CRA International Inc (CRAI) 2012 Q1 法說會逐字稿

Good morning, and welcome to Charles River Associates' first-quarter fiscal year 2012 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 introduction, I'd like to turn the call over to Mr. Mackie. Please go ahead, sir.

Thank you, Rob.

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, prospects, target, 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 or 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, level 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 these non-GAAP items to their GAAP equivalents.

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

Thanks, Wayne. I'd like to open by saying that we're disappointed with our overall performance in the first quarter of fiscal 2012, which was below our expectation. The performance of management consulting business was lower than expected, overshadowing the solid performance of continued growth in our litigation business.

As a result non-GAAP revenue decreased by 12% compared with the first quarter of fiscal 2011, clearly not the start to the year that we wanted. The management consulting business shortfall affected our firm-wide utilization in this quarter, which declined to 68% from 75% in the first quarter of fiscal 2011.

Despite nearly double-digit revenue growth in fiscal 2011, a principal cause of the management consulting revenue decline across all of our geographies in the first quarter was the reluctance of some clients to proceed with consulting projects while they were occupied with more fundamental challenges in their markets. This was particularly evident in Europe where economic uncertainties continued into the first quarter.

However, this Q1 setback, the management consulting pipeline, particularly in North America, has a growing number of committed and highly probable projects. As a result, we remain encouraged about the prospects of our management consulting business for fiscal 2012 as a whole.

The first quarter softness in management consulting was reflected in our international revenue contribution for the quarter, which declined to 20%. The lower international revenue in the first quarter produced a loss in our international operations. We were not able to record a tax benefit for those losses, which resulted in an unusually high effective tax rate in the quarter of 87% on a GAAP basis and 77% on a non-GAAP basis.

During the first quarter, our litigation business grew in excess of 8% relative to the first quarter of fiscal 2011. This line of business difficulty represents about two-thirds of our revenue stream, but it was approximately 85% in Q1 of fiscal 2012. Competition, which is our largest litigation practice had an outstanding first quarter and continued to benefit from M&A and antitrust assignments in both North America and in Europe. The practice performed very well on both sides of the pond.

Our competition practice's revenue has grown in five of the past six quarters, reaching its highest quarterly level since 2007 in the first quarter of fiscal 2012. Our finance, intellectual property, and labor and employment practices also made solid contributions during the quarter.

Although our first quarter performance was disappointing, we believe that we can achieve our previously announced goals of approximately 6% annual revenue growth for fiscal 2012 and approximately 11% non-GAAP fourth-quarter operating margin. Attaining these goals will be challenging because the deficit we created in the first quarter and the uncertainties that exist in the marketplace.

However, we expect to accomplish our revenue goals through a combination of continued strong performance from our litigation business and a recovery in management consulting. We expect management consulting recovery to be stronger in North America, but much improved in our international management consulting operations as well.

In addition to strengthening our pipeline of work, we have the financial flexibility to recruit and pursue acquisition opportunities that can help drive growth in our practices. And we expect these efforts to benefit us as the year progresses.

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

Thanks, Paul. 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 Q1 2012 performance, and our outlook for the year. In terms of our consulting headcount, we ended up the quarter with 523. That number consisted of 404 senior staff and 119 junior staff. We are pursuing rainmakers who can help drop -- further drive our near-term growth in our practices.

Our utilization for Q1 of fiscal 2012 was 68%. This compares to 75% in Q1 of fiscal 2011. We're disappointed with the slow stats of the year. However, we are maintaining our target utilization in the low- to mid-70s. As a result of the lower revenue, our net revenue per consultant in Q1 of fiscal 2012 declined to approximately $130,000 compared to $148,000 in Q1 of fiscal 2011.

In terms of our operations, non-GAAP SG&A rose on a percentage basis in Q1 of fiscal 2012 compared to Q1 of fiscal 2011, as a result of lower revenue during the quarter. In Q1, we reduced our non-GAAP SG&A by approximately $400,000 compared with Q1 of fiscal 2011. This reduction in SG&A expense reflected our continued emphasis on expense management and improving internal efficiencies. We also recorded a $545,000 adjustment to our restructuring reserve related to vacant office space.

