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 September 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 check mark 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 November 1, 2023, 19,239,000 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 September 30, 2023 and December 31, 2022
Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and 2022
4
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2023 and 2022
5
Consolidated Statements of Cash Flows for the nine months ended September 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
22
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
31
Item 4.
Controls and Procedures
PART II
OTHER INFORMATION
Legal Proceedings
32
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
33
SIGNATURES
34
PART I.
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data, unaudited)
September 30,
December 31,
2023
2022
ASSETS
Current Assets:
Cash and cash equivalents
$
101,706
103,629
Marketable investments
9,750
19,688
Accounts receivable, net of allowance for expected credit losses of $626 and $560 as of September 30, 2023 and December 31, 2022, respectively
41,016
73,345
Deferred commissions
16,558
24,559
Prepaid expenses and other current assets
15,855
14,069
Total current assets
184,885
235,290
Property and equipment, net
19,693
23,208
Operating lease right-of-use assets
42,021
49,970
Goodwill
242,061
242,149
Intangible assets, net
40,343
49,504
Other assets
7,053
8,317
Total assets
536,056
608,438
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable
762
361
Accrued expenses and other current liabilities
56,533
91,007
Deferred revenue
158,349
178,021
Total current liabilities
215,644
269,389
Long-term debt
35,000
50,000
Non-current operating lease liabilities
40,843
50,751
Other non-current liabilities
11,679
16,642
Total liabilities
303,166
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 - 24,672 and 24,367 shares as of September 30, 2023 and December 31, 2022, respectively
Outstanding - 19,235 and 19,062 shares as of September 30, 2023 and December 31, 2022, respectively
247
244
Additional paid-in capital
273,797
261,766
Retained earnings
178,344
174,631
Treasury stock - 5,437 and 5,305 shares as of September 30, 2023 and December 31, 2022, respectively
(211,149
)
(207,067
Accumulated other comprehensive loss
(8,349
(7,918
Total stockholders’ equity
232,890
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
Nine Months Ended
Revenues:
Research
80,606
87,038
249,211
262,265
Consulting
28,237
37,382
89,957
115,075
Events
4,588
3,259
23,522
23,556
Total revenues
113,431
127,679
362,690
400,896
Operating expenses:
Cost of services and fulfillment
47,978
52,717
151,884
166,959
Selling and marketing
39,967
44,231
123,080
133,249
General and administrative
15,108
16,448
51,650
47,897
Depreciation
2,262
2,374
6,557
6,992
Amortization of intangible assets
3,041
3,352
9,175
10,068
Restructuring and related costs
19
12,140
Total operating expenses
108,375
119,122
354,486
365,165
Income from operations
5,056
8,557
8,204
35,731
Interest expense
(763
(584
(2,286
(1,732
Other income, net
568
346
1,632
192
Gain on investments, net
426
Income before income taxes
4,861
8,319
7,550
34,617
Income tax expense
2,377
2,905
3,837
11,181
Net income
2,484
5,414
3,713
23,436
Basic income per common share
0.13
0.29
0.19
1.24
Diluted income per common share
0.28
1.22
Basic weighted average common shares outstanding
19,191
18,958
19,164
18,939
Diluted weighted average common shares outstanding
19,289
19,139
19,239
19,192
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, unaudited)
Other comprehensive loss, net of tax:
Foreign currency translation
(2,435
(4,971
(483
(10,813
Net change in market value of investments
30
(54
52
(147
Net change in market value of interest rate swap
(5
259
Other comprehensive loss
(2,405
(5,030
(431
(10,701
Comprehensive income
79
384
3,282
12,735
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
(4,106
(3,023
Stock-based compensation
11,169
11,036
Operating lease right-of-use assets amortization and impairments
9,089
8,138
Amortization of deferred financing fees
332
331
Amortization of (discount) premium on investments
(168
48
Foreign currency gains
(30
(167
Changes in assets and liabilities:
Accounts receivable
32,288
34,801
8,000
10,741
(1,002
2,185
403
262
Accrued expenses and other liabilities
(34,839
(30,801
(20,809
(26,262
Operating lease liabilities
(10,581
(9,556
Net cash provided by operating activities
9,791
37,803
Cash flows from investing activities:
Purchases of property and equipment
(3,903
(4,227
Purchases of marketable investments
(964
(22,819
Proceeds from maturities of marketable investments
11,138
21,081
Other investing activity
246
Net cash provided by (used in) investing activities
6,304
(5,719
Cash flows from financing activities:
Payments on borrowings
(15,000
(25,000
Repurchases of common stock
(4,082
(15,112
Debt issuance costs
(25
Proceeds from issuance of common stock under employee equity incentive plans
3,485
4,298
Taxes paid related to net share settlements of stock-based compensation awards
(2,620
(2,975
Net cash used in financing activities
(18,242
(38,789
Effect of exchange rate changes on cash, cash equivalents and restricted cash
242
(10,727
Net change in cash, cash equivalents and restricted cash
(1,905
(17,432
Cash, cash equivalents and restricted cash, beginning of period
105,654
118,031
Cash, cash equivalents and restricted cash, end of period
103,749
100,599
Supplemental disclosure of cash flow information:
Cash paid for interest
1,944
1,456
Cash paid for income taxes
10,583
5,380
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 nine months ended September 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).
