CRA International Inc (CRAI) 2003 Q2 法說會逐字稿

Good day everyone and welcome to the Charles River Associates second quarter fiscal 2003 conference call. Today's call is being recorded. The replay will begin today at 2:00 p.m. eastern time and will be made available through Wednesday, June 18 at midnight eastern time. The rebroadcast dial in number is (719)457-0820 and you will be asked to enter a confirmation code, 305415. Again that number is (719)457-0820 with the confirmation code 305415. You may also listen to a webcast on CRA's Web site located at www.crai.com. In addition, today's news release is posted on the site for those who did not receive it by e-mail or Fax. With us today is CRA's President and Chief Executive Officer, Mr. James Burrows and EVP and Chief Financial Officer, Mr. Phil Cooper. At this time for opening remarks I would like to turn the call over to Mr. Cooper. Please go ahead, sir.

Thank you, Cynthia. 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 expectations as of today, June 12, 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 important factors. Such factors that could cause actual results to differ materially from any forward-looking statements made by the company include, among others, the 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 second quarter results, revenue rose 44% to $40.2 million from $28 million in the second quarter of 2002 continuing our pattern of year over year growth. This growth is driven by strong demands across almost all of our business consulting and litigation consulting practices as well as by improved utilization. Another positive factor is higher than anticipated client reimbursable [inaudible] contribution from the acquisition of staff from the former ADL completed at the end of Q2 last year. Net income grew 41% year over year to $2.8 million, or 30 cents per diluted share. In terms in terms of individual practices, the strongest practices in the quarter were finance, energy and environment, competition and metals and minerals. Although we have not seen a complete rebound in the M&A arena, CRA's strong reputation allows us to remain involved in many of the transactions taking place. We also continued our active involvement in high profile antitrust cases. For instance, CRA provided the critical economics and antitrust analysis for the plaintiff's led by Wal-Mart in the Visa, Master Card, Debit Card case. On June 6 a number of major clients reached an out of court settlement for approximately $3 billion. As we indicated on the first quarter conference call we expected that the Iraq conflicts would cause a destruction in revenue [inaudible] as we pulled staff out of Saudi Arabia and as consulting opportunities in other countries in the region were interrupted. Primarily as a result of this conflict, CMP revenues in the quarter declined by roughly $400,000, well within our expected range of $300,000 to $600,000. Because the conflict also interrupted the flow of new opportunities and proposals there may be some further impact in Q3. The pipeline of new business opportunities, however, is strong so we anticipate that growth in CMP revenues will resume by the fourth quarter of 2003 if not sooner.

Our international offices contributed 16% of our revenues. The Toronto, Melbourne and Wellington offices experienced significant revenue increases. London revenues declined in line with the decline in Middle East revenues most of which originate in London. Revenues originating in Mexico declined as a result of a delay in the expected start date of a significant new contract from Q2 to Q3. Revenues originating in Mexico are expected to increase for the balance of the year. London revenues should also increase as our Middle East revenues increase and we are expecting continued growth in the other foreign offices.

Turning to our NeuCo subsidiary, NeuCo posted revenue of nearly $1 million, essentially flat with its first quarter results, leading to a very small operating loss. Based on the current backlog we expect NeuCo's revenues to be higher in Q3 after adjustment for the four traditional accounting weeks and higher than they were in Q1 than they were in Q2. NeuCo also continues to have a strong pipeline of opportunities. In addition we continue to expect the $8.4 million four-year [inaudible] contract that was announced earlier this year to be signed later this year. We expect to be able to recognize additional revenues as soon as the contract is signed.

