CRA International Inc (CRAI) 2011 Q2 法說會逐字稿

Good morning, and welcome to the Charles River Associates' second-quarter 2011 conference call. Today's call is being recorded. You may listen to the webcast on Charles River Associates' 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 Charles River Associates' 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 to Mr. Mackie. Please go ahead, sir.

Thank you, Daniel. 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 upon 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 today's news release and prepared CFO remarks.

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 the GAAP equivalents. In addition, I should point out that this marks the second quarter under our new fiscal year-end which shifted on 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, 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 previous reported 2010 results. This means that our 2011 quarterly results will not be directly comparable to our 2010 quarterly results. Our Q2 fiscal 2011 results reflect a 13-week quarter which ended July 2, 2011 compared with the 12-week quarter we reported for fiscal second quarter of fiscal 2010 which ended May 14, 2010.

We have also included a sequential comparison of Q1 of this year, which was 13 weeks in length. I would also like to remind everyone that today's news release and my prepared CFO remarks are posted on the IR section of our website. I will not be reading these remarks today.

Now let me turn it over to Paul Maleh for his report. Paul?

Thanks, Wayne, and good morning, everyone. Thank you for joining us today. In Q2, CRA delivered another quarter of solid top and bottom line results with positive contributions across nearly all of our primary practice areas including a particularly strong performance from our international operations. We saw continuation of the broad based demand for our services that we experienced in the past several quarters. While overall economic uncertainty continues to be an underlying factor in the markets we serve, we saw more clients moving ahead with their consulting projects and we maintained an active schedule of litigation activity. As a result, we grew our non-GAAP revenues by more than 20% year-over-year and 3% sequentially while substantially increasing our profitability. Overall Q2 was a good quarter for us. We are pleased with how the business performed and want to thank our employees for a good quarter.

There are a few highlights I'd like to focus on to provide you with additional insights into our performance.

First, as was the case in Q1, our results this quarter were driven by broad-based demand, which was encouraging. Both our litigation and management consulting businesses generated growth in the quarter on a sequential and year-over-year basis lead by an uptick in our global industrial consulting practice and another solid quarter for Marakon, our management consulting business was up more than 50% from Q2 a year ago. At the same time, our litigation business, on the strength of our competition demands practices, also contributed to our year-over-year growth.

We are particularly pleased to see competition, which is our largest practice, continue to be extremely active and deliver high levels of performance. As we announced during the quarter, our competition practice was retained by Sprint Nextel to analyze the competitive effects raised by the proposed AT&T/T-Mobile merger with the team lead by senior consultants Steven Salop and Stanley Besen. Our analysis in this high stakes case was submitted to the Federal Communications Commission as part of Sprint Nextel's commission -- petition to deny. CRA economists all submitted a response to AT&T's rebuttal to the initial submission and participated in a day-long FCC economics hearing. CRA economists also participated in a hearing before the California Public Utilities Commission that is also reviewing the deal. Our work in this matter is ongoing.

In addition, the performances of other practices during the second quarter such as life sciences, labor and employment, auctions and competitive bidding and financial economics also demonstrated continued strength.

Second, our international operations had a solid quarter. International operations accounted for 29% of our total revenue during the quarter, the highest level since the fourth quarter of fiscal 2009. The increased international contribution further enhanced our profitability and helped to lower overall tax rate in the quarter to 37% on a non-GAAP basis.

Third, our focus on broadening our client relationships and on business development and client facing activities continued to generate positive momentum. These efforts proved effective as our lead flow and closure rates on new engagements were steady. The broad-based improvement in demand for our services, the strength in our international operations and our client facing activities enable us to achieve utilization of 74% for the quarter consistent with the 75% level we had in Q1. We are encouraged by our strong start in utilization in the first half of this year and we are continuing to pursue opportunities to better leverage our staff.

Fourth, our results in Q2 demonstrated that we began to fully benefit from being a leaner organization and from continuing to simplify our internal processes and better allocate our resources. These focus areas, in concert with our revenue growth and ongoing emphasis on highly managing expenses, enabled us to achieve double-digit non-GAAP operating margin for the second consecutive quarter. This was the first time we achieved two consecutive quarters of double-digit non-GAAP operating margin since fiscal 2007.

