CRA International Inc (CRAI) 2010 Q4 法說會逐字稿

Good morning, everyone, and welcome to Charles River Associates fourth quarter fiscal year 2010 conference call. Today's call is being recorded. You may listen to the webcast on CRA's website located at www.crai.com. In addition, today's news release and prepared remarks from the Company's chief financial officer are posted on the Investor Relations section of the site.

With us today are CRA's President and Chief Executive Officer, Paul Maleh, and Chief Financial Officer, Wayne Mackie. At this time for opening remarks and introductions I would like to turn the call over to Mr. Mackie. Please go ahead, sir.

Thank you, Jackie. Statements made during this conference call concerning the future business, operating results, estimated cost savings, and financial condition of the Company and statements using the terms anticipates, believes, expects, should, or similar expressions are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements are based on management's current expectations 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 are included in the Company's filings with the Securities and Exchange Commission and in today's news release and prepared CFO remarks which are posted on the Company's website.

The Company cannot guarantee any future results, levels of activity, performance or achievement. The Company undertakes no obligation to update any of its forward-looking statements after the date of this call.

Let me remind everyone that we will be referring to some non-GAAP financial items on this call. I would encourage everyone to refer to today's earnings release for a full reconciliation of non-GAAP items to their GAAP equivalents. Our non-GAAP results exclude the results of our new co-subsidiary, expenses related to restructuring activities and expenses related to the repurchase of our convertible bonds. In addition we have provided normalized non-GAAP financial information for third quarter of fiscal 2010 on a basis intended to convert the 16-week period to an as if 12-week period in order to provide an equivalent comparison to financial information for the 12-week fourth quarter of fiscal 2010. Let me now turn it over to our CEO, Paul Maleh, for his commentary. Paul.

Thanks, Wayne, and good morning, everyone. Thank you for joining us on today's call. Following the improved performance we achieved in the third quarter, our fourth-quarter results continue to put us on the right track. There are highlights to note about the conclusion to the year.

First, what was most encouraging about our fourth-quarter results was that it was truly a broad-based improvement. It was not being driven by a few projects or one or two large practices performing better. Instead, we saw nearly all of our practices achieve sequential revenue growth compared with the normalized Q3. In fact, our top-line grew more than 20% sequentially on a normalized basis within both litigation and management consulting. On a year-over-year basis overall revenue also grew.

Second, on the bottom-line our cost reduction and restructuring measures were effective. When you look at our results on a non-GAAP basis, we delivered higher operating margins for the third consecutive quarter.

During the year we restructured and simplified our organization and focus on client facing and business development activities to drive our utilization to more acceptable levels. This quarter we exceeded our original goal of 70% utilization with a rate of 73%, which represented our highest rate in more than two years.

And thirdly, as Wayne will review later in his CFO report, we continue to generate healthy cash flow and maintain a strong balance sheet. Our continued improvement in margins boasted our profitability this quarter and resulted in cash flow from operations of more than $21 million and included the return of $10.3 million deposit that had been placed in escrow in connection with the business acquisition we made in 2006. Wayne is going to talk about our capital structure during his remarks, but I will say that we were pleased by the level of cash flow we generated this quarter. It enabled us to buy back nearly $26 million of our convertible bonds at a discount. That accounts for more than half of our remaining balance on that debt.

We also bought back approximately 14,000 shares of stock in Q4. Even with the repurchases we concluded the year with more than $80 million in cash and equivalents and short-term investments. And we are in a strong position with substantial financial flexibility as we enter 2011. Overall, we are pleased with the progress we made.

Looking at our top-line performance in more detail, as I mentioned, it was broad-based improvement. In management consulting we saw significant improvement. During our second quarter call we described some of the challenges in the marketplace, which included clients being reluctant to undertake consulting projects, spending less than they had in the past and engagements, when they happened, being smaller and of shorter duration.

While we expect challenges to continue, at least in the short term, during the fourth quarter both our Global Industrial Consulting Practice and our Marakon team continue to make strong contributions, building upon the momentum they developed in the third quarter.

In Litigation Consulting, we generated double-digit sequential growth in a number of practices, including finance, life sciences and intellectual property. We were also particularly pleased to see the continued strength in our competition practice, given the uneven activity in the M&A market. Overall, litigation activity, which had stalled earlier in the year, picked up its clients' willingness to resume spending on previously dormant matters grew in the quarter.