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

Thanks, Jim. As always, I'd like to begin my comments by reminding you that CRA's FY 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 sixteen-week quarter. As Jim mentioned, Q2 revenue increased nearly 44% to $40.2 million, compared with $28 million in the second quarter's of fiscal 2002. In addition to the strong contribution from the majority of our practice areas, second quarter top line results benefited from a $1.5 million sequential increase in client reimbursables, which include client related travel and other expenses. Also, the second quarter of 2003 included the full contribution of the staff we acquired from the then Arthur D. Little corporation, who joined us in [inaudible] beginning in late April, 2002, near the end of Q2. That staff have all been well integrated into our chemicals and petroleum practice. For the second quarter, NeuCo posted revenues of $943,000, up 42.5% from revenue of $662,000 in the year ago period, and was consistent with its first quarter results. NeuCo's operating loss for the second quarter was [diminimus]. Second quarter GM was 37.2%, compared with 38.4% in the second quarter of fiscal 2002, and 37.6% in Q1 of this year. The sequential decrease in GM is primarily the result of a higher level of client reimbursables in the second quarter. As you know, reimbursables create zero margin and can weigh heavily on GM percentages, particularly at higher amounts such as in Q2.

Total consultant utilization for the second quarter was 731/2%, up from 71% recorded in both the first quarter of this year and the second quarter of fiscal 2002. Looking ahead to the third quarter, considering the summer holiday season, our goal is to keep utilization at current levels. As a result we now believe that a realistic end of the year utilization rate would be in the mid 70s with a full year average in the range of 72 to 74%. We will continue to evaluate ways to improve this metric.

SG&A for the second quarter was $10.3 million, or 25.7% of total revenue. This is almost one percentage point lower than the 26.6% recorded in Q1 of this year, reflecting our continued success in managing our expenses effectively. We expect SG&A to stay in the mid 20s as a percentage of revenue going forward.

Q2 fiscal 2003 operating income was $4.6 million compared with $2.6 million in the second quarter of fiscal 2002, and $3.8 million in the first quarter of fiscal 2003. The operating margin was 11.5% compared with 11% in the first quarter of fiscal 2003 and 9.3% in Q2 last year. Net income grew 41% to $2.8 million or to 30 cents per diluted share in the second quarter compared with $2 million or 22 cents per diluted share in Q2 fiscal 2002. Weighted-average fully diluted shares outstanding for the first quarter of fiscal 2003 were, for the second quarter of 2003 were 9.3 million, compared with 9.2 million in the second quarter of fiscal 2002.

Professional head count stood at 348 at the end of the second quarter, flat with the first quarter. As we mentioned last quarter we did not expect much head count growth in 2003, but that we would be recruiting for our finance practice. Gross consultants ads in the second quarter were seven of which three were in our finance practice. Our end of quarter junior to senior staff breakdown is 99 junior consultants and 249 senior consultants.

Looking at the BS, billed and unbilled receivables increased sequentially to $47.5 million at the end of Q2 from $44.6 million at the end of Q1. This growth was offset by an increase in current liabilities to $31.8 million at the end of Q2 from $30.5 million at the end of Q1. DSO's were 95 days in Q2, down substantially from 103 days at the end of the first quarter. This breaks down into 30 days of un-billed and 65 days of billed in Q2 compared with 33 days of unbilled and 70 days of billed respectively in the sequential first quarter.

Cash and equivalents and investments stood at $28 million at the end of the second quarter, flat with Q1. Cash flow from operations was $7.5 million for the second quarter. CAPEX was $1.8 million.

Turning briefly to CRA's results for the first two second quarters of fiscal 2003 total revenue was $75 million, up approximately 44% from $52.2 million in the comparable period in fiscal 2002. Again, the first two quarters of 2003 include the full contribution from the operations of the former ADL staff whom we acquired beginning April 29 of last year, 12 days before the end of Q2. Operating income of $8.5 million is 62.2% higher than the $5.2 million reported in 2002. Net income of $5 million is up 41% from $3.6 million in fiscal 2002. Earnings per diluted share in the first two quarters of fiscal 2003 totaled 54 cents compared with 38 cents in the same period of fiscal 2002.

That concludes the financial review and I will turn the call back over to Jim.