We also significantly improved our SG&A as a percent of revenue. Our non-GAAP SG&A improved to 20.8% in the quarter compared to 21.8% in Q1 of this year and 22.2% in the year ago quarter. Commissions to non-employee experts, which are included in non-GAAP SG&A, represented 1.6% of revenue in Q2 compared with 1.5% in the first quarter of this year and 1.9% of revenue in the Q2 of last year.

And lastly during the quarter, our remaining $21.9 million of subordinated notes were retired, thereby lowering our interest expense going forward. Wayne will discuss our capital structure and financial position in his remarks, but the company's financial position remains strong.

Our efforts to deepen our client relationships are working. The business development team we added late last year continued to augment our litigation consulting business. They broadened the awareness of the CRA brand within our existing law firm clients and worked to establish relationships for us at additional firms. And within both litigation and management consulting businesses, we continue to invest in training opportunities for our consultants with particular focus on advancing their business development skill. The steady flow I mentioned was due in large part to all of these outreach efforts, and while we are pleased with the progress, we continue to temper our overall enthusiasm in light of the current economic uncertainty that could potentially slow the pace of litigation related activity and limit spending on major consulting projects.

We also continued to selectively hire throughout the first half of this year and in Q2 we welcomed several notable additions to our staff. Late in the quarter, we welcomed Professor Damien Neven, former Chief Economist at DG Competition, as a Senior Academic Consultant to our competition practice. During his successful tenure as Chief Economist, he led a major expansion of the Chief Economist team to nearly 30 highly trained economists. We are delighted that he is now part of our team as there are few academic economists in the world who share Professor Neven's knowledge of competition issues from both a regulatory and academic standpoint.

Another prominent hire for us was the addition of Craig Elson and his nine-person team, which includes two senior individuals, Renee McMahon and David Wensel. All three are now vice presidents and have substantial experience in valuation and solvency matters. Craig was formerly senior managing director at LECG and previously ran the Chicago office. He is a renowned expert in his field and has significant experience with the economic, financial, accounting, and valuation aspects of commercial litigation. The arrival of Craig's team reflects our strategic objective to recruit highly experienced experts who can supplement our service offering and the value we provide our clients.

Before turning the call over to Wayne, I'd like to briefly offer some views on our year-to-date performance. In the first half of 2011, we experienced good momentum around generating balanced and profitable growth across the company. Our lead flow and closure rates on new engagements were steady. As we enter the second half of the year, we continue to see positive indicators for demand across our lines of business.

Looking ahead, we believe CRA is well positioned for profitable growth across the majority of our practice areas as market conditions continue to improve. CRA is an attractive destination for consultants, and we intend to continue to be aggressive in recruiting rainmakers that can further drive profitable growth in our practices. Overall, we remain optimistic about the growth prospects for our business in 2011.

With that I will now turn the call over to Wayne for some financial highlights. Wayne?

Thanks, Paul. Before talking about some of our forward metrics, I wanted to highlight one item on our income statement. The restructuring adjustment to our pretax Q2 2011 results of $1 million is related to the leased office space at our former Houston office. The reason we are making that adjustment this quarter is related to our assumptions about subleasing and occupancy going forward. It's important to point out this charge does not reflect any new restructuring activity on the part of the company this quarter. While expense management remains important to us, as Paul highlighted, our emphasis now is on driving our business forward and leveraging assets we have, not on additional restructuring.

With that, let me call your attention to some key financial metrics and factors that you may want to consider when assessing our performance. One, in terms of consulting headcount, we entered this quarter with 519, of whom 385 are senior staff and 134 are junior staff. This is essentially flat with the 518 we reported in Q1 and 520 we began with in fiscal 2011. As Paul highlighted, we continue to concentrate our hiring efforts on recruiting rainmakers and selectively making other key hires that will enable us to increase our staffing leverage and maintain acceptable levels of utilization.

We were pleased with delivering another quarter of mid 70%s utilization and we now stand at 75% for the first half of the year. The combination of higher revenues and prior restructuring is having the desired effect on our utilization performance. Going forward, while we are cautious about the potential for economic volatility to disrupt our momentum, we are targeting utilization of low to mid 70%s in the second half of the year.

Our net revenue per consultant in Q2 was $153,000 compared with $148,000 in Q1. If you were to analyze our first half performance, you would get approximately $603,000 for fiscal 2011. This compares very favorably to the $498,000 we reported for fiscal 2010.

