FORRESTER RESEARCH, INC. - Quarter Report: 2011 September (Form 10-Q)

 

 

FORM 10-Q

(MARK ONE)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

o		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		(I.R.S. Employer
incorporation or organization)		Identification Number)
60 Acorn Park Drive
CAMBRIDGE, MASSACHUSETTS		02140
(Address of principal executive offices)		(Zip Code)

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

As of November 1, 2011, 22,673,000 shares of the registrant’s common stock were outstanding.

 

 

FORRESTER RESEARCH, INC.

INDEX TO FORM 10-Q

		PAGE
PART I. FINANCIAL INFORMATION			3
ITEM 1. Financial Statements			3
Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010 (Unaudited)			3
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2011 and 2010 (Unaudited)			4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 (Unaudited)			5
Notes to Consolidated Financial Statements			6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			20
ITEM 4. Controls and Procedures			20
PART II. OTHER INFORMATION			20
ITEM 1A. Risk Factors			20
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			20
ITEM 6. Exhibits			22
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

FORRESTER RESEARCH, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data, unaudited)

		September 30,				December 31,
		2011				2010
ASSETS
Current Assets:
Cash and cash equivalents		$	73,586			$	86,927
Marketable investments (Note 4)			139,033				119,990
Accounts receivable, net			43,159				73,574
Deferred income taxes			1,790				4,089
Deferred commissions			9,406				12,598
Prepaid expenses and other current assets			16,181				16,733
Restricted cash			2,216				3,879
Total current assets			285,371				317,790
Long-term marketable securities (Note 4)			9,539				9,117
Restricted cash			—				11,609
Property and equipment, net			51,490				19,838
Deferred income taxes			4,550				7,779
Goodwill			71,677				67,958
Intangible assets, net			11,170				8,487
Non-marketable investments (Note 5)			7,684				7,359
Other assets			488				540
Total assets		$	441,969			$	450,477
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	5,037			$	3,644
Accrued expenses			27,959				36,485
Deferred revenue			117,547				131,521
Total current liabilities			150,543				171,650
Non-current liabilities			13,059				6,920
Total liabilities			163,602				178,570
Stockholders’ Equity (Note 8):
Preferred stock, $.01 par value
Authorized — 500 shares, issued and outstanding — none			—				—
Common stock, $.01 par value
Authorized — 125,000 shares
Issued — 30,779 and 30,500 as of September 30, 2011 and December 31, 2010, respectively
Outstanding — 22,564 and 22,812 as of September 30, 2011 and December 31, 2010, respectively			307				305
Additional paid—in capital			368,462				358,017
Retained earnings			95,765				81,652
Treasury stock — 8,215 and 7,688 as of September 30, 2011 and December 31, 2010, respectively, at cost			(181,000	)			(162,595	)
Accumulated other comprehensive loss			(5,167	)			(5,472	)
Total stockholders’ equity			278,367				271,907
Total liabilities and stockholders’ equity		$	441,969			$	450,477

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

FORRESTER RESEARCH, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data, unaudited)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
Revenues:
Research services		$	49,242			$	42,895			$	141,130			$	123,063
Advisory services and other			20,532				16,882				67,836				60,547
Total revenues			69,774				59,777				208,966				183,610
Operating expenses:
Cost of services and fulfillment			25,071				22,399				78,593				69,026
Selling and marketing			24,927				20,228				76,401				61,036
General and administrative			7,928				9,489				25,176				24,413
Depreciation			1,420				943				3,335				2,740
Amortization of intangible assets			679				905				1,898				2,715
Total operating expenses			60,025				53,964				185,403				159,930
Income from operations			9,749				5,813				23,563				23,680
Other income (expense), net			378				(945	)			273				1,278
Gains on investments, net			8				1,377				648				1,829
Income before income taxes			10,135				6,245				24,484				26,787
Income tax provision			4,403				2,541				10,371				10,409
Net income		$	5,732			$	3,704			$	14,113			$	16,378
Basic income per common share		$	0.25			$	0.16			$	0.62			$	0.73
Diluted income per common share		$	0.25			$	0.16			$	0.61			$	0.71
Basic weighted average common shares outstanding			22,620				22,462				22,672				22,456
Diluted weighted average common shares outstanding			23,082				23,107				23,179				23,040

