CRA International Inc (CRAI) 2013 Q3 法說會逐字稿

Good morning and welcome to Charles River Associates third-quarter fiscal year 2013 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, Kevin. Statements made during this conference call concerning the future business, operating results, tax rates, and financial condition of the Company and statements using the terms believes, expects, should, prospects, target, remain encouraged, opportunities, 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 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 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 as well as adjusted EBITDA. I would encourage everyone to refer to today's earnings release for a full reconciliation of these non-GAAP items to their GAAP equivalents, as well as the calculation of adjusted EBITDA based on GAAP and non-GAAP results.

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

Thanks, Wayne, and good morning, everyone. In Q3 of fiscal 2013 CRA delivered top- and bottom-line results and we are pleased with the broad-based improvement across our portfolio. Third-quarter contributions from both Litigation/Regulatory and Management Consulting resulted in a 13.8% sequential revenue growth and 12.8% year-over-year revenue growth on a non-GAAP basis.

We delivered companywide utilization of 78% during the quarter and our profitability also was enhanced, resulting in an adjusted EBITDA margin based on non-GAAP results of 16.7%. Our growth during the third quarter was driven by broad-based demand and positive contributions from nearly all practice areas.

Five practice areas delivered more than a 20% increase in revenue on a sequential basis including Auctions & Competitive Bidding, Finance, Intellectual Property, Marakon, and Transfer Pricing. Each of these practices benefited from ongoing assignments and new project wins. I would like to take a moment to describe some highlights from the quarter.

First, our Litigation & Regulatory revenue grew in the third quarter sequentially and year over year by 9.1% and 21%, respectively, on a non-GAAP basis. This growth was led by our antitrust and competition economics practice which continued to deliver high levels of performance. Q3 was our third consecutive quarter of record revenue in our Antitrust & Competition Economics practice.

Our Litigation & Regulatory portfolio was also involved in a variety of matters including in the healthcare sector around hospital mergers and other transactions, pharmaceutical-related litigation, and reimbursement disputes. For example, one matter brought together the talents from our Antitrust & Competition Economics and Finance practices to look at the competitive effects and financial viability of a hospital merger currently under investigation.

These two practices also combined resources to assist key financial institutions on their regulatory and litigation matters. Competition authorities and financial market regulatories around