CRA International Inc (CRAI) 2011 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Charles River Associates first-quarter 2011 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, Dan. 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. In addition, this marks the first quarter under our recently changed fiscal year-end from the last Saturday in November to the Saturday nearest December 31. Under the new reporting schedule, each year will now have four 13-week quarters, beginning with this quarter, 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, 2011. I should also point out that we have not recast our previously reported 2010 results. This means that our 2011 quarterly results will not be directly comparable to our 2010 quarterly results. As we report each quarter, we will clearly point out the different periods covered. We believe the temporary comparability issues are more than offset by the benefits of a more traditional fiscal cycle.

Let me now turn it over to Paul Maleh for his CEO report. Paul?

Thanks, Wayne, and good morning, everyone. Thank you for joining us on today's call. On our call with you in January, we spoke about the positive momentum we experienced as we concluded fiscal 2010, and I'm pleased to report that our performance in the first quarter of 2011 continued this trend. The net result is solid Q1 revenue performance, improved margins and higher earnings per share. There are a few highlights of our first quarter performance that are particularly encouraging.

First, we continue to experience broad-based demand for our services. We experienced momentum around new engagements within both our litigation and management consulting businesses, particularly in our competition, finance and Marakon practices. The performance of other practices such as life science, labor and employment, options and competitive bidding and financial economics also demonstrated continued strength. Geographically our international operations had a strong quarter, with solid contributions from Europe and the Middle East.

Second, our focus on client-facing and business development activities continued to gain momentum and helped to drive our utilization to 75% for the quarter, our highest rate since fiscal 2007. We are pleased with the strong start to the year, and we will strive to exceed our fiscal 2011 goal of low-70s utilization.

Third, we delivered double-digit operating margins for this quarter for the first time in more than two years. The combination of higher revenue, our focus on tightly managing our SG&A expenses and better allocating our resources drove our non-GAAP operating margin to 10% this quarter. Non-GAAP SG&A as a percentage of revenue decreased 21.8%, compared with 25.3% a year ago and 22.3% in Q4 of fiscal 2010. Commissions to non-employee experts, which are included in non-GAAP SG&A, represented 1.5% of revenue in the first quarter of 2011 and the first quarter of fiscal 2010, 2.5% in the fourth quarter of fiscal 2010. We are beginning to realize the full benefits of the restructuring actions we have taken in recent quarters.

Looking at the goals we have set out this year, our efforts to deepen our client relationships proved effective during the quarter. Within litigation consulting, the business development team that was assembled in late 2010 continued to enhance their lead flow. They worked with individuals across the firm to not only expand and extend our relationship with existing law firm clients but also to introduce us to new law firm contacts.

To further support our organic growth, we continued to invest in opportunities for consultants from across the company to advance their business development skills. In addition, during the quarter we welcomed several senior-level consultants in various geographies, including California, Massachusetts, New York and Texas, where we re-established a presence in the Dallas market. Bruce Fortenbaugh joined CRA as a vice-president in our labor and employment practice located in our Oakland office. Bruce has considerable experience in providing economic, financial and statistical analysis related to litigation matters. Also, in California Dr. Darrell Williams became associated with our competition practice as a senior consultant. Darrell is a former staff economist at the President's Council of Economic Advisors and a former financial economist at the FTC. Dr. Michael Salinger joined our competition practice as a senior advisor located in our Boston office. Michael is a profess of economics at the Boston University School of Management and previously was director of the Bureau of Economics at the FTC. In New York, Peter Chen joined CRA as a vice-president in our transfer pricing practice. Peter is a CPA and attorney and has extensive experience advising corporations in both China and the US. Jeffrey Matthews joined CRA as a vice-president in our Dallas office, who has significant experience in financial investigations, forensic accounting and litigation support.

While these efforts helped us create an active project flow, clients have continued to carefully manage their spending. For our litigation business, we have been encouraged by the report about more activity in the overall M&A market and about a regulatory environment that may be more open to enforcement, which tends to enhance demand for our regulatory expertise.

Our management consulting business also saw pickup in activity in several large consulting engagements that have strengthened our utilization and revenue.

We believe as market conditions improve, we are well positioned for profitable growth. In addition, we continue to maintain a strong financial position. Wayne will provide some additional comments about our capital structure, but we concluded the quarter with more than $80 million in cash and equivalents and short-term investments. CRA's reputation and financial strength allows us to actively pursue talent acquisition opportunities that bolster our portfolio of services and geographic footprint.

