CRA International Inc (CRAI) 2011 Q4 法說會逐字稿

Good day, everyone, and welcome to Charles River Associates fourth-quarter and year-end 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, I would like to turn the call to Mr. Mackie for opening remarks and introductions.

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 performance and results to differ materially from any forward-looking statements made by the Company are included in the Company's filings with the SEC, and in today's news release and prepared CFO remarks. The Company cannot guarantee any future results, levels of activity, performance or achievements. 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 these non-GAAP items to their GAAP equivalents.

I would like to remind everyone that the Q4 results we will be discussing today reflect the fiscal year reporting schedule we adopted in fiscal 2011. Under this schedule, our fiscal year now has four 13-week quarters, compared to our prior schedule of reporting three 12-week quarters and one 16-week quarter. So, as has been the case for the past three quarters, our Q4 fiscal 2011 results are not directly comparable to our Q4 fiscal 2010 results. ¶ Our Q4 fiscal 2011 results reflect a 13-week quarter, which ended December 31, 2011, compared with a 12-week quarter reported for Q4 fiscal 2010, which ended November 27, 2010. We also have included a sequential comparison of Q3 of this fiscal year, which was an equal 13 weeks in length. Beginning with our 2012 fiscal year, our results will be comparable on a year-over-year basis.

I also would like to mention that today's news release and prepared remarks are posted on the IR section of our website. I will not be reading these remarks today. Let me now turn it over to Paul Maleh for his report.

Paul?

Good morning, everyone. Just over a year ago, on our Q4 fiscal 2010 earnings call, we outlined the key elements of our strategy for fiscal 2011, generating balanced and profitable growth across the Company, strengthening client relationships within our two lines of business, and simplifying our internal processes. We are pleased with the momentum in each of these areas in fiscal 2011, and also the progress we made in the fourth quarter.

Before I discuss our Q4 performance, I want to call your attention to the results we achieved in fiscal 2011. On a year-over-year basis, total revenue grew more than 6%. Annual utilization increased to 74% from 67% in fiscal 2010. Non-GAAP net income for fiscal 2011 rose by 82% to $17.1 million, compared with fiscal 2010 non-GAAP net income of $9.4 million. These results were supported by our strong fourth quarter performance in conclusion to fiscal 2011.

In the fourth quarter, we achieved sequential revenue growth in both our Litigation and Management Consulting businesses. Overall, we delivered sequential non-GAAP revenue growth of nearly 6%, which helped drive our non-GAAP operating margin of 10% in the quarter. We achieved utilization of 74% in the quarter, a solid finish to the year.

Our Litigation business had another strong quarter, similar to what we experienced throughout the year. Sequential growth in Litigation for the quarter was approximately 5%; and for the full fiscal year, this business grew 7%. Our Q4 performance was led by a number of our larger practices, including competition, finance, and life sciences. Each of these practices benefited from ongoing assignments and new project wins. For example, we provided economic analysis and expert testimony in a matter pertaining to monopolization in the medical equipment rental industry. On behalf of a financial institution, we were retained to analyze bid-rigging and breach-of-contract claims related to transactions involving the sale and securitization of life insurance policies.

Looking at utilization's annual performance in fiscal 2011, I want to highlight our greatest and largest practice, Competition, which produced four quarters of outstanding results, and achieved annual growth of more than 20%. On the strength of its M&A and anti-trust work, as well as the outstanding team we have in place in both North America and Europe, it has been a top performer for all of us this year. In addition, our Finance practice grew by approximately 25% for the full year. This was driven by the contributions from across the practice, along with solid performance by Craig Elson and his team, who joined during the year.

Turning to our Management Consulting business -- looking at our performance from an annual perspective, our Management Consulting business grew nearly 10% in 2011, led by our Marakon, chemicals strategy, and auction and competitive bidding practices. In addition, the performance of this business line improved in the fourth quarter, growing by more than 6% sequentially from Q3. Our Management Consulting practices advise senior-level management on strategic growth issues impacting their business in a range of industries. For example, we advised a global insurance leader on a division's investment growth strategy, and we assisted a large industrial company on the development and roll-out of a growth strategy for a $1-billion-plus [position].

A goal for us in fiscal 2011 was to achieve a non-GAAP operating margin of 10%. In Q4, we hit that goal as our margin improved due to higher revenue, combined with our ongoing expense management initiatives. Our gross profit on a non-GAAP basis improved by more than 200 basis points sequentially from Q3 to Q4. For the full year, our non-GAAP operating margin was essentially in line with our goal, coming in at 9.8%, which was 270 basis points higher than fiscal 2010.

Also during the quarter, we welcomed a new Chief Information Officer, Scott Simon. Scott joins us after nine years at Bose Corporation. Prior to Bose, Scott spent 10 years with firms such as Cambridge Technology Partners. We believe his experience in delivering practical technology solutions that drive business performance, combined with his consulting background, is a natural fit for the CIO roll at CRA. We are looking forward to his contributions.