Turning to the tax rate, the losses in our international operations this quarter resulted in an unusually high effective tax rate of 87% on a GAAP basis and 77% on a non-GAAP basis. However, if our full-year revenue and profitability expectations are realized in the aggregate and geographically, we believe that our non-GAAP annual effective tax rate should improve to the low- to mid-40% range. This is higher than we expected at the beginning of the year and is due to the change in mix of geographic profitability.

Turning to the balance sheet, on a DSO front, as expected, we experienced an increase in total DSO in Q1 of fiscal 2012. DSO were 114 days in the quarter, up from 96 days reported in Q4 of fiscal 2011. As we previously announced, we began the conversion of a new enterprise-wide financial system in January, on January 1 of this year. The transition to this advanced system did not allow billing for approximately three weeks at the beginning of the quarter.

We view this increase as temporary and expect our DSO to normalize over the remained of the year, and we continue to target a DSO level below 100 days. In terms of our capital position, we concluded the first quarter with more than $51 million in cash and cash equivalents in short-term investments. As expected, this is down from the $76 million we reported at the end of Q4 fiscal 2011, as the first quarter is typically when the bulk of our annual bonus compensation is paid to our staff for fiscal 2011 performance.

In addition during the quarter, the first quarter of fiscal 2012, we repurchased 123,000 shares of our common stock for approximately $3.1 million. From a balance sheet perspective, we continue to be positioned strongly. In Q1 of fiscal 2012, we used approximately $21.1 million of cash from operations, reflecting the payment of bonuses and the increase in receivables and unbilled services.

We have, essentially, no long-term debt and we continue to have access to a $60 million credit facility as needed. As Paul highlighted, we have significant flexibility to execute our growth strategy moving forward.

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

Thank you. We'll now be conducting the question-and-answer session. (Operator Instructions) Our first question is from the line of Joseph Foresi of Janney Montgomery Scott. Please state your question.

Hi, guys. I wonder if, Paul, you could talk a little bit about what you're doing in the international business. Are you rightsizing that? And I know you've maintained guidance here. Maybe you could talk about the strength of the pipeline and the seasonality and the realization of that, and how you expect the numbers to play out throughout the year.

Okay. Good morning, Joe. Let me start with the international operations. I think one thing the firm has done effectively over the past three years is we're constantly monitoring our market place and trying to see how the demand side of our equation sort of matches the supply side. And those kind of efforts and adjustments are being made continuously, and it will continue to be made more on a continuous matter. I do not anticipate any large scale restructurings at this time.

With respect to the specifics on the international operations, particularly in management consulting, that group is already working on shifting those resources to projects that have made -- particularly in other geographies that they could be made better use of. So we expect those assets to be better utilized in the future, not necessarily on projects originating from Europe.

Okay. And as far as the pipeline and the seasonality that maybe you're seeing -- I know obviously you have got, I would say, probably a better visibility on that because you've maintained the guidance. But should we expect a ramp to start the second quarter and move throughout the back of the year? How should we think about that pipeline?

Sure. Let me try to address that. So I want to start with the litigation business. If I look at our litigation business now, it has been really consistent for the past six quarters now dating back to the summer of 2010. If I look at the utilization in that business on a quarter-to-quarter basis, it's really the fluctuations that are within 100, 200 basis points.

So we're seeing that consistency in the largest segment of our business and we saw that throughout Q1. In addition, we also look at the lead flow and new projects being created within that line of business, and that has also been very consistent. So we have no reason to believe we should be expecting any kind of downturn or softening of the litigation business as we move out from Q2 through Q4.

Turning to the management consulting business, they're examining the pipeline. It's probably a little easier on the litigation side of the business. What was difficult and I know frustrating for many people, and I'm sure including you, is when we look at the value of the management consulting pipeline throughout the quarter, it too was fairly constant. But we saw lengthening of the retention cycle, and thus a delay in the realization of the revenue.

