CRA International Inc (CRAI) 2003 Q1 法說會逐字稿

Good day and welcome everyone to the Charles River Associates first quarter fiscal 2003 conference call. Today's call is being recorded. A replay of the call will be available beginning at 2:00 p.m. Eastern Time today and will be available through Wednesday, March 26 at midnight Eastern Time. The rebroadcast dial-in number is 719-457-0820 and you'll be asked for a confirmation code, which is 666849. Again that dial-in number is 719-457-0820, with the confirmation code of 666849. You also may listen to a Web cast on CRA's Web site, located at www.crai.com. In addition, today's news release is posted on the site for those of you who did not receive it by e-mail or fax.

With us today is President and Chief Executive Officer, Mr. James Burrows, and Executive Vice President and Chief Financial Officer, Mr. Phil Cooper. At this time, for opening remarks, I'd like to turn the conference over to Mr. Cooper. Please go ahead, sir.

Thank you, Chris. Statements in this conference call concerning the future business, operating results, and financial condition of the company, are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Such statements are based upon management's current expectation as of today, March 20, 2003 and are subject to a number of factors and uncertainties. Information contained in these forward-looking statements is inherently uncertain and actual performance and results may differ materially due to many factors.

Such factors that could cause actual results to differ materially from any forward-looking statements made by the company include, among others, dependence upon key personnel, attracting and retaining qualified consultants, dependence upon outside experts, intense competition, and professional liability. Further information on potential factors that could affect the company's financial results is included in recent filings with the SEC.

Jim?

Thanks, Phil.

Turning to our first quarter results, demand for CRA's economic and business consulting services was strong in Q1. We experienced solid contributions from many of our practices. As a result, revenue grew nearly 44 percent year over year to 34.8 million. Net income grew 41 percent year over year to 20 - to two point two million, or 24 cents per diluted share. Our growth is a direct result of the leveraging of last year's acquisition of ADL's Chemicals and Energy North American and U.K. based practices and improvements in utilization.

Looking at our practice areas individually, our Finance practice is once again a significant contributor as general financial litigation and securities cases continue to grow. Finance practice revenues were up about 25 percent from Q1 of 2002. Overall our Finance practice has been one of our fastest growing practice areas in the past year and we expect that growth to continue. In fact, although we are not actively recruiting to expand head count corporate wide in 2003, we are aggressively recruiting for our Finance practice.

Our Competition practice, which includes both Merger and Anti-Trust, as well as much of our General Commercial litigation, increased over 10 percent relative to Q1, 2002. Other practice areas in litigation increased over 15 percent from a year ago.

The Chemicals and Petroleum practice was enjoying success globally, aided by the additional staff gain through the ADL acquisitions. The practice was on plan for Q1 of this year and we are expecting continued growth for the balance of the year. Backlog is as strong as it has been since the acquisition and utilization has improved.

Another of our larger practices that is healthy and growing is our Energy practice. Revenues accounted for in the practice were modestly below Q1 of FY02, which was a very strong quarter for the practice. Utilization in the practice was very strong this quarter, partly as a result of the fact that practice staff members billed a significant percentage of their time to energy related projects that were accounted for in other practices.

Energy related business in the firm was up in total from last year's Q1. The amount of inner practice work is a sign of the success of the integration of the new ideal staff and the energy staff with the company at large.

Turning quickly to other practices, the Metals and Minerals practice had an extremely strong quarter. And the strong link within this practice area will continue through the second quarter.

Pharmaceuticals also had a strong quarter.

The only practice area whose business was soft was Transportation, which reflects the difficult condition of the transportation industry.

Looking at Q1 from a geographic perspective, our International Offices continue to perform well, with a pace similar to the end of Q4. International revenue accounted for 18 percent of total revenue in the most recent quarter. Almost all of our foreign offices contributed to the growth of international revenue in Q1, with the U.K. reporting the largest gain.

There is one more item I would like to discuss in the context of our International Operations and that is the effect of the current political climate will have on CRA overseas. Through our London office we perform a sizable amount of work for companies in the Middle East, particularly in Saudi Arabia. We have pulled our staff out of Saudi Arabia this week. We will continue to perform on the relative engagements primarily out of our London albeit at a slightly reduced rate.

We estimate that if the staff cannot return after this quarter, in a worst-case scenario there might be a net reduction of revenues in the C and P practice of about 300 thousand to 600 thousand in the current quarter, which we will believe will be offset by an increase in C and P revenues from other sources. And again, that's a worst-case estimate.

At this time it remains to be seen what kinds of long run impacts military conflict will have on our presence there and on our business in general. We will be obviously watching this situation very closely in the coming months.