Turning to our margins, over the past two years we have continually adjusted and fine-tuned our business model to lower our cost structure and channel resources into our most promising lines of business.

The results of those efforts are evident in the operating margin level. Our non-GAAP operating margin for Q4 was 9.5%, improving from the 8.0% we recorded in Q3 and 6.5% in Q2, 3.2% in Q1. Looking at fiscal 2010 in total, while it was a challenging year for CRA, we concluded the year with stronger prospects for growth. As a result of an uncertain economy and clients limiting or delaying their spending, we committed to a series of ongoing initiatives to reignite growth in our business for the long-term.

Our strategy have four key components -- leveraging what makes CRA distinct, the combination of our functional capabilities and industry insights to solve our clients problems; leveraging the diversity of our expertise through greater collaboration; investing in our people; and creating a highly efficient and scalable infrastructure. As we conclude 2010 I can say that we made progress in each area.

Throughout the year we marketed with greater focus on the powerful combination of our functional and analytical capabilities, along with access to leading industry expertise. This strengthened our offering to clients and in turn contributed to the vitality and profitability of CRA.

Our most important asset is our people and we focused investments in them, particularly in the areas of business development and client service training. In order to accelerate our growth we also continued to recruit senior-level individuals who could rapidly deliver revenue. As part of this strategy and as I outlined on our Q3 call, we assembled an experienced business development team to ensure that the value of our litigation consulting service offerings is fully realized in the marketplace. And we are pleased with their contributions to date. As we move forward we believe they will be a contributing factor to our growth in litigation consulting, along with the greater focus on investment in business development and client facing activities by many of our consultants.

And as I discussed earlier, we continue to create a highly efficient and scalable infrastructure to lower our costs and foster increased productivity. We achieved this through a series of carefully targeted actions, which included better aligning staff levels with our revenue, renegotiating leases, and lowering our office rental expenses and limiting hiring within our administrative operations. Each action that we took was carefully targeted so as not to jeopardize our immediate and longer term growth prospects. And they enabled us to close the year as a leaner and more efficient organization.

Although we weathered a difficult start to fiscal 2010, we focused on these key initiatives and emerged with improved prospects for growth by year's end. We couldn't have reached this point without the efforts of our people and I want to thank them for their contributions.

Entering fiscal 2011 we are encouraged by the sequential growth we achieved in Q4 across many of our practices. Our goal is to be the consulting firm of choice for two of our equally important constituencies, our employees and our clients, for their most important and difficult legal, regulatory and business related issues.

Three key elements that will help to get us there and that will be the focus of our strategy going forward include -- continuing to build a structure that generates balance and profitable growth across the firm; developing stronger and deeper client relationships within our two main lines of business, litigation and management consulting; and investing in the professional growth and development of our people. These strategies taken together are focused on extending the momentum we established in the fourth quarter.

We enter fiscal 2011 better positioned for sustained growth, with an improving operating margin, a healthy operating cash flow and strong balance sheet and more efficient organization and an outstanding reputation. While we remain cautious about our clients spending environment, we see signs of business conditions starting to improve within our markets and we enter 2011 cautiously optimistic.

With that, I will now turn the call over to Wayne for his financial review. Wayne?

Thanks, Paul. To remind everyone, today's news release and my detailed prepared remarks are posted on the IR section of our website. I would like to begin my brief remarks this morning by touching upon a recent announcement to change our fiscal year-end. In mid-December our Board of Directors voted to amend our bylaws to shift our fiscal year-end to the Saturday nearest December 31 of each year from our historical fiscal year-end of the last Saturday in November. We believe the benefits of this change to CRA will be threefold. It provides for more consistent quarter to quarter comparison, it improves comparability with our industry peers on both a quarterly and annual basis, and aligns our reporting cycle with a more traditional fiscal calendar.

Under the new reporting schedule each year will now have 13 four-week quarters, beginning in fiscal 2011, compared with our prior schedule of reporting three 12-week quarters and one 16-week quarter. Our 2011 fiscal year began January 2, 2011 and will end December 31.

As a result of making this change to our fiscal year, we will report a five-week transition period running from November 28, 2010 to January 1, 2011. We currently expect to report the results of that five-week transition period during the first quarter. We will report the results of the comparable five-week stub period of 2009 at the same time.

