Overview
We derive revenues from subscriptions to our Research, Connect and Analytics products and services, licensing electronic "reprints" of our Research, performing advisory services and consulting projects, and hosting Events. We offer contracts for our Research, Connect and Analytics products that are typically renewable annually and payable in advance. Subscription products are recognized as revenue ratably 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 advisory and consulting services independently and/or to supplement their access to our subscription-based products. Consulting project revenues, which generally are short-term in nature and based upon fixed-fee agreements, are recognized as the services are provided. Advisory service revenues, such as workshops, speeches and advisory days, are recognized when the service is complete or the customer receives the agreed upon deliverable. Billings attributable to advisory services and consulting projects are initially recorded as deferred revenue. Events revenues consist of ticket or sponsorship sales for aForrester -hosted event. Billings for Events are also initially recorded as deferred revenue and are recognized as revenue upon completion of each Event. As previously noted, onJanuary 3, 2019 , we acquired 100% of the issued and outstanding shares ofSiriusDecisions, Inc. , a privately held company based inWilton, Connecticut with approximately 350 employees globally.SiriusDecisions equips business-to-business (B2B) sales, marketing, and product leaders with the actionable research, frameworks, tools, operational benchmarks and expert advice to maximize performance and drive alignment. Pursuant to the terms of the merger agreement, the Company paid$246.8 million at closing, which included the purchase price of$245.0 million plus estimated cash acquired, reduced by certain working capital items. Net cash paid, which accounts for the cash acquired of$7.9 million , was$237.7 million . We paid for the acquisition with$175.0 million of debt and cash on hand. See Note 2 - Acquisitions in the Notes to Consolidated Financial Statements for more information on the acquisition. 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 and annual fees for cloud-based information technology systems are allocated to these categories according to the number of employees in each group. In the first quarter of 2019, we modified our calculation of client retention, dollar retention, and enrichment in conjunction with a project to fully automate the calculations. Client retention has been expanded to include virtually all client relationships (except for clients that only purchase web-based products such as individual reports, workshops and Event tickets) in comparison to the prior calculation that included only clients that purchased subscription-based products. Dollar retention and enrichment are now calculated at a client account level in comparison to a contract level in the prior calculation. This results in a broader view of dollar retention and enrichment as it includes virtually all products in the calculations (except for web-based products mentioned above) and captures all enrichment that occurs within the year for an account. We have provided the metrics under the new methodology for each quarter of 2018 in the table below. Q1 2018 Q2 2018 Q3 2018 Q4 2018 Client retention 71 % 71 % 71 % 71 % Dollar retention 90 % 89 % 90 % 90 % Enrichment 110 % 107 % 109 % 109 % 17
-------------------------------------------------------------------------------- Deferred revenue, agreement value, client retention, dollar retention, enrichment, and number of clients are metrics that we believe are important to understanding our business. We believe that the amount of deferred revenue, along with the agreement value of contracts, provide a significant measure of our business activity. We define these metrics as follows:
• Deferred revenue - billings in advance of revenue recognition as of the
measurement date.
• Agreement value - the total revenues recognizable from all contracts to
purchase our services in force at a given time (excluding contracts that
consist solely of Consulting services and the value of Event sponsorships
included in all contracts), without regard to how much revenue has already
been recognized. No single client accounted for more than 3% of agreement
value at
• Client retention - the percentage of client companies (defined as all clients except those that only purchase web-based products such as individual reports, workshops and Event tickets) at the prior year measurement date that have active contracts at the current year measurement date.
• Dollar retention - the percentage of the total dollar value of client
companies' active contracts at the prior year measurement date that have active contracts at the current year measurement date.
• Enrichment - the dollar value of client companies' active contracts at the
current year measurement date compared to the dollar value of the corresponding client companies' active contracts at the prior year measurement date. • Clients - we aggregate the various divisions and subsidiaries of a corporate parent as a single client and we also aggregate separate instrumentalities of the federal, state, and provincial governments as a
single client. We include only clients that purchased subscription-based
products in our definition of clients.
