable operating lease agreements (refer to Note 5 – Leases in the Notes to Consolidated Financial Statements for additional information). The remaining duration of non-cancelable office space leases ranges from less than 1 year to 8 years. As of June 30, 2023, remaining non-cancelable lease payments are due as follows: $8.1 million in 2023, $30.1 million within 2024 and 2025, $18.0 million within 2026 and 2027, and $8.9 million beyond 2027.
In addition to the contractual cash commitments included above, we have other payables and liabilities that may be legally enforceable but are not considered contractual commitments.
As of June 30, 2023, we had cash, cash equivalents, and marketable investments of $123.6 million. This balance includes $90.8 million held outside of the U.S. If the cash outside of the U.S. is needed for operations in the U.S., we would be required to accrue and pay U.S. state taxes and may be required to pay withholding taxes to foreign jurisdictions to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate these funds for our U.S. operations. We believe that our current cash balance and cash flows from operations will satisfy working capital, financing activities, and capital expenditure requirements for the next twelve months and to meet our known long-term cash requirements.
Refer to Note 1 – Interim Consolidated Financial Statements in the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements including the expected dates of adoption and effects on results of operations and financial condition.
Critical Accounting Policies and Estimates
For information regarding our critical accounting policies and estimates, please refer to Note 1, "Summary of Significant Accounting Policies" and Item 7, “Critical Accounting Estimates” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. There have been no material changes to the critical accounting policies and estimates previously disclosed in that report.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our assessment of our sensitivity to market risk since our presentation set forth in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2022.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as such term is defined under Securities Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2023. Based upon their evaluation and subject to the foregoing, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance as of that date.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2023, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in the "Note 15 - Contingencies", in Part I, Item 1 of this Quarterly Report is incorporated herein by reference.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A: Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, which could materially affect our business, financial condition or future results. The risk factors described in our Annual Report on Form 10-K remain applicable to our business. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Through June 30, 2023, our Board of Directors authorized an aggregate $585.0 million to purchase common stock under our stock repurchase program. During the quarter ended June 30, 2023, we purchased the following shares of our common stock under the stock repurchase program:
Maximum Approximate Dollar
Total Number of Shares
Value of Shares that May
Total Number of
Average Price
Purchased as Part of Publicly
Yet be Purchased
Shares Purchased
Paid per Share
Announced Plans or Programs
Under the Plans or Programs
Period
(#)
($)
(In thousands)
April 1 - April 30
74,966
May 1 - May 31
June 1 - June 30
27,500
29.82
74,146
Total for the quarter
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
During the three months ended June 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
ITEM 6. EXHIBITS
3.1
Restated Certificate of Incorporation of Forrester Research, Inc. (see Exhibit 3.1 to Registration Statement on Form S-1A filed on November 5, 1996)
3.2
Certificate of Amendment of the Certificate of Incorporation of Forrester Research, Inc. (see Exhibit 3.1 to Annual Report on Form 10-K for the year ended December 31, 1999)
3.3
Certificate of Amendment to Restated Certificate of Incorporation of Forrester Research, Inc.
3.4
Amended and Restated By-Laws of Forrester Research, Inc. (see Exhibit 3.4 to Annual Report on Form 10-K for the year ended December 31, 2022)
4.1
Specimen Certificate for shares of Common Stock, $.01 par value, of Forrester Research, Inc. (see Exhibit 4 to Registration Statement on Form S-1A filed on November 5, 1996)
31.1
Certification of the Principal Executive Officer. (filed herewith)
31.2
Certification of the Principal Financial Officer. (filed herewith)
32.1
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (furnished herewith)
32.2
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (furnished herewith)
101.INS
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. (filed herewith)
101.SCH
Inline XBRL Taxonomy Extension Schema Document. (filed herewith)
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document. (filed herewith)
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document. (filed herewith)
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document. (filed herewith)
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document. (filed herewith)
Cover Page Interactive Data File (embedded within the Inline XBRL Document). (filed herewith)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
By:
/s/ L. CHRISTIAN FINN
L. Christian Finn
Chief Financial Officer
(Principal financial officer)
Date: August 9, 2023