Thanks, Phil. A brief look forward before we go to your questions. CRA's second quarter performance is indicative of the continuing demand for our high level economic and business consulting services. Activity was strong across most of our practice areas and currently we have a strong flow of new business opportunities. As we highlighted in previous quarters the diversity of our vertical market expertise is essential to CRA's success. As a result of our Q2 performance and anticipated improvements in Q3 and Q4, we are increasing our full year fiscal 2003 revenue expectation from the 20 to 25% -- to 20 to 25% growth over fiscal 2002 revenue. We previously had provided guidance of 15 to 20% EPS growth. We now expect full year EPS growth to be about 25 to 30% year over year in fiscal 2003, up from our earlier expectation of 15 to 20%.

With that I will ask Cynthia to open the call for questions. Cynthia?

Thank you, Mr. Burrows. Today's question and answer session will be conducted electronically. If you would like to ask a question, please press the star key followed by the digit one. We will proceed in the order that you signal. If you are using a speaker phone please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, if you would like to ask a question please press star one. We will pause momentarily to give everyone an opportunity to signal.

We will take our first question from Matt Litfin with William Blair & Company. Please go ahead

Yes, good morning, congratulations. You guys have said in the past that your goal for SG&A as a percent of revenue is somewhere between 25 and 30%. You are now at the low end of that range. Would you care to either reset that goal or maybe address the sustainability of current levels?

Hi, Matt. I believe the current level is sustainable. We will have continuing efforts to attack those expenses. Obviously if revenues continue to grow as fast as they are, that lowers the percentage. But we are focused on that and we have the new initiatives that we began at the year targeting all of those kinds of administrative expenses. I do want to point out, though, that there is a volume component in there in that performance fees to outside experts who source revenues for CRA are also include so as revenue growth at least that portion of SG&A expenses grows with revenue.

Okay. Maybe if I could throw in a follow up.

Sure.

Explain for us why DSO has been improving over the past years? What are you doing there and what are your goals in regards to collections?

You mean other than excellent management? We should mention that in these times we actually, first of all we are focused on it and we look at these things on a weekly basis and there is much more focused which is shared between the financial administrative staff and the consulting staff. So we've got more of a team approach than we've had in the past. But secondly there have been a number of clients that we are working for who we might call euphemistically credit challenged and we've been using more retainers; to reflect our current revenue accrual so that we are more in line with the revenue that is building up. And that is contributing to lower DSOs also.

Great. That's helpful. Thank you very much.

We will take our next question from Sandra Notardonato with Adams Harkness Hill. Please go ahead.

Hi, I was wondering if we were start off with the reimbursable function that you saw during the quarter. Is that a function of several different clients? Maybe you can give some color on why that happened here in May?

I think some of it is due to our overseas clients with greater amounts of travel and also the fact that at least on one major project there was an outside subcontractor that we drew into the project that had a significant role in the project. So I think those are two factors that contribute to the higher level of reimbursables.

I know it's probably hard to predict but can you give us a sense of what we can expect in the next couple of quarters?

You're right, it's hard to predict. I think that given that our activity with that specific client continues I would not be surprised at all to see it continuing at the Q2 level.

Okay. So we can see growth margins, then, probably in the 37.5% range.

I do want to emphasize that we are not happy keeping it there and we are going to try and drive that up a bit higher.

Okay. But the real way to drive that up would be to get utilization up to 75% which we are not going to see in August, we could potentially see in November.

Yes, that's what we would like and that is the ultimate way to increase those gross margins.

Okay. In the press release you talk about the strength in your litigation consulting business. I've also heard this from FTI Consulting. Can you talk specifically about what's happening there? You mention, maybe just leave it at that. If you can talk about what's happening there?

Well, business is active and there is really no single event there's just an active flow of litigation. It's just part of the long term trend, I would say more blocking and tackling. The litigation business I think is a growth business and it tends to grow largely independent of what's happening in the economy.

I would add, Sandy, that it is also really the sum of a lot of projects. So even something that had the profile of the Visa/ Master Card/ Wal-Mart situation was really only about 2% of our revenues in Q2.

