Forrester Q3 2026 Earnings Conference Call - FORRESTER RESEARCH INC

Financial Performance:

• Total revenue declined 9% year-over-year to $86.1 million, down from $94.3 million in Q3 2025.
• Contract Value (CV) decreased 3.5% year-over-year, an improvement over the 7% decline in the prior year; Q1 and Q2 declines were 3.3% and 3.5% respectively.
• Research revenue fell 3% to $70.1 million (down from $72.7 million), while reprints declined 6%.
• Consulting revenue dropped 31% to $14.7 million due to market uncertainty and the exit from the strategy consulting business.
• Events revenue was $1.2 million, with YoY comparison limited due to prior-year Q4 event inclusion.
• Operating income decreased 35% to $6.5 million (7.6% of revenue), down from $9.9 million (10.5% of revenue) in Q3 2025.
• Net income fell 35% to $4.7 million ($0.24 EPS), compared to $7.2 million ($0.37 EPS) in Q3 2025.
• Operating expenses decreased 6% primarily due to lower compensation and reduced real estate costs; headcount is down 10%.
• Cash flow from operations was $33.4 million, including $17.1 million in landlord funding received for headquarters renovation.
• Free cash flow year-to-date, excluding headquarters build-out spending, was approximately $13.9 million.
• Balance sheet remains strong with $117.6 million in cash; debt reduced by $5 million to $30 million.
• Stock buyback program accelerated with $10 million repurchased in Q3; $66 million authorization remains.

Guidance and Future Outlook:

• Full-year 2026 revenue guidance remains $350–$360 million (down 9–12% vs. 2025), assuming research declines mid-single digits, consulting low 20s, and events mid-to-high teens.
• Full-year 2026 operating margin guidance is 6% to 6.5%.
• EPS guidance revised upward to $0.77–$0.82 (previously $0.72–$0.82) due to expense management and buyback impacts.
• FY26 CV outlook adjusted to a range of -2% to +2% (centered on flat performance) for the year-end, reflecting Q4 variability and delayed U.S. federal deals.
• Management expects 2027 CV growth to return, citing stabilization, improved retention, and new product adoption.
• Capital expenditure run rate is ~$3 million annually; $2.5 million remaining spend on headquarters build-out, with $17.2 million received from landlord funding.

Business Segments and Product Lines:

• Launched "Team Solutions," a collaborative research product designed to enable cross-team transformation and decision-making.
• Expanded AI portfolio with "AI Access Plus," offering research access via AI plus quarterly analyst inquiry sessions; now comprises ~4% of CV base with margins higher than traditional products.
• AI Access (launched previously) contributes ~4% to CV base and has driven meaningful incremental bookings.
• "Where You Work" strategy expanded to include Anthropic's Claude environment via a limited early adopter plugin; future integrations planned for Slack and Google Gemini.
• Consulting segment exited the strategy consulting business earlier in the year, significantly impacting segment revenue.
• Events strategy shifted to smaller, shorter-duration formats to improve efficiency; Q3 hosted sold-out forums in APAC and EMEA focusing on B2B and AI.

Market and Competitive Landscape:

• Research identifies AI as a major growth driver; 70% of AI users report increased value, with 142% YoY growth in prompts and 65% growth in total users.
• Forrester's "AI Disruption Model" forecasts that infrastructure, data, cybersecurity, and identity providers will benefit, while labor-intensive knowledge work faces disruption.
• Management challenges "AI doomsday" narratives from frontier model companies, citing self-serving motivations for regulation and calling for client rationality in AI implementation.
• Strategic shift to target small AI startups (under $50M valuation) previously excluded from vendor sales, positioning AI Access Plus as an entry point.
• High-tech and enterprise CIO/CTO segments show strength; U.S. federal government sector faces funding uncertainties impacting deal timing.
• Market share stability indicated by wallet retention rising to 89% and client retention at 78% (up 1 point QoQ, down 4 points YoY).

Risks and Challenges:

• U.S. federal government selling environment faces uncertainty due to funding issues, delaying large deals and impacting CV forecasting.
• Consulting revenue continues to decline due to the exit of strategy consulting and broader market uncertainty.
• Complex enterprise deals in the pipeline may extend sales cycles, creating variability in Q4 performance.
• Reliance on a single large headquarters capital project ($25M total cost) creates one-time cash flow variability.
• Potential market volatility due to "doomsday" narratives from AI frontier labs could impact client confidence and spending decisions.

Management Commentary and Tone:

• Tone is confident yet pragmatic; acknowledges revenue declines but emphasizes improved retention metrics and margin protection.
• Management expresses strong belief in AI as a transformative opportunity ("a dream fulfilled") that increases, rather than decreases, the need for research and advisory services.
• CFO Chris Finn and CEO George Colony emphasize cost discipline, highlighting 6% OpEx reduction and 10% headcount reduction.
• Management defends the decision to exit strategy consulting and refocus on high-margin research and AI-enabled self-service products.
• Confidence in returning to CV growth in 2027 is high, driven by new products, sales force enablement, and retention improvements.

Analyst Questions and Answers:

• CV Growth Confidence: Management attributes the cautious FY26 CV range (-2% to +2%) to delayed U.S. federal deals, complex enterprise sales, and Q4 booking volatility; 2027 growth is expected due to retention and product innovation.
• AI Monetization & Margins: AI Access and AI Access Plus offer significantly higher margins than traditional products; AI Access is projected to grow from 4% to ~5% of CV by year-end.
• Sales Staff Decline: Chosen to focus on sales productivity and performance management; headcount expansion is paused in the near term to optimize efficiency, with specific focus on high-performing segments.
• Product Pipeline: Pipeline value remains consistent with recent quarters but shows higher quality and contribution from the new AI portfolio; focus is on deal velocity and conversion.
• Pricing Strategy: No immediate new pricing tiers planned; current portfolio (Team Solutions, AI Access Plus) addresses client needs for flexibility and broader organizational access.

Other Key Points:

• Q3 performance beat consensus on revenue, margin, and EPS despite revenue decline.
• Forrester's "AI Disruption Model" analyzed 17 business categories and 205 technology markets to predict sector-specific AI impacts.
• Management advises clients to build private AI models rather than relying solely on frontier labs, emphasizing security and legal liability for model creators.
• The company is aggressively repurchasing stock to support EPS and return value to shareholders while maintaining a strong cash position.
• Early indicators for the new events strategy are positive, with strong sponsorship activity in EMEA and APAC regions.