Nine Months Ended September 30,
98,735
Restricted cash classified in other assets (1):
2,043
1,864
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. The standard has not impacted the Company’s financial position or results of operations, and will not have an impact in the future as the Company no longer has any financial instruments that reference LIBOR.
Note 2 — Marketable Investments
The following table summarizes the Company’s marketable investments (in thousands):
As of September 30, 2023
Gross
Amortized
Unrealized
Market
Cost
Gains
Losses
Value
Corporate obligations
7,892
(126
7,766
Federal agency obligations
1,999
(15
1,984
Total
9,891
(141
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 nine months ended September 30, 2023 and 2022.
The following table summarizes the maturity periods of the marketable investments in the Company’s portfolio as of September 30, 2023 (in thousands).
FY 2023
FY 2024
FY 2025
1,996
3,864
1,906
5,848
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
3,417
4,349
92
15
5,401
49
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 September 30, 2023, there were no events or circumstances that required an interim impairment test. Accordingly, as of September 30, 2023, the Company had no accumulated goodwill impairment losses. Approximately $8.1 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 nine months ended September 30, 2023 is summarized as follows (in thousands):
Balance at December 31, 2022
Foreign currency translation adjustments
(88
Balance at September 30, 2023
Finite-Lived Intangible Assets
The carrying values of finite-lived intangible assets are as follows (in thousands):
September 30, 2023
Net
Carrying
Accumulated
Amount
Amortization
Amortizable intangible assets:
Customer relationships
77,776
40,125
37,651
Technology
16,241
15,328
913
Trademarks
12,477
10,698
1,779
106,494
66,151
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)
2,772
2024
9,903
2025
8,872
2026
8,391
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 September 30, 2023.
9
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 base 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 September 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):
Description:
Credit facility
The contractual annualized interest rate as of September 30, 2023 was 6.666%.
The Company had $114.4 million of available borrowing capacity on the credit facility (not including the expansion feature) as of September 30, 2023. The weighted average annual effective interest rate for the three and nine months ended September 30, 2023, was 6.60% and 6.24%, 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 September 30,
Operating lease cost
3,068
3,546
Short-term lease cost
228
214
Variable lease cost
1,257
1,000
Sublease income
(130
(192
Total lease cost
4,423
4,568
For the Nine Months Ended September 30,
9,622
10,798
747
526
3,113
4,013
(391
(575
13,091
14,762
10
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
10,442
9,556
Operating lease ROU assets obtained in exchange for lease obligations
1,110
172
Weighted-average remaining lease term - operating leases (years)
4.5
5.3
Weighted-average discount rate - operating leases
4.3
%
Future minimum lease payments under non-cancelable leases and estimated future sublease cash receipts from non-cancelable arrangements as of September 30, 2023 are as follows (in thousands):
Operating Lease
Sublease
Payments
Cash Receipts
4,009
15,900
625
13,816
12,320
5,659
8,764
Total lease payments and estimated sublease cash receipts
60,468
778
Less imputed interest
(5,510
Present value of lease liabilities
54,958
Lease balances as of September 30, 2023 are as follows (in thousands):
Operating lease ROU assets
Short-term operating lease liabilities (1)
14,115
Total operating lease liabilities
The Company’s leases do not contain residual value guarantees, material restrictions, or covenants.