Turning to our NeuCo subsidiary, after several quarters of losses, NeuCo posted a strong quarter, generating revenue of nearly a million dollars up from $582 thousand in Q4 of 2002. NeuCo also contributed positively to operating earnings for the first time since the first quarter of fiscal 2002. NeuCo has booked significantly new business between last year - late last year and early this fiscal year. This gives NeuCo enough contracted backbone to support revenues in the current range for at least the next few quarters.

In addition, we announced earlier that UE selected NeuCo for a cost-sharing contract that can provide up to eight point four million dollars in revenue for NeuCo over the next four years. NeuCo is currently in process of negotiating the contract. We expect that revenues may commence on this contract by the third quarter of this year.

I would like to caution, however, that as of many major account vertical software companies, NeuCo revenue has historically been volatile and extremely difficult to predict with any certainty on a quarter-to-quarter basis.

And one final note, last week NeuCo purchased shares from the Bank of Sea trustee for German manufacturer boiler (Doug Forsek). Although this is a NeuCo stock transaction and the shares were not purchased by CRA, this transaction reduced NeuCo's total number of shares outstanding, which raises CRA's equity ownership in NeuCo from 49.7 percent to 59.7 percent.

On a different topic, some of you may be familiar with CRA's shareholders agreement signed by all of the pre-IPO shareholders of CRA. This agreement permits the transfer of restrictive CRA shares and provides CRA with an option to purchase the restricted shares of shareholders who leave the firm for discounts of 30 percent of 60 percent, depending on whether the shareholder competes with the firm after leaving. The percentage of the original holdings subject to these restrictions declines over the 10-year period of the agreement.

On April 23, 2003 the restrictions on transfers expire for 20 percent of the original shareholdings or about one and a quarter million shares. I am very pleased to announce that the shareholders have agreed to extend the lock-up on these shares by one year to April, 2004 and to include in this extended lock-up all of the remaining pre-IPO shares that had already been released from restrictions at earlier dates. In total, about one point seven million shares are subject to this extended lock-up provision.

As part of the amendment to the shareholders agreement, about the transfer expiration date for about 600 thousand shares will be moved up from April, 2006 to April, 2005. The agreement is an enormous vote of confidence by the pre-IPO shareholders for which management is very grateful. The details of the amendment to the shareholders agreement will be included in an AK filing when the amendment is finalized.

With that I would now turn the call over to Phil Cooper, who will discuss our financials in greater detail. Phil?

Thanks, Jim.

As a reminder, CRA's fiscal operates on 13 four-week cycles, producing quarters unequal in length. Our first, second, and fourth quarters are typically 12-weeks, while Q3 is a 16-week quarter. Note also that CRA's fiscal 2002 was a 53-week year and Q4 was 13-wekk, rather than a 12-week quarter.

As Jim mentioned, Q1 revenue increased nearly 44 percent to 34.8 million compared with 24.2 million in the first quarter of last year. The contributions from the ADL's staff acquired in May, 2002, strong performance from a majority of our practice areas, and utilization improvements, produced this strong year-over-year growth.

For the first year, first quarter, NeuCo posted revenue of $974 thousand, up 67 percent sequentially from 582 thousand in Q4 of 2002. This compares with revenue of one point four million in the first quarter of 2002, the last quarter Newco had a positive contribution to operating income before the current quarter.

First quarter gross margin was 37.6 percent, compared with 39.4 percent in the first quarter of fiscal 2002, and 36.6 percent in Q4 of fiscal 2002. The sequential increase in gross margin is the recent of the higher utilization rates CRA recorded in the first quarter of fiscal 2003 and NeuCo's quarter-to-quarter improvement.

Due to primarily to improved utilization among our senior consultants, total utilization for the quarter was 71 percent, a two point increase over the 69 percent reported in the fourth quarter of fiscal 2002 and a four-point improvement over the 67 percent reported in Q1 of fiscal 2002.

Because the first quarter includes the holiday season, with Christmas and New Year's Day falling on Wednesdays this fiscal year, we were concerned about revenue remaining flat relative to the fourth quarter. We are therefore encouraged by sequential, quarterly revenue growth on a 12-week normalized basis of three point four percent, especially factoring in the severe winter snowstorm conditions that temporarily prevented many of our staff from reaching our two largest offices, DC and Boston.

We continue to believe that we will be able to reach our goal of mid-70s utilization average for the fiscal year. We are currently off to a good start with our Q1 numbers.

SG&A for the first quarter was nine point three million or 26.6 percent of total revenue, essentially flat with a 26.9 percent reported in the fourth quarter and comfortably within our range of mid-20s. Excluding a one-time charge of 388 thousand for real estate costs, reflecting recognized losses on sub-leases in DC and downtown LA, SG&A would have fallen to 25 and a half percent of total revenue.