Looking ahead, we anticipate continued revenue growth of approximately 6% for 2012, which is consistent with the growth we achieved in 2011. While we remain cautious about our client spending environment and the potential weakness in Europe, we are expecting overall demand for our services will remain relatively stable in fiscal 2012. And we're targeting a utilization rate for the full year in the low to mid 70%s. The revenue growth and utilization we are targeting for fiscal 2012 should result in an incremental ramp in our annual non-GAAP operating margin. We are targeting approximately 11% by the fourth quarter of fiscal 2012.

In closing, I want to thank all of our employees for a solid performance in Q4 and for the full fiscal year. We believe CRA's established reputation will continue to serve us well going forward. We also believe that our strong capital position provides significant financial flexibility to aggressively pursue consultant and acquisition opportunities that can help drive additional growth in our practices.

What that, I will now turn the call over to Wayne for a review of some financial metrics.

As I've done on previous calls, I want to call your attention to some key financial metrics and other factors that you should consider when assessing our Q4 and fiscal 2011 performance, and our outlook for 2012. In terms of consulting headcount, we ended the quarter with 521. That number consisted of 399 senior staff and 122 junior staff. This is a slight net decrease from the 526 we reported in Q3, which included 403 senior staff and 123 junior staff. We expect modest headcount growth in 2012.

We achieved 74% utilization in Q4 for the full 2011 fiscal year -- we achieved 74% utilization in Q4 and for the full fiscal 2011 year. We are pleased to have hit our utilization goal of low- to mid-70%s for the second half of the fiscal year. Our prior restructuring and internal resource productivity initiatives are having the desired effect on our utilization performance. For 2012, we are maintaining our target utilization in the low- to mid-70%s.

In addition, we are working to increase our consulting staff leverage. Our net revenue per consultant in Q4 was approximately $140,000, compared with the $133,000 in Q3. For fiscal 2011, our net revenue per consultant was $574,000, which compares favorably to the $498,000 we recorded in fiscal 2010.

Turning to our tax rate, it was approximately 42% in Q4 on a non-GAAP basis, which is slightly higher than the 40% we recorded in Q3, but generally in line with our expectations. Looking at it on a full-year basis, our non-GAAP tax rate for fiscal 2011 was about 40% versus 43% in fiscal 2010, reflecting the improved profitability of our international operations. Based on our outlook for 2012, we currently are anticipating our 2012 non-GAAP tax rate, which excludes the effect of NewCo, to be in the 40% range.

Turning to the balance sheet, we have some great news to report on the DSO front. You may remember from our last call that we reported a spike in our DSO, which rose to 120 days at the end of Q3. During Q4, we launched a major initiative throughout our organization to address this issue. As a result, we dramatically reduced our DSO to 96 days by year-end. Our ability to lower our DSO speaks to how well our entire team mobilized on this initiative, from the financial administration group to the practice leaders themselves. I would like to thank everyone for their efforts.

As we enter 2012, we plan to maintain our target DSO level of below 100 days. However, I should note that we began the conversion to a new enterprise-wide financial system on January 1. The transition has gone smoothly to-date, and we are excited about the capabilities of our new system. But it did forestall our billing process for the first few weeks of the new year. We expect to catch up as Q1 progresses, but in all likelihood, we will see a temporary increase in DSO in the Q1 as a result.

In terms of our capital position, we concluded the year strongly, with more than $76 million in cash and cash equivalents and short-term investments. That is up substantially from the $54 million we reported at the end of Q3. Our Q4 cash flow from operations was approximately $28 million. During the quarter, we purchased 167,000 shares of our common stock, for $3.3 million.

I should also point out here that in Q2 of 2011, we bought back all our remaining outstanding convertible bonds. Therefore, we have essentially no long-term debt, and we continue to have access to a $60 million credit facility as needed. We believe that we enter fiscal 2012 well-positioned financially, and with significant flexibility to pursue our growth strategy. That concludes my remarks.

Rob, we now would like to open up the call for questions.

(Operator Instructions) Tim McHugh, William Blair.

First, just wanted to ask you, you gave some good color about some of the difference practices areas in the growth this year, and obviously the overall Company's growth is not quite as fast as some of those practices you highlighted. So what isn't working? You gave us some good color on what is working, but what parts of the business are below average growth right now.

It's hard to say that things aren't working. I think the portfolios as a whole did perform extraordinarily well in 2011. The ones we highlighted were extraordinary growth. I think the majority of our service offerings experienced higher levels of profitability in 2011 than they did relative to 2010. So there are clearly a few areas that need to be supplemented or enhanced by some hiring activities, and we're really focused on that right now. But if I look at the overall portfolio, it's hard to point to any large segment that didn't move the needle for the firm.