Client retention, dollar retention, and enrichment are not necessarily indicative of the rate of future retention of our revenue base. A summary of our key metrics is as follows (dollars in millions):
As of Absolute Percentage December 31, Increase Increase 2019 2018 (Decrease) (Decrease) Deferred revenue$ 179.2 $ 135.3 $ 43.9 32 % Agreement value$ 358.0 $ 266.3 $ 91.7 34 % Client retention 72 % 71 % 1 1 % Dollar retention 90 % 90 % - - Enrichment 106 % 109 % (3 ) (3 %) Number of clients 2,880 2,353 527 22 %
Deferred revenue, agreement value and number of clients include the effect of
Deferred revenue atDecember 31, 2019 increased 32% compared to the prior year with approximately 24 percentage points of growth due to the acquisition ofSiriusDecisions . Agreement value increased 34% atDecember 31, 2019 compared to the prior year with approximately 25 percentage points of growth due to the acquisition ofSiriusDecisions and the remainder due to both an increase in contract bookings and increased bundling of Consulting services with our Research and Connect products in our contracts. Client retention, dollar retention and enrichment rates were essentially consistent with the prior year. Client count atDecember 31, 2019 increased 22% compared to the prior year with approximately 17 percentage points of growth due to the acquisition ofSiriusDecisions .
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles inthe United States of America ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our policies and estimates, including but not limited to, those related to our revenue recognition, leases, 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. 18 -------------------------------------------------------------------------------- We consider the following accounting policies to be those that require the most subjective judgment or that involve uncertainty that could have a material impact on our financial statements. If actual results differ significantly from management's estimates and projections, there could be a material effect on our financial statements. This is not a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for management's judgment in its application. For a discussion of our other accounting policies, see Note 1 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements. • Revenue Recognition. We generate revenues from subscriptions to our Research, Connect and Analytics products and services, licensing electronic reprints of our Research, performing advisory services and
consulting projects and hosting Events. We execute contracts that govern
the terms and conditions of each arrangement. Revenues are recognized when
an approved contract with a customer exists, the fees, payment terms, and
rights regarding the products or services to be transferred can be
identified, it is probable we will collect substantially all of the
consideration for the products and services expected to be provided, and
we have transferred control of the products and services to the customer.
We continually evaluate customers' ability and intention to pay by
reviewing factors including the customer's payment history, our ability to
mitigate credit risk, and experience selling to similarly situated
customers.
Our contracts may include either a single promise (referred to as a performance obligation) to transfer a product or service or a combination of multiple promises to transfer products or services. We evaluate the existence of multiple performance obligations within our products and services by using judgment to determine if the customer can benefit from each contractual promise on its own or together with other readily available resources and if the transfer of each contractual promise is separately identifiable from other promises in a contract. When both criteria are met, each promise is accounted for as a separate performance obligation. Revenues from contracts that contain multiple products or services are allocated among the separate performance obligations on a relative basis according to their standalone selling prices. We obtain the standalone selling prices of our products and services based upon an analysis of standalone sales of these products and services. When there is an insufficient history of standalone sales, we use judgment to estimate the standalone selling price, taking into consideration available market conditions, factors used to set list prices, pricing of similar products, and internal pricing objectives. The majority of our research services revenues, including our Research, Connect and Analytics subscription products, are recognized ratably over the term of the contract. Certain research services revenues, including revenues from sales of reprints, are recognized as revenue when delivered. Advisory services revenues, such as workshops, speeches and advisory days, are recognized at the point in time the service is complete or the customer receives the agreed upon deliverable. Consulting product revenues are recognized over time as the services are provided, based on an input method that calculates the total hours expended compared to the estimated hours required to satisfy the performance obligation. This input method was chosen since it closely aligns with how control of interim deliverables is transferred to the customer throughout the engagement. It is also the method used internally to price consulting services and assess operational performance. This method requires the use of judgement in determining