Our net revenues per consultant in Q2 -- turning to our tax rate, it is approximately 37% in Q2 on a non-GAAP basis. We are very pleased to report a rate below 40%. As Paul pointed out, our international operations had a solid quarter, enabling us to manage our overseas tax obligations and lower our overall corporate tax rate. Based on our current outlook, we now expect our 2011 full year non-GAAP tax rate, which excludes the effect of NeuCo and restructuring, to be in the mid-to-high 30%s.

With the repurchase of the remaining principal balance of convertible bonds of approximately $21.9 million in Q2, we now have essentially no long-term debt, although I should note that we continue to have a $60 million credit facility to access if we choose to. Over the course of the past several years and prior to the $21.9 million repurchase, we bought back approximately $68.1 million in bonds at a discount ahead of our retirement obligation. In doing so, we saved approximately $2.2 million. Since the beginning of fiscal 2010, including the final $21.9 million repurchase, we have repurchased $62.5 million of our bonds using internal cash, which reflects the strength of our business model and capital position. Even with the large bond repurchase this quarter and $1.4 million in stock buybacks, we concluded Q2 with nearly $52 million in cash, cash equivalent and short-term investments.

And lastly, I would like to highlight that the change in our fiscal year is going to create an uneven year-over-year comparison in the upcoming Q3 results. Under our former fiscal year structure, the third quarter was typically a 16-week period as it was in fiscal 2010; however Q3 2011 will be a 13-week period and will not be directly comparable with a three-week difference in reporting periods. Therefore as we did this quarter, we will continue to incorporate sequential information in our announcement for the reminder of the fiscal year. Even though there is some seasonality in our business, we believe we will provide investors with a more equal quarterly comparison to help evaluate our performance.

That concludes my remarks, Daniel. Would you now -- we would now like to open the call for questions.

(Operator Instructions). Our first question is from Joe Foresi of Janney Montgomery Scott. Caller, please proceed with your question.

Hi, Paul and Wayne. This is Jeff Rossetti in for Joe. Congratulations on the quarter. Just wanted to see if you could maybe talk a little bit more about the practices in the international that performed well?

Sure. I'll start with international. International positive performance you saw in Q2 is really a continuation of the great contribution that we saw in Q1. That performance is really driven by what I would say all three major business units of our international operation, starting with our European competition practice, had significant penetration during that time period. The Marakon Group, with a couple of significant engagements, continued to contribute. And also the Middle East performed solidly during that same time. Overall on the firm, as we continue to stress over our script is that it was a broad based demand. Litigation and management consulting both had very strong quarters. And within litigation, it was across the major lines of business from competition to finance to life sciences to even some of the smaller business units.

Okay. Thanks. And your expectation for maybe utilization to trend down a little bit in the second half, is that equally distributed due to seasonality and maybe some of the macro headwinds that might impact the ligation environment?

We're going to continue to strive to drive utilization as high as we can. And we're forecasted to try to have utilization in the low to mid 70%s for the remainder of the year. there is going to, of course, be some seasonality impact through the summer months, and also in the holiday season to come during Q4. But our goal is to continue the patterns that we've been achieving.

Okay. And then just on the use of cash, it look like you started to buy back some shares, any plans to do that now that you've retired that outstanding debt going forward?

I think share purchases, particularly where our price has been, is a very good investment to this firm. So, we bought back shares during Q2 and we will continue to look for such opportunities in the quarters ahead.

Just maybe a couple more if I could. Paul, you spoke about the business development team. Could you maybe talk about the closure rates or just the competitive environment with how you are going to market and if it's changed at all how CRA have increased its competitive advantage at all?

I don't think we are back to 2006, 2007 sort of activity level. But if I were to look at the activity levels during Q2, it is very consistent with that kind of activity that we saw during Q4 of 2010 and Q1 of 2011 in terms of lead flow coming in. I think we are steadily improving our closure rates or our hit rates in terms of once presented the opportunity and that credit goes to a lot of people, not just the business development team, but our consultant is just doing a better job bringing the best talent to bear.

Okay. And last if I could, just on any changes in attrition and just the availability of -- are you seeing more competition for those rainmakers out there to -- from other competitors to add on to your senior hires?