The Wal-Mart was only 2% of the revenues?

Yes.

Okay. What does litigation consulting represent as a percentage of the total?

We don't have a specific break on that because we just don't keep our data in that way but I can give you a general impression.

Sure.

Litigation probably continues at around 65% which is about where it's been.

Okay. Say that again, Jim?

Say 60 to 65%.

Okay. And growing north of 25 or 20 to 25 in the range, how is litigation consulting growing?

I think both parts of our business at this point are growing organically at the same rate.

And you bring up the organic number. Can you give us the organic growth rate was for May? And I just warrant to confirm that the new guidance does not include any acquisition, it's all organic.

To answer your second question first, the new guidance does not involve any assumptions about acquisitions whatsoever, although we continue to look and analyze, there are a number of companies that we talk to from time to time in the ordinary course of our business. With respect to the organic, I don't have a breakdown right now. I can [inaudible] the first quarter because for one thing we are not recording the activities of the ADL, the staff we acquired from ADL separately, but in this first quarter I believe about 17 or 18% was the rest of the company not including the new [expand] chemicals and petroleum practice, was growth there and I would expect it's about the same in Q2.

Same in Q2. Okay. And you bring up looking at acquisitions, can you talk a little bit about where you could see yourself focusing on or what you do see yourself focusing on? Is it expanding existing services that you have or are you looking to bolt on some new services to set you up for 2004?

We are really focusing on beefing up our major consulting activities that we are currently involved in.

And the companies that you are looking at, can you give a sense of what types of multiples they are getting or what would want to get, the evaluation parameters?

I'm not sure what multiples, let's say the industry is getting. It's very hard to find true comps given the [inaudible] of consulting companies that are public that look something like us. But certainly our goal in looking at these is to pay not more than one times revenue or five times EBITDA. And we have other financial and strategic goals when we evaluate these companies.

Okay.

By the way, just to go back to one of your questions, one of my colleagues here reported that Q2 may actually have a higher percentage of organic growth than Q1, maybe of the 44% maybe over 20% coming from organic sources.

Okay. Great. And maybe we could take this off-line but how did he get to go that? Is he in the room? Is this secret person in the room?

It's basically excluding the chemicals and petroleum practice. And she is in the room.

She is in the room. Fantastic. It must be Karen.

Yes.

Okay. Well, thank you, guys and obviously a wonderful quarter. Hope you can keep it up.

Thank you, Sandra.

We will take our next question from Jim Janesky with Janney Montgomery Scott. Please go ahead.

You mentioned that while the M&A business is nowhere near where it was in its peak an couple of years ago and while it seems like you've done a very effective job in retooling to where the market is right now, we have noticed recently that M&A activity in some cases is up 40% in some places? Do you think that what we are looking at is a weekly anomaly and how quickly if we do have a return in the M&A market will you be able to go after that business?

It would naturally come to us. We don't go after it because --

Right, okay.

We are basically known to be the people to go to or one of the few people you go to for that kind of business. We have seen -- there is continuing activity it's not just at the level we were at three years ago. So I would think that we would see it pretty quickly now. I should say that it hits our revenues later than we would pace our investment bank activity because we often get retained at the very ends when all of a sudden they realize that they might have a problem. So a merger could be going through the works for six months before we get hired.

Okay. But you have seen some slight rebound?

Yes.

Okay. You talked about -- what areas are you seeing any softness at all? I mean are there any particular areas of your practices that are not as strong as what you reported?

Well, one area we talked about which was revenues coming out of the Middle East which we think is just a hiccup because not only did we have to slow down some existing projects but there really was no, there was no business activity going on for about three months. So the meetings to discuss more additional projects weren't happening. We think it will pick up at some point possibly quite soon depending on how fast we can get existing proposals converted into contracts. The only other place with any kind of systemic issue is transportation, which in our transportation practice actually expects its revenues to go up in the second half based on the backlog they now have. But the second quarter continued to be on the soft side and you can imagine the reasons why. The customers are basically the companies that are in the deepest trouble in the economy, such as airlines. So that practice was on the slow side, it's a very small practice in terms of the share of our business but they are expecting some growth in the second half.