the required number of hours to complete the project. Event revenues are recognized upon completion of the Event. Reimbursed out-of-pocket expenses are recorded as advisory services and events revenues in the Consolidated Statements of Income (Loss). Our Research subscription products include access to all or a designated portion of our research, and depending on the type of license, unlimited phone or email analyst inquiry, and unlimited participation in Forrester Webinars, all of which are delivered throughout the contract period and are accounted for as a single performance obligation. Certain of our Research subscription products also include advisory services or an Event ticket and these products are accounted for as two performance obligations: (1) the subscription and (2) the advisory services or Event ticket. Arrangement consideration is allocated to each obligation based upon its standalone selling price, which is determined based on standalone sales of the advisory services or Event ticket and the estimated selling price of the remaining subscription services. Our Connect revenues primarily consist of annual subscriptions for Leadership Boards, which include access to the Research offering, access to a private forum with other Leadership Board member peers, access to aForrester advisor, member-generated content, and one Event ticket. Leadership Boards are accounted for as two performance obligations: (1) the Event ticket and (2) the remaining services that are delivered throughout the contract period. Arrangement consideration is allocated to each obligation based upon their standalone selling prices, which are determined based on standalone sales of Event tickets and the estimated selling price of the remaining services. Our Analytics subscription products include access to designated survey data products and access to an analytics client manager, which are delivered throughout the contract period and are accounted for as a single performance obligation. Certain of our Analytics subscription products also include advisory services and these products are accounted for as two performance obligations: (1) the subscription and analytics client manager, and (2) the advisory services. Arrangement consideration is allocated to each obligation based upon its standalone selling price, which is determined based on standalone sales of the advisory services and the estimated selling price of the remaining Analytics services. 19
-------------------------------------------------------------------------------- We are required to estimate the amount of prepaid performance obligations that will expire unused and recognize revenue for that estimate over the same period the related rights are exercised by our customers. This assessment requires judgment, including estimating the percentage of prepaid rights that will go unexercised and anticipating the impact that future changes to products, pricing, and customer engagement will have on actual expirations. We update the estimates used to recognize unexercised rights on a quarterly basis.
• Leases. We enter into operating leases, primarily for office space for
our employees, which are recorded as operating lease right-of-use assets
and operating lease liabilities on our Consolidated Balance Sheets. The
amounts recorded are based on the present value of the future minimum
lease payments over the lease term at the commencement date of the lease.
We use judgement to determine the discount rate in the present value
calculation as an implicit rate in our lease agreements is generally not
determinable. Currently, we use our incremental borrowing rate based on
information available at lease inception or at the time of lease
modification. Future events and economic factors could cause these rates
to change or for us to conclude that different rates should be used to measure the initial lease asset and liability. Some of our lease agreements contain options to extend or terminate the lease. When determining the lease term at inception, these options are included in the measurement and recognition of the lease asset and liability when it is reasonably certain that we will exercise the option, which requires judgement. We consider various economic factors when making this determination, including, but not limited to, the significance of leasehold improvements incurred in the office space, the difficulty in replacing the asset, underlying contractual obligations, or specific characteristics unique to a particular lease. Subsequent to entering into a lease, if it becomes reasonably certain that we will exercise an option that was not included in the lease term, we account for the change in circumstances as a lease modification, which results in the remeasurement of the lease asset and liability as of the modification date. We continually evaluate whether facts or events indicate it is reasonably certain that management will exercise an option.
•
with finite lives recorded in our Consolidated Balance Sheets.
required to be measured for impairment at least annually or whenever
events indicate that there may be an impairment. In order to determine if
an impairment exists, we compare each of our reporting units' carrying
value to the reporting unit's fair value. Determining the reporting unit's
fair value requires us to make estimates of market conditions and
operational performance, including projected financial results, discount
rates, control premium, and valuation multiples for key financial metrics.
