CRA International Inc (CRAI) 2011 Q3 法說會逐字稿

Good morning, and welcome to Charles River Associates' Third 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, Melissa. 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 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 in 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 Securities and Exchange Commission and in 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 equivalent.

I would like to remind everyone that the Q3 results we will be discussing today reflect our new fiscal year reporting schedule. Under this 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.

I should also note that we have not [rehashed] our previously reported 2010 results. This means that our 2011 quarterly results are not directly comparable to our 2010 quarterly results. Our Q3 fiscal 2011 results reflect a 13-week quarter, which ended October 1, 2011 compared with the 16-week quarter we reported for Q3 of fiscal 2010 which ended September 3, 2010.

We have also included a sequential comparison to Q2 of this year which was an equivalent 13 weeks in length. As a result, on this call we will discuss some normalized non-GAAP financial information for the quarter and fiscal year-to-date periods ending September 3, 2010.

This presentation basis is intended to convert the 16-week and 40-week periods to an as if 13 and 39-week periods respectively in order to provide an equivalent comparison to financial information for the 13 and 39 weeks ending October 1, 2011, respectively. I would also like to mention that today's news release and my prepared remarks are posted on the IR section of our website. I will not be reading these marks today.

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

Thanks, Wayne, and good morning, everyone. Let me start by saying that our results for the third quarter fell short of our expectations. Our non-GAAP revenue for the third quarter was $69.4 million down from $79.6 million for the second quarter of fiscal 2011.

As outlined in our release this morning, we experienced lower than expected revenue this quarter primarily due to project completions and the slowdown in activity of several large products within our management consulting business.

As a result of the scale of these engagements, the contribution of our management consulting business was below expectations for the quarter, particularly overseas. International revenue accounted for 24% of this quarter's revenue compared with 29% in the first half of this fiscal year, and 28% in the third quarter of 2010.

Our management consulting business typically represents approximately one-third of our revenue. Year-to-date, our management consulting business revenue grew 25% on a normalized basis compared to the three-quarters of a year ago. During Q3 a number of new assignments began, and other projects entered new phases.

For example, for a specialty paper converter, we were engaged to develop a business plan for accelerated commercialization of a new technology, and another assignment of the follow-on to working with an oil field service provider, we were asked to extend our work into the overall corporate strategy as well as due diligence support of the target acquisition.

Comparing Q3 2011 to Q3 of a year ago on a 13-week normalized basis, revenue in (inaudible) chemical strategy and auctions and competitive bidding grew nearly 25%, 40%, and 60% respectively. However, the scale and the number of management consulting engagements that came to an end abruptly have slowed considerably during the quarter made it difficult to immediately and seamlessly transfer staff to new projects.

We believed this was a temporary pause in the long-term growth trajectory for a management consulting business and we remain optimistic about its business prospects.

Turning to our litigation business, which typically represents two-thirds of our revenue stream, we maintain an active schedule of litigation activity in Q3. While we saw some expected Q3 seasonalities, the overall performance was consistent with what we experienced in the first half of the year. If you normalize Q3 2010 to a 13-week, basis, for comparison purposes, our litigation business in Q3 2011 grew by more than 10% year-over-year, and nearly 10% on a year-to-date basis compared to the same period in fiscal 2010.

In Q3, our litigation business was led by solid contributions from competition and finance, two of our largest practices. They participated in several significant projects. For example, competition practice continues to work on behalf of Sprint-Nextel and its opposition to the proposed AT&T/T-Mobile merger.

CRA's analysis was submitted to the Federal Communication Commission as part of Sprint-Nextel's petition to deny. During the third quarter, the Department of Justice sued to enjoin the merger and Sprint did the same. In Europe, the competition practice assisted MWM and Caterpillar to gain unconditional clearance in Phase Two of the European Commission Investigation.

Steady performance of our litigation business also drove utilization in the quarter. Our overall utilization rate was 73% during Q3, which is in line with our previously announced goal of low to mid-70s utilization for the second half of the fiscal year. Utilization was 75% for the first half of fiscal 2011 and 68% in Q3 of fiscal 2010.

During the quarter, we started to realize the benefits of several key hires, including Craig Elson and his nine-person team who we discussed on our previous conference call. This team is off to a good start and has excellent prospects for growth, particularly in valuation and solvency matters.