During the nine months ended September 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
91,580
107,224
296,257
333,709
Europe
13,778
12,167
43,053
42,510
Asia Pacific
6,074
6,377
17,593
19,495
Other
1,911
5,787
5,182
11
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 September 30, 2023 or 2022.
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 September 30, 2023 and 2022, the Company recognized $27.9 million and $31.9 million of revenue, respectively, related to its deferred revenue balances at the beginning of each such period. During the nine months ended September 30, 2023 and 2022, the Company recognized $153.8 million and $171.2 million of revenue, respectively, related to its deferred revenue balance at January 1 of each such period.
Approximately $338.9 million of revenue is expected to be recognized during the next 24 months from remaining performance obligations as of September 30, 2023.
Reserves for Credit Losses
The allowance for expected credit losses on accounts receivable for the nine months ended September 30, 2023 is summarized as follows (in thousands):
560
Provision for expected credit losses
559
Write-offs
(493
626
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 September 30, 2023 and 2022 was $9.2 million and $10.4 million, respectively. Amortization expense related to deferred commissions for the nine months ended September 30, 2023 and 2022 was $28.3 million and $32.2 million, respectively. The Company evaluates the recoverability of deferred commissions at each balance sheet date and there were no impairments recorded during the nine months ended September 30, 2023 and 2022.
12
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 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, net in the Consolidated Statements of Operations because the Company does not designate these contracts as hedges for accounting purposes.
During the nine months ended September 30, 2023, the Company entered into nine foreign currency forward exchange contracts, all of which settled by September 30, 2023. Accordingly, as of September 30, 2023, there is no amount recorded in the Consolidated Balance Sheets for these contracts. During the nine months ended September 30, 2022, the Company entered into eleven foreign currency forward exchange contracts, all of which settled by September 30, 2022. Accordingly, as of September 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)
25
(170
Other income, net (2)
(99
(63
(33
(239
Total expense
(38
(409
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.
13
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.
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)
22,902
Marketable investments (2)
Total Assets
32,652
5,800
25,488
During the nine months ended September 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 nine months ended September 30, 2023 was $3.8 million resulting in an effective tax rate of 50.8% for the period. Income tax expense for the nine months ended September 30, 2022 was $11.2 million resulting in an effective tax rate of 32.3% 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 50%.
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 June 30, 2023
(137
(5,807
(5,944
Foreign currency translation (1)
Unrealized gain, net of tax of $(10)
(107
(8,242
Interest Rate
Swap
Balance at June 30, 2022
(118
(8,794
(8,860
Unrealized gain (loss) before reclassification, net of tax of $13
(41
Reclassification to income, net of tax of $7 (2)
(18
Balance at September 30, 2022
(172
47
(13,765
(13,890
(159
(7,759
Unrealized gain, net of tax of $(17)
Balance at December 31, 2021
(212
(2,952
(3,189
Unrealized gain (loss) before reclassification, net of tax of $3
136
(11
Reclassification to income, net of tax of $(47) (2)
123
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
98
181
75
253
Options and restricted stock units excluded from diluted weighted average share calculation as effect would have been anti-dilutive
631
307
649
110
Note 12 — Stockholders’ Equity
The components of stockholders’ equity are as follows (in thousands):
Three Months Ended September 30, 2023
Common Stock
Treasury Stock
NumberofShares
$0.01ParValue
AdditionalPaid-inCapital
RetainedEarnings
OtherComprehensiveIncome (Loss)
TotalStockholders'Equity
24,512
245
269,371
175,860
5,332
(207,887
231,645
Issuance of common stock under stock plans, including tax effects
160
2
282
284
105
(3,262
Stock-based compensation expense
4,144
Net change in marketable investments, net of tax
24,672
5,437
Three Months Ended September 30, 2022
24,159
254,937
170,847
5,305
210,099
193
(501
(499
3,905
Net change in interest rate swap, net of tax
24,352
258,341
176,261
213,889
Nine Months Ended September 30, 2023