I should also point out that we will not recast our previously reported 2010 results. Therefore, during 2011, when we report our quarterly results, those 13-week quarters will be accompanied by our previously reported results of fiscal 2010. This means that our 2011 quarterly results will not be directly comparable to our 2010 quarterly results. When we report each quarter during 2011 we will clearly point out the different periods covered. We believe the temporary comparability issues are more than offset by the benefits of a normal fiscal cycle.

I'd like to direct my remarks to some key metrics and factors that you may want to consider when assessing our performance for 2010 and beyond. In terms of consulting headcount, we ended the quarter with 548, up from 431 of senior staff and 117 our junior staff. For fiscal 2011 we anticipate continuing to recruit rainmakers and other hires who will enable us to improve our staffing leverage and keep utilization at an acceptable level.

We surpassed our utilization goal of 70% for the quarter with a rate of 73%. After a slow start to the year, our utilization continued on an upward trajectory as it began with 60% in Q1, followed by 65% in Q2 and 68% in Q3. Full year 2010 utilization was 67% compared with 69% for fiscal 2009. As we enter 2011 we are targeting utilization in the low 70s for the full year.

Our net revenue per consultant was $498,000 for fiscal 2010, down 1% from $501,000 for fiscal 2009. The decrease was due to lower utilization earlier in the year, partially offset by a small rate increase. For fiscal 2011, with a rate increase similar to level we achieved in the last couple of years and attaining the full year utilization goal I mentioned, our revenue per consultant should increase accordingly.

Our tax rate was approximately 42% in Q4 on a non-GAAP basis, the third consecutive quarter at that level. This reflects the progress we have made improving performance of our international operations at the beginning of the year, with a 58% non-GAAP tax rate in Q1. Based on our current outlook, our expectations for a tax rate in 2011 without the effect of NeuCo is in the low to mid 40s. For the year, as expected, we incurred non-cash interest expense of approximately $1.2 million for fiscal 2010 related to a new accounting standard for convertible bonds that was implemented at the start of the year.

The interest expense on the convertible bonds will end upon the expected retirement of the remaining bonds in June of 2011. Assuming the remaining bonds are outstanding until their likely redemption in June of 2011, the non-cash interest expense related to these bonds for fiscal 2011 will be approximately $228,000.

And lastly I'd like to spend a minute discussing our capital structure. During Q4 we repurchased $25.7 million of our convertible bonds. We were able to repurchase these bonds at a slight discount, which resulted in a cash savings to the Company of approximately $200,000. In addition, this repurchase will allow us to avoid cash interest expense of approximately $402,000 from the end of fiscal 2010, November 27, 2010, through June of 2011 when we expect these bonds to be redeemed.

That leaves us a remaining principal balance of bonds of approximately $21.9 million, which is redeemable in June of 2011. We concluded the year with cash and equivalents and short-term investment position of more than $80 million, so we have the capital ready -- readily available to retire the remainder of the bond obligation.

We also have a $60 million credit facility with RBS Citizens Bank that provides us with additional flexibility. This week we extended our credit facility for an additional two years through April 2014. The amended terms include more favorable compliance and availability ratios and a lower borrowing rate, which speaks to our financial position and strong relationship with RBS Citizens. As we address the remainder of our bond obligations in the months ahead, we will continue to update you on our capital plans.

That concludes my remarks, Jackie. We would now like to open up the call for questions.

(Operator Instructions) Our first question is coming from David Gold of Sidoti & Co.

Hi, good morning.

Morning.

So, a couple of questions there. First, can you speak a little bit on the 73% utilization. Obviously a pleasant surprise and a sharp jump sequentially. But your thinking is that, that eases back down going into the first quarter? It sounds like for the year maybe that it is not as sustainable as we'd like to see it. Can you just give some color on that?

Sure. Hi, David. What we've been very pleased about, even though 73% is not our long-term goal at CRA, as we have noted throughout this call is we saw improvements in utilization really across a number of our practices. And the other thing we were pleased is that the trending without -- through the quarter was also positive is terms of from beginning to end. We are not sure whether that is going to continue, but again, we're cautiously optimistic that we can maintain a utilization in the low 70%s throughout the year. So, the little fluctuations I really can't comment on, but the aggregate level we hope to achieve.

What makes you think though that it is more likely to say, to come down from here given the momentum in the business and the pickup. Is it a function of the hiring that you plan to do or is there something more to it or was there something one-time in the quarter?