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

FORRESTER RESEARCH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

		Nine Months Ended September 30,
		2011				2010
Cash flows from operating activities:
Net income		$	14,113			$	16,378
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			3,335				2,740
Amortization of intangible assets			1,898				2,715
Net gains from investments			(648	)			(1,829	)
Deferred income taxes			5,820				(537	)
Stock-based compensation			3,093				3,686
Amortization of premium on investments			2,523				1,728
Foreign currency losses			1,202				683
Other non-cash items			—				89
Changes in assets and liabilities, net of acquisitions:
Accounts receivable			31,273				27,524
Deferred commissions			3,193				913
Prepaid expenses and other current assets			926				(3,295	)
Accounts payable			(1,732	)			1,927
Accrued expenses			(3,428	)			(2,692	)
Deferred revenue			(15,061	)			(12,342	)
Net cash provided by operating activities			46,507				37,688
Cash flows from investing activities:
Acquisitions			(7,164	)			(1,660	)
Purchases of property and equipment			(33,194	)			(6,248	)
Purchases of marketable investments			(81,008	)			(105,102	)
Proceeds from sales and maturities of marketable investments			58,888				118,235
Decrease in restricted cash			13,272				1,851
Other investing activity			307				314
Net cash provided by (used in) investing activities			(48,899	)			7,390
Cash flows from financing activities:
Proceeds from issuance of common stock under employee equity incentive plans			7,017				10,773
Excess tax benefits from stock-based compensation			432				399
Repurchases of common stock			(18,405	)			(13,951	)
Net cash used in financing activities			(10,956	)			(2,779	)
Effect of exchange rate changes on cash and cash equivalents			7				(2,004	)
Net increase (decrease) in cash and cash equivalents			(13,341	)			40,295
Cash and cash equivalents, beginning of period			86,927				97,805
Cash and cash equivalents, end of period		$	73,586			$	138,100

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

FORRESTER RESEARCH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Interim Consolidated Financial Statements

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. 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, 2010. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position, results of operations, and cash flows as of the dates and for the periods presented have been included. The results of operations for the three and nine months ended September 30, 2011 may not be indicative of the results for the year ending December 31, 2011, or any other period.

Note 2 — Revenue Recognition

Effective January 1, 2011 the Company adopted Update No. 2009-13, “Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force” (ASU 2009-13) for contracts entered into or materially modified after that date. ASU 2009-13 updates the previous multiple-element revenue arrangements guidance. The revised guidance primarily provides three significant changes: 1) it eliminates the need for objective and reliable evidence of the fair value of the undelivered element in order for a delivered item to be treated as a separate unit of accounting; 2) it eliminates the residual method to allocate the arrangement consideration; and, 3) it modifies the fair value requirements of EITF Issue 00-21 by providing “best estimate of selling price” in addition to vendor specific objective evidence and vendor objective evidence for determining the selling price of a deliverable. In addition, the guidance also expands the disclosure requirements for revenue recognition. The adoption of ASU 2009-13 did not have a material impact on the Company’s financial position, results of operations or cash flows.

Forrester generates revenues from licensing research (including our data products), performing advisory services and consulting projects and hosting events. Forrester executes contracts that govern the terms and conditions of each arrangement. Revenues are recognized when persuasive evidence of an arrangement exists, the fee is fixed or determinable, services have been provided to the customer, and collectability is reasonably assured. Revenue contracts may include either a single product or service or a combination of multiple products and services. Revenues from contracts that contain multiple products and services are allocated among the separate units of accounting based on their relative selling prices; however, the amount recognized is limited to the amount that is not contingent on future performance conditions. The Company obtains the selling prices of its products and services based on an analysis of standalone sales of these products and services during the year. Research service revenues are recognized ratably over the term of the contract. Advisory service revenues are recognized when the customer receives the agreed upon deliverable and consulting project revenues, which are short-term in nature and based upon fixed-fee agreements, are recognized as the services are provided. Losses on consulting project contracts, if any, would be recognized in the period in which the loss first becomes probable and reasonably estimable. Reimbursed out-of-pocket expenses are recorded as advisory services revenue. Event revenues are recognized upon completion of the event.

Annual subscriptions to our RoleView research include access to all or a designated portion of our research, and depending on the type of license, membership in one or more of our Forrester leadership boards, unlimited phone or email analyst inquiry, unlimited participation in Forrester Teleconferences, and the right to attend one event. Contracts for RoleView research entered into prior to the adoption of ASU 2009-13 on January 1, 2011, were accounted for as one unit of accounting and recognized ratably as research services revenue over the membership period. Contracts for RoleView research entered into or significantly modified after January 1, 2011 are accounted for as two units of accounting: 1) the event ticket and 2) the remaining research services that are delivered throughout the contract period, based on the new guidance that permits alternative methods of determining selling price as it relates to the components that we do not sell on a standalone basis, such as research services in this case. Arrangement consideration is allocated to each of these elements based upon their relative selling prices, which is based on standalone sales of event tickets and the estimated selling price of the remaining research services. Annual subscriptions to our data products include access to designated survey data products and access to a data specialist, which are delivered throughout the year, and are accounted for as one unit of accounting and recognized ratably as research services revenue over the membership period. Clients are offered a service guarantee, which gives them the right to cancel their contracts prior to the end of the contract term and receive a refund for unused products or services.

Note 3 — Acquisition

On May 12, 2011, Forrester acquired Springboard Research (“Springboard”), a provider of research and advisory services focused on Asia Pacific and emerging markets. Springboard was a former division of Knowledge Platform, Inc. The acquisition of the Springboard business further supports Forrester’s role-based strategy and expands Forrester’s coverage in the Asia Pacific region. The total purchase price was approximately $9.0 million, of which approximately $6.7 million was paid on the acquisition date and $2.3 million (the “Holdback”) is payable at various times through June 1, 2013, subject to possible reduction to satisfy indemnification claims and specified contingencies. Of the $2.3 million Holdback, up to $0.9 million could be retained by the Company if certain key employees do not remain with the Company through May 12, 2012 or if the Company is not able to occupy one of Springboard’s facilities through September 15, 2012. As of September 30, 2011, $1.2 million and $0.9 million of the Holdback remains in accrued expenses and non-current liabilities, respectively, in the Consolidated Balance Sheets. The results of Springboard, which were not material to the consolidated financial statements, have been included in Forrester’s consolidated financial statements since May 12, 2011 in the Technology Industry Client Group segment. Pro forma financial information has not been provided as it is not material to the consolidated results of operations.