24,367
305
862
865
132
16
Nine Months Ended September 30, 2022
24,085
241
245,985
152,825
5,027
(191,955
203,907
267
1,320
1,323
278
Equity Plans
Restricted stock unit activity for the nine months ended September 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
33.34
Vested
(256
45.33
Forfeited
43.24
Unvested at September 30, 2023
952
38.36
Stock option activity for the nine months ended September 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
(27
34.23
Outstanding at September 30, 2023
204
33.98
6.52
Exercisable at September 30, 2023
1.57
Vested and expected to vest at September 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):
17
2,449
2,268
6,505
6,397
790
743
2,094
2,128
905
894
2,570
2,511
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
5.51
3.71
Expected dividend yield
0.0
Expected life
4.75 Years
0.5 Years
Expected volatility
43
35
Weighted average fair value
14.24
7.90
10.22
As of September 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 each of the three and nine months ended September 30, 2023, the Company repurchased approximately 0.1 million shares of common stock at an aggregate cost of approximately $3.3 and $4.1 million, respectively. During the three and nine months ended September 30, 2022, the Company repurchased approximately 0.3 million shares of common stock at an aggregate cost of approximately $15.1 million. From the inception of the program through September 30, 2023, the Company repurchased 17.1 million shares of common stock at an aggregate cost of $514.1 million.
Note 13 — Restructuring and Related Costs
In January 2023, the Company implemented a reduction in its workforce of approximately 4% 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 September 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 nine months ended September 30, 2023 (in thousands):
Accrual at December 31, 2022
4,360
Additional restructuring and related costs
1,550
Non-cash charge (included above)
Cash payments
(4,546
Accrual at September 30, 2023
362
In May 2023, the Company implemented a reduction in its workforce of approximately 8% 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 September 30, 2023 to be fully paid by the end of 2023.
18
The following table rolls forward the activity in the restructuring accrual for the May 2023 action for the nine months ended September 30, 2023 (in thousands):
10,590
(2,253
Non-cash lease settlement gain (included above)
(6,221
2,255
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 expense, other income, 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
6,517
21,720
Events revenues
Total segment revenues
87,123
Segment expenses
(31,749
(10,739
(4,031
(46,519
Selling, marketing, administrative and other expenses
(58,796
(3,041
(19
Interest expense, other income, and gains on investments
(195
9,015
28,367
96,053
(33,058
(14,747
(3,377
(51,182
(64,588
(3,352
(238
21,439
68,518
270,650
(99,792
(34,521
(16,186
(150,499
(182,672
(9,175
(12,140
(654
31,126
83,949
293,391
(100,135
(43,123
(16,179
(159,437
(195,660
(10,068
(1,114
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 a settlement agreement subject to court approval, 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.
20
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.
21
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 nine months ended September 30, 2022, and we have also provided recast CV amounts dating back to the third 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
349.4
348.9
0.5
(—
%)
Client retention
73
(2) points
Wallet retention
91
(7) points
Number of clients
2,538
2,875
(337
(12
Contract value at September 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 September 30, 2023 compared to the prior year period. However, client retention decreased by 1 percentage point compared to the prior quarter and wallet retention was consistent compared to 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 inflation, increased interest rates, geopolitical turbulence, and the ongoing threat of recession, and 2) the ongoing transition of our client base to our Forrester Decisions product platform that was launched in August 2021. As of September 30, 2023, approximately 57% of our overall CV is in our Forrester Decisions product platform. In the longer term, we anticipate that approximately 80% of our CV will be in our Forrester Decisions product platform. The remaining approximate 20% of CV represents non-Forrester Decisions CV products, primarily reprints. The ongoing macroeconomic conditions and product transition are anticipated to pressure our key metrics through at least the first half of 2024.
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.