In closing, let me just say that we are encouraged by the strong start to the year. We are in a position to benefit from our leaner organization and a business model that can be profitably leveraged as revenue expands. Our employees have done an excellent job in raising awareness about our services to clients and in maintaining expense vigilance, and I want to thank them for their contributions during the quarter.

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 prepared CFO remarks are posted on the Investor Relations section of the Company's website. As I've done in previous calls, I want to call your attention to some key financial metrics and other factors that you should consider when assessing our performance. In terms of consulting headcount, we ended the quarter with 518, of whom 406 are senior staff and 112 are junior staff. This is essentially flat with the 520 we began the quarter with. Going forward, we anticipate continuing to recruit rainmakers and selectively making other key hires that will enable us to increase our staffing level and maintain utilization at acceptable levels.

As Paul mentioned, we surpassed our utilization goal of the low 70s with a rate of 75% for the quarter. Excluding the five-week transition period, our utilization has now improved in five consecutive quarters as we continue to benefit from a combination of higher revenue and prior restructurings. We are extremely pleased with this upwards trajectory and our performance in Q1, and we are continuing to strive to exceed target utilization in the low 70s for the remainder of 2011.

Our net revenue per consultant was $148,000 in Q1. To give you a true apples-to-apples comparison for this metric, if you were to annualize that number, you would get approximately $592,000. This compares with approximately $498,000 for fiscal 2010.

Turning to our tax rate, it was approximately 40% in Q1 on a non-GAAP basis, which is now our fourth consecutive quarter at the low 40s level. We are pleased to have brought some consistency to that number, which is indicative of how we have improved our international operations and managed our overseas tax obligations. Based on our current outlook, we expect our tax rate for the full year of 2011 without the effect of Newco to be in the low to mid 40s.

We currently have a remaining principal balance on preferable bonds for approximately $21.9 million, as we did not purchase any during the transition period or Q1. Bond holders have the option to put the bonds to us on June 15, 2011. In addition, CRA has the option to call the bonds any time after June 19, 2011. Assuming a stock price below the $40 conversion price, bond holders will receive par value of the bond in cash if they exercise their right to put the bonds. CRA has not made any final determination as to whether and when we might exercise our right to call the bonds in the event the bond holders choose not to exercise their right to put the bonds. However, we have the capital resources to easily retire the entire obligation as we ended Q1 with cash, cash equivalents and short-term investments of more than $80 million. In addition, we have a $60 million credit facility that could provide us with additional flexibility. If we elect to call the bonds, we will issue a public announcement.

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

(Operator instructions) Tim McHugh, William Blair & Company.

Just first want to ask a couple things. I guess one of the areas you talked about in strength is the Middle East and the national operation. Given some of the geo-political events over there, can you talk if there's been any impact or if there's any concern about potential impact, and how your business sits around some of the events over there?

Yes. The disruption there, I guess our first concern was about the safety of our employees, so we took various steps during the first quarter to ensure their safety during some of the disruptions, particularly in Bahrain. During that time, our consultants continued to service their clients in the region, either through our Riyadh office or from our other locations. Lead flow, despite the disruptions, has been relatively stable for the time being, but it is something we are closely monitoring.

Okay. And your commentary about trying to target a low 70s utilization for this year, considering the first quarter performance was better than that, I guess is there anything you're seeing in the business or was there any abnormally large projects in the first quarter that pumped that up? Or is there seasonality just that you expect the second half of the year not to be as strong because of vacation? Just trying to understand your thinking there.

No, I guess our thinking is if I look at the characteristics during Q4 of this year, a lot of those same characteristics still applied during Q1. The only reason I raise that, I'm not seeing any abnormal activity in any particular practice area or any large project that drove that. It is broad-based demand across both litigation, management consulting and across a number of the practices within each group. So those same characteristics still apply, which is giving us the confidence that we have right now in our outlook.

Okay. And then Wayne, on the SG&A here, you've kept it kind of stable. You said you're starting to get some of the benefits of the restructuring costs. I know last quarter you talked about investing in business development and some training and other things. How should we think about SG&A over the rest of the year? Is this a relatively stable level, or is there other things that you might want to invest in a little bit so we might see some growth in that? Any help there?

We don't anticipate to see any growth in the SG&A. We would expect for that level to stay relatively constant or slightly decline as revenue expands. But we've been very diligent on maintaining those cost levels, so I don't see any reason why our business model wouldn't hold even given increased revenue.

