Decisions Platform Transition And Izola AI To Improve Future Client Retention

Key Takeaways

• Transitioning to the Forrester Decisions platform and targeting higher-value clients enhances operating leverage, improving profitability and net margins.
  
• Investing in AI tools and operational restructuring increases client satisfaction, retention, and sales productivity, leading to revenue and earnings growth.
  
• Economic uncertainties and underperformance in key segments have led to revenue declines and could pose challenges to Forrester's growth and profitability.

Catalysts

Operates as an independent research and advisory company in the United States, Europe, the United Kingdom, Canada, Asia Pacific, and internationally.

• Forrester completed its multiyear transition to the Forrester Decisions platform, which refocuses the company on a singular research product and simplifies operations, improving profitability and operating leverage as the focus on higher-value contracts increases. This is expected to impact net margins positively.
  
• The introduction and enhancement of the generative AI tool, Izola, is anticipated to improve client satisfaction and retention rates, thereby enhancing revenue growth and client engagement.
  
• Forrester is targeting higher-value clients and emphasizing multiyear contracts, leading to higher contract values per client and increased sales productivity, which should eventually boost revenue and earnings.
  
• Investments in events to expand experiences and audiences aim to make events a stronger driver of contract value growth and client retention, potentially increasing revenue from this segment.
  
• Operational restructuring, including a 6% workforce reduction and ongoing cost management, aims to align expenses with revenue and improve cash flow, expected to positively affect net margins and future earnings.

Forrester Research Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Forrester Research's revenue will decrease by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.3% today to 5.3% in 3 years time.
• Analysts expect earnings to reach $21.8 million (and earnings per share of $1.15) by about March 2028, up from $-5.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.3x on those 2028 earnings, up from -33.5x today. This future PE is lower than the current PE for the US Professional Services industry at 21.7x.
• Analysts expect the number of shares outstanding to decline by 0.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.25%, as per the Simply Wall St company report.

Forrester Research Future Earnings Per Share Growth

Risks

• The ongoing economic and political uncertainties, along with continued weakness in the technology and tech services markets, could hinder sales efforts and contribute to flat contract value (CV) growth for 2025, impacting overall revenue.
  
• Forrester experienced a decline in bookings and contract value, particularly towards the end of the fourth quarter, leading to a 9% revenue decline for the quarter and a 10% decline for the year, which could affect future earnings.
  
• The transition to Forrester Decisions has not yet fully stabilized sales motion and culture, suggesting potential challenges in execution and revenue growth as CV bookings were missed in Q4.
  
• Forrester's events business faced significant challenges in 2024, with a 42% decline in Q4 revenue and a 34% decline for the year. Poor performance in this segment could adversely affect future revenue and profitability.
  
• Despite improvements, the consulting and events businesses have underperformed with consulting revenue declining 18% year-over-year and reliance on sponsorships affecting event revenues. This could continue to suppress net margins and earnings.

Valuation

• The analysts have a consensus price target of $15.0 for Forrester Research based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $415.1 million, earnings will come to $21.8 million, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 7.3%.
• Given the current share price of $10.15, the analyst price target of $15.0 is 32.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.