In addition, during the quarter, we welcomed Rebecca Szelc, a new Vice President and expert in economic damages. Rebecca joined our Dallas office, where we expanded our presence earlier in the year with the hiring of Jeffery Matthews and a financial accounting and valuation team.

For the quarter, our headcount grew slightly to 526 consultants from [519] at the end of the second quarter of fiscal 2011. We must do a better job adding more top rainmaking talent to support our organic growth. This is a priority going forward, and we will continue to explore all opportunities in the marketplace.

Turning to our expenses, our margins were affected by the lower revenue. On a non-GAAP basis, our operating margin was 8.3% compared with 10.3% for the first half of fiscal 2011 and 8.0% for Q3 of the last fiscal year.

On an absolute dollar basis, we reduced non-GAAP SG&A by nearly $400,000 to $16.2 million in the third quarter compared to $16.6 million on a sequential basis from Q2, as we continued our emphasis on expense management and improvement and improving internal efficiencies. SG&A represented 23.3% of revenue in Q3 versus 20.8% in Q2 of fiscal 2011 and 24% in Q3 of fiscal 2010.

Although our year-to-date performance in fiscal 2011 has improved in several key areas, such as deepening our client relationships and investing in our people, our third quarter results were well below our expectations.

Our goal is to get our growth trajectory back on track. With our talented team of consulting and administrative professionals, I remain confident in our existing business model and the prospects for achieving broad-based growth across our portfolio.

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

Thanks, Paul. As I've done on previous calls, I want to call your attention to some key financial metrics and other factors you should consider when assessing our Q3 performance.

In terms of consulting headcount, we ended the quarter at 526. That number consisted of 403 senior staff and 123 junior staff. This is a slight increase as Paul said, to 519 as of the end of Q2, which included 385 senior staff and 134 junior staff.

During the quarter, we achieved 73% utilization. This is in line with our goal of utilization in the low to mid-70s for the second half of the fiscal year. We now stand at 74% for the first three quarters of this fiscal year. The prior restructurings we've completed are having the desired effect on our utilization performance. For the fourth quarter, we expect utilization to be within our targeted range.

Turning to our tax rate, it was approximately 40% in Q3 on a non-GAAP basis up from 37% we recorded in Q2. This is driven by our lower international revenue in the quarter. Based on our outlook for Q4, we expect our 2011 full-year, non-GAAP tax rate, which excludes the effect of new-co and restructuring, to be in the high 30% to 40% range.

Turning to the balance sheet, there is one item I want to address this morning; our DSO. DSO at the end of the third quarter were 120 days, compared to 105 days in Q2 and above our target of being below 100 days.

The lower revenue in Q3 compounded the increase in DSO. Our billing and collection effort is not satisfactory, and we have communicated with each of our senior client base and consultants who have accounts receivable and under-billed balances that require immediate billing and collection actions. The initial response from our team has been encouraging, and this focus on billing and collection will continue as we reduce DSO to an acceptable level during Q4.

In terms of capital, we have a strong position with more than $54 million in cash, cash equivalents, and short-term investments. We repurchased 179,000 shares of our common stock for $4.4 million during the quarter. As a reminder, we bought back the remainder of our convertible bonds in Q2 of this fiscal year and [have] essentially no long-term debt.

At the same time, we continue to have access to a $60 million credit facility if needed. This will enable us to effectively pursue our growth strategy going forward. That concludes my remarks.

Melissa, we will now like to open the call up for questions.

Thank you. We will now be conducting a question and answer session.

(Operator Instructions)

Gentlemen, our first question comes from the line of Joseph Foresi with Janney Montgomery Scott. Please proceed with your question.

Hi. My first question is just it sounded like there's some contracts or some business that was completed in the quarter. Maybe you can give us some idea of why that surprised you overall, and some idea of what backlog looks like going forward.

Sure. The couple of large engagements, I can't provide you client names, but what I can say is that these large engagements had a horizon of at least three to six months longer than that from what we experienced here at CRA. There were some factors outside of our control and outside the delivery of the services we were providing that caused the shorting of these projects.

So it did lead as a surprise, but with that said, management consulting does work on some very large engagements. And when these large engagements come to an end it is very challenging to seamlessly move from one project to another.

