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Executives

Karyl Levinson - VP, Corporate Communications

Mike Doyle - CFO

George Colony - CEO

Charles Rutstein - COO

Analysts

Laura Lederman - William Blair

Kevin Ciabattoni - Boenning & Scattergood

Brian Murphy - Sidoti & Company

Vincent Colicchio - Noble Financial

Mick Dobray - Robert W. Baird

Forrester Research, Inc. (FORR) Q2 2010 Earnings Call July 29, 2010 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2010 Forrester Research Earnings Conference Call. My name is Saline; I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct the question-and-answer-session. (Operator instructions). As a reminder, this conference is being recorded for replay purposes.

I'd now like to turn the conference over to your host for today, Karyl Levinson, Vice President, Corporate Communications. Please proceed.

Karyl Levinson

Good morning, thank you for joining our second quarter call. With me today are George Colony, Forrester's Chairman of the Board and CEO, Charles Rutstein, Forrester's Chief Operating Officer, and Mike Doyle, Forrester's Chief Financial Officer.

Mike will open the call and provide detail on our financial results for the quarter. George will follow Mike and provide a strategic update on the business and our role-based strategy. After George completes his review, we'll open the call to Q&A.

A replay of this call will be available until August 5, 2010 and can be accessed by dialing 888-286-8010. Please reference the pass code 90149232. This call is also available via webcast, and will be archived in the investor section at forrester.com.

Before we begin, I'd like to remind you that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as expect, believe, anticipate, intend, plans, estimate, or similar, expressions are intended to identify these forward-looking statements. These statements are based on the Company's current plans and expectations and involve risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward-looking statements.

Some of the important factors that could cause actual results to differ are discussed in our reports and filings with the Securities and Exchange Commission. The Company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. I'll now hand the call over to Mike Doyle.

Mike Doyle

Thanks, Karyl. I will now begin my review of Forrester's second quarter financial performance, the balance sheet at June 30, our second quarter metrics and the outlook for the third quarter and full-year 2010.

Please note that the income statement numbers I'm reporting are pro forma and exclude the following items; amortization of intangibles, stock-based compensation expense, reorganization costs in 2009, acquisition related costs and credits and net realized gains and losses from investments.

Also, we continue to utilize an effective tax rate at 40% for pro forma purposes. The actual effective tax rate for the second quarter of 2010 is approximately 39%. For the second quarter, Forrester met its quarterly guidance for revenue, pro forma operating margin and earnings per share.

We're pleased with the continued improvement in our operating performance which reflects healthy revenue across all product segments, and excellent operating discipline, resulting in strong bottom-line performance.

We continue to see signs of an improving economy both with improved customer retention, which is now above historical averages and improved customer enrichment metrics. Cash flow performance was strong for the quarter and up versus prior year. Now, let me turn to more detailed review of our second quarter results.

Forrester second quarter revenue increased 5% to 64.7 million from 61.6 million in the second quarter of last year. Given our deferred revenue recognition model, we are continuing to see the positive revenue effects of our improved bookings performance over the last three quarters, despite the negative impact of foreign currency on our second quarter revenue. In addition, we continue to experience strong consulting delivery and increased events revenue.

Second quarter research services revenue increased 5% to 40.8 million from 39 million last year; research services revenue was 63% of total revenue for the quarter which was in line with the second quarter of 2009. Second quarter advisory services and other revenue increased 6% to 23.9 million from 22.6 million in the second quarter of 2009, and represented 37% of total revenue for the quarter.

Year-to-date advisory services increased 9% to 43.7 million from 39.9 million for the same period last year. Our international revenue mix declined to 27% for the second quarter 2010, compared to 30% in the second quarter last year, primarily due to the impact of foreign exchange rates. On a local currency basis, our international revenues grew at a slightly slower rate than our U.S. business. We would now like to take you to the activity behind our revenue, and review the results for each of our products starting with research.

In the second quarter, we added 387 new research documents; the top three research roles were the market research professional which was combined this past quarter. It previously was two separate roles, a consumer market research and a B2B Market Research Professionals. Technology product management and marketing professionals, 4,682 members with our second leading role, and the enterprise architecture professional with 4,398 members was our third leading role.