But the value of that portfolio was not changing significantly. If anything, we saw it improving as the quarter progressed. So it gives us a little more confidence now heading in to Q2, Q3, Q4 as we're seeing a lot of these highly probably projects actually convert into committed assignments. When I say committed assignments, that means the scope both in terms of the services that are going to be rendered and also the fees that will be received have been agreed upon and are under contract.

So we're seeing a growing number of those revenues. I do not expect all those revenues to be recouped in terms of the deficit that we have in Q1, to be recouped in Q2. Rather than I expect them to be recouped over the next three quarters. And, thus, when we talk about the 6% annual growth rate, we're talking about the year as a whole.

Okay. Just two more quick ones for me. It sounds like the decision making was slow in the quarter and then picked up. Can you give us a better insight into why that is? Were clients worried about the macro to start the year? Were they just slower out of the gate? I know it's somewhat geographic-specific. But why would it slow in the first quarter and then pick up as you kind of move throughout the year?

Well, I don't know whether that's going to really pick up the decision-making process as we go throughout the year. But what we were seeing during Q1 particularly in Europe is discussions and relationships that we have ongoing with a number of companies. We're just stretching out and we weren't converting these discussions into committed or contracted assignments.

So that was the challenge. What we see towards the latter half of first quarter and what we're seeing now as we entered the second quarter is, one, a growing number of the committed assignment and, two, even the highly probably assignments now are more concentrated in North America, which the retention cycle has been shorter than that that we're experiencing in Europe.

Okay. Last question for me, just real quickly. The M&A activity has been very slow, yet the teams like the litigation is continuing at a pretty good pace in the competition is as well. Maybe you could just talk how should we think about what we're reading and seeing on the M&A side versus how your businesses expected to perform this year. Thanks.

I was hoping you can give us some insight on the M&A side. Really, given the uncertainty and the low level of activity that we've been seeing on the M&A side, it's really a compliment to our competition and antitrust practice for their performance now over the past couple of years, both in North America and Europe. It's truly been outstanding.

For them to be registering record revenue dating back to 2007 in this type of uncertain economy speaks to the quality of the offering. So the other thing that should be important to note is that the competition group, yet, it's reliant on M&A activity, but it also does a significant amount of antitrust type work, which is not as reliant on the M&A level of activity.

When we look at the outlook for competition, we're not expecting any sharp ramp-up in M&A activity, but we are expecting it to remain relatively stable to the levels that we have seen over the past number of quarters. If we're able to maintain that level of M&A activity, we believe we can sort of hold our own, until the macroeconomy improves.

With respect to the other litigation practices, again, we've seen nothing to indicate a change in the demand cycle. So when we're looking at 8%, I think there again, we're growing probably faster than the market as a whole in this segment and we are optimistic that that will continue for the remainder of the year.

Thank you.

Thank you, Joe.

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

Hi, good morning.

Hi, David.

So, first, I was looking for, I guess, a little bit more color on utilization management from here. I mean, I guess we're at the lowest utilization we've seen in memory, and I was curious. As we talked about that getting back into the 70%s, is that purely a function of the pipeline turning into work or are there other things that you can do differently?

Yes, we're clearly not happy with the utilization trend. We haven't seen a utilization rate of 68% probably since the summer of 2010. It's not acceptable to the firm. It's not acceptable to any of the business lines. Right now, we are not taking any actions to downsize the consulting staff because we believe that the workflow and the outlook is there to support the level of headcount that we have right now. And we do expect management consulting to have a stronger contribution in the quarters ahead.

Okay. So is that to say -- I mean, it will purely be a function of that pipeline turning into work?

We're seeing that pipeline turn into work, and so it's a function of seeing that conversion, getting bodies working on behalf of their clients, and that's receiving fees for that work. It's a function of these assignments continuing as expected. Of course, we can't forecast unexpected ends to large consulting projects. So we have no reason to believe, standing here today, that that's going to happen over the next three quarters.