What we look for in management consulting is an overall growth trajectory and general health of the business. And what I tried to stress throughout my prepared remarks, is that I don't see a change in that general health of the business. Yes, we are disappointed in the volatility we experienced during the Q3, but overall optimism for management consulting remains unchanged.

And I'm sorry, Joe, can you repeat the last part of the question?

Yes, I think it was kind of building on what you were talking about on the general health of the business. How does backlog look right now versus where we were maybe heading into the quarter, and how quickly can you back sell the tail off in those contracts?

In the litigation business, the backlog remains as healthy as we had during Q1 or Q2, so we remain very bullish on that side of the business going forward. On the management consulting business, if I look at the backlog, the backlog is as healthy as we've had at any point during the year. The challenge is, is just bringing some of these opportunities to fruition and actually be getting work sooner rather than later.

But in terms of a not probability-weighted or not timeline-weighted, it's about the same as we've had in the prior quarters.

Okay. Maybe you can talk about any impact that you're seeing from any of the macro issues going on out there particularly the slowdown in M&A activity, and how that might affect any kind of conversion time.

Sure. On the litigation business, there is clearly concern in the marketplace, but we haven't seen that translate into a really a reduction in lead flow, or in a change in the management of the assignments that we currently have.

On the management consultant side of the business what we have noticed is inquiries haven't necessarily dropped off, but clients do appear to be a little more cautious in terms of undertaking large assignments. So they're inquiring, but what we're seeing is a more of a phased approach to addressing their needs.

Okay. And then, just lastly, you mentioned in your prepared remarks about the need to high more rainmakers. Have you set any targets around this, and what areas are you looking to hire?

Yes, I guess we do have targets; I'm not going to share them with you. But in general, we have a portfolio right now both geographically and across our service offerings that I'm really quite comfortable with. The targets really are largely litigation-based management consultants, we'll look for potential geographic expansion, but a lot of the growth there is pure organic.

So despite the disappointment in Q3, those growth rates that I sited for you are real positive for this organization because they are purely organic growth that we experience across these service lines.

But, we need to do a better job identifying the recruiting opportunities. I think once identified, we have done a positive effort there on converting these opportunities, but I'm really not satisfied with the number of opportunities crossing our desks right now.

Okay, thank you.

Thank you. Our next question comes from the line of David Gold with Sidoti & Company. Please proceed with your question.

Hey, good morning. I wanted to get a little bit more color on the management consulting projects surrounding -- I was a little bit surprising when you spoke about that. But I guess I was more curious if you could characterize the end -- not the end, the slowdown that you are seeing, by way of and would you attribute it to the economy, was it other factors where -- sort of other things going on there?

And then part two of the question is you commented you're confident it's a temporary pause, but if you could give us some insight as to how temporary a pause it might be, and also what gives you the confidence there it would be helpful. Sorry, long question.

Sure. With respect to the drivers, for the decline, it's hard for me to say what really drove the decision of our ultimate clients to slowdown the course or to stop the existing efforts. I think economy clearly plays a role in everyone's decision-making, but to say it was the economic uncertainty that caused the end, I don't feel comfortable saying that, and I don't really think we have a lot of evidence to make that statement.

What's the second part of your question? I'm sorry, someone just passed me a note, David, and I lost track.

Oh, sure. You had commented that you're confident it's a temporary pause so I wanted to see if there's some insight as to --

I guess what gives me a little confidence that it's a temporary pause is our management consulting business probably does as good a job as any of our service lines in monitoring their pipeline through time.

And if I look at their pipeline now relative to what it was in Q1 and Q2, I still see a lot of fruitful opportunities in that pipeline, and just talking to my colleagues, I see their confidence in their ability to convert these opportunities.

So, it's really examining the book of business and leads that they have that gives me that confidence. The biggest uncertainty is the conversion of those opportunities to reel revenue generating projects.

Right. But I guess maybe I'm confused and maybe you can help me a little better. So you're not sure if the economy stopped things and you and your folks on the management consulting side were surprised by it, right, but yet you're still confident in their ability to project for you.

You've got to help me a little bit here, if it was or wasn't the economy and you're folks are doing a good job on the projection side, basically, have we changed anything, are we doing something different, or are we standing by and hoping this business comes back and their ability gets better?