A summary of the purchase price allocation for Springboard is as follows (in thousands):

Assets:
Cash		$	85
Accounts receivable			561
Other current assets			285
Goodwill			3,695
Intangible assets			4,815
Total assets			9,441
Liabilities:
Accrued expenses			160
Deferred revenue			312
Total liabilities			472
Net assets acquired		$	8,969

Approximately $2.1 million of the goodwill is deductible for tax purposes. The Company believes the goodwill reflects its expectations of synergistic revenue opportunities from the acquisition and the value of the acquired workforce.

Intangible assets are amortized according to the expected cash flows to be received. The following are the identifiable intangible assets acquired and their respective weighted average lives (dollars in thousands):

						Useful
		Assigned				Life
		Value				(in years)
Customer relationships		$	3,605				7.5
Research content			1,080				1.5
Backlog			130				1.0
		$	4,815

Note 4 — Marketable Investments

The following table summarizes the Company’s marketable investments (in thousands):

						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
		Cost				Gains				Losses				Value
September 30, 2011
Available-for-sale securities
State and municipal obligations		$	10,828			$	11			$	(6	)			10,833
Federal agency and corporate obligations			128,458				169				(427	)			128,200
Total short-term available-for-sale securities			139,286				180				(433	)			139,033
ARS, long-term			11,000				—				(1,461	)			9,539
Total available-for-sale securities		$	150,286			$	180			$	(1,894	)		$	148,572

						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
		Cost				Gains				Losses				Value
December 31, 2010
Available-for-sale securities
State and municipal obligations		$	12,011			$	23			$	(25	)		$	12,009
Federal agency and corporate obligations			107,669				483				(171	)			107,981
Total short-term available-for-sale securities			119,680				506				(196	)			119,990
ARS, long-term			11,000				—				(1,883	)			9,117
Total available-for-sale securities		$	130,680			$	506			$	(2,079	)		$	129,107

Realized gains and losses on securities are included in earnings and are determined using the specific identification method. Realized gains or losses on the sale of the Company’s federal agency, state, municipal and corporate obligations were not material in the three and nine months ended September 30, 2011 or 2010.

The following table summarizes the maturity periods of the marketable securities in the Company’s portfolio as of September 30, 2011. In February 2008, certain auction rate securities (“ARS”) that Forrester held experienced failed auctions that limited the liquidity of these securities. These auction failures have continued and based on current market conditions, it is likely that auction failures will continue. The following table reflects the ARS at their contractual maturity dates of between

2024 and 2034 (in thousands).

		FY 2011				FY 2012				FY2013				Thereafter				Total
Federal agency and corporate obligations		$	21,285			$	57,713			$	48,194			$	1,008			$	128,200
State and municipal obligations			5,133				5,700				—				—				10,833
ARS							—				—				9,539				9,539
Total		$	26,418			$	63,413			$	48,194			$	10,547			$	148,572

The following table shows the gross unrealized losses and market value of Forrester’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):

		As of September 30, 2011
		Less Than 12 Months								12 Months or Greater
		Market				Unrealized				Market				Unrealized
		Value				Losses				Value				Losses
State and municipal bonds		$	1,113			$	6			$	—			$	—
Federal agency and corporate obligations			67,015				427				—				—
ARS			—				—				9,539				1,461
Total		$	68,128			$	433			$	9,539			$	1,461

		As of December 31, 2010
		Less Than 12 Months								12 Months or Greater
		Market				Unrealized				Market				Unrealized
		Value				Losses				Value				Losses
State and municipal bonds		$	3,258			$	25			$	—			$	—
Federal agency and corporate obligations			45,928				171				—				—
ARS			—				—				9,117				1,883
Total		$	49,186			$	196			$	9,117			$	1,883

Fair Value

The Company measures certain financial assets at fair value on a recurring basis, including cash equivalents, available-for-sale securities and trading securities. The fair values of these financial assets have been classified as Level 1, 2 or 3 within the fair value hierarchy as described in the accounting standards for fair value measurements.

Level 1 — Fair value based on quoted prices in active markets for identical assets or liabilities.

Level 2 — Fair value based on inputs other than Level 1 inputs that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Fair value based on unobservable inputs that are supported by little or no market activity and such inputs are significant to the fair value of the assets or liabilities.