We realigned our management structure into Products, Research, andSiriusDecisions as ofJanuary 1, 2019 from our prior structure of Products, Research, andProject Consulting . We performed a qualitative assessment of goodwill for the Products and Research reporting units (as theProject Consulting reporting unit did not contain goodwill) as ofJanuary 1, 2019 , which was based on the quantitative assessment that was performed as ofNovember 30, 2018 and activity inDecember 2018 . We concluded that no impairment existed atJanuary 1, 2019 and goodwill was reassigned as ofJanuary 1, 2019 based on the relative fair values of the Products and Research reporting units. Absent an event that indicates a specific impairment may exist, we have selectedNovember 30th as the date to perform the annual goodwill impairment test. The annual assessment of goodwill can be based on either a quantitative or qualitative assessment, or a combination of both. We completed the annual goodwill impairment testing as ofNovember 30, 2019 utilizing a quantitative assessment for theSiriusDecisions reporting unit and a qualitative assessment for the Research reporting unit and concluded that the fair values of each of our reporting units exceeds their respective carrying values. Future events could cause us to conclude that impairment indicators exist and that goodwill associated with our acquired businesses is impaired. Any resulting impairment loss could have a material adverse impact on our results of operations. Intangible assets with finite lives as ofDecember 31, 2019 consist of acquired customer relationships, acquired technology, acquired backlog, and trade names and were valued according to the future cash flows they are estimated to produce or the estimated costs to replace the assets. These assigned values are amortized on a basis which best matches the periods in which the economic benefits are expected to be realized. Tangible assets with finite lives consist of property and equipment, which are depreciated over their estimated useful lives. We continually evaluate whether events or circumstances have occurred that indicate that the estimated remaining useful life of our intangible and long-lived tangible assets may warrant revision or that the carrying value of these assets may be impaired. No such events or circumstances occurred during 2019. To compute whether intangible assets have been impaired, the estimated undiscounted future cash flows for the estimated remaining useful life of the assets are compared to the carrying value. To the extent that the future cash flows are less than the carrying value, the assets are written down to their estimated fair value. 20
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• Income Taxes. We recognize deferred tax assets and liabilities using
enacted tax rates for the effect of temporary differences between book and
tax bases of assets and liabilities as well as operating loss carryforwards (from acquisitions). Such amounts are adjusted as appropriate to reflect changes in the tax rates expected to be in effect
when the temporary differences reverse. We record a valuation allowance to
reduce our deferred taxes to an amount we believe is more likely than not
to be realized. We consider future taxable income and prudent and feasible
tax planning strategies in assessing the need for a valuation allowance.
As a global company, we use significant judgment to calculate and provide for income taxes in each of the tax jurisdictions in which we operate. In the ordinary course of our business, there are transactions and calculations undertaken whose ultimate tax outcome cannot be certain. Some of these uncertainties arise as a consequence of transfer pricing for transactions with our subsidiaries and potential challenges to nexus and credit estimates. We estimate our exposure to unfavorable outcomes related to these uncertainties and record a liability based on the probability for such outcomes in accordance with current accounting guidelines. Although we believe our estimates are reasonable, no assurance can be given that the final tax outcome will not be different from what is reflected in our historical income tax provisions, returns, and accruals. Such differences, or changes in estimates relating to potential differences, could have a material impact on our income tax provision and operating results in the period in which such a determination is made.
Results of Operations for the years ended
The following table sets forth our Consolidated Statements of Income (Loss) as a percentage of total revenues for the years noted.
Years Ended December 31, 2019 2018 Revenues: Research services 64.7 % 63.9 % Advisory services and events 35.3 36.1 Total revenues 100.0 100.0 Operating expenses: Cost of services and fulfillment 42.6 41.0 Selling and marketing 37.4 36.9 General and administrative 11.5 12.3 Depreciation 1.9 2.2 Amortization of intangible assets 4.9 0.3 Acquisition and integration costs 1.9 1.0 Income (loss) from operations (0.2 ) 6.3 Interest expense (1.8 ) - Other income (expense), net (0.1 ) 0.2 Gains (losses) on investments, net - 0.1 Income (loss) before income taxes (2.1 ) 6.6 Income tax expense (benefit) - 2.3 Net income (loss) (2.1 )% 4.3 % 21
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2019 compared to 2018 Revenues Absolute Percentage Increase Increase 2019 2018 (Decrease) (Decrease) (dollars in millions) Revenues$ 461.7 $ 357.6 $ 104.1 29 % Revenues from research services$ 298.7 $ 228.4 $ 70.3 31 % Revenues from advisory services and events$ 163.0 $ 129.2 $ 33.8 26 % Revenues attributable to customers outside of the U.S.$ 98.8 $ 83.4 $ 15.4 18 % Percentage of revenue attributable to customers outside of the U.S. 21 % 23 % (2 ) (9 %) Number of clients (at end of period) 2,880 2,353 527 22 % Number of events 19 15 4 27 % Total revenues increased 29% during 2019 compared to 2018 withSiriusDecisions contributing 22 percentage points of the increase. Revenues from customers outside of theU.S. increased 18% during 2019 compared to the prior year. The increase in revenues attributable to customers outside of theU.S. was primarily due to the acquisition ofSiriusDecisions , which added$9.2 million in international revenue, and growth in revenues in theAsia Pacific region andEurope in the legacyForrester business. Research services revenues are recognized as revenue primarily on a ratable basis over the term of the contracts, which are generally twelve-month periods. Research services revenues increased 31% during 2019 compared to the prior year withSiriusDecisions contributing 26 percentage points of the increase. The remainder of the increase was primarily driven by growth in the legacy Analytics, Connect and Research products. Revenues from advisory services and events increased 26% during 2019 compared to the prior year withSiriusDecisions contributing 16 percentage points of the increase. The remainder of the increase was due to growth of legacy Consulting revenues, which were partially offset by a decline in legacy Events revenues.