Tim, the other thing I would add is that what we have done, I think you mentioned the business development initiative we instituted this past fall. That continues rolling along, so that's built in to our current SG&A expenses and the percentage of revenue they represent and will continue to. So we certainly made some very significant reductions in SG&A, but we've also added some of the critical things to facilitate growth, like the business development effort, training and development of our people and some marketing expenditures as well.

I mean, the focus has really been trying to add more value to our consultants, to try to drive revenue growth there. So there were tradeoffs that we had to make and decisions we had to make, but those decisions were driven at keeping that SG&A level constant or slightly declining.

Okay, great. And then the last question I was going to have was on the anti-trust and competition practice that you said was relatively strong for you. I just wonder if you could elaborate on what you're seeing there. The people I've checked with have told me it's -- are giving me mixed feedback on that sector, but it sounds like you're doing pretty well there right now.

Yes, that practice both in North America and also in Europe has just been exceptional for the last several years, and that strength is continuing in the marketplace. We're getting positive signs in the market by seeing relatively strong M&A activity and signals that it might even improve in the quarters to come. There's been a lot of discussion by both the US Commissions and the European Commissions of increasing the level of enforcement. And I think all those factors continue to benefit a strong practice. And the fact that they delivered during weak economic conditions gives us a lot of confidence that they're going to deliver in even stronger ones.

Okay, great. Thanks a lot.

Thanks, Tim.

David Gold, Sidoti & Company.

I just wanted to delve a little bit more into the utilization question. Essentially, I guess what might be helpful would be from where we sit with the 75% utilization in the first quarter, pointing as I think Tim mentioned to low 70s suggests some step down. Now, we know there's some seasonality, but maybe you could give us a sense for how detrimental, say, the month of December was, if we go back a year or so. Just to give us more of a sense of apples to apples. Or maybe month-by-month utilization, say, December to March. Would that be possible?

Sure. A year ago, we ended the quarter Q1 2010 with a utilization of 60%. December of 2010 was a soft quarter, but again, ending a quarter in 60% also tells you that January and February weren't particularly strong, either. So I don't think the seasonality is really the driver of the increase of the utilization here. The other thing I would note, even though our target, we're maintaining our target of low-70s utilization, that's by no means we're trying to provide any signal of a decrease in performance in the future quarters. We'll continue to strive for the higher levels, but with that said, I wish I could say my visibility provides me the accuracy to give you 100 or 200 basis point difference in that number.

Got it. But I guess presumably as we sit today, are we holding strong in the 70s, 75, say?

That's what we're working towards, yes.

Okay. And then I guess part two, can you give some update both on headcount numbers and targets for the year?

David, we don't project headcount numbers. I gave a few numbers a couple of minutes ago as to where we are, where we are at the end of the quarter and the beginning of the quarter. We do expect to add some people during the year, but we're not talking about large numbers. Again, we're focused on rainmakers and senior folks that can help us drive revenue.

Got you. Thanks.

Thank you.

Jeff Rossetti, Janney Montgomery Scott.

Thanks for taking my question. Paul, I know you mentioned earlier just some of the regulatory enforcement that was picking up and impacting your competition practice. I just wanted to see across the other practices how regulatory enforcement is changing and impacting CRA.

I don't know as much about the regulatory enforcement on the other practices, but clearly M&A activity is something that does have an impact on a number of different businesses ranging from legal regulatory all the way to management consulting. So a stronger economy, more willingness of firms to look at acquisition opportunities provides more consulting matters. But probably on the pure enforcement side of things, the competition probably enjoys most of that benefit.

Okay, thanks. And I think I guess, Wayne, you just addressed this, but the higher level of utilization doesn't change your position as far as the headcount at all. If you were to continue this higher level, it may be in the mid 70s. You wouldn't increase recruitment or any strategy, just focusing on rainmakers?

I think we're focused on rainmakers going forward. I think this model can run at a higher rate than 75%, so we're not at capacity by any means. There's always a desire to try to improve our leverage within the organization. That has taken a negative impact over the past couple of years. But that is more opportunistic. We will not let staff or numbers of staff lead our demand here because we do have the capacity built into the business.

Thanks. Congratulations.

Thank you.

Gentlemen, there are no further questions at this time. I would now like to turn the conference back over to Paul Maleh for any closing or additional remarks.

Again, thank you to everyone for joining us this morning. We appreciate your time and attention and look forward to updating you on our second-quarter conference call. This concludes today's call. Thank you, everyone.

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect your lines at this time.