The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010 (in thousands):

		As of September 30, 2011
		Level 1				Level 2				Level 3				Total
Money market funds (1)		$	4,364			$	—			$	—			$	4,364
Federal agency and corporate obligations (2)			—				138,027				—				138,027
State and municipal obligations			—				10,834				9,538				20,372
Total		$	4,364			$	148,861			$	9,538			$	162,763

		As of December 31, 2010
		Level 1				Level 2				Level 3				Total
Money market funds (1)		$	25,222			$	—			$	—			$	25,222
Federal agency and corporate obligations			—				107,981				—				107,981
State and municipal obligations			—				12,009				9,117				21,126
Total		$	25,222			$	119,990			$	9,117			$	154,329

Level 2 assets consist of the Company’s entire portfolio of federal, state, municipal and corporate bonds, excluding those municipal bonds described below with an auction reset feature. Level 2 assets have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, typically utilizing third party pricing services or other market observable data. The pricing services utilize industry standard valuation methods, including both income and market based approaches and observable market inputs to determine value. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events.

Level 3 assets at September 30, 2011 consist entirely of municipal bonds with an auction reset feature (ARS). Prior to 2008, the fair value of the ARS investments approximated par value due to the frequent resets through the auction process. While the Company continues to earn interest on its ARS investments at the contractual rate, these investments trade infrequently and therefore do not have a readily determinable market value. Accordingly, the estimated fair value of the ARS no longer approximates par value. At September 30, 2011, the Company held ARS with one investment advisor. The Company values the ARS using a discounted cash flow model that includes estimates of interest rates, timing and amount of cash flows, credit and liquidity premiums and expected holding periods of the securities, which is considered a Level 3 valuation. The valuation resulted in an unrealized loss recorded in other comprehensive loss in the Consolidated Balance Sheets of $1.5 million at September 30, 2011 and $1.9 million at December 31, 2010. The Company believes that the loss is temporary due to the strong underlying credit rating of the securities and the fact that the Company does not intend to sell the securities and is not likely to be required to sell the securities. The assumptions used in valuing the ARS are volatile and subject to change as the underlying sources of these assumptions and market conditions change.

Through July 1, 2010, the Company also held ARS with UBS AG (UBS). Historically, UBS provided a valuation utilizing Level 3 inputs for the ARS investments. UBS utilized a discounted cash flow approach to arrive at its valuation, which was corroborated by a separate and comparable discounted cash flow analysis prepared by the Company. The assumptions used in preparing the discounted cash flow model included estimates, based on data available at each balance sheet date, of interest rates, timing and amount of cash flows, credit and liquidity premiums, and expected holding periods of the ARS. In November 2008, the Company accepted an offer (the “Right”) from UBS entitling the Company to sell at par value ARS originally purchased from UBS at any time during a two-year period from June 30, 2010 through July 2, 2012. The Company valued the Right as an asset using a discounted cash flow approach including estimates of interest rates and timing and amount of cash flows, adjusted for any bearer risk associated with UBS’s financial ability to repurchase the ARS beginning June 30, 2010, based on data available at each balance sheet date. The combined fair value of the Right and the UBS ARS historically equaled the par value of the UBS ARS. The remaining $5.4 million of par value UBS ARS at June 30, 2010 were sold to UBS at par under the Right on July 1, 2010.

The following table provides a summary of changes in fair value of the Company’s Level 3 financial assets for the nine months ended September 30, 2011 and 2010 (in thousands):

		ARS
Balance at December 31, 2010		$	9,117
Sales/Maturities			—
Total gains (losses):
Included in other comprehensive income			422
Included in earnings			—
Balance at September 30, 2011		$	9,539

		UBS
		Right				ARS
Balance at December 31, 2009		$	2,100			$	39,525
Sales/Maturities			—				(31,675	)
Total gains (losses):
Included in other comprehensive income			—				(16	)
Included in earnings			(2,100	)			2,100
Balance at September 30, 2010		$	—			$	9,934

Note 5— Non-Marketable Investments

At September 30, 2011 and December 31, 2010, the carrying value of the Company’s non-marketable investments, which were composed primarily of interests in technology-related private equity funds, were $7.7 million and $7.4 million, respectively.

One of the Company’s investments, with a book value of $1.6 million and $1.7 million at September 30, 2011 and December 31, 2010, respectively, is being accounted for using the cost method and, accordingly, is valued at cost unless an other-than-temporary impairment in its value occurs. The other investments are being accounted for using the equity method as the investments are limited partnerships and the Company has an ownership interest in excess of 5% and, accordingly, the Company records its share of the investee’s operating results each period. The Company recorded a gain from its non-marketable investments of $0.6 million and $1.8 million during the nine months ended September 30, 2011 and 2010, respectively, which are included in gains on investments, net in the Consolidated Statements of Income. Gains from non-marketable investments were insignificant during the three months ended September 30, 2011 and were $1.4 million during the three months ended September 30, 2010.

Note 6 — Reorganization

The following table rolls forward the activity in the reorganization accrual for the nine months ended September 30, 2011 (in thousands):

		Facility
		Consolidation				Total
Accrual at December 31, 2010		$	446			$	446
Cash payments			(446	)			(446	)
Accrual at September 30, 2011		$	—			$	—

Note 7 — 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 options and vesting of restricted stock units when dilutive.