What are you seeing in Europe? You talked about being cautious or somewhat about what might happen there given obvious macro issues. But what are you seeing from your base level of activity as you go throughout the quarter?

What we're seeing is, one, our Competition Antitrust practice is really not missing a beat. They had a great year, and we saw that consistent performance really throughout the quarters. So even though there's been a lot of talk about our lessened M&A activity in Europe, at least our share of those matters did not seem to be impacted at the current time, but of course you have to keep track of that. So kudos to that group. On the Management Consulting side, what we're seeing is the leads are still coming through. We are talking with senior management about crafting and moving forward on potential assignment, but if anything there's been a lengthening in the retention process that we've noticed now over the last couple of quarters in Europe.

But no significant change versus that -- it didn't get much worse or something like that throughout the quarter?

We haven't seen it get much worse, no.

And then this scaling to 11% margin across next year, what would be the areas you're looking most for? Is it just leveraging SG&A or do you hope to further improve gross margin across next year? And if it is gross margin, what would be the driver given that your utilization guidance is pretty much similar to this past year.

Yes, the utilization guidance is similar, but what we're trying to do is make sure we're making the most productive use of our consulting staff. So, one, let's see if we can have the average revenue per VP increase throughout the year. So you don't necessarily have to have an improvement in utilization, but that can drive improved margin. The other part here is on the mix between junior and senior staff, we're trying to reintroduce an appropriate amount of leverage given what the demand environment is here, but we also believe will contribute to the improved margin enhancement. And we're still being very diligent on the SG&A side. We still think there's some cost savings opportunities, but really beyond that, is just the ability to leverage that existing cost base across more revenue.

What drove that gross margin? Gross margin was much higher than we thought in the fourth quarter here. I know utilization was up a little bit, but gross margin was up more than I would have thought given that?

I think a lot of it has to do with the mix of the revenue through the introduction of some more junior resources over the Q3, and Q4 begins to impact that performance. So even though we don't see the change in utilization, the mix of the staff is improving or going in the right direction here.

Tim, the improvement in revenue in Q4 certainly was one of the significant drivers in the gross margin from, you say Q3, the sequential comparison you might have in mind.

Okay. And then, Wayne, just two quick numbers question. One is, do you have what reimbursable expenses were, I'm not sure if I missed those.

I'm sorry, Tim, I didn't hear.

What reimbursable expenses were?

The reimbursables for Q4 were 12.9%, or $9.4 million.

Okay. And then, what was international revenue versus domestic revenue.

International for the quarter was 24%, for the full year 26%.

Great. Thank you.

Joseph Foresi, Janney Montgomery Scott.

My first question here is just on the guidance of the 6% revenue growth, what are your expectations for the general macro backdrop there? In other words, is there a provision in case we should potentially double-dip or things get worse in Europe? I'm trying to get a general sense of what is built into that number.

6% is assuming consistent market conditions that we experienced for the majority of 2011 into 2012. So North America has been relatively stable now for actually more than the last year, we're probably going on 18 months of a stable demand platform. There has been signs of a slight improvement, but we are not necessarily incorporating that into our forecast for North America. Europe is I think where we believe more risk exists right now going into 2012 with the uncertainty. There's always a possibility that having greater impact outside of Europe, and impacting the North American economy, that is not built into the 6% figure. We are not expecting a broad-based impact in North America for the European uncertainty.

So just to clarify, it sounds like you're taking a conservative approach to Europe and expecting North America to stay where it was, where it's been.

I think that is a good summary yes.

Perfect. And just looking at the margin profile of the business, obviously you think they can expand. What are you thinking about maybe internally about the optimal margins for this type of business? What do you think you feel like you would be comfortable maintaining the margin rather than expanding it?

I think there's no reason why this business can't be in the low teens on the operating margin line. And that is what our goal is, and 2011 was a good step-forward, we hope 2012 continues that process, but again during the next one to three years, we would be disappointed to not see operating margins in the 13% to 14% range.

Okay. And then the last question for me is, just looking at the M&A numbers, I know you said that the business has done well despite decreasing M&A activity, just numerically on a macro level. Can you just help us reconcile that? Are you working on some large projects that could potentially be affecting that number supporting it, or is the work that you're doing just separate from any new M&A activity? Just trying to put those two things together.

It's really a combination of the two. There are clearly some large ongoing projects that we have, but the really impressive thing about the Competition group, is they've had large projects. We have talked about the Sprint matter in earlier quarters. But even as that declines on the demand side, they have new retentions. And that demand side has been very consistent for that group. So it is a mix of the existing large matters, new cases, and the cycle of both of those has maintained a very steady demand. If I look at the utilization of that group throughout the last 12 months, it is basically a straight line.