We hosted 63 teleconferences in the second quarter with a total attendance of 1,998. Forrester Leadership Boards are peer offering for senior executives continues to improve achieving year-over-year revenue growth of 4% in both the second quarter and on a year-to-date basis. The seven boards focused on IT roles now have a total of 963 members, technology industry boards now have a total membership of 282, and finally the marketing and strategy boards have a total membership of 398.

At the end of the second quarter, the Forrester Leadership Boards had 1,643 members, an increase of 5% from March 31 of 2010 and 5% from December 31, 2009. In our data business, we continue to add and renew an impressive list of clients, including the addition of 14 new 1B plus companies in the second quarter, including Master Card, Colt, Anheuser-Busch, HSBC, NBC, Hilton, United Airlines Craft and Virgin America.

In our consulting business, the demand for our consulting services increased 4% from the second quarter of 2009, which we believe reflects an improving economy and a continued focus on the needs of our clients in their roles. Consulting improvement was broad-based across each of our operating segments. In our events business, as they did in the first quarter of 2010, our second quarter 2010 events business continued to strengthen in both sponsorships and attendee sales.

The second quarter is typically one of the larger quarters for our events business. We hosted two IT role-based events in the second quarter, our flagship IT events, IT Forum North America and IT Forum EMEA, and two MNS role-based events, Marketing Forum North America and Customer Experience Forum North America.

In the third quarter 2010, we are hosting one IT role-based events, Security Forum North America. In the fourth quarter, we will host five IT role-based events. Our new CIO Forum North America, Content and Collaboration Forum North America, Business Process and Application Delivery Forum North America and Sourcing and Vendor Management Forum in both North America and EMEA.

We will also host two MNS role-based events in the fourth quarter, Consumer Forum North America and Marketing and Strategy Forum North America. Operating expenses for the second quarter were 52.2 million, up 10% from 47.4 million in the second quarter of 2009, due to significantly higher commissions, bonus payouts and higher compensation and benefit cost associated with increased headcount, primarily in sales.

Travel and Entertainment expenses have also increased as business activity continues to improve. Operating income was $12.5 million or 19.3% of revenue, compared with 14.2 million, or 23% of revenue in the second quarter of 2009.

The strong second quarter revenue was offset by the increased operating expenses as we ramp-up our sales organization to reflect the improved economy. In addition, operating income was negatively impacted by the fluctuations of exchange rates in the second quarter of 2010 as compared to the same period in 2009.

Other income for the second quarter was 1.1 million, up 153% from the second quarter of 2009. The increase is primarily due to the net foreign exchange gains on foreign liability balances, partially offset by a decrease in interest income, reflecting lower global interest rates.

Net income for the second quarter was 8.2 million and earnings per share was $0.35 on diluted, weighted average shares outstanding of 23.1 million, compared with net income of 8.8 million, and earnings per share of $0.38 on 22.9 million weighted average shares outstanding in the second quarter of last year.

Turning to Forrester's six month results, total revenue for the six month period ending June 30, 2010 increased 5% to 123.8 million from 118 million last year. Year-to-date 2010 research services revenue increased by 2.1 million or 3% to 80.2 million. Research services represented 65% of total year-to-date revenue, a 1% decline, compared to the same period in 2009.

Operating income for the six month period, it was 21.9 million or 17% of revenue, compared with operating income of 23.3 million or 19.8% of revenue in the first six months of 2009. The decline versus prior year reflects additional investment in sales personnel as our business activity increases.

As a reminder, with our deferred revenue model, bookings run ahead of revenue. We plan our reinvestment based on bookings activity, knowing there can be a lag between revenue and expense, particularly post-recession.

Net income on a year-to-date basis was 14.5 million from 15 million last year, a decline of 3.8%. Earnings per share was $0.63 on diluted weighted average shares outstanding of 23 million compared with $0.65 and 23 million weighted average shares outstanding last year. The decrease is primarily the result of reinvestment in the business, principally in our sales organization.

Now I'd like to review the balance sheet. Our strong balance sheet reflects the continued improvement in our business. Our total cash and marketable securities at June 30 were 287 million, up 27.2 million from our year-end 2009 balances. We generated 32.4 million in cash from operations during the first six months of 2010 which is up 3 million or 10% from prior year primarily due to increased bookings activity due to the improving economy and customer need for our products and services.

We've received 8.3 million in cash from the auctions exercised and employees stock purchase plan in the first six months of the year. During the first six months of 2010, we repurchased 159,000 shares at a total cost of $5 million versus 10 million in the first six months of 2009. We will continue to be active with the buyback at selected price points and have 53.8 million remaining in our repurchase authorization.