Please refer to the "Segment Results" section below for a discussion of revenue and contribution margin results by segment.
Cost of Services and Fulfillment
Absolute Percentage Increase Increase 2019 2018 (Decrease) (Decrease) Cost of services and fulfillment (dollars in millions)$ 196.7 $ 146.5 $ 50.2 34 % Cost of services and fulfillment as a percentage of total revenues 42.6 % 41.0 % 1.6 4 % Service and fulfillment employees (at end of period) 776 639 137 21 % Cost of services and fulfillment expenses increased 34% in 2019 compared to 2018. Approximately$39.5 million of the increase was attributable to the acquisition ofSiriusDecisions . The remainder of the increase was primarily due to (1) a$5.5 million increase in compensation and benefit costs, resulting principally from an increase in the number of employees compared to the prior year period and annual merit increases, (2) a$2.3 million increase in stock compensation expense, (3) a$1.2 million increase in lease expense and computer software costs, and (4) a$1.1 million increase in professional services costs primarily due to an increase in outsourced services related to revenue delivery. 22
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Selling and Marketing Absolute Percentage Increase Increase 2019 2018 (Decrease) (Decrease) Selling and marketing expenses (dollars in millions)$ 172.9 $ 131.8 $ 41.0 31 % Selling and marketing expenses as a percentage of total revenues 37.4 % 36.9 % 0.5 1 % Selling and marketing employees (at end of period) 780 590 190 32 % Selling and marketing expenses increased 31% in 2019 compared to 2018. Approximately$33.4 million of the increase was attributable to the acquisition ofSiriusDecisions . The remainder of the increase was primarily due to (1) a$5.1 million increase in compensation and benefit costs, resulting principally from an increase in the number of employees compared to the prior year period and annual merit increases, (2) a$1.1 million increase in professional services costs primarily due to an increase in advertising and marketing costs, (3) a$0.7 million increase in stock compensation expense, and (4) a$0.6 million increase in lease expense and computer software costs. We intend to increase our sales employees by approximately 4% to 6% during 2020 as compared to 2019. General and Administrative Absolute Percentage Increase Increase 2019 2018 (Decrease) (Decrease) General and administrative expenses (dollars in millions)$ 53.0 $ 43.9 $ 9.1 21 % General and administrative expenses as a percentage of total revenues 11.5 % 12.3 % (0.8 ) (7 %) General and administrative employees (at end of period) 239 203 36 18 % General and administrative expenses increased 21% in 2019 compared to 2018. Approximately$6.0 million of the increase was attributable to the acquisition ofSiriusDecisions . The remainder of the increase was primarily due to (1) a$1.3 million increase in compensation and benefit costs, resulting principally from an increase in the number of employees compared to the prior year period and annual merit increases, (2) a$1.0 million increase in professional services costs primarily due to an increase in technology services, accounting, and tax costs, (3) a$0.5 million increase in lease expense and computer software costs, and (4) a$0.4 million increase in stock compensation expense.
Depreciation
Depreciation expense remained essentially consistent during the year ended
Amortization of Intangible Assets
Amortization expense increased by
Acquisition and Integration Costs
Net acquisition and integration costs increased by$5.2 million to$8.9 million in 2019 as compared to$3.8 million in 2018 due to the acquisition and ongoing integration ofSiriusDecisions . The costs consist of the direct and incremental costs to acquire and integrate the companies acquired during 2019 and 2018, as well as certain fair value adjustments related to the acquisitions. The costs primarily consisted of consulting, severance, accounting and tax professional fees, and lease expense for unused facilities. For the year endedDecember 31, 2019 , these costs included an offset of$2.5 million related to the benefit of recording deferred commissions forSiriusDecisions in the first year following the acquisition. We expect to incur integration costs in a range of$1.8 million to$2.2 million for the year endingDecember 31, 2020 . 23
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Income (Loss) from Operations
Income (loss) from operations was a loss of$1.1 million in 2019, which is a decrease of$23.5 million from income of$22.4 million in 2018. The decrease was primarily due to acquisition related costs, including an increase in amortization of intangible assets and acquisition and integration costs of$22.6 million and$5.2 million , respectively, partially offset by an increase in income from operations of$4.3 million due to the other factors mentioned above.
