CRA International Inc (CRAI) 2003 Q4 法說會逐字稿

Good day everyone, and welcome to the Charles River Associates fourth quarter fiscal 2003 conference call. (OPERATOR INSTRUCTIONS). With us today is CRA's 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, Allison. 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, January 15, 2004, 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, dependence upon key personnel; attracting and retaining qualified consultant; 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?

Thank you, Bill. Looking at our fourth-quarter results, revenue rose 7.1 percent to $39 million -- from $36.4 million in the fourth quarter in 2002 -- our 23rd consecutive quarter of year-over-year revenue growth. Net income of $3 (ph) million represents year-over-year growth of 31.4 percent. Q4 2003 EPS was 28 cents. Keep in mind that we achieved this revenue and earnings growth despite having one less week of operations and 16 percent more diluted shares outstanding this quarter, compared with a year ago.

These results were driven by continued solid performance in several of our or core practice areas, particularly competition, finance, an (indiscernible) environment, and from our NeuCo subsidiary. Positive trends for the competition (ph) practice included steady increases in M&A work, and general corporate litigation. The primary driver for our finance practice continues to be the proliferation of securities-related litigation. Merger-related work continued this recovery with revenues increasing by about 50 percent in FY '03 from FY '02. Q4 revenues were over twice the year-earlier quarter, and 10 percent of the Q3 rate.

M&A, competition-related work now represents almost 10 percent of CRA's revenues. Finance-related litigation revenues increased over 30 percent on a quarter-over-quarter basis, and over 23 percent for the year as a whole, and now represent well over 15 percent of total revenues.

NeuCo generated stronger-than-expected revenue of $1.9 million in Q4, which more than tripled Q4 fiscal 2002 revenue. Quarter-to-quarter, NeuCo achieved a small operating profit. As was the case in Q3, NeuCo did not receive any revenue in Q4 from a major project that is won with the Department of Energy. We've been told that the contract negotiations between NeuCo and the DOE are nearly concluded, and we are hopeful that the contract will be signed early in fiscal year '04.

As we discussed in our Q3 conference call, we anticipated chemicals and petroleum prices revenues, generated in the Middle East, to pick up in the fourth quarter as increased stability returns to the region. However, the volatile conditions in the region remain, and while we have seen progress in rebuilding the pipeline of opportunity, the delay in monetizing these opportunities continues. The Q4 run rate in revenues from this area was up from Q3 by about half a million dollars, normalized on a quarterly basis, but has yet to recover for the run rate at the beginning of the year. The trends, however, are favorable.

Looking briefly at our smaller practices, we experienced mixed performance in Q4 just as we did in Q3, with some growing and others remaining flat or declining slightly.

Revenue from our international offices has stabilized at 14 percent of total revenue in Q4, equal to the percentage in the sequential third quarter. Our Mexico office performed well in Q4, taking into account work performed from Mexican entities in collaboration with U.S. personnel. Other international offices remain steady.

On the headcount front, we capitalized on opportunities to bolster our senior staff ranks by adding a number of renowned economists with diverse backgrounds in private and public sector consulting. We express some of the important contributors to our practice areas in the coming years. With that, I will now turn over the call over to Phil. Phil?

Thanks, Jim. As always, I would like to start my comments by reminding you that CRA's fiscal year operates on 13 four-week cycles, producing quarters unequal in length. Q3 is a 16-week quarter, while our first, second, and fourth quarters are typically 12 weeks each. Also important to note this quarter, as Jim mentioned, Q4 of fiscal year 2002 was 13 weeks long instead of 12, as it was in FY 2003. So, please keep that in mind when making year-over-year comparisons of our financial results. We are comparing a 13-week quarter last year to this year's 12-week quarter.

Q4 revenue increased to 39 million, from 36.4 million in the fourth quarter of fiscal 2002, representing organic growth of 7.1 percent. On a normalized basis, with Q4 fiscal 2002 and Q4 fiscal 2003 each having 12 weeks, year-over-year revenue growth would have been approximately 16 percent. And that is organic.