Accounts receivable at June 30, 2010 was 39.8 million compared to 36.3 million as of June 30, 2009. Our day sales outstanding at June 30 was 56 days, up from 54 days at June 30, 2009. And account receivable over 90 days was 8% at June 30, 2010, down from 9% last year reflecting improved collections performance.

Our capital spending for the second quarter of 2010 was $1 million compared to 200,000 in the second quarter of 2009. Capital spending for the first six months of 2010 was approximately 2.4 million compared to 2.7 million in the first six months of last year. We expect capital spending to increase in the second half of 2010 as we increase our investment in customer-facing technology.

Deferred revenue at June 30 was 108.5 million, up 11% over June 30 of 2009. Our future accounts receivable balances are amounts to be invoiced in the future for clients with multi-year deals or scheduled payment terms. Deferred revenue, plus future AR, grew 12% year-over-year. The strong year-over-year increase reflects improved business activity as our business continues to rebound strongly from 2009 levels and it's the best indicator of future performance.

I'll now review Forrester's second quarter metrics. Agreement value; this represents the total value of all contracts for research and advisory services in place without regard to the amount of revenue that has already been recognized or is yet to be recognized, and it was 189.3 million at June 30, 2010, an increase of 2% from the second quarter of 2009.

At June 30, 2010, Forrester's retention rate for client companies was 79%, an increase of two points from March 31, 2010. And our dollar retention rate during the same time period was 89%, an increase of one point from our first quarter 2010.

Our enrichment rate was 101% for the rolling 12-month period ended June 2010 which is up 3 points from March 31, 2010. We calculate client and dollar retention, rates and enrichment rates on a rolling 12 month basis. Due to the fluctuations between quarters with deals that close early or slip into the next quarter. The rolling 12 month methodology captures the proper trend information.

At the end of the second quarter, our total for client companies was 2523, up 36 from March 31st, 2010. As of June 30th, 2010 there are 3.2 rolls per client which is flat with the first quarter 2010 levels. Overall, our client and dollar retention and enrichment metrics coupled with our differed revenue performance, highlight the continued improvement we're seeing in our business. For headcount at the end of the second quarter Forrester had a total staff of 1008, up from 986 at March 31, 2010.

As we continue to invest in growing our sales staff, current headcount includes a research staff of 362 and sales staff of 356. Sales attrition, an important driver of sales productivity is running at a rate approximately 50% below the first six months of 2009. This bodes well for sales productivity in the balance of 2010.

The last topic I'd like to cover today is our business outlook for the third quarter and full year 2010. In summary, sales performance and continued expense management discipline during the first half of 2010 allowed us to perform at or above our revenue, pro forma operating margin, and EPS guidance. In addition, we are encouraged by the positive trends on our key customer retention and enrichment metrics.

Our balance sheet is in excellent shape, with cash flow up 10% year-over-year, allowing us to be opportunistic in this market pursuing acquisitions, new business and other vehicles to enhance shareholder value. Differed revenue, a key indicator of future performance was up 11%. We continue to focus on hiring additional sales personnel while maintaining low attrition compared to year ago levels. Our progress on the sales front is laying the foundation for strong second half of 2010 and positions us for successful 2011.

As a result we have increased our guidance for the balance of the year, increasing our revenue guidance and raising our earnings per share guidance above previous levels. We have kept operating margin in line with previous guidance to reflect our intent to continue to reinvest in the business. Our pro forma guidance in third quarter and full year 2010 reflects our view that the economic conditions are improving and therefore continued investment in our business in the form of sales and research talent is appropriate.

As a reminder, our guidance excludes the following, amortization of intangible assets, which we expect to be approximately 900,000 for the third quarter and approximately 3.6 million for the full year 2010. Stock based compensations expense of 1.1 to 1.3 million for the third quarter and approximately $5 million for the full year 2010 and gains and losses and investments.

For the third quarter 2010, we are aiming to achieve total revenues of approximately 57.5 to 60.5 million. This range reflects a 7 % to 12% improve versus prior year.

Operating margin of 11.5 to 13.5%, other income of approximately 250,000, a pro forma income tax rate of 40% and pro forma diluted earnings per share of approximately $0.18 to $0.22. Our pro forma full-year guidance is as follows. Total revenues of approximately 244 to 252 million, this reflects an increase of between 5 and 8% versus prior year.