I don't think we necessarily planned for it to come down from the area of the low 70%s throughout the year, what gives us some confidence, again, is the fact that the improvement is broad-based. So, there is a little bit of diversification that we are experiencing across the practices to create some stability in the utilization levels. But when we are talking about our outlooks, it is really with the assets we have. We're constantly looking for buying opportunities, both on individual hires and also any group hires that may exist, but this is really what the assets we currently have at CRA.

Okay. And then just on the litigation side, can you give a little color or sense, it seems like spending there eased a little bit and you are sort leave the beneficiary, but I think your comment was that, that was more on existing cases. Can you give some sense on what you think is happening there and why -- what is sort of pushing things along, is it statute of limitations or otherwise?

Yes, I wish I knew that. I am just grateful that we are seeing a little bit of loosening of the purse strings there. It is -- the improvement was not only through existing large dormant matters, but the lead flow that we've talked about throughout the year also was healthy throughout the quarter. So right now we haven't seen any kind of precipitous decline in that lead flow and so hopefully we will have a nice mix of existing older projects and new engagements.

Got you, got you. And one last for Wayne, if I might. He commented on anticipating rate increase for this year and was just curious if you can add some color there or how large an increase might you be expecting?

For the rate increase what we are expecting in 2011 is hopefully a pattern that we have experienced over the past couple years, which has really been a realized rate increase in the 3% to 4% range and that is what we hope to target into 2011.

Perfect. Thanks so much.

Thank you. Our next question is coming from Joseph Foresi of Janney Montgomery Scott.

Hi, guys. My first question here is I know we have had sort of upticks in litigation and downticks throughout the last maybe two years. Does this uptick, first of all, feel any differently than what you have seen before? It sounds like it is more broad-based. And secondly, how do we look at this versus some of the starts and stops in the last couple of quarters?

I think that is the biggest challenge for us is, is this the difference than what we have experienced in the past. I would have lost -- . Well, there have been other times that we have seen improvements and then we have seen the decline. The parts that make me cautiously optimistic is, again you touched upon it, it being broad-based across a number of our litigation-based practices. And the fact that lead flow continues to be on a healthy basis.

Okay. And so, I guess if we were looking at this from sort of the outside, as you looked at it compared to like let's say last year, does the process feel more normalized or is it too just too early to tell on any of those kind of metrics?

It is a little too early to tell. It's for the most part of this year, as you know, we are operating on a healthy basis, on a lower than healthy basis. We're never pleased to be operating utilization in the 60% range. So, 73% starts feeling a little more normal and is really a high point, as we noted, for the past two years. So, we hope that this will continue going forward.

Okay. Any utilization targets for this year?

I think we are going to target utilization in the low 70%s for the overall year. There may be some choppiness, but unless we see a dip in demand, hopefully we can maintain a steady level of performance.

Okay. One last question. On the M&A side we have seen activity pick up in the general backdrop in the number of M&A engagements. Do you see that as a driver or maybe you could just frame for us some of the potential catalysts as we head into 2011.

M&A activity is clearly a driver of both our litigation and management consulting activities. The activity overall has been choppy at best throughout 2010 and I think real sustained M&A activity is only going to come from sustained economic improvement. But with that said our competition practices has really done an outstanding job maintaining share and getting their number of cases there.

The other part, too, that gives me a little bit of optimism with respect to forward-looking is our management consulting activities, which has clearly seen a pickup over the past couple of quarters. The reason that gives me optimism is if you think about spending of clients in terms of level or degrees of discretionary spend, management consulting is typically more discretionary than that of legal and regulatory consulting. So the fact that we are seeing activity pick up across those areas I think bodes well for the overall consulting segment.

Okay, thank you.

Thank you. (Operator Instructions) Our next question is coming from Tim McHugh of William Blair & Co.

Yes, hi, guys. First wanted to ask a little bit on the expense side. Margins did improve sequentially, but some of the expenses jumped up a little bit on a sequential basis here, so I just want to dig into those a little bit and particularly, I guess, start with the business development costs and some of the SG&A. Were those more one-time items or is -- I know you have talked about investing in that area more. Is that more of a permanent increase in SG&A? Just want to understand kind of how to model forward and think about that expense line.