Q1 fiscal 2003 operating income was three point eight million dollars, compared with two point six million in the first quarter of fiscal 2002 and three point three million in the fourth quarter of fiscal 2002, the latter quarter normalized for a traditional 12-week, Q4 quarter.

The operating margin was 11 percent, compared with nine point seven percent in the fourth quarter fiscal 2002, and 10.8 percent in Q1 last year. Excluding the aforementioned real estate charge, the operating margins for Q1 of fiscal 2003 would have been 12.1 percent.

Net income grew 41 percent to two point two million or 24 cents per share in the first quarter compared with one point six million or 17 cents per share in Q1 of fiscal 2002. Weighted average fully diluted shares outstanding for the first quarter of fiscal 2003 were nine point two million compared with nine point three million in the first quarter of fiscal 2002.

Again, for those of you looking at our performance on a sequential basis, I point out that CRA's fourth quarter of fiscal 2002, which ended November 30, was 13-weeks in length. Adjusting results for the uneven length of quarters, sequential revenue and net income growth from the first quarter of 2003 were three point four percent and four point seven percent respectively.

Professional consultant headcount stood at 348 at the end of the first quarter, down from 353 at the end of the fourth quarter. Our current junior to senior staff breakdown is 98 junior consultants and 250 senior consultants. As Jim mentioned, we do not expect much net headcount growth in 2003, but we will continue to be opportunistic in selectively hiring consultants to meet demand in our strongest practices, particularly in Finance.

Looking at the balance sheet, billed and unbilled receivables increased sequentially to 44.6 million at the end of Q1 from 41.9 million at the end of Q4. This growth was offset by an increase in current liabilities to 30.5 million at the end of Q1 from 27.1 million at the end of Q4.

Day sales outstanding were 103 days in Q1, flat with Q4. This breaks down into 33 days of unbilled and 70 of billed in Q1 compared with 41 days of unbilled and 62 days of billed in the sequential fourth quarter.

One other item on the income statement that had a measurable impact on our first quarter results was currency fluctuations. During the quarter, we had net foreign exchange realized and revaluation losses of about $75 thousand, primarily reflecting the weakening of the Mexican peso. As our international business has now grown to 18 percent of total revenue, foreign currency fluctuations will be a permanent component of our income statement. We are taking steps to insulate ourselves on a reasonably, reasonable cost effective basis from volatility associated with foreign exchange losses and gains.

Cash and equivalents and investments stood at 28 million at the end of the first quarter versus 24.3 million at the end of Q4. Cash flow from operations was five point five million for the first quarter. Capital expenditures were one point three million.

That concludes the financial review and I'll turn the call back over the Jim. Jim?

Thanks, Phil.

A brief look forward before we to your questions.

CRA's first quarter performance demonstrates that we are experiencing growth across the majority of our practice areas and that our functional expertise strengthened certain vertical markets and geographical reach gives us a diversity stance in cyclical downturns in any of our markets. This positions us well to capitalize on the increased demand we are facing.

We continue to expect our Finance, Chemicals and Petroleum, Energy and Environment, and Competition practices to be the largest contributors to our revenue, while we expect most of our smaller practices to grow at higher rates of smaller revenue bases.

As I mentioned earlier, we believe NeuCo has rebounded from the electric utility recession of fiscal year '02, although revenues from that business remain hard to predict. However, with several additional sizable opportunities in the pipeline and now with the strong backlog, we are confident that NeuCo will be contributor to the CRA earnings in fiscal year '03.

Operationally we believe our recent improvement in utilization is promising. The staff average is trending up steadily. Excuse me, the staff utilization is trending up steadily. As a result, we continue to anticipate that utilization will increase during the year from the mid to high 70s by the end of the year. As we progress through the year, utilization improvements translate into better margins.

Looking into second quarter, we expect revenue to increase slightly on a sequential basis, although we remain cautious about the impact of military action in Iraq on our international revenues.

For the year, we currently expect revenues and earnings to be at the high end of the 15 to 20 percent range we provided during our Q4 call.

As a final thought, our balance sheet remains strong and highly liquid with, as Phil mentioned, $28 million in cash and long run, long-term investments. We continue to generate strong cash flow, which gives us the flexibility we need to pursue our growth objectives.

With that, I will ask the operator to open the call for questions. Operator?

Thank you, sir. Today's question and answer session will be conducted electronically. At this time, if you would like to ask a question, please press the star key followed by the digit one on your touch-tone telephone. If you are using speakerphone for today's conference, please make sure your mute function is turned off in order for your signal to reach our equipment.

Once again, if you would like to ask a question at this time, please press star, one.

We'll take our first question from Matt Litfin with William Blair and Company.

Good morning. Congratulations on your quarter.

You mentioned, Jim, hiring aggressively in the Finance practice, but really that's the only one. Do you have a target for year-end consultant headcount?