Pro forma operating margin of approximately 14.5 to 15.5%; other income of approximately 2.7 million. A pro forma tax income tax rate of 40% and pro forma diluted earnings per share of $1.03 to $1.09. We provided guidance on a GAAP basis for the third quarter and full-year 2010 in our press release and 8-K filed this morning.

Thank you, I'll now turn the floor over to George.

George Colony

Thank you, Mike and I'd like to welcome everyone to the call. I'll cover four topics this morning. Number one, the economy in Forrester's forecast, two, an update on the company's three business imperatives. Three, Forrester's social efforts and finally number four I would like to say a few words about the capital structure of the company.

Turning first to the economy in tech spending. As we move beyond mid-year, Forrester continues to reject growth in the IT market both here and abroad. Our analyst forecast to tech spending will increase 9.9% in the U.S. this year, and 7.8% globally in U.S. dollars. We continue to project the computer equipment and software spending will lead this growth. We see the market for equipment growing 19.4% and the market for software growing 10.5%.

We forecast IT services to grow at 6.4%. Services expenditures follow the purchase of software, so it necessary lags the general recovery in tech. globally Forrester's forecasting 7.2% growth in Asia Pacific tech spending measured in local currency. Western and Central Europe will experience the slowest IT market growth at 4.1% also measured in local currency.

Tech spending as you know is closely correlated with the GDP growth. Forrester expects nominal U.S. GDP to increase 3.5% in 2010. I'd like to turn now to Forrester's three business imperatives and they are number one, becoming more robust, two, increasing the size of the sales force, and three, increasing the percentage of Forrester's business that's its indicated.

Looking first to the extension of robust, on the research front, we continue to make important progress toward roles. Practice leaders, the managers of each of the role businesses continued to do the research for consulting data product streams to former coherent and relevant suite of offerings to the individual roles.

Achieving relevancy is now a shared goal of the product teams under the aegis of the practice leaders. Relevancy was very much on display as the four forms we held in the second quarter. Each highly oriented its specific roles and the decisions and challenges confronting those roles. The two IT Forums addressed the eight IT roles in special sessions.

The Marketing forum held in the Los Angeles centered around Interactive marketing professionals, CMO and marketing leadership professionals, and technology product management and marketing professionals. And finally we held a forum in June that was centered directly on the customer experience professional and as a footnote; this event was sold out and oversubscribed.

We're certainly not all the way to our destination but we are making great progress, developing relevant content for roles.

We continue to reshape our selling to be more focused on people and less on institutions and companies. Unless we feel like a fine point and it is critical to our goal of expanding roles per account, a metric which has remained at 3.2 through the first half of 2010.

And speaking of sales, this is a good segway to Forrester's second business imperative, the expansion of our sales force. The Company's goal is to expand the number of sales people, 15% to 20% per year. In 2010, Forrester's sales headcount has grown 13%, putting us on target for the year.

As Mike has noted, sales attrition is running at less than one half of 2009 levels. This is a very encouraging sign for productivity increases in the second half of the year. The company's third business imperative is to increase the percentage of our business that is syndicated and we call this metric Q.

The second quarter showed solid performance for events and for consulting our two non-Q businesses. However, we also experienced a strong quarter for research, boards and data, meaning that our business has showed good balance. We're on track to achieve our Q targets for 2010.

I'll now like to talk for a few moments about Forrester's efforts in social. As you know, Forrester offers free content which is available to the wider world beyond our client base. And we do this for four reasons, number one, to generate sales leads, two, an open social platform builds a broad community of ideas and views, increasing value for our clients. Three, to broadly exposing markets, Forrester's ideas and brands and finally, four, social has opened up new means of doing research.

Our analysts use these tools to test their ideas, perform quick surveys and to detect the subtle changes in the market, which may have impact on the roles that they serve. In short, social is enabling Forrester to universally sell, market, research and serve our clients.

In the first quarter of 2010, we ruled that a standard platform for individual analyst blogs and for aggregated role blogs. This has enabled our social content to be indexed, linked and incorporated with the company's research, data events and other products. As an example of an infrastructure operations professional who's planning cost strategy, can now get an integrated view across all Forrester content be it socially derived or contain in a research report or proprietary data.

We had more than 180,000 blog post views in June, up 17% from May and up 146% from June of 2009. In addition to blogs, the company has introduced online communities for three of our roles.