And just I'm going to sneak one last one in here, just because I wanted to get it in there. Paul, since you've taken over, it seems like you have obviously started moving the margins up and it seems like you're getting a better handle on the business. Can you talk a little bit about what you have done internally, any processes you have changed or any functions you have changed to get a better sense the direction of the business and to get a better handle to be able to give guidance?

I think the most simple way I can put it is we are doing everything we can to allow our consultants to be successful. So on the SG&A side, we need to try to, one, provide the highest-value services to our consultants so they can outreach to their clients and better service their clients, but then again at a minimal cost. Because we need to try to push as much of those cost savings to higher-compensation packages for our consultants and higher returns for our shareholders. So that it has been the push on the SG&A side.

On the Consulting side, there has been a lot of effort on professional development, which our Consulting colleagues have really embraced. There has been a lot of effort on improving our business development in client outreach. And the growth that we are experiencing, yes, we've had some individual hires, but it's largely organic growth. It's largely our consultants just doing a better job getting out to the marketplace. So I view that as the role of our Corporation, or the center, is to give them the tools to be successful, and they have done really an excellent job over the last 12 to 18 months on embracing that.

Thank you.

(Operator Instructions) David Gold, Sidoti & Company.

A couple of things. One, can you go through or speak a little bit about the change in Management Consulting between third quarter and fourth quarter? Obviously pretty nice pick-up from there. But A, do you still just presumably characterize third quarter as a blip. B, what do you think it took to get things going there again?

I think there were unique circumstances in the third quarter in terms of when you have a large matter like we had ending abruptly. There is clearly a transition for Management Consulting offering of the size of CRA's. But there is still issues with Europe, and we've talked about that over the last six months. It has lengthened a little bit of the close cycle for new engagements. But again, the lead flows are there, the pipeline looks healthy and we are just seeing the conversions happen. We'd of course like them to happen at a little faster rate, but the pipeline is there. We haven't seen the pipeline diminish, and that gives us confidence for 2012 in its totality.

Got you. Was it then really as simple as timing given the engagement that ended and it takes a little time to get folks reengaged?

Yes, with respect to the ending of the large case in Q3, that was clearly timing of getting people engaged, and the other timing piece we were wrestling with would just be time to close the new opportunities that are being gathered by the group.

Got you. And then as to guidance, can you give some color on what your view is or what sort of expectation is baked in there on the M&A climate?

On the M&A side, right now the numbers we gave are assuming no large acquisition. We are going to, of course, be very active on hiring of individual rainmakers, group hires, and I think that is baked in to the revenue growth expectations. Anything outside those individuals or small group hires would be in addition to that 6% of revenue growth, David.

Okay. As far as the climate for M&A,your business activity for say comp policy or whatnot? In other words what your expectation is baked in there for the M&A climate broadly, not specific to Charles River, but basically from the business that is generated by M&A.

Okay. So I guess you're trying to go back to the Competition practice. Clearly the Management Consulting side of the business is impacted by the level of M&A activity for the kind of strategy services they are doing. Our Competition practice is one of the prominent practices in our industry, and thus, they have a very high share of the available mergers that are being contested or assisting clients on potential acquisition strategies there. So we hope that continues. And they have been able to do that even at the depressed M&A levels that we've experienced in the past year.

So all of that embedded in your guidance is essentially the current level or some pick-up there?

Right now, we're just assuming the M&A level stays about where it is at. We are not assuming a large pick-up there. If we do see a large pick-up, of course that will be well-received, but I expect us to get our fair share of the market.

Got you. By way of uses of cash, you said right now you're not thinking about anything more than some group hires. You did buy some stock back in the quarter. What is your current thinking or feeling on use of cash as you build-up that nice position?

We are going to be very active in the marketplace on acquiring new talent and adding depth to a lot of our practice areas. So that will clearly be one use of cash. We still believe our stock is a very attractive buy for us and any other investor, so we will be an active purchaser of our shares in the coming weeks and quarters. So those are the two main avenues that we plan to use our cash on.

Okay. And then just one last one. Wayne, I heard you give the numbers for headcount, but when you gave the total number, you were too quick for me. Could you give that one again?

At the end of Q4, David, the total Consulting headcount was 521, and we break that down as 122 junior staff and 399 senior staff. I think you probably have the previous quarter's, that info.

I do. Perfect. Thank you both.

At this time we have reached the end of the Q&A session. I will now turn the conference back over to Mr. Maleh for any closing or additional remarks.

Again, I want to take an opportunity to thank everyone for joining us today. As always, we appreciate your time and interest in CRA, and look forward to updating you on the progress throughout 2012. With that, this concludes today's call. Thank you again.

Thank you for participating, ladies and gentlemen. You may disconnect your lines at this time.