For the fourth quarter, NeuCo posted revenue of 1.9 million, which, as Jim said, more than tripled the $583,000 we recorded in the year-ago period. NeuCo's results were better than the guidance we provided at the end of the third quarter, for NeuCo revenue of 1.1 million or better. For the fourth quarter, NeuCo's operating profit was slightly more than $300,000. Also, as Jim mentioned, NeuCo's Q4 results do not include any revenue from the Department of Energy contract, which has yet to be finalized.

Fourth-quarter gross margin was 40.6 percent, a 400-basis-point increase from the 36.6 percent in Q4 of fiscal 2002, and 140-basis-point sequential increase from 39.2 percent in Q3 of this year. The year-over-year increases in gross margin primarily are the result of improved consultant utilization and lower reimbursable expenses.

Total consultant utilization for the fourth quarter was 73 percent, up slightly from 72 percent in Q3 of this year, but up more significantly from the 69 percent recorded in the comparable period in fiscal 2002. Consultant utilization benefited from the increase in work in merger competition analysis and finance litigation.

For the full year, consultant utilization was 72 percent in fiscal 2003, up from 69 percent in fiscal 2002. While we are encouraged by this improvement in utilization, our actual utilization was at the low end of our expected range for this year.

SG&A for the fourth quarter was $10.1 million, or 25.9 percent of total revenue. This represents a full percentage point improvement from the comparable quarter in fiscal 2002, and a 110-basis-point improvement from the third quarter of this year. The sequential reduction stems from cost control and the increase in utilization, which allows better absorption of fixed overhead costs. We continue to expect SG&A to stay in the mid 20s as a percentage of revenue, going forward.

Fourth-quarter operating income increased to $5.7 million, compared with 3.5 million in the fourth quarter of fiscal 2002. Operating margin was 14.7 percent, compared with 9.7 percent in the fourth quarter of fiscal 2002, and 12.2 percent in the third quarter of this year.

Net income grew 31.4 percent, year-over-year, to $3 million dollars, or 28 cents per share, compared with $2.3 million, or 25 cents per share, in Q4 of fiscal 2002. Note that a $10.8 million -- excuse me -- at 10.8 million shares, CRA's weighted average fully-diluted share count was approximately 16 percent higher in Q4 of this year, compared to the 9.3 million shares used in the prior year calculation.

Professional headcount stood at 344 at the end of the fourth quarter, down slightly from 348 in the third quarter. As with Q3, turnover above the junior analyst associates level remains very. Our current junior to senior staff breakdown is 116 junior consultants and 228 senior consultants, compared with 111 junior and 237 senior in the third quarter of this year. During this last quarter, several younger consultants we characterized as senior consultants returned to graduate school, accounting for most of the sequential decline in senior consultants.

Looking at the balance sheet, billed and unbilled receivables increased sequentially to $49.5 million at the end of Q4, from 45.9 million at the end of Q3. Current liabilities increased to $39.7 million at the end of Q4, from 36.5 million at the end of Q3.

Day sales outstanding were 104 days in Q4, up from 100 days at the end of the third quarter. This breaks down into 38 days of unbilled and 66 days of billed in Q4, compared with 37 days of unbilled and 63 days of billed in the sequential third quarter. Our target for DSOs, however, remains in the 95 to 100 day range.

Cash and equivalents and long-term investments stood at 65.7 million at the end of the fourth quarter, up from 62.5 million in Q3. Cash provided by operating activities was $4 million for Q4, and 22.4 million for fiscal year 2003, compared to 13.4 million for fiscal year 2002.

For the full year, fiscal 2003, total revenue was $163.5 million, up 25.1 percent from $130.7 million in fiscal 2002. Again, that is despite fiscal 2002 having an extra week of operation because of the timing of CRA's fiscal year end.

Operating income of $20.2 million was roughly 50 percent higher than the 13.4 million reported in fiscal 2002. Net income in fiscal 2003 increased 35.5 percent to 11.4 million, from 8.4 million in fiscal 2002. Fiscal 2003 earnings per diluted share totaled $1.16, compared with 91 cents in fiscal 2002. Overall, CRA enjoyed a very successful year in fiscal 2003. And, with that, I will turn the call back over to Jim.