Traffic on our main community page increased 24% in Q2 over Q1. At the end of Q2, there were 6,800 members of the three communities with 70 new members joining every day. We have planned to add communities for the remaining 16 roles in the near future.

And a final not on social, we're excited to announce that on September 14, a new book, authored by Forrester's analysts will be issued by the Harvard Business School Press. Titled Empowered, the book builds on Forrester's best seller Groundswell. The book outlines how employees can use new tools to help customers. I would like with a few words about Forrester's capital structure. Now as Mike has noted Forrester is presently carrying $287 million of its balance sheet and this is 123% of our 2009 revenue.

At the company's April and July Board meeting's there have been discussions about the uses of this cash. Now our top priorities remain acquisitions and reinvestment in the business.

In addition the Board is considering other approaches to enhance shareholder value and this includes dividends and increased buyback of the company's shares. The Board will continue to analyze and research this topic I will give an update on the Q3 call.

So, to conclude Forrester's momentum of the first quarter continued to build in the second quarter continued to build in the second quarter. While the economy climbs a wall of worries it is nonetheless in recovery by the way that also includes recovery in Europe.

Forrester's acquisition pipeline remains filled and the price of potential deals continue to stay at reasonable levels. We're very excited about the new Forrester book and our experiments in events and social. Our march to change all of the company's DNA through a role based continues and with every step we take we can see palpable increases and the relevancy of our work.

Finally, sales attrition has dropped into a much more manageable range which bodes very well for sales productivity in the second half of 2010. If you are in the neighborhood please visit us here in Cambridge and we look forward to seeing many of you on the road during the quarter. Thank you listening to the call. I would now like to welcome Charles Rutstein, Forrester's COO to join Mike and me for questions.

We will now take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And your first question comes from the line of Laura Lederman with William Blair. Please proceed.

Laura Lederman - William Blair

Good morning and thanks in advance for taking my questions. One is can you talk a little bit and I guess this is my question between the difference in the growth and deferred and in the agreement value which was up much less and then I have some more questions. Thank you.

George Colony

You bet. Thanks a good questions Laura, I mean what we did we have made a changed in methodology on agreement value, mid-stream last year and basically what we stripped out of agreement value going forward was the second year of multi-year deals. So, our historical numbers still carry the multi-year deal activity in there whereas our current year performance reflects only the first year of the multi-year deal. So, as we cycle through that metric it will become more normalized I would suspect as we get into 2011 but for now it's going to create some distortions which is why we still believe the deferred revenue and deferred revenue plus future AR become better signals of what's going to happen with our business.

Laura Lederman - William Blair

Do you have by chance the apples-to-apples to growth in agreement?

George Colony

I don't have that, what we can do is it will try and pull back together on an approximate basis and we will push it out onto the website as a metric so it's available to all investors.

Laura Lederman - William Blair

It will be great, thank you. My second question is EMEA and how your business looked as you went through the quarter. There has been a lot of rhetoric and concern about euro zone, demand in general. So, I guess a two prompt question is how did your business look as you went to the quarter and also separately I know George that you gave a number for growth in Europe been fairly weak but what type of deterioration are you guys actually seeing in IT spending in general in Europe? So that 3% for the full year, does that include a negative second half given there has been good demand in the first? Sorry for the wrong long winded question.

Charles Rutstein

Laura, its Charles. I'll start and then perhaps pass to George. With respect to our business in EMEA, in the quarter, we definitely saw a softness relative to other parts of the world. That being said, the business grew nicely EMEA, which is to say that it's growing at a slower rate than we were able to grow here in the U.S.

And I think that outlook probably persists for our business, certainly as far as I can see into this quarter but it's not like it was during the times back in '09 and end of '08. We're not talking about deals just evaporating. It's just sort of a slower pace of things going on.

George Colony

Its one of those deals Laura, where if you read the paper you think that Europe is in major distress but we see gradual recovery there. We actually expect the euro to strengthen as the year continues onward. So it's not as bad as the daily news would show and it's, again as Charles said we have good growth here, just not as fast as the U.S.

Laura Lederman - William Blair

If we talk about price increases and what you're thinking of there, what you've implemented, what you're likely to implement and also the markets receptance to price increases?

George Colony

So, so as you know Laura, we typically undertake price changes in the summer time. This year is no exception. We always look at the same three factors; product demand, the value that we deliver and the competitive environment.