Basic and diluted weighted average common shares are as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Basic weighted average common shares outstanding			22,620				22,462				22,672				22,456
Weighted average common equivalent shares			462				645				507				584
Diluted weighted average common shares outstanding			23,082				23,107				23,179				23,040
Options excluded from diluted weighted average share calculation as effect would have been anti-dilutive			447				344				209				490

Note 8 — Stockholders’ Equity

Comprehensive Income

The components of total comprehensive income for the three and nine months ended September 30, 2011 and 2010 are as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Net income		$	5,732			$	3,704			$	14,113			$	16,378
Cumulative translation adjustment			(2,593	)			3,637				298				(1,785	)
Unrealized gain (loss) on marketable investments, net of tax			(197	)			103				7				(140	)
Total comprehensive income		$	2,942			$	7,444			$	14,418			$	14,453

Equity Plans

Stock option activity for the nine months ended September 30, 2011 is presented below (in thousands, except per share data):

						Weighted -				Weighted -
						Average				Average
						Exercise				Remaining				Aggregate
		Number				Price Per				Contractual				Intrinsic
		of Shares				Share				Term (in years)				Value
Outstanding at December 31, 2010			2,215			$	26.00
Granted			345				34.56
Exercised			(222	)			25.21
Forfeited			(64	)			31.30
Outstanding at September 30, 2011			2,274			$	27.22				6.59			$	12,771
Exercisable at September 30, 2011			1,373			$	24.99				5.24			$	10,332

Restricted stock unit activity for the nine months ended September 30, 2011 is presented below (in thousands, except per share data):

						Weighted-
						Average
						Grant Date
		RSUs				Fair Value
Unvested at December 31, 2010			192			$	27.64
Granted			116				33.19
Vested or settled			(9	)			29.86
Forfeited			(20	)			27.90
Unvested at September 30, 2011			279			$	29.86

Stock-Based Compensation

Forrester recognizes the fair value of stock-based compensation in net income over the requisite service period of the individual grantee, which generally equals the vesting period. Stock-based compensation was recorded in the following expense categories (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Cost of services and fulfillment		$	678			$	531			$	1,325			$	1,588
Selling and marketing			294				238				686				708
General and administrative			440				387				1,082				1,390
Total		$	1,412			$	1,156			$	3,093			$	3,686

In 2009, the Company issued to its employees 95,496 performance-based RSUs. The vesting of the RSUs is subject to performance criteria and will vest at 100% or 40% on April 1, 2012, or the RSUs could be forfeited, depending on whether specified revenue growth and certain operating margin targets related to full year 2011 performance are achieved. Compensation expense in 2009, 2010 and the three months ended March 31, 2011 was recognized based on an estimate of 100% vesting of the RSUs. During the three months ended June 30, 2011, the Company modified its assessment of the likelihood of vesting to the 40% level and recorded a credit, to stock-based compensation expense, of approximately $0.8 million during the three months ended June 30, 2011 resulting from the change in estimate. Compensation expense in the three months ended September 30, 2011 continued to be recognized based on an estimate of 40% vesting.

Forrester utilizes the Black-Scholes valuation model for estimating the fair value of stock-based compensation. Options granted under the equity incentive plans and shares subject to purchase under the employee stock purchase plan were valued using the following assumptions:

		Three Months Ended								Three Months Ended
		September 30, 2011								September 30, 2010
		Equity Incentive				Employee Stock				Equity Incentive				Employee Stock
		Plans				Purchase Plan				Plans				Purchase Plan
Average risk-free interest rate			1.11	%			0.08	%			1.37	%			0.20	%
Expected dividend yield			None				None				None				None
Expected life			3.5 Years				0.5 Years				3.5 Years				0.5 Years
Expected volatility			40	%			28	%			40	%			25	%
Weighted average fair value		$	10.01			$	7.56			$	9.49			$	6.87

		Nine Months Ended								Nine Months Ended
		September 30, 2011								September 30, 2010
		Equity Incentive				Employee Stock				Equity Incentive				Employee Stock
		Plans				Purchase Plan				Plans				Purchase Plan
Average risk-free interest rate			1.29	%			0.14	%			2.02	%			0.17	%
Expected dividend yield			None				None				None				None
Expected life			3.5 Years				0.5 Years				3.6 Years				0.5 Years
Expected volatility			40	%			28	%			40	%			25	%
Weighted average fair value		$	10.53			$	7.55			$	9.63			$	6.23

Treasury Stock

Forrester’s Board of Directors has authorized an aggregate $260 million to purchase common stock under the stock repurchase program. The shares repurchased may be used, among other things, in connection with Forrester’s employee and director equity incentive and purchase plans. As of September 30, 2011, Forrester had repurchased approximately 8.2 million shares of common stock at an aggregate cost of approximately $181.0 million.

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, foreign exchange gains or losses on the remeasurement of deferred tax liabilities and tax benefits related to disqualifying dispositions of incentive stock options are treated as discrete items and are recorded in the period in which they arise.

Note 10 — Operating Segments

Forrester is organized into three client groups with each client group responsible for writing relevant research for the roles within the client organization on a worldwide basis. The three client groups, which are considered operating segments, are: Business Technology (“BT”) (formerly called Information Technology or IT), Technology Industry (“TI”), and Marketing and Strategy (“M&S”). In addition, the Company’s Events segment supports all three client groups. All of the client groups generate revenues through sales of research, advisory and other service offerings targeted at specific roles within their targeted clients. Each of the client groups consists of research personnel focused primarily on issues relevant to particular roles and to the day-to-day responsibilities of persons within the roles. Amounts included in the “Events” segment relate to the operations of the events production department. Revenue reported in the Events segment consists primarily of sponsorships and sales of event tickets to Forrester events.