Interest Expense
During the year endedDecember 31, 2019 , we incurred$8.1 million of interest expense. Interest expense consists of interest on our borrowings used to finance the acquisition ofSiriusDecisions . We expect to incur interest expense in a range of$5.9 million to$6.1 million for the year endingDecember 31, 2020 .
Other Income (Expense), Net
Other income (expense), net primarily consists of interest income as well as gains and losses on foreign currency. The decrease in other income (expense), net of$1.2 million during 2019 was primarily due to a decrease in interest income compared to 2018 due to the use of cash for the acquisition ofSiriusDecisions .
Gains (Losses) on Investments, Net
Gains (losses) on investments, net include our share of equity method investment gains or losses from our technology-related investment funds and gains or losses from the sale of marketable securities. The decrease during 2019 was due to minimal investment gains recognized by the underlying funds in 2019 as compared to an investment gain of$0.6 million in the prior year.
Income Tax Expense (Benefit)
Absolute Percentage Increase Increase 2019 2018 (Decrease) (Decrease) Provision for income taxes (dollars in millions) $ -$ 8.1 $ (8.1 ) (100 %) Effective tax rate 0.3 % 34.6 % (34.3 ) (99 %) The decrease in the effective tax rate during 2019 as compared to the prior year was primarily due to the relative size of the loss before taxes in 2019 of$9.6 million compared to income before taxes in 2018 of$23.5 million , audit settlements in non-U.S. territories in 2019, and the impact of foreign subsidiary income subject toU.S. tax in 2019.
Segment Results
In the first quarter of 2019, we realigned our management structure into
Products, Research and
The Products segment includes revenues from our Connect, Analytics, and Events products (excluding the revenues fromSiriusDecisions products) and the costs of the organizations responsible for developing and delivering these products. In addition, this segment includes Consulting revenues and the related costs of our project consulting organization. The project consulting organization delivers a majority of our project consulting revenue (excludingSiriusDecisions consulting) and certain advisory services primarily related to the Analytics product line. This segment also includes the costs of the product management organization that is responsible for product pricing and packaging and the launch of new products. The Research segment includes revenues from our Research products and the cost of the organizations responsible for developing and delivering the Research products (excluding the costs and revenues fromSiriusDecisions products). In addition, this segment includes Consulting revenues primarily from the delivery of advisory services (such as workshops, speeches and advisory days) delivered by our research analysts.
The
24 -------------------------------------------------------------------------------- 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, except as noted above for theSiriusDecisions segment, 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, interest and other income (expense), and gains (losses) on investments. The accounting policies used by the segments are the same as those used in the consolidated financial statements. For 2020, we determined thatSiriusDecisions will no longer operate under a separate management structure. Our internal management and reporting will be aligned to consolidate each of theSiriusDecisions products and related operations under a single, combined organization within our existing Products and Research segments. Accordingly, in the first quarter of 2020, we will modify our segment reporting, which will eliminate theSiriusDecisions segment, and incorporateSiriusDecisions Research products into the Research segment and incorporateSiriusDecisions Consulting , Connect and Event products into the Products segment. Sirius Products Research Decisions Consolidated Year Ended December 31, 2019 (In thousands, except percentages) Research services revenues Research $ -$ 161,487 $ 57,702 $ 219,189 Connect 54,350 - 1,874 56,224 Analytics 23,322 - - 23,322 Total research services revenues 77,672 161,487 59,576 298,735 Advisory services and events revenues Consulting 76,567 53,258 6,127 135,952 Events 12,985 - 14,025 27,010
Total advisory services and events revenues 89,552 53,258
20,152 162,962 Total segment revenues 167,224 214,745 79,728 461,697 Segment expenses 81,520 55,330 45,734 182,584 Contribution margin 85,704 159,415 33,994 279,113 Year over year revenue change 12 % 3 % N/A 29 % Year over year expense change 9 % 4 % N/A 42 % Sirius Products Research Decisions Consolidated Year Ended December 31, 2018 (In
thousands)
Research services revenues Research $ -$ 157,112 $ -$ 157,112 Connect 51,377 - - 51,377 Analytics 19,910 - - 19,910 Total research services revenues 71,287 157,112 - 228,399 Advisory services and events revenues Consulting 64,309 51,396 - 115,705 Events 13,471 - - 13,471