Now it's important to note that we made an important change to the packaging last year as you may recall. That is implications for the pricing. The big win out of that packaging change was that we now have the flexibility to differentially price our offerings by client segment and that allows us of course to extract appropriate value from clients for the value that we deliver.

Therefore the picture that I'll tell you about the pricing front is a little muddy. It's a little hard to see. It's not an across the board price increase. Rather the price change that we're making isn't across the board but rather specific to the segment.

So in general we're taking prices up a few percent inline with the rising cost of doing business, maybe a little more aggressive in places where we face little competition and a little less aggressive elsewhere. In general though, the pricing environment has been very good. Our rate of discounting has come down during this year. Part of that is the discipline in the sales force and part of that I think is the environment in which we're operating.

Laura Lederman - William Blair

Thank you. One final question, then I'll pass it on. If you look at the last comment about some areas more competitive, some areas less competitive, could you talk about which of those areas are, which are less and which are more?

George Colony

Sure. As you may expect Laura, in places where we have a direct competitor, for example in the IT space with Gartner, that's going to be more competitive in places where there is no pure analog as in the marketing and strategy business, there is nice competition.

Laura Lederman - William Blair

That's what saved your boat. Never pay to assume. Thanks a lot guys.

George Colony

Thanks Laura.

Operator

Your next question comes from the line of Kevin Ciabattoni from Boenning & Scattergood. Please proceed.

Kevin Ciabattoni - Boenning & Scattergood

Good morning guys.

George Colony

Good morning, Kevin.

Kevin Ciabattoni - Boenning & Scattergood

Can you give us some color on what you've seen in terms of sales cycles in the quarter and then also what your strategy is going forward in terms of account segments and a plan to maybe increase penetration in the 1B plus accounts?

George Colony

Your looking at how we moved that 3.2 number?

Kevin Ciabattoni - Boenning & Scattergood

Yup.

George Colony

Okay, so a couple of things there. With respect to the sales cycles, they have become much more predictable than they were. Let's say this time last year and that that is perhaps the most significant change. I would say the cycle time may be down, but only modestly. The difference is that it become highly predictable. During the downturn what we saw typically was a deal would be on track until a very early late stage. And then something unexpected, unexpected both for us and for the buyer would happen.

That's no longer going on. In fact, our forecast accuracy based on the cycle times we expect has been rock solid all the way through the first half of the year. So, that feels stable to me. With respect to the second part of the question about deeper penetration into those on 1B plus accounts, Greg Nelson is our Chief Sales Officer. He is working hard on just that. And that metric gets a little bit muddy by the fact that it includes both the enrichment which Mike talked about in the quarter into existing 1B plus accounts, but it would also includes the new signings, and when we sign new accounts, they will typically come on at few receipt. So that kind of dilutes the metric, and it's a little hard to see from the outside what's going on there.

Mike Doyle

But it's a big deal because as you know we've been selling, we sold traditionally to companies and institutions and not to individuals, and that's really the transition that is underway here in sales, and the transition that Greg is really driving us toward. It's this moment to if we have three roles that had expressed an outlook for the four, the four [through] tenths role. And so it is -- I'd say that the sale transition roles is like a little bit to research, but we would expect by 2011 that we will be down, headed down that road and driving the number higher.

Kevin Ciabattoni - Boenning & Scattergood

Okay, that's very helpful. And what do you guys seeing in terms of an acquisition pipeline. Are you guys leaning towards either IT or the Research side of things?

George Colony

Pipeline is, it used to be quite good. It is -- as I said in my remarks pricing is still reasonable. I would say that we're tending to approach more companies and being than being approached by those companies. And those and that is somewhat of more difficult road to move down, but I'll tell you our pipeline is still very strong. With the Board meeting on Tuesday, we reviewed it, and I would say it is as full as it was at this last time last year if everything is all right.

Mike Doyle

Yeah. I would agree. I think that the activity is been good. I agree with George. I think we're been more aggressive in pursuing in addition to any ideas that come across. To your question about client group, we look for all client groups. So, we are opportunistic because we are -- frankly, we are bullish in all three of our client group businesses. So, if we see opportunities out there, we are going to pursue them. So, it tends to be a cross client groups.

Kevin Ciabattoni - Boenning & Scattergood

Does the pipeline includes targets for every, for all the three client groups?