One of the advantages, Jim, of our size and diversification is that the practices that have been weak before can turnaround at any point in time. If we take a look last year we might have focused on the energy and environment practice, particularly the electric utilities sector. Well, that's quite strong now. At the same time metals and minerals, which last year at this point might have been reasonably weak is very strong now. So these things move around and this is a portfolio effect.

Okay. Do you think -- you've increased your guidance even above the upper end of previous guidance. Is there something inherent in your model now, even in the projects you are doing that is giving you more visibility? For example, Visa Master Card, the retailers as a whole took action against Visa Master Card and now there's talk that maybe they are going to do it individually? Are these types of cases giving you comfort, so to speak, that there is more visibility on your revenues?

I don't know if I would trace it to that. I think it's just basically just more of the same. We are sort of busy in a number of areas around the company and as Phil said the portfolio effect, so if we just simply extrapolate from where we are based on momentum of individual practices, it leads to a certain implication. I don't think there's any particular thing I could point to say, we are going to win this particular contract or this particular practice has a lot of backlog in the second half. It's just that the business during the first half sort of picked up across a lot of our different lines of business.

And we think our pipelines are healthy.

Okay. NeuCo, could you clarify your comment that in the third and fourth quarter you expect it to be better than the second quarter adjusting for the third quarter? Do you just essentially expect it to be better than $1 million? Is that what you are saying?

No, what I meant was the third quarter is 33% longer than the second quarter so what I was trying to say is that we are expecting revenues in the third quarter to be more than 33% of revenues in the second quarter's.

Okay. Got it. Okay. That's clear. Then finally, head count, you said it was at 348?

That's correct.

I missed that. Where were you again in the second quarter?

348.

I'm sorry, in the first quarter?

348.

So that was flat. Did you mention what your hiring plans are going to be for the rest of the year? Do you real still think you are going to grow into your current consultant base?

We don't have a hiring target to just add body count. We are selectively recruiting in certain areas where we are pretty sure we can get people to work right away. But our hiring is basically pretty much [inaudible] replacement with the thought that if we have the business we can always add people and we have [summary service] capacity in the system now.

Okay. Thank you very much.

If you would like to ask a question, please press star one at this time. We will take our next question from Mike Warner with Kennedy Capital. Please go ahead.

Hi, congratulations. This is the first time I've been on this call. I did have a question about the utilization. There was a comment made that that kind of insinuated that your utilization could improve toward the end of this year. Could you give me, just give me your opinion on why that might occur?

Well, I should caution that this was not a forecast and basically we would like to operate the company in the high 70s or into the 80s, that's our target. And we want to get there one way or the other. We don't, there's no visibility in the sense that I know today that the end of the year we'll be at some number that's at a higher level than we are now. It's just that that's our target and we think the momentum is going in the right direction.

We are holding individual practice leaders accountable for margins in their areas and that kind of pressure certainly leads to response. I think I've mentioned on a prior call that at least relative to some of the higher values for that metric in the past that as we have more international business and as we have more business consulting business than we had in the past that both of those operate at naturally lower utilization than the domestic litigation business. So our average may not get as high as it was historically but we certainly believe that we should try to drive it higher than it is right now.

Okay. And you thought in general there was, I think Jim you mentioned that the litigation practice was 60 to 65%. Was that of your total business?

Of the total business.

Okay. And then is business consulting the other part?

As a total I guess total excluding NeuCo.

NeuCo is about 3% of our business and of the nonNeuCo business breaks 65, 35 roughly.

I'm sorry, I didn't catch the question.

Between litigation and business consulting.

Okay.

And again, your criteria for acquisition types of potential is no more than one times revenue and five times EBITDA?

On the whole jurisdiction that's what we are looking for.