23
Results of Operations
The following table sets forth our statement of operations as a percentage of total revenues for the periods indicated:
71.1
68.2
68.7
65.4
24.9
29.3
24.8
28.7
4.0
2.5
6.5
5.9
100.0
42.3
41.3
41.9
41.6
35.2
34.6
33.9
33.2
13.3
12.9
14.2
11.9
2.0
1.9
1.8
2.7
2.6
3.4
6.7
2.3
8.9
(0.7
(0.5
(0.6
(0.4
0.3
0.4
0.1
2.1
8.6
1.1
2.8
2.2
4.2
1.0
5.8
Three and Nine Months Ended September 30, 2023 and 2022
Revenues
(dollars in millions)
113.4
127.7
(14.2
80.6
87.0
(6.4
(7
28.2
37.4
(9.1
(24
4.6
3.3
1.3
41
Revenues attributable to customers outside of the U.S.
25.8
25.5
1
Percentage of revenue attributable to customers outside of the U.S.
3 points
362.7
400.9
(38.2
(10
249.2
262.3
(13.1
90.0
115.1
(25.1
(22
23.5
23.6
79.0
82.9
(3.9
1 point
24
Total revenues decreased 11% and 10% during the three and nine months ended September 30, 2023, respectively, compared to the prior year periods, and revenues from customers outside the U.S. increased 1% and decreased 5% during the three and nine months ended September 30, 2023, respectively.
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 7% and 5% during the three and nine months ended September 30, 2023, respectively, compared to the prior year periods. The decrease in revenues during the three months ended September 30, 2023 was primarily due to a decline in revenue from our reprint product and our other smaller and discontinued products coupled with a decline in revenue from our subscription research products of 1%. The decrease in revenues during the nine months ended September 30, 2023 was primarily due to a decline in revenue from our reprint product and our other smaller and discontinued products, which was partially offset by revenue from our subscription research products growing 1%.
Consulting revenues decreased 24% and 22% during the three and nine months ended September 30, 2023, respectively, compared to the prior year periods. The decrease in revenues during the three and nine months ended September 30, 2023 was due to a decrease in delivery of both advisory and consulting services due to lower client bookings due to 1) the macroeconomic environment and 2) 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 increased 41% and were flat during the three and nine months ended September 30, 2023, respectively, compared to the prior year periods. The increase in revenues during the three months ended September 30, 2023 was due to an increase in the number of events held in the current period, as one event that was held in the fourth quarter of 2022 took place in the third quarter of 2023. Accordingly, during the fourth quarter of 2023, we will hold one less event as compared to the fourth quarter of 2022.
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)
48.0
52.7
(4.7
(9
Cost of services and fulfillment as a percentage of total revenues
42
Service and fulfillment employees (at end of period)
908
(13
151.9
167.0
(15.1
Cost of services and fulfillment expenses decreased 9% during the three months ended September 30, 2023 compared to the prior year period. The decrease was primarily due to (1) a $3.4 million decrease in professional services costs primarily due to a decrease in contractor costs, outsourced expenses, and consulting fees and (2) a $1.7 million decrease in compensation and benefit costs due to a decrease in headcount. These decreases were partially offset by a $0.8 million increase in event expenses primarily due to an increase in the number of events held during the current quarter.
Cost of service and fulfillment expenses decreased 9% during the nine months ended September 30, 2023 compared to the prior year period. The decrease was primarily due to (1) a $7.9 million decrease in professional services costs primarily due to a decrease in contractor costs, outsourced expenses, and consulting fees, (2) a $6.5 million decrease in compensation and benefit costs due to a decrease in headcount, 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 (3) a $1.2 million decrease in facilities costs due to a decrease in straight-line lease expense and variable lease expense. These decreases were partially offset by a $0.6 million increase in event expenses primarily due to an increase in the number of events in the current period.
Selling and Marketing
Selling and marketing expenses (dollars in millions)
40.0
44.2
(4.3
Selling and marketing expenses as a percentage of total revenues
Selling and marketing employees (at end of period)
680
796
(116
123.1
133.2
(10.2
(8
Selling and marketing expenses decreased 10% during the three months ended September 30, 2023 compared to the prior year period. The decrease was primarily due to (1) a $3.3 million decrease in compensation and benefit costs due to a decrease in commissions expense and headcount and (2) a $0.4 million decrease in software costs.