Total advisory services and events revenues 77,780 51,396
- 129,176 Total segment revenues 149,067 208,508 - 357,575 Segment expenses 75,039 53,326 - 128,365 Contribution margin 74,028 155,182 - 229,210 Product segment revenues increased 12% during 2019 compared to the prior year period. Connect revenues increased 6% driven by our Certification products and Analytics revenues grew 17% due primarily to the FeedbackNow product line. Consulting revenues increased 19% driven by strong consultant delivery and Events revenues decreased by 4% due in part to holding four fewer events as compared to the prior year. 25
-------------------------------------------------------------------------------- Product segment expenses increased 9% during 2019 compared to the prior year period. The increase in expenses was primarily due to a$5.1 million increase in compensation and benefit costs due to an increase in the number of employees and annual merit increases, and a$0.8 million increase professional services costs primarily due to an increase in outsourced services related to revenue delivery. Research segment revenues increased 3% during 2019 compared to the prior year period as the Research product line increased 3% driven by our reprint product and Consulting revenues increased 4%. Research segment expenses increased 4% during 2019 compared to the prior year period. The increase in expenses was primarily due to a$1.4 million increase in compensation and benefits due to an increase in the number of employees and annual merit increases and small increases in professional services and travel and entertainment.
A detailed description and analysis of the fiscal year 2017 year-over-year
changes can be found in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form 10-K
for the year ended
Liquidity and Capital Resources
We have historically financed our operations primarily through funds generated from operations. Research services revenues, which constituted approximately 65% of our revenues during 2019, are generally renewable annually and are typically payable in advance. We generated cash from operating activities of$48.4 million and$38.4 million during the years endedDecember 31, 2019 and 2018, respectively. The$10.0 million increase in cash provided from operations during 2019 was primarily attributable to a$17.2 million increase in cash generated from accounts receivable and deferred revenue due to strong bookings and collections activity in the current year, partially offset by a$4.0 million decrease in cash generated from prepaid expenses and other current assets. During 2019, we used cash in investing activities of$249.5 million , consisting primarily of$237.7 million for the acquisition ofSiriusDecisions , net of cash acquired, and$11.9 million in purchases of property and equipment. Property and equipment purchases during 2019 consisted primarily of software and leasehold improvements. During 2018, we generated$40.0 million of cash from investing activities, consisting primarily of$54.4 million in net sales and maturities of marketable investments as we liquidated our entire portfolio of marketable securities during 2018 to fund theSiriusDecisions acquisition. We used$9.3 million for the acquisitions of FeedbackNow and GlimpzIt and also used$5.1 million for purchases of property and equipment during 2018. Property and equipment purchases during 2018 consisted primarily of software. We generated$129.4 million of cash from financing activities during 2019 primarily due to$171.3 million of borrowings to finance theSiriusDecisions acquisition, which reflects the face value of debt of$175.0 million less$3.7 million that was netted against the proceeds to pay debt issuance costs. This was partially offset by$42.3 million of repayments of debt that consisted of$36.0 million of discretionary payments on our revolving credit facility and$6.3 million of required repayments of our term loan. We used$14.0 million of cash from financing activities during 2018 primarily due to$14.5 million for the payment of quarterly dividends, consisting of a$0.20 per share dividend each quarter,$9.9 million for purchases of our common stock, and$2.5 million in taxes paid related to net share settlements of restricted stock units. These uses were partially offset by$13.0 million of proceeds received from the exercise of stock options and our employee stock purchase plan. AtDecember 31, 2019 , we had$14.0 million outstanding on our revolving credit facility and plan to use excess cash flow, if any, to continue to make discretionary payments on our revolving credit facility. We also anticipate paying approximately$3.5 million of deferred acquisition purchase price for the FeedbackNow acquisition during 2020. As ofDecember 31, 2019 , our remaining stock repurchase authorization was approximately$60.1 million . In connection with the acquisition ofSiriusDecisions , we entered into a$200.0 million credit agreement onJanuary 3, 2019 . The credit agreement provides for: (1) senior secured term loans in an aggregate principal amount of$125.0 