What type of size of firm would you consider and how would you finance it? In terms of revenues, I guess?

We certainly, we have opportunities to range anywhere from small which might be in the three to $5 million range to close to $100 million. Obviously at the larger scale there would be financing issues. We are not terribly anxious to have a lot of debt so if we ended up with a bigger size acquisition, we would probably try to have some kind of paper or something involved.

A take out of equity following it.

There's nothing like that that's very eminent but in terms of our general thinking.

You said you would try and do it with equity or not?

I think equity, obviously in a smaller acquisition sitting with about $28 million in liquidity and having a cash generating business we could afford the larger -- the smaller acquisition without resorting to that. If there were a very large acquisition of the sort that Jim mentioned we would use equity as opposed to, we won't even come close to any of the standard industry metrics of how many times EBIDTA our debt position could be, we are just not going to do that.

And your last acquisition was when, when did that close?

At the end of April and beginning of May and [inaudible] we were one of the five buyers of the seven pieces of the Arthur D. Little company, and I think our EPS today is reflective of how accretive that was. That was done without stock.

Okay. That's it for now. Thank you very much.

Thank you, and welcome.

Thanks.

We will take a follow-up question from Matt Litfin with William Blair & Company. Please go ahead.

Yeah, Phil, I wonder if you could address the net effect of any currency changes in the quarter?

Give me just a second. We did have a net currency loss in Q1, I think we have a small currency gain in Q2. About $100,000 in Q2.

Okay.

That's net.

One more question if I might. This is a very general question for Jim, but maybe you could address for us why is Charles River Associates seeing success in this kind of environment in contrast to what we are hearing about companies like Mackenzie and [inaudible] and BCG?

Okay. I would say there are a couple of factors. One is essentially more than half our business is litigation and the market conditions there are really quite different from what the large management consulting firms are seeing. Litigation just continues to be a good business. Secondly, on the business consulting side, our consulting tends to be very expertise driven. The consulting staff is quite senior. We don't have huge teams. A big team for us would be five people. A lot of this is high level consulting with experienced individuals with loss of industry and technical expertise working with clients. It's very targeted, arrival shot type consulting. And I think the consulting activities that are not doing well are the ones where, it's just basically an Army of consultants descends on a company and camps out. That's just not the way we work.

Great. Thanks very much.

We will take a follow-up question from Mike Warner with Kennedy Capital. Please go ahead.

Hello, again. Could you give me who you believe are your closer competitors, if --

Ure. The closest will probably be LECG, [inaudible] is a private firm or National Economic Research Associates based in New York, they are owned by Marsh and McLennen, a very small piece. They are the two largest of our competitors. There are a number of firms that are, say half or two-thirds of our side, Corner Stone Analysis Group, [inaudible]. We also compete with accounting firms that have litigation practices, the Big Four all do a significant amount of work with litigation although not actively present in any of the markets that we address. On the business consulting side, I would say the firms we see the most often are MacKenzie and Boozallen. Mike Warner: Can you be a little bit more specific for me on the litigation side, what exactly do you did there?

Well, the biggest practice area is competition, antitrust cases and mergers. I would say the second biggest practice and rapidly growing is financial securities. It can be [inaudible] a lot of litigation involving accounting firms, investment banks and generally any litigation that involves some form of finance custom money. We do a lot of [commercial] property litigation, general and commercial damages.

Regulatory work, especially in the energy sector.

Financial trade, employment discrimination, product liability. Basically anything where there's at the end of the day there's some form of economic analysis or finance analysis is needed.

We work with the law firms that help and prepare a series of case, track them and help them prepare for deposition and witnesses and cross-examination and so on.

Okay. Okay. That sounds good. Thanks again.

Gentlemen, it appears we have no further questions at this time. I will now turn the call back over to Mr. Burrows for closing comments.

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

Thank you.

This does conclude the Charles River Associates 2003 conference call. We do thank you for your participation and you may disconnect at this time.