Let me address the business development side and then I will let Wayne try to address some of the more specifics on the expense side. The business development costs with respect to training and investing in our employees, I do expect that to continue going forward. And the fourth quarter was also the first quarter in which we had the full expense of our business development team, the hires that we did during August and September of 2010. Now those expenses weren't completely offset yet by incremental revenue generated by that team. So, once their operations becomes more steady state, I think as a percent of revenue you should see those costs sort of minimize.

Hi, Tim, it's Wayne.

Yes.

In terms of the other items in SG&A in inference of the absolute dollars, in Q4 we had our annual officers meeting, which we tend to run up a fair amount in the travel costs and downtime and so forth. So, that is certainly one of the items that is Q4 unique.

In addition, the performance payments were a little bit higher, which are the amount of commissions effectively we paid to outside consultants that are in SG&A costs. And then we have, as I think we've mentioned in prior calls, the significant systems project that is going on and there are some cost that are in the quarter that relate to that as well. Those are the principal items that I think account for the increased dollars in the SG&A category this quarter.

How are you going to think about the expenses? Hopefully we're in a sustained environment here where revenue is going to start to recover consistently, but as expenses tend to creep back you have taken a lot out. Are you going to think in terms of an incremental margin, is it a timeline that you want to get back to your prior margins? How are you going to think about letting expenses come back into the business?

I think we're definitely looking to get back to our historical margins on the SG&A side. As a percent of revenue we actually hope to have some small incremental reductions on that line. So, we are not looking to expand, we feel our current infrastructure base has the capability to actually add significant revenue without any kind of significant increases. So, we hope that small revenue growth would actually lead to substantial profit growth in our segments.

And then can I ask on the gross margin the utilization rate was very good, but -- and jumped a little bit sequentially, but the gross margin is down a little sequentially. I know you mentioned incentive payments in your prepared remarks, Wayne. Is that just reflecting the improved demand for consultants or were those recruiting costs? What prompted the increase and, I guess, with the higher utilization, why. Wondered if you have seen an improvement in that line?

Well, Tim, in terms of the cost, the SG&A cost, it was effectively the cost of the compensation cost in total, both the base and incentive compensation that drove the levels in Q4. I think that our view as we go forward, much like the SG&A conversation we just had, is that as revenues come up, and we obviously expect they will and we think we have just completed a third quarter of continued improvement after a very tough couple of years with the economy being off, that those ratios, the percentage of the gross margin, the SG&A percentage and operating income, all will start to come back to a level that we have been shooting for, for really a couple few years now.

Okay. Great. And then on the antitrust side, is it fair -- it sounds like basically -- or the competition practice, as you call it, you never saw the weakness there that others might have seen, but you didn't seem to describe that as one of the areas that has been improving quickly for you lately. Is it fair to call it kind of flattish still, just holding its own?

Yes, I would call it flattish, but let me put an asterisk on that. It is flattish because it has not really incurred the dip in demand and output that many of our other practices have over the last two and one half, three years. So it has sustained performance on a revenue basis and sustained performance on a margin basis during that time. So, it has really sustained performance on a revenue basis and the same performance on a margin basis during that time. So, flattish from a good starting point.

Okay. And then my last question is on the GIC, can you elaborate a little more? Is that the Middle East work, is that M&A projects, or just broad discretionary spend improving?

I think a lot of the GIC improvement has been in North America. So, we are clearly seeing some improvements there. There has been improvements in terms of the combining of our legacy GIC resources with that of our new Marakon colleagues. So that is offering our clients some expanded services to help them benefit on their strategies. So it has been largely increase of activity in North America, modest increases in the Middle East, but again largely US-based.

Okay. And then just one more if I could quick. Is it fair to still think two-thirds of the revenue is litigation and one third business or has the addition of Marakon and the growth of that changed that mix at all? I think that is pretty fair to say. Yes, about two thirds, one third is still the split. We have seen a growth in aggregate in the management consulting fees, so we have also seen some improvements on the litigation side. Okay. Thanks, guys.

Thank you. (Operator Instructions). Thank you, there are no further questions I would like to hand the floor back over to management for any closing comments.

Again, I just want to thank everyone for joining us this morning. We really do appreciate your time and attention and look forward to updating you on our progress in the quarters ahead. With that, this concludes today's call. Thank you, everyone.

And that concludes our conference call. Thank you for joining us today. You may disconnect your lines at this time.