Mike Doyle

That's correct.

Kevin Ciabattoni - Boenning & Scattergood

Okay and then one last into housekeeping. What was the impact of affects in the quarter, and what you guys kind of feeling for that back half of the year?

George Colony

We -- the impact on revenue for the quarter was about a point on our growth. So we -- our revenue was up 5%. Absent FX it would have been up 6%. Now that tends to drop down, and have a very modest impact adversely on the bottom line. So, as I think I've said before we have a natural hedge and a lot of our expenses that are outside of the U.S. as well.

We have analysts; we have sales people who are sitting in host countries as well, so that softens the impact. For the balance of the year, our guidance assumes that both the euro and the pound will stay at rates where they sit today, but our low end of the guidance captures what we think could be some downside to both the euro and the pound and some of the upside captures. I don't expect frankly much upside on foreign exchange. But at this point we are assume flat and our downside captures, what we think could be the downside on both euro and the pound.

Kevin Ciabattoni - Boenning & Scattergood

Okay. Great, thanks.

Mike Doyle

You bet.

George Colony

Thanks.

Operator

Your next question comes from the line of Brian Murphy with Sidoti & Company. Please proceed.

Brian Murphy - Sidoti & Company

Hi, thanks for taking my question. Michael, the consolidated gross margin is down a couple of hundred basis points year-over-year. I was wondering if you could just give us a rough breakdown of the impact there. I'm guessing part of that is currency, but what was the rest? Was it mix or is that higher salaries or what?

Mike Doyle

Yeah. We have a couple of things going on Brian. I think that --most importantly is that as our business rebounded, if I look at both, what we paid out in commissions and what we paid out in our matrix bonuses which we pay out quarterly based on business performance; versus prior year they are up significantly and as we said, that's a good problem for us to have in expenses because that means our business is growing both, from a top line basis but also that we're hitting bottom line numbers as well.

And the other piece of it is headcount growth. We are up year-over-year and that adds to it. So, we're continuing to reinvest in the business. So, yeah there was, FX actually gives us a little bit of favorability on the expense side but the bulk of it is really, it's comp and benefits associated with increased headcount and improved business performance.

Brian Murphy - Sidoti & Company

Okay. And George, you gave us a lot of detail about what you guys are doing with Social. Would you say that that's where Forrester's research coverage is most differentiated right now and maybe give us a little bit more detail on why that might give you leg up moving forward?

George Colony

Well, I think it is a good area of differentiation. But it's not the only area of differentiation. I would say that as we're becoming more role-based, we're becoming more differentiated from the competition. Our research is specifically about the problems and challenges of each of those roles.

So I would say, if you ask me the question generally, what's your differentiation, say goal is number one? I would say in the differentiation with Gartner as an example. Because we have a large practice of marketing and strategy we are able to help IT groups and marketers work together on issues like social computing.

So, the secondary differentiation, if role is number one, two would be the fact that we are in the marketing strategy space. That's number two. The number three, I think you're right. I think we have a very, very strong practice in Social.

I think -- I'm a little biased here I guess but I'd say we're the world leaders in analyzing Social and it's direction and it's future. As you know, Groundswell was the bestselling book of Harvard Business School Press in 2008 and Empowered, our new book coming out; we expect to be just as successful. So, I think it's a good early strength for us.

Brian Murphy - Sidoti & Company

Sounds good. Thanks a lot.

George Colony

Okay.

Operator

Your next question comes from the line of Vincent Colicchio with Noble Financial. Please proceed.

Vincent Colicchio - Noble Financial

Good morning guys. The advisory business had a strong quarter. Could you give us a little bit more color in terms of which service lines have stood out?

Charles Rutstein

Sure Vince, its Charles. I think we saw strength in each of the constituent parts that make up that line item. So events was up nicely year-on-year. Consulting delivery was up even more sharply and some of the other much smaller one-time items, the data and so forth were up as well. So I'd say it was fairly widespread but the fastest growing was probably the consulting business.

Vincent Colicchio - Noble Financial

And is that a good sign in terms of, for an upturn in IT spending? Is that early indicator?

Charles Rutstein

Yeah. You bet. One of the things here Vince is that as the sales force productivity goes up and we continue to add to the backlog of consulting, we're working our way through that. So, let me say it differently. So we sell a contract that's got both syndicated and non-syndicated products in it. We're going to recognize the syndicated overtime and the non-syn often right up-front. So that's why you may see some of the delta. The other factor is Strategic Oxygen, our acquisition that we closed at tail end of last year. That drove a bunch of non-syndicated business as well.