Selling and marketing expenses decreased 8% during the nine months ended September 30, 2023 compared to the prior year period. The decrease was primarily due to (1) a $8.0 million decrease in compensation and benefit costs due a decrease in commissions expense, headcount, incentive bonus costs, and benefit costs (due to the introduction of the flexible vacation and personal paid time off policy in the United States), (2) a $1.0 million decrease in facilities costs due to a decrease in straight-line lease expense and variable lease expense, (3) a $0.6 million decrease in professional services costs primarily due to a decrease in consulting fees, and (4) a $0.6 million decrease in travel and entertainment expenses.
General and Administrative
General and administrative expenses (dollars in millions)
15.1
16.4
(1.3
General and administrative expenses as a percentage of total revenues
General and administrative employees (at end of period)
280
300
(20
51.7
47.9
3.8
2 points
General and administrative expenses decreased 8% during the three months ended September 30, 2023 compared to the prior year period. The decrease was primarily due to a $0.9 million decrease in compensation and benefit costs due to a decrease in headcount.
General and administrative expenses increased 8% during the nine months ended September 30, 2023 compared to the prior year period. The increase was primarily due to (1) a $5.3 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, and (2) a $0.7 million increase in software costs. These increases were partially offset by a $1.3 million decrease in compensation and benefit costs due a decrease in 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.
26
The fluctuation for depreciation expense was immaterial during the three and nine months ended September 30, 2023 compared to the prior year periods.
Amortization of Intangible Assets
Amortization expense decreased by $0.3 million and $0.9 million during the three and nine months ended September 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% 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 in our workforce of approximately 8% 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 severance and related costs for this plan to be paid during 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 $0.6 million during the three and nine months ended September 30, 2023, respectively, compared to the prior year periods due to an increase in the annualized interest rate on our borrowings, which was partially offset by lower average outstanding borrowings.
Other Income, Net
Other income, net primarily consists of interest income, gains and losses on foreign currency, and gains and losses on foreign currency forward contracts. Other income, net increased $0.2 million and $1.4 million during the three and nine months ended September 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. The fluctuation for gain on investments, net was immaterial during the three and nine months ended September 30, 2023 compared to the prior year periods.
Income Tax Expense
Provision for income taxes (dollars in millions)
2.4
2.9
Effective tax rate
14 points
11.2
(7.3
(66
51
19 points
Income tax expense decreased by $7.3 million during the nine months ended September 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
27
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 50%.
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 expense, other income, 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
(23
Year over year expense change
(4
(6
28
Research segment revenues decreased 9% and 8% during the three and nine months ended September 30, 2023, respectively, compared to the prior year periods. For the three and nine months ended September 30, 2023, research product revenues within this segment decreased 7% and 5%, respectively. The decrease in revenues during the three months ended September 30, 2023 was primarily due to a decline in revenue from our reprint product and our other smaller and discontinued products coupled with a decline in revenue from our subscription research products of 1%. The decrease in revenues during the nine months ended September 30, 2023 was primarily due to a decline in revenue from our reprint product and our other smaller and discontinued products, which was partially offset by revenue from our subscription research products growing 1%. For the three and nine months ended September 30, 2023, consulting product revenues within this segment decreased 28% and 31%, 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 4% during the three months ended September 30, 2023, compared to the prior year period, and for the nine months ended September 30, 2023, expenses were consistent with the prior year period. The decrease in expenses during the three months ended September 30, 2023 was primarily due to (1) a $0.6 million decrease in compensation and benefit costs primarily due to a decrease in headcount and (2) a $0.6 million decrease in professional services primarily due to a decrease in contractor costs and consulting fees.