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

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

The following tables present information about reportable segments (in thousands):

		BT				TI				M&S				Events				Consolidated
Three months ended September 30, 2011
Revenue		$	25,220			$	21,655			$	21,499			$	1,400			$	69,774
Direct margin			17,065				15,231				13,387				410				46,093
Selling, marketing, administrative and other expenses																			(35,665	)
Amortization of intangible assets																			(679	)
Income from operations																		$	9,749

		BT				TI				M&S				Events				Consolidated
Three months ended September 30, 2010
Revenue		$	23,047			$	18,342			$	17,889			$	499			$	59,777
Direct margin			16,283				13,410				11,059				(146	)			40,606
Selling, marketing, administrative and other expenses																			(33,888	)
Amortization of intangible assets																			(905	)
Income from operations																		$	5,813

		BT				TI				M&S				Events				Consolidated
Nine months ended September 30, 2011
Revenue		$	73,667			$	62,373			$	62,828			$	10,098			$	208,966
Direct margin			49,319				44,381				38,615				4,601				136,916
Selling, marketing, administrative and other expenses																			(111,455	)
Amortization of intangible assets																			(1,898	)
Income from operations																		$	23,563

		BT				TI				M&S				Events				Consolidated
Nine months ended September 30, 2010
Revenue		$	69,173			$	54,617			$	52,133			$	7,687			$	183,610
Direct margin			48,456				40,215				31,880				3,182				123,733
Selling, marketing, administrative and other expenses																			(97,338	)
Amortization of intangible assets																			(2,715	)
Income from operations																		$	23,680

During the three months ended September 30, 2011, the Company identified errors in the presentation of direct margin by operating segment during the nine-month period ending September 30, 2010. Certain corporate level adjustments related to the BT, TI and M&S segments were incorrectly classified within the Event segment. There was no effect on consolidated segment direct margin. The Company has concluded that the error described above was immaterial to all periods discussed. The Company has detailed the adjustments to the prior periods below (amounts in thousands):

		BT				TI				M&S				Events				Consolidated
Direct margin — three months ended March 31, 2010
As reported		$	15,913			$	13,915			$	10,159			$	(120	)		$	39,867
As adjusted			15,981				13,318				10,199				369				39,867
Change		$	(68	)		$	597			$	(40	)		$	(489	)		$	—
Direct margin — three months ended June 30, 2010
As reported		$	16,166			$	14,388			$	10,616			$	2,090			$	43,260
As adjusted			16,192				13,487				10,622				2,959				43,260
Change		$	(26	)		$	901			$	(6	)		$	(869	)		$	—
Direct margin — six months ended June 30, 2010
As reported		$	32,079			$	28,303			$	20,775			$	1,970			$	83,127
As adjusted			32,173				26,805				20,821				3,328				83,127
Change		$	(94	)		$	1,498			$	(46	)		$	(1,358	)		$	—
Direct margin — three months ended September 30, 2010
As reported		$	15,990			$	13,616			$	11,059			$	(59	)		$	40,606
As adjusted			16,283				13,410				11,059				(146	)			40,606
Change		$	(293	)		$	206			$	—			$	87			$	—
Direct margin — nine months ended September 30, 2010
As reported		$	48,069			$	41,920			$	31,834			$	1,910			$	123,733
As adjusted			48,456				40,215				31,880				3,182				123,733
Change		$	(387	)		$	1,705			$	(46	)		$	(1,272	)		$	—

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. These statements include, but are not limited to, statements about the adequacy of our liquidity and capital resources, future revenue growth rates, anticipated increases in our sales force, future depreciation expenses and anticipated continued repurchases of our common stock. These statements are based on our current plans and expectations and involve risks and uncertainties that could cause actual future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual future activities and results to differ include, among others, our ability to retain and enrich memberships for our research products and services, technology spending, our ability to respond to business and economic conditions and market trends, the risks and challenges inherent in international business activities, competition and industry consolidation, the ability to attract and retain professional staff, our dependence on key personnel, and possible variations in our quarterly operating results. These risks are described more completely in our Annual Report on Form 10-K for the year ended December 31, 2010. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

We derive revenues from memberships to our research products and services, performing advisory services and consulting projects, and hosting events. We offer contracts for our research products that are typically renewable annually and payable in advance. Research revenues are recognized as revenue ratably over the term of the contract. Accordingly, a substantial portion of our billings are initially recorded as deferred revenue. Clients purchase advisory services independently and/or to supplement their memberships to our research. Billings attributable to advisory services and consulting projects are initially recorded as deferred revenue. Advisory service revenues are recognized when the customer receives the agreed upon deliverable. Consulting project revenues, which generally are short-term in nature and based upon fixed-fee agreements, are recognized as the services are provided. Event billings 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 research personnel and 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 are allocated to these categories according to the number of employees in each group.