Vincent Colicchio - Noble Financial

And Mike, a question on the month-by-month progress. As the quarter unfolded was there any difference -- there was a world worry later on the quarter in the June period. Did you see revenue impacted in anyway?

Mike Doyle

No, I think what happens with us, as you know Vince I'd love to see the cycle change. It certainly would cut down on the grey hairs I have but our cycle has been the same since I've been here I think since George started the business, that we tend to build up towards the end of the last month of every quarter and the last two weeks of every quarter are always a lot of fun, depending upon how you look at it.

And this quarter was no different. But we were happy with the way the quarter came out. It worked as we had expected and we're fairly confident that we're rolling and month-by-month we'll make September an exciting month for us and the December is the most exciting month of the year for us.

George Colony

We saw no deceleration Vince.

Mike Doyle

Right.

Vincent Colicchio - Noble Financial

Okay. Thanks guys.

Mike Doyle

Thanks Vince.

Operator

Your next question comes from the line of Dan Leben with Robert W. Baird. Please proceed.

Mick Dobray - Robert W. Baird

Good morning. This is Mick Dobray for Dan Leben. Just a couple of questions for me. First, surrounding the metrics that you mentioned earlier, I'm trying to understand how much of the metrics improvement was sort of activity in the quarter versus rolling off 2Q'09, which obviously was a bit of different operating environment? How should I think about that?

Mike Doyle

It's a good question, Mick. I think that, first of all the retention metrics, I'm thrilled by. There are above historical norms. So even if you assume that there is some factor in there that would suggest that we're building off a somewhat lower base; although it wasn't that dramatic as there wasn't a huge dropdown in 2009 like there had been in the years past.

That suggests really strong performance and it implies that we've come back very rapidly from the recession and actually at this point are running a little bit ahead of what we've done in the years past. I think enrichment, it steps to some of the slower build back but the fact that we're north of a 100 on a rolling 12, I'm happy about it. It implies that the quarter was reasonably good.

And so given that none of those metrics gave that much when we went into 2009, the fact that they have rebounded as strongly as they have suggests that we've had a very, very nice recovery of off of a difficult recession for a lot of business, less so for Forrester.

So I feel that if you discount them at all, it's marginal. It really is relative to a year ago.

Charles Rutstein

I'm with Mike here Mick. It's Charles. Regardless of what data are dropping out from Q2 of last year, the fact remains but as a point in time metric it's well above the historical norms and so as a snapshot in time, we're very happy with that performance.

Mick Dobray - Robert W. Baird

Excellent. And one final point for me here. Can you please elaborate a little bit on the capital structure discussion; perhaps give us an insight as to how the Board is thinking about it and what are some of the goals that they're aiming for in this discussion?

Mike Doyle

Sure. Basically where we are, first and foremost the users for our cash, primary and priority uses for the cash continue to remain the same which is we are going to reinvest in the business and we will look for acquisitions that we think add to value and that by the way has not changed. That's been historic for us to practice and as we move forward all of the board discussions have absolutely started and ended with that thought in mind.

So we're not moving away from that. I agree with George that there is a lot of opportunity in the M&A pipeline. Again we are selective as he has pointed and I think a number of you pointed out over the years. So that tends to be, we get acquisitions sporadically.

The pieces that we look at are how do we enhance shareholder value and obviously there's a number of levers to pull. There is dividends in a variety of forms and there is more aggressive share repurchase and those are things that the board is considering. Obviously it's complicated by a very uncertain tax situation in the U.S right now.

So I think the board is trying to factor all of these pieces in. We've had I think very good discussions with the board and I think there is more to come to George's point and I think we'll be in a better position to talk and give an update in the third quarter as George suggested.

Mick Dobray - Robert W. Baird

Thank you.

George Colony

What I'd say here Mike is that the board is looking is looking at this issue broadly. We'll leave it at that.

Mick Dobray - Robert W. Baird

Thank you.

Operator

(Operator Instructions). If there are no further questions I'd like to hand the call back over to Karyl Levinson, please.

Karyl Levinson

Thank you very much for joining us today. Have a good day.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.

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Source: Forrester Research, Inc. Q2 2010 Earnings Call Transcript
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