Forrester gets off to a fast start

A conference call last week has kicked off a series of discussions here at Lighthouse about Forrester Research. The second-most influential analyst firm had a good 2005, and it’s made a good start to 2006. However, there are some issues and opportunities that still face it. Over the next few days, I’ll be outlining our analysis in a little detail.

There are five key reasons why Forrester has made a fast start in 2006.

  1. First, the firm’s research seems increasingly relevant. Partly that’s the impact of increasing client choice, as Forrester allocates more of its effort in line with customer requests. For example, we’ve seen around 24 Waves published this quarter, which is a record. Over the next quarter, Q2, we are expecting the firm’s research revenues to growth sharply, at around 14%. Much of that growth will come from its Wholeview service, the roughly 65% of Forrester’s research business which is syndicated. The number of seats bought will rise, but that figure will be distored because some clients have open-ended deals that don’t count seats. Cashflow is better because the business is growing, and that is supporting investment in more data services, including the new Technographics services researching Hispanic consumers in the US.
  2. Second, Forrester’s back in the cycle of added investments in hiring, and that is driving performance by staffing up new offers and bring on more salespeople. The firm is recruiting and in particular its emphasis on more people in APac is wise, as is using new hires to shift the balance from research to sales and, by holding research flat, increasing the number and value of its sales professionals. The firm traditionally hired a lot in Q4, and then bedded them in during the rest of the year. We estimate Forrester had over 40 new staff in Q1 and will end the year at 800 staff: on average, our forecast is that the firm will add 25 staff a quarter.
  3. Third, we estimate that Forrester’s consulting services are growing at 20% year on year, and quality also seems to be rising. Using the impossibly hard net promoter scores for customer advocacy, Forrester gets a staggeringly high score of 71. Perhaps this is a good result because Forrester includes non-syndicated research in its consulting business. We estimate up to 1/3rd of its consulting is custom research, and expectations are easier to meet with that sort of consulting work.
  4. Fourth, Forrester’s boards are giving it a boost in revenue and in rapport with clients. Formerly known as Oval programs, the leadership boards may account for 10% of revenue by the end of this year. We expect the number of boards to be stable this year, but to go from 10 to 15 or 20 over 2 years. Board is a word that offers better branding than Oval, and we think a reasonable goal would be for Forrester to top 600 board members this year. The program has already seen 40% growth. There are now over 550 board members, who have allowed that sector of the business to register 40% growth in revenue. Forrester seems to feel that it is the key to growth in research spending.
  5. Fifth, Forrester’s events business has seen 30% growth, following the success of the IT Forum. There’s a lot more we could say about this, but we won’t. Some of us think this is a strong performance. However, the other view is that Forrester is rising from too low a base level. Events are not a ‘winner takes all’ business, but the economies of scale are clear.

Overall, this means that growth is accelerating at Forrester. We will see revenues around $180 million this year, with higher earnings and over 1% extra operating margin each year until Forrester changes track. Even if Forrester does little extra, it looks set to become fatter and happier.

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