Thanks, Phil. Looking back through the year, there are two constants of our business -- our success was based on our reputation, which is among the best in the industry. It is the reason why CRA's name is frequently linked to any significant transaction, litigation or other events affecting the economic landscape. And two, the diversity of our practice areas, both in terms of vertical market presence and functional expertise, generally enables us to withstand major cyclical shifts in any one market.

Our performance in 2003 certainly reflected these factors. Despite having one less week of operations and major turmoil in the Middle East, which supports the growth of one of our larger practice areas, CRA still achieved revenue growth of 25 percent. As we look into fiscal 2004, we expect those two constants to remain the foundation of CRA's growth. Building on that, we will continue to capitalize on opportunities in all of our practice areas, and make the necessary investments to better position them for growth. We expect our (indiscernible) to exhibit steady annual improvement, and we anticipate that the major DOE contract will be under way shortly.

As a result, we expect revenue and earnings growth in fiscal 2004 to be in the range of 15 to 20 percent, with revenue growth towards the lower end of the range and earnings growth at the higher end of the range. While we do not give quarterly guidance, I would like to remind everyone that Q1 generally is a slower quarter because of seasonality effects, including, in particular, the effects of the mid-week Christmas and New Year's holidays.

Turning to utilization, we expect continued improvement in fiscal 2004, with our full-year target range at 74 to 76 percent. Again, as is normally the case in the first quarter, we do not expect to see an improvement in consultant utilization during the first quarter of fiscal 2004.

Before we open the call to questions, I would like to take a moment to discuss CRA's other announcement this morning. We signed a $40 million unsecured credit facility with citizens Bank of Massachusetts, which will be earmarked for general corporate purposes and acquisition financing. As we highlighted in the release, we have identified a number of opportunities to accelerate CRA's penetration in key vertical and geographic markets, and this facility gives us the financial flexibility we need to pursue these opportunities. Please note that the 2004 revenue and earnings growth projections I just mentioned do not include the impact of any potential acquisitions.

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

(OPERATOR INSTRUCTIONS). Matthew Litfin, William Blair & Co.

Good morning, gentleman. Congratulations on the quarter. The mid-teens revenue growth guidance that you put for 2004 -- does that imply the increase in utilization up to the mid-70s? Or is that simply headcount and price, and the 74 to 76 percent utilization rate is more kind of a goal of yours?

It essentially implies both in that we assume headcount will be growing, and that the 15 percent growth was (indiscernible) upon about 75 percent utilization.

Thanks. That is helpful. On follow-up, if I might. I think you mentioned, Phil, the nine senior consultants who left during the quarter. What did you say was the cause of that? You say they went back to school?

Well, through the year, in fact, there's been a slight shrinkage in that area. Some people were actually promoted. And so, technically, that is one reason there are less consultants in that area. The other half was departured to graduate school. You know, I cannot break it down any more than that.

Okay. One more, if I might, while I'm on the line here. I think the last couple of quarters you guys have talked about pretty major pick-up in the M&A market. Are you still continuing to see that build? Are you on either side of the big bank acquisition announced today? And what can you say about the M&A market, generally?

Well, frankly, you know, I believe Jim had mentioned, our increase in merger-related revenues -- the increase has actually continued on a quarter-over-quarter basis. It has trended up throughout the entire fiscal 2003. In other words, the increase itself is getting larger. And, we are up to the point where Q4 was more than doubled the quarter of the prior year. And, we are approaching 10 percent of CRA's total revenue. And, as you know, Matt, in the past, that has been a larger percent of CRA's revenue, and we hope that it continues as an increase in percentage, not because anything else declines. Jim?

Just to make a couple of points. The first is, our involvement tends to lag the actual announcement of mergers, although sometimes we are hired before a merger is announced -- it is also quite commonly the case that we get hired after a merger has been announced and is well underway, and they are running into some problems with the regulatory reviews. We do work on banking mergers. Those tend not to lead to as much work for us as mergers in other industries, just because of the problems that are encountered at the regulatory level -- on the competition side, seem to be less severe.