Deferred revenue, agreement value, client retention, dollar retention and enrichment are metrics we believe are important to understanding our business. We believe that the amount of deferred revenue, along with the agreement value of contracts to purchase research and advisory services, provide a significant measure of our business activity. 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 research and advisory service contracts in force at a given time (but not including advisory-only contracts), without regard to how much revenue has already been recognized.
	•		Client retention - the percentage of client companies with memberships expiring during the most recent twelve-month period that renewed one or more of those memberships during that same period.
	•		Dollar retention - the percentage of the dollar value of all client membership contracts renewed during the most recent twelve-month period to the total dollar value of all client membership contracts that expired during the period.
	•		Enrichment - the percentage of the dollar value of client membership contracts renewed during the most recent twelve-month period to the dollar value of the corresponding expiring contracts.

Client retention, dollar retention, and enrichment are not necessarily indicative of the rate of future retention of our revenue base. A summary of our key metrics is as follows (dollars in millions):

		As of								Absolute				Percentage
		September 30,								Increase				Increase
		2011				2010				(Decrease)				(Decrease)
Deferred revenue		$	117.5			$	104.6			$	12.9				12	%
Agreement value		$	211.2			$	191.8			$	19.4				10	%
Client retention			81	%			80	%			1				1	%
Dollar retention			91	%			89	%			2				2	%
Enrichment			104	%			102	%			2				2	%
Number of clients			2,703				2,562				141				6	%

The increase in deferred revenue and agreement value from September 30, 2010 to September 30, 2011 is primarily due to increased demand for our products and services. Client and dollar retention rates as well as our enrichment rate have all increased from the September 30, 2010 period and remain at or near historic highs.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires us to

make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our policies and estimates, including but not limited to, those related to our revenue recognition, stock-based compensation, non-marketable investments, goodwill and other intangible assets, income taxes and valuation and impairment of marketable investments. Management bases its estimates on historical experience, data available at the time the estimates are made and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have updated our critical accounting policies for “revenue recognition” and “valuation and impairment of marketable investments” below. Our other critical accounting policies and estimates are described in our Annual Report on Form 10-K for the year ended December 31, 2010.

Revenue Recognition.

Effective January 1, 2011 we adopted Update No. 2009-13, “Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force” (ASU 2009-13). ASU 2009-13 updates the previous multiple-element revenue arrangements guidance. The revised guidance primarily provides three significant changes: 1) it eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting; 2) it eliminates the residual method to allocate the arrangement consideration; and, 3) it modifies the fair value requirements of EITF Issue 00-21 by providing “best estimate of selling price” in addition to vendor specific objective evidence and vendor objective evidence for determining the selling price of a deliverable.

We generate revenues from licensing memberships to our research (including our data products), 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 persuasive evidence of an arrangement exists, the fee is fixed or determinable, services have been provided to the customer, and collectability is reasonably assured. Our contracts may include either a single product or service or a combination of multiple products and services. Revenues from contracts that contain multiple products or services are allocated among the separate units of accounting based on their relative selling prices; however, the amount recognized is limited to the amount that is not contingent on future performance conditions. For example, when a discount off of list price is provided in a multiple element contract, the discount is applied ratably to the research and data products only (which commence delivery on the first day of the contract), as the undelivered products in the contract (advisory services or events) would be refundable to the customer at list price. We obtain the selling prices of our products and services based upon an analysis of standalone sales of these products and services during the year. Research service revenues are recognized ratably over the term of the contract. Advisory service revenues are recognized when the customer receives the agreed upon deliverable and consulting project revenues are recognized as the services are provided. Reimbursed out-of-pocket expenses are recorded as advisory services revenue. Event revenues are recognized upon completion of the event.

Annual subscriptions to our RoleView research include access to all or a designated portion of our research, and depending on the type of license, membership in one or more of our Forrester leadership boards, unlimited phone or email analyst inquiry, unlimited participation in Forrester Teleconferences, and the right to attend one event. Contracts for RoleView research entered into prior to the adoption of ASU 2009-13 on January 1, 2011, were accounted for as one unit of accounting and recognized ratably as research services revenue over the membership period. Contracts for RoleView research entered into or significantly modified after January 1, 2011 are accounted for as two units of accounting: 1) the event ticket and 2) the remaining research services that are delivered throughout the contract period based on the new guidance that permits alternative methods of determining selling prices as it relates to the components that we do not sell on a standalone basis, such as research services in our case. Arrangement consideration is allocated to each element based upon its relative selling price, which is determined based on standalone sales of event tickets and the estimated selling price of the remaining research services. Annual subscriptions to our data products include access to designated survey data products and access to a data specialist, which are delivered throughout the year, and are accounted for as one unit of accounting and recognized ratably as research services revenue over the membership period. We offer our clients a service guarantee, which gives our clients the right to cancel their contracts prior to the end of the contract term and receive a refund for unused products or services. Furthermore, our revenue recognition determines the timing of commission expenses, as commissions are earned during the month a contract is booked and are deferred and recognized as expense as the related revenue is recognized. We evaluate the recoverability of deferred commissions at each balance sheet date.

Valuation and Impairment of Marketable Investments.