million (the "Term Loans") and (2) a senior secured revolving credit facility in an aggregate principal amount of$75.0 million (the "Revolving Credit Facility"). We utilized the full$125.0 million of the Term Loans and$50.0 million of the Revolving Credit Facility to finance a portion of the acquisition ofSiriusDecisions and to pay certain fees, costs and expenses incurred in connection with the Term Loans and Revolving Credit Facility. Additional information is provided in Note 4 - Debt in the Notes to Consolidated Financial Statements. Borrowings under the credit agreement can be repaid early, in part or in whole, at any time and from time to time, without premium or penalty, other than customary breakage reimbursement requirements for the London Interbank Offering Rate ("LIBOR") based loans. The Term Loans must be prepaid with net cash proceeds of (i) certain debt incurred or issued by us and our restricted subsidiaries and (ii) certain asset sales and condemnation or casualty events, subject to certain reinvestment rights. 26
-------------------------------------------------------------------------------- Amounts borrowed under the credit agreement bear interest, at our option, at a rate per annum equal to either (i) LIBOR for the applicable interest period plus a margin that is between 1.75% and 2.50% based on our consolidated total leverage ratio or (ii) the alternate base rate plus a margin that is between 0.75% and 1.50% based on our consolidated total leverage ratio. In addition, we will pay a commitment fee that is between 0.25% and 0.35% per annum, based on our consolidated total leverage ratio, on the average daily unused portion of the Revolving Credit Facility, payable quarterly, in arrears. During 2019, we entered into an interest rate swap contract to effectively convert the floating base interest rate to a fixed rate on approximately 80% of the outstanding Term Loan principal balance. Additional information is provided in Note 11 - Derivatives and Hedging in the Notes to the Consolidated Financial Statements. The credit agreement contains certain customary restrictive loan covenants, including among others, financial covenants that apply a maximum leverage ratio and minimum fixed charge coverage ratio. 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 ofForrester , sell assets, pay dividends or other payments in respect to capital stock, change fiscal year, or enter into certain transactions with affiliates and subsidiaries. We were in full compliance with the covenants as ofDecember 31, 2019 and expect to continue to be in compliance through the next 12 months. The credit agreement also contains customary events of default, representations, and warranties. As ofDecember 31, 2019 , we had cash and cash equivalents of$67.9 million . This balance includes$48.1 million held outside of theU.S. If the cash outside of theU.S. is needed for operations in theU.S. , we would be required to accrue and payU.S. state taxes and may be required to pay withholding taxes to foreign jurisdictions to repatriate these funds. However, our intent is to permanently reinvest these funds outside of theU.S. and our current plans do not demonstrate a need to repatriate these funds for ourU.S. operations. We believe that our current cash balance and cash flows from operations will satisfy working capital, financing activities, and capital expenditure requirements for the next twelve months. As ofDecember 31, 2019 , we had future contractual cash obligations as follows (in thousands): Contractual Obligations Total 2020 2021 2022 2023 2024 Thereafter Operating lease payments (1)$ 93,255 $ 15,904 $ 14,092 $ 13,577 $ 13,073 $ 12,673 $ 23,936 Debt - principal and interest payments (2) 134,870 14,134 16,811 16,286 18,850 68,789 - Purchase commitments (3) 16,055 14,315 870 870 - - -$ 244,180 $ 44,353 $ 31,773 $ 30,733 $ 31,923 $ 81,462 $ 23,936
(1) We primarily lease office space under non-cancellable operating lease
agreements. Refer to Note 7 - Leases in the Notes to Consolidated Financial
Statements for additional information on the Company's leases.
(2) Principal repayments are based on the contractual repayment dates. Interest
payments are based on the interest rates in effect as of
Refer to Note 4 - Debt in the Notes to Consolidated Financial Statements.
(3) Purchase commitments principally consist of contractual commitments for
software, outsourced research services and Event venues. In addition to the contractual cash commitments included above, we have other payable and liabilities that may be legally enforceable but are not considered contractual commitments. See Note 13 - Certain Balance Sheet Accounts in the Notes to Consolidated Financial Statements for more information on our payables and liabilities.
As of
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet financing arrangements.
Recent Accounting Pronouncements
See Note 1 - Summary of Significant Accounting Policies 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. 27
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