Great. Thank you very much.

Jim Janesky, Janney Montgomery Scott.

Yes, good morning. When we look at other opportunities outside of M&A, I mean, certainly, merger and acquisition activity is going to be a big driver, eventually, of your revenues. But, when we look at opportunities outside of that -- for example, you know, the mutual fund industry investigation, which is highly publicized and, you know, any work -- not accounting-related work from Sarbanes-Oxley, but conflict work that could flow your way. I mean, is that an opportunity for you?

On the first factor, definitely yes. When we talk about financial securities regulation, we tend to include in that bucket work that was (indiscernible) for example, the mutual funds. (inaudible) events that have been publicized.

In connection with Sarbanes-Oxley, we think that we are the beneficiary of work that may be pouring out of the accounting firms because of conflict concerns. It's often hard to put our finger on that, because we would not necessarily know why we were hired. So we do think that is a trend in the business, that the accounting firms will be doing less litigation work in the future as clients become more concerned about conflicts.

And, Jim Janesky, I want to append Jim Burrows answer by reminding you that often, with respect to things like the mutual fund timing investigations and so one, there is a long delay until CRA gets hired.

Right, because you'll be assessing damages and things of that nature -- right?

That is absolutely correct.

Okay. Fair enough.

And the same thing is true for the Sarbanes-Oxley-related work, that not only are getting some current work, we believe, from the fact that it can't be done in accounting firms without going through the -- by accounting firms, without going through the client's audit committee, but, there will also be new litigation spawned by failure to meet the new higher bar that is being demanded of public corporations in reporting.

Okay. And, on the headcount front, I mean, do you expect to get more active in hiring, not so much at the senior -- or very senior -- levels, but to bring headcount up to kind of take advantage of any of the opportunities that are going to be out there in '04? What are your thoughts?

Well, we do have hiring plans. And, as you know, at the same time, we are trading off; we're trying to keep our utilization high. But, we, in fact, have retained searches out there right now to build staff in those areas where we feel some supply constraints. Certainly in our financial and securities litigation practice -- that is one area we feel some capacity constraints. Jim, do you want to --?

Well, I don't think we are having trouble hiring people to staff work as the work grows. So we are not doing very much hiring ahead of demand once you get below the senior staff level. At the senior level, we always have the hiring window open because if we can bring in senior people that can help grow the business, we will always do that.

So sir, in hiring ahead of demand -- I mean, that is kind of -- that certainly was an issue in the last slowdown in M&A. But, do you feel if something, you know -- that if there was a huge increase in the pipeline of projects, you'd be able to hire quite easily in the current labor market?

I don't think we would have any trouble. We always have people in our hiring pipeline. We would just accelerate it.

Okay. I guess, then, as a follow-up -- and I will move on to somebody else. But, if you put all of this together, other than seasonal issues in the first quarter, is there something that I am missing with respect to --? I mean, essentially, it seems as if your business did better in the fourth quarter, a lot of momentum, a lot of things on the horizon in '04. Yet, you know, your guidance, so to speak, for '04 was pretty much in line with what it was at the end of the last quarter. Is there something that I am missing there -- for that level of consistency?

We are feeling pretty good about the momentum, I mean, in all of our practice areas. The practice areas are optimistic. At the corporate level, we try to be prudent about what we're planning on, just to avoid over-hiring and sort of over-forecasting. So, I think there is good momentum across the board. There is certainly good momentum in the finance area; there's good momentum in the merger area; general litigation continues to increase. We are seeing lots of signs (indiscernible) that the efforts over the past year, like growing the practice. And also, we saw in the pipeline (indiscernible) and the Middle East are starting to pay off. So, we don't really see any areas that we anticipate weakness in for the year. So, in general, we are feeling pretty positive.

But, on the other hand, as you know, there is an increase in securities-related litigation.

Okay. Fair enough. Thank you.

Sandra Notardonato, Adams, Harkness & Hill.

My first question, just on perspective on what your M&A practice represented, as a percentage of the mix, when this segment peaked in the late '90s? And what the utilization (technical difficulty)?