I guess, let me start by saying that there's a few things that I am confident about with respect to the business with certainty. It had nothing to do with the services being provided. So this is not something in which our client selected to go with a different service provider, quality of the services, and the recommendations were not what's driving this decision.

We had some instances in which cost-cutting initiatives led to a slowdown. We had some instances in which appetite for rapid change slowed a little bit. So, they were really client-specific issues.

And the part that I'm a little uncomfortable with just because I'm not there in the boardroom with these clients is how big a role did the macro economy play in these decisions and how much of it was micro or specific to the individual clients.

We're monitoring these leads well. When we talk about having a lead flow, the lead flow exists because our consultants are in constant dialog with these clients and talking about these opportunities. These aren't sort of pie in the sky hopes and dreams that they're pursuing, these are discussions and they have a path that leads to an actual revenue-generating assignments here.

Got you. Got you. Okay, so that's helpful. So I guess the short of it is, to sum all that up, do you expect the new ins and projects to help you as early as the fourth quarter or do you think we have another quarter or so and maybe it's into next year with things pick back up, from management consulting that is?

As Wayne said, we expect our utilization to be in the low to mid 70s. We do expect a pick up in the management consulting business, whether they'll return to Q1, Q2 levels, that still remains to be seen, but we do expect an improvement over the Q3 performance.

Got you. And that's near term?

That's near term, yes. And again, this is not a permanent shift in the demand curve flow of the management consulting business.

Got you, perfect. That's helpful. Thanks so much, Paul.

Thank you.

(Operator Instructions)

Our next question comes from the line of Tim McHugh with William Blair & Company. Please proceed with your question.

Yes, I wanted to first ask about the weakness in that management consulting business like the other callers, if I look at the international revenue for the overall business, it seems like the international revenue was particularly weak. And I just wanted to make sure that's primarily where you saw that and did you see the same trends in management consulting in the US as you did in Europe?

A lot of these large assignments that we referenced were across the various different providers within our management consulting ranks and largely concentrated in our international operations. So, we did see a more significant drop off in international management consulting versus our domestic management consulting [office].

Did you see a drop off in the domestic management consulting, or was it just not as big as international or --

Yes, we did a slowdown due to some smaller engagements, but it was not anywhere near the magnitude of the international. And part of that is international was a having a truly stellar first half of the year. So, the slowdown was much more pronounced when we went to the levels we experienced.

And I guess as we look at what happened here, it sounds like given the magnitude of the revenue hit, this had to have happened -- it wasn't the last couple of weeks of the quarter when you saw this. So, I guess given we're another month into the following quarter, you've had at least a month or two since you probably saw some of these engagements.

And is that -- have you seen them pick up new engagements yet, is your confidence picking back up, is it based on actual engagements?

Yes, I've seen improvements relative to the Q3 performance already in Q4, but I haven't seen that level resume or the Q1 and Q2 levels.

So they won some work, but they haven't replaced everything yet?

Right.

Okay. And then, on the litigation consulting side, can you give a little more -- I know you touched briefly on, you said competition remained solid and securities litigation or finance area is it broad-based strength, or is there any particular areas that are -- ?

No. I mean, I guess, competition in finance we're particularly strong, but similar to the prior quarters, where we were very happy to see the broad-based contributions that really continued through Q3 and an expectation basis, we're also seeing it materialize in Q4. So, that gives us the confidence in terms of the coming weeks and quarters.

Okay. And then, lastly, the senior consultant ranks seemed to increase nicely sequentially. I'm assuming since its senior consultants, that it's not related to campus hiring and those were more just organic hiring efforts that you talked about in terms of growing the rainmaker base.

Yes. Some of the movements have to do with some promotions, but we did increase our VP rainmaking ranks. We tried to highlight a few of those in the past couple of quarters. And some of these hires have ramped up much more quickly than we ever expected, but we're again, very pleased with the contributions we're getting from these new hires, and we're optimistic that they will improve going into Q4.

Okay, great. Thanks.

Thank you. At this time, we've reached the end of the Q&A session. I will now turn the conference back over to Mr. Maleh for any closing remarks.

Thank you, Melissa, and thank you to everyone for joining us today. We appreciate your time, and really look forward to updating you on our year-end conference call. That concludes today's call.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.