Okay. And then I guess if we think about the [less] you mentioned as to visibility, in the third quarter, we had a similar issue for management consulting and it was a characterized as a blip at that time, and fourth quarter proved that out to be right. What do you attribute the volatility to and is there, basically, some way to give us confidence? Or what, I guess, gives you confidence that basically the pipeline will convert as strongly as you expect and given just that history of third quarter down, fourth quarter, back up, first quarter down in a big way.

Yes. No, I think that's a very fair question. Management consulting, clearly, has been more volatile than our litigation business. I think one large part of that has to do with the relative size of the two business lines. When you're talking about an operation at 70%, 75% of your total revenue, that being litigation, that size has a momentum, and it is more established within the organization.

So we should expect more consistency and less volatility. When we look at an operation like management consulting that we expect to grow at a faster rate over the next, say, one to three years in the litigation business, there will be more volatility. But we're looking at it much more from a value proposition and less on a quarterly basis.

The reason I noted in our press release and our prepared remarks about everyone wants to point to Q3 for management consulting has to be indicative of their performance. But the fact is, they grew profitability at around 10% in 2011. So this is a thriving business. We're doing our best to minimize the volatility, but when we look out to 2012 and beyond, we believe that it is going to continue to be a thriving business. And I know my colleagues are doing everything they can to reduce that quarter-to-quarter volatility.

Okay. And then also just to get a little bit more color there, was it that the projects stopped that you were working on during the quarter or was it just the lack of pipeline turning into business that closed the issue?

No. Unlike Q3 of 2011 where we had a very large assignment stop and we had to deal with transferring staff to other assignments. We didn't have that experience during Q1. What Q1 was, is we have pipeline and as we try to manage our staff, we try to manage when cases are going to be converted to actual billing matters, and those conversions just stretched out.

And in particular, as we see that the economic environment in Europe was staying volatile and no resolution in sight, that just kept on being extended. So that was the primary cause. We weren't losing any engagements. So I can't point to the two large engagements that we were counting on that we lost to competitors. That's not the case.

I can point to the fact that a large engagement ended abruptly. That wasn't the case. It was really the conversion of our pipeline to fee-bearing assignments.

Got you, got you. Okay. And that's helpful. I appreciate it.

Okay. Thank you, David.

Thank you. (Operator Instructions) Our next question is from the Tim McHugh of William Blair. Please proceed with your question.

Yes. Just one quick question is the weakness. You talked about by geography. Was it across kind of all the different types of management consulting services and the industry verticals as well or was it concentrated in one area?

We did see it across, basically, the entire management consulting portfolio. We saw some industry verticals impacted. What I can cite on the industry verticals, the European uncertainty actually impacted some North American relationships we have because of the reluctance of those clients to begin any kind of large investment programs. And we also saw more in our strategy of functionally-based offerings.

Okay. And then just at a high level, you've got a nice cash balance and you can certainly use that for repurchases, but the other use of it could be acquisitions or doing something else. And so my question is, given the volatility and the results over the last few years especially in management consulting, do you need a much larger scale or platform to be able to manage through the lumpiness of those projects? Does that become a priority, given the lumpiness? Or how do you think about that versus kind of repurchases?

I'm looking for the best return to the shareholders. So clearly, at our price levels, I still think repurchase is a very attractive investment. But gaining scale is a high priority. We've been real active on the recruiting front and also the evaluation of acquisition opportunities.

Our pipeline is probably as active now with respect to recruiting and acquisitions as it has been, and hopefully that can start paying dividends in the quarters ahead. But I don't see it as an either-or. Given our cash balance and our access to capital through our credit line and other kind of facilities, I don't think I have to make that choice as we stand right now.

Okay. Thank you.

Thank you, Tim.

Thank you. 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.

Okay. 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 progress throughout 2012. This concludes today's call.

Thank you. You may now disconnect your line at this time. Thank you for your participation.