(indiscernible). I'm having someone try to look that up while you're talking, so if you have some other questions.

Okay. Great. What is the bill rate increase we can expect in 2004?

About 5 percent.

Okay. Are you noticing any increase in the cost of hiring people who's skills are in great demand right now, like someone who has M&A expertise? Or, forensic accounting expertise?

Could you repeat the question?

I'm just trying to gauge if there has been an increase in the cost of hiring people who's skills are in great demand in today's market. Meaning, is it costing you -- are they demanding higher salaries or up-front bonuses or anything like that?

No. Actually, there has not been anything that we have seen.

Okay. The tax rate this quarter, Phil, was up above 40 percent again. What should we be modeling for next year? And how can you get that number down to a steadier 38, 40 percent?

Well, getting it down there is not something that we have total control over. The regulatory rates are what they are. There are some (indiscernible) losses in some of the smaller other countries, where we are doing business. And that leads to the larger rates. But, in fact, if I were modeling, going forward, I would be basing my tax rate on 43 percent. It is higher in the fourth quarter because the fourth quarter has to bear the catch-up, based on any new information that materialized in the fourth quarter, to make the whole year come out right. So, one quarter has to make the whole year right, and that is why on the margin, it goes up as much as it does. But, going forward, I would base it upon 43 percent.

And, in terms of your question to Jim about merger-related revenue, our practice data really only goes back to the beginning of fiscal year 2002. I think, in past conversations, Jim has speculated that our merger-related revenue might have been as high as 20 percent of total CRA revenue, but, I cannot back that up with a worksheet.

Okay. Do you have anecdotal information on how high utilization was in your M&A practice when it represented a larger percentage of the total?

Utilization in the firm back in the '98 and '99 period was up in the 85 to 89 percent range. It was particularly high in that practice area. Now, the reason we do not have data is that we -- merger work -- we have a number of different practices, but the merger work tends to be spread across the practices. So, sometimes it will show up in the -- it will not necessarily show up in the competition practice. The people that do the merger work are the same people that do other litigation work. All I can tell you is the utilization in our litigation practice in the late '90s -- '98, '99, and early 2000 -- was very, very high. The corporate average utilization was 85 to 89 percent. But, it was probably higher in those practices in the rest of the company.

And again, Sandy, just to go back to that time period, that was before we had the international offices, or, as we have said in past calls, the building of the business consulting group, whereas that group runs at lower utilization, generally, in a steady-state because of marketing, but also bills at a higher rate, which tends to offset.

Okay. Do you break out the profitability of your international practice, as a whole?

Not really. We are very much focused on a practice-based view of the company. We obviously, for statutory recording reasons, need to look at the revenues and profits of other jurisdictions in reporting in the UK, Australia and New Zealand and so on. But, in fact, those are often multiple -- represent multiple practices. And we don't -- I think that would probably require more investment in transfer pricing analysis than we have in collection of the published data than we have (indiscernible) to date undergone.

There is substantial cost-staffing. For example, the Middle East work is all booked out of our London office. But, it is staffed from people across the country. There are significant consultants who are based in the United States (indiscernible). There are consultants in the Asia-Pacific offices that work in that work. Similarly, on Mexico, that work is staffed out of (indiscernible) Mexico and the United States. So, it becomes very difficult to track profitability at the regional level when there is a huge amount of cross-staffing.

Okay. Just a couple more questions. Your degree of confidence that we could start to see some level of spending out of the DOE contract in the first half of the fiscal year?

High.

High? Okay. Did you feel just as high last quarter? Or, is there something on the margin that has occurred that gives you more confidence?

It's been a long, painful process. Actually, the only reason we announced that we have been awarded the contract is DOE put it on their web page. We started getting calls from newspaper reporters.

We read it in the (indiscernible).