I think competition for good staff is always going to be hot and heavy, particularly now when there is capacity in our sector. We continue to be aggressive in their pursuits. But we are first and foremost looking for individuals who can fit into our portfolio and deliver the quality of services that we've grown accustomed to. With that said, the number of opportunities that are being presented to us remains about as high as I've seen in the past several quarters.

Okay. And there is no real pickup in attrition at all, if you've seen at all on the lower level or within any managing directors?

On the lower level is really has a cycle to it. Our junior staff stayed typically on the litigation side for about two to four years and the turnover happened during the summer months with exits usually in the beginning of the summer and reentry of new staffs towards the end of the summer, early fall. So, I haven't seen anything really atypical from that pattern. On the senior staff front, it has really been consistent with what we've seen over the past several quarters.

Okay. Squeezing one more in, if I could. Just the SG&A that's something that you've been able to holding -- don't see any change in your ability to hold that going forward?

No, I mean we talk a lot about our consulting staff doing a tremendous job. I think our administrative unit and corporate units deserve a lot of credit for constantly trying to find more efficient processes and systems that enable us do more with less. We continue to believe we can leverage that SG&A, but we are starting to see more of the full benefit there from the actions we've taken in the past 12 to 18 months.

Okay. Thank you very much.

Thank you.

Our next question comes from Tim McHugh of William Blair. Caller, please proceed with your question.

Hi. This is actually Matt Hill in for Tim this morning. Talking more about the recruitment of rainmakers, that sort of thing. Do you guys see a point or what would you actually need to see happening in your business where you would begin to start leveraging up that operating model bringing in more junior consultants?

That's a good question. Because, I am sure, we have been able to drive down SG&A as a percent of revenue. We are very pleased with that. But we have some work to do on the gross margin line and that gross margin line has really been impacted by two or three major areas. And one of those areas exactly what you are raising is the leverage that has been taken out of our model over the past two to three years through restructuring activity. We are -- it's been a focus of our practice areas to begin reintroducing leverage effectively into our business model, but that is not an adjustment one can make in one quarter. So, I think hopefully you will start seeing the impact in the next 12 to 24 months as we begin trying to reverse that.

Okay. And then just one more, are you seeing any changes in your operations in the Middle East with any the geopolitical stuff going on over there?

We continue to evaluate the Middle East. It's performing in an acceptable manner. But we continue to evaluate it in terms of with the -- certainly the political environment there and where it fits into our continually evolving business, but at the moment it continues to grow along.

Okay, great. Thanks.

Our next question comes from David Gold of Sidoti & Company. Caller, please proceed with your question.

Hi. Good morning.

Good morning.

Wanted to flush out a little bit more if you can, what you are seeing on the litigation side? And presumably it's starting -- things are starting to ease or open up there a little bit more. But, can you speak to more directly what you are seeing and any color you can put as to as the court calendars opening up or is it just folks are eager to spend?

We are starting to see a little bit of the backlog that has happened over the past year or two in terms of case which is finally beginning to come. I couldn't tell you whether that's because of the court calendars are opening or clients or just deciding to move forward with their defense or prosecution of these matters. But, we are seeing activity clearly, pickup and that's really across the number of litigation areas, whether from antitrust securities or more general commercial damages.

Okay, helpful. And then we can shift a little bit to head count and sort of hiring plans. One, Wayne can you just go over again both head count and then if you can give us a quarter end number? And then two, more broadly, Paul, you can comment about looking for rainmakers, but you can give us a sense for how many folks you would like to add between now and say the end of the year?

Sure. We ended Q2 with a total consulting head count of 519 and that is comprised with 385 senior staff and about 134 junior staff. Even at those levels we believe that there is significant capacity without adding more bodies because the utilization is where it is. We're going to let the revenue drive our hiring plans. I still don't feel comfortable enough with the economic conditions to hire ahead of demand. So, we are going to have demand develop and then fill in. I think the labor markets are still conducive to that approach right now.

Got you. Okay. Perfect. Thanks.

Thank you.

It appears there are no further questions at this time. I would now like to turn the floor back to management for closing remarks.

Again, thank you to everyone for joining us today. As always, we appreciate your time and interest in CRA and look forward to updating you on our Q3 conference call. This concludes today's call. Thank you, everyone.