We don't have a target. I think the likely increase will be in the 10 to 20 range, which would be three to six percent, but it could be higher. We are not recruiting aggressively at entry levels other than in Finance, but we always are recruiting for more senior individuals and in fact we have a very senior person that indicated very recently he would be coming. So it's a little bit hard to predict, but we think there will be growth during the year.

I see. Maybe if one of you could comment on the acquisition pipeline, what that looks like. And also, what the contribution was to the growth or in dollar terms, whichever you want to frame it, for the ADL acquisition since this is the final quarter that that was not included.

Matt was we had indicated in the past the integration of the ADL personnel into our Chemicals and Petroleum practice and in fact into our company at large has been quite successful and we will not be reporting on them separately. But if we were to just strip out our Chemicals and Petroleum practice from 2002 and the first quarter and 2003 the first quarter, the top line growth is still over, I think, about 27 percent.

Great. That's helpful, if someone could comment on the acquisition pipeline?

The acquisition pipeline is extraordinarily strong. One of the comments that Jim made was that even with some softening if we're not in our mid-Eastern revenues - if we're not able to return personnel to, let's say, Saudi Arabia before the end of the quarter, much of that is going to be offset because we have an extremely strong domestic pipeline.

Great. OK. Thank you very much.

As a reminder ...

Actually, Matt, did you - were you representing acquisitions or ADL on that question?

Just one moment, gentlemen.

And Mr. Litfin your line is open, sir.

Yes, I was talking more about acquisitions, Jim.

We do have a good - there is a good supply of opportunities. There's nothing imminent at the moment, but we're always - we're always looking at acquisition possibilities.

Great. Thanks, Jim. Thanks, Phil.

We'll take our next question from Sandra Notardonato with Adams Harkness and Hill.

Hi. Thanks for taking the question. Can you give a specific gain that you saw from NeuCo in the quarter on an after tax basis?

Yes, we can do that if you'll just hold on for a second.

Sure.

I believe before tax it was - and before minority interest, it was in the order of 75 million, 75 thousand, excuse me, 75 million, 26 thousand after tax and after minority interest..

OK. And can we expect that to be sustainable over the next few quarters if we do continue to see a million or so in revenue per quarter or could that go up?

I think it's more - more likely to go up than down, based on what's in the pipeline right now. For example, we will - we do expect to see BOE revenues coming in at some point once we conclude negotiating that contract.

And that's expected to be concluded around the August time period?

We're actually now anticipating there'll be some revenues on that maybe as early as the beginning of the third - of the third quarter.

OK. OK. And is, are you making any predictions as to how much revenue we can see in that quarter from this contract?

No, that's really very hard to tell at the moment, but it could be material and as I said we do have in our NeuCo's regular business has enough backlog that they could until late in the year it'd be on at least a break-even basis, if not better.

OK. Let me shift gears and talk about utilization for a second. We saw the sequential improvement in the quarter. Did that come from improvements on the ADL side or from the strong performance of the practice areas at our core at CRA?

I, Sandra, this is Phil. I think the answer to that question is yes, from both sides, actually. There's been improvement in the various litigation oriented practices and the ADL group within CMP and CMP overall has increased utilization from the 40 to 50 percent range, low 40s to the mid-50s.

So would it be fair to assume that in order to get to the mid to high 70 target range you're going to need to see more improvement on the ADL or is it going to be a balance of both for the remainder of the year?

Balance of both for the remainder of the year.

OK. And a couple, just a couple more, regarding the revenue that you see from the Middle East, what was that this quarter, if you don't mind me asking?

We had been running in recent periods in the 300 thousand to 400 thousand range. And that won't - that won't - that won't drop to zero, so the - we do - as I said on a worst-case basis, if that goes - if that goes totally away there might be a loss of $100 thousand a period, but that's very unlikely.

OK, any big projects in the pipeline that are at risk because of the geo-political situation?

No.

OK.

I should say not that I'm aware of.

OK. And was there any of the deferred revenue number fell in the quarter. Can you share that?

One point seven million.

OK. Great. Thank you and great quarter.

Thank you.

As a reminder, ladies and gentlemen, that is star, one for questions.

We'll go next to Paul Sagara with OMT Capital.

Yes, I was wondering if you could tell me what the gross margin would have been without NeuCo and then also if there's, what the level of reimbursements were for the quarter?

We have that if you could just hold on for a second.

Sure.

Gross margin without NeuCo was 36 and a half percent and we don't break out the level of reimbursements. We have not done so and we don't at this point think it's appropriate to do so.

OK.

This concludes today's question and answer session. At this time I'd like to turn the conference back over to Mr. Burrows for any additional or closing comments.

Thank everyone. We look forward to speaking with you next quarter and this concludes today's call.

This concludes today's teleconference. We thank you for your participation. You may disconnect at this time.