We found out about this from the Boston Herald, actually, first, before we were even notified. Yes, our confidence level is higher. In the earlier periods, we were not receiving any indication of problems, but we still had a number of issues that were being discussed with DOE. The report I now have from our people at NeuCo is that there are no outstanding issues; there's been full agreement on every single term, and every single word in the contract has been agreed to. We are just waiting for signing. So, the contract was delayed from the fourth quarter to our first quarter, because when DOE slipped past the September 30th deadline, the funds had to come out of the next fiscal year. And apparently, those funds were not restored until January 12. So, there has been one (indiscernible) after another. But, I am told that there is actually nothing now preventing the signing, except the signing.

Okay. Your guidance that you have provided does not include any spending from this contract -- is that right?

Well, our guidance for NeuCo, which is that NeuCo will have a somewhat better year this year than last year, does not include DOE. That was the -- (multiple speakers). But the guidance of the company includes (inaudible).

Okay. Can you explain that, Jim?

We believe that NeuCo revenues (indiscernible) DOE will be up from 2003.

Okay. All right. Then, my last question -- just along the lines of the credit facility that you signed. Can you talk about the valuations you are seeing on the acquisition targets that you have identified?

Okay, as I think I commented last quarter, we certainly saw one valuation that was certainly too high for us, and we believed too high, in general, with respect to a major acquisition. For the opportunities we are looking at, we have made a corporate decision, based upon our shareholder needs and looking at shareholder value, that we are not going to overpay for acquisitions. It has to pay on a basis of metrics which run over a longer-term, in terms of accretive value. Looking at comps -- again, not at just one comp, but -- and looking at things like discounted cash flow and so on. So, we are taking a slightly longer view of what the valuations should be, i.e. -- you know, there is some quip or comment out there that sometimes the best acquisition is the one you do not do. We will not grossly overpay for an acquisition.

Can I make the assumption, then, Phil, that you have walked away from some things recently because of valuation?

Yes, you can make that assumption.

Okay. Thank you, very much.

Thank you, Sandy.

(OPERATOR INSTRUCTIONS). Matt Litfin.

What was the rate that you got on your new credit facility?

The rate is actually a matrix. It is based upon the ratio between debt and EBITDA. And it varies from about 125 basis points to 175 basis points. During the extreme, maybe 200 basis points over LIBOR.

Okay. Great. Thank you.

We think it's a very attractive situation. We also will only be paying 18 basis points, per year, on the unused portion.

Jim Janesky.

DSOs -- can we talk a little bit about, you know, what the direction will be going into the February quarter? What, you know, any additional steps that you are taking to bring those down below 100 again?

Writing more memos, making more phone calls. Without being facetious, let me, you know, at least try to reply anecdotally as to why it has gone up. I think, last year when we hit a -- let's say, for recent periods, a low -- well below 100 days -- we had situations where we were working with what I termed a number of credit-challenged clients. And we were actually working -- had retainers where the cash was flowing to us ahead of the work. That, obviously, had a great -- and some of those projects were extraordinarily large -- that had a very beneficial effect in bringing down DSOs.

More recently, we have not had the same kind of client outside of bankruptcy. Now, many of those -- there are many clients that we are working with who are already in Chapter 11. And, actually the collection -- both the billing and the collection -- have longer delays. Having to do with what's called a fee application for a client in Chapter 11 requires a lot of extra work, including some skills that we were -- did not have native, inside the company, and for which we have retained outside help. So, it is longer to get a bill out, and then the -- given the process, which includes the bankruptcy courts, where only a portion -- usually 80 percent -- of the billing, plus the expenses, is paid on a "timely" basis. And, the last 20 percent is held up (indiscernible) it is reviewed by the court.

Okay, so, as you move away from that type of work, we can expect it to go down in '04 -- right?

Right. Well again, we're not doing bankruptcy restructuring work. (multiple speakers) Often what we are doing is regulatory work or other markets definition work and so on. But, in fact, we do you have, especially in the (indiscernible) utility area, a number of clients who are in bankruptcy. And, that work is actually very solid work, and quite profitable. But, it does involve longer DSO.

Okay. Thank you.

Gentlemen, we have no further questions standing by at this time. I would like to turn the conference back over to you for any additional or closing comments.

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

Thank you.

Thank you for your participation in today's conference call. You may disconnect at this time.