Consulting segment revenues decreased 23% and 18% during the three and nine months ended September 30, 2023, respectively, compared to the prior year periods. The decrease in revenues during the three and nine months ended September 30, 2023 was primarily due to a decrease in delivery of consulting services due to lower client bookings due to 1) the macroeconomic environment and 2) 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 27% and 20% during the three and nine months ended September 30, 2023, respectively, compared to the prior year periods. The decrease in expenses during the three months ended September 30, 2023 was primarily due to (1) a $2.0 million decrease in professional services primarily due to a decrease in contractor costs and consulting fees, (2) a $1.2 million decrease in compensation and benefit costs primarily due to a decrease in headcount, and (3) a $0.8 million decrease in outsourced expenses. The decrease in expenses during the nine months ended September 30, 2023 was primarily due to (1) a $4.5 million decrease in professional services primarily due to a decrease in contractor costs and consulting fees, (2) a $2.0 million decrease in outsourced expenses, and (3) a $1.9 million decrease in compensation and benefit costs primarily due to a decrease in headcount and benefit costs.
Event segment revenues increased 41% during the three months ended September 30, 2023, compared to the prior year period, and for the nine months ended September 30, 2023, revenues were consistent with the prior period. The increase in revenues during the three months ended September 30, 2023 was primarily due to an increase in the number of events held in the current period, as one event that was held in the fourth quarter of 2022 took place in the third quarter of 2023. Accordingly, during the fourth quarter of 2023, we will hold one less event as compared to the fourth quarter of 2022.
Event segment expenses increased 19% during the three months ended September 30, 2023, compared to the prior year period, and for the nine months ended September 30, 2023, expenses were consistent with the prior period. The increase in expenses during the three months ended September 30, 2023 was primarily due to an increase in the number of events in the current period.
Liquidity and Capital Resources
We have historically financed our operations primarily through funds generated from operations. Research revenues, which constituted approximately 69% of our revenues during the nine months ended September 30, 2023, are generally renewable annually and are typically payable in advance. We generated cash from operating activities of $9.8 million and $37.8 million during the nine months ended September 30, 2023 and 2022, respectively. The $28.0 million decrease in cash provided from operations for the nine months ended September 30, 2023 compared to the prior year period was primarily due to a $19.7 million decrease in net income, the timing of certain benefit payments, and an increase in income tax payments.
29
During the nine months ended September 30, 2023, we generated cash from investing activities of $6.3 million primarily from $10.2 million in net maturities of marketable investments partially offset by $3.9 million of purchases of property and equipment, primarily consisting of computer software. During the nine months ended September 30, 2022, we used cash in investing activities of $5.7 million primarily for $4.2 million for purchases of property and equipment, primarily consisting of computer software and equipment, and $1.7 million in net purchases of marketable investments.
We used $18.2 million of cash from financing activities during the nine months ended September 30, 2023 primarily due to $15.0 million of discretionary repayments of our revolving credit facility, $4.1 million for purchases of our common stock, and $2.6 million in taxes paid related to net share settlements of restricted stock units, partially offset by $3.5 million of net proceeds from the issuance of common stock under our stock-based incentive plans. We used $38.8 million of cash in financing activities during the nine months ended September 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 $1.3 million of net proceeds from the issuance of common stock under our stock-based incentive plans. As of September 30, 2023, our remaining stock repurchase authorization was approximately $70.9 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 September 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 September 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 September 30, 2023, remaining non-cancelable lease payments are due as follows: $4.0 million in 2023, $29.7 million within 2024 and 2025, $18.0 million within 2026 and 2027, and $8.8 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 September 30, 2023, we had cash, cash equivalents, and marketable investments of $111.5 million. This balance includes $73.6 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.
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 September 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 September 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 September 30, 2023, our Board of Directors authorized an aggregate $585.0 million to purchase common stock under our stock repurchase program. During the quarter ended September 30, 2023, we purchased the following shares of our common stock under the stock repurchase program:
Maximum Approximate Dollar
Total Number of Shares
Value of Shares that May
Total Number of
Average Price
Purchased as Part of Publicly
Yet be Purchased
Shares Purchased
Paid per Share
Announced Plans or Programs
Under the Plans or Programs
Period
(#)
($)
(In thousands)
July 1 - July 31
49,781
30.62
72,622
August 1 - August 31
31.63
71,041
September 1 - September 30
5,000
31.35
70,884
Total for the quarter
104,781
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
During the three months ended September 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)
Certificate of Amendment to Restated Certificate of Incorporation of Forrester Research, Inc.
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)
104
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: November 8, 2023