Our investment portfolio may at any time contain investments in U.S. Treasury and U.S. government agency securities, taxable and/or tax exempt municipal notes (some of which may have an auction reset feature), corporate notes and bonds, commercial paper and money market funds. The assessment of the fair value of certain of the debt securities (e.g. those containing an auction reset feature) can be difficult and subjective due in part to limited trading activity of certain of these debt instruments.

In accordance with the accounting standard for fair value measurements, we have classified our marketable investments as Level 1, 2 or 3 within the fair value hierarchy. Fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets. Fair values determined by Level 2 inputs utilize data points that are observable, either directly or indirectly, such as quoted prices for similar assets, 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. Fair values determined by Level 3 inputs utilize unobservable data points.

As of September 30, 2011, we held municipal bonds with a fair value of $9.5 million ($11.0 million at par value) with an auction reset feature (“auction rate securities” or “ARS”). The fair value of the ARS was determined by utilizing a discounted cash flow approach, which is considered a Level 3 valuation. The assumptions used in preparing the discounted cash flow model include estimates, based on data available at September 30, 2011, of interest rates, timing and amount of cash flows, credit and liquidity premiums, and expected holding periods of the ARS. The assumptions used in valuing the ARS are volatile and subject to change as the underlying sources of these assumptions and market conditions change, which may lead us in the future to record additional losses for these securities. We classified these ARS as available-for-sale securities and determined that the losses were not considered other-than-temporary and were not due to credit losses. Accordingly, changes in the market value of the ARS have been recorded in other comprehensive loss in the Consolidated Balance Sheets for the three and nine month periods ended September 30, 2011 and 2010. If market conditions deteriorate further, we may be required to record unrealized losses in other comprehensive loss or impairment charges within the Consolidated Statements of Income. We may not be able to liquidate these investments unless the issuer calls the security, a successful auction occurs, a buyer is found outside of the auction process, or the security matures.

At September 30, 2011, we held $139.0 million of marketable investments, excluding ARS, which were valued using Level 2 inputs. Level 2 investments are initially valued at the transaction price and subsequently valued, at the end of each reporting period, by our investment managers utilizing third party pricing services, which consists of one price per instrument. We do not obtain pricing or quotes from brokers directly and historically we have not adjusted prices obtained from our investment managers for our non-ARS portfolio. We verify the pricing information obtained from our investment managers by obtaining an understanding of the pricing methodology and inputs utilized by the pricing services to value our particular investments, as well as an understanding of the controls and procedures utilized by our investment managers to both ensure the accurate recording and to validate the pricing of our investments obtained from the pricing services on an annual basis.

Our marketable investments consist solely of high credit quality corporate and municipal bonds with a weighted average credit rating AA and do not include difficult to value features. The majority of our marketable investments are in large corporate notes.

We conduct periodic reviews to identify and evaluate each investment that has an unrealized loss, in accordance with the meaning of other-than-temporary impairment and its application to certain investments, as required under current accounting standards. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses on available-for-sale securities that are determined to be temporary, and not related to credit loss, are recorded, net of tax, in accumulated other comprehensive loss.

For available-for-sale debt securities with unrealized losses, management performs an analysis to assess whether we intend to sell or whether we would more likely than not be required to sell the security before the expected recovery of the amortized cost basis. Where we intend to sell a security, or may be required to do so, the security’s decline in fair value would be deemed to be other-than-temporary and the full amount of the unrealized loss would be recorded within gains (losses) on investments, net in the Consolidated Statements of Income. Regardless of our intent to sell a security, we perform additional analysis on all securities with unrealized losses to evaluate losses associated with the creditworthiness of the security. Credit losses are identified where we do not expect to receive cash flows sufficient to recover the amortized cost basis of a security and are recorded within gains (losses) on investments, net in the Consolidated Statements of Income.

Results of Operations

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Revenues:
Research services			71	%			72	%			68	%			67	%
Advisory services and other			29				28				32				33
Total revenues			100				100				100				100
Operating expenses:
Cost of services and fulfillment			36				37				38				38
Selling and marketing			36				34				36				33
General and administrative			11				16				12				13
Depreciation			2				2				2				2
Amortization of intangible assets			1				1				1				1
Income from operations			14				10				11				13
Other income, net			—				(2	)			—				1
Gains on investments, net			—				2				1				1
Income before income taxes			14				10				12				15
Income tax provision			6				4				5				6
Net income			8	%			6	%			7	%			9	%

Three Months Ended September 30, 2011 and September 30, 2010

Revenues

		Three Months Ended								Absolute				Percentage
		September 30,								Increase				Increase
		2011				2010				(Decrease)				(Decrease)
		(dollars in millions)
Revenues		$	69.8			$	59.8			$	10.0				17	%
Revenues from research services		$	49.2			$	42.9			$	6.3				15	%
Revenues from advisory services and other		$	20.5			$	16.9			$	3.6				21	%
Revenues attributable to customers outside of the U.S.		$	20.5			$	16.3			$	4.2				26	%
Percentage of revenue attributable to customers outside of the U.S.			29	%			27	%			2				7	%
Number of clients (at end of period)			2,703				2,562				141				6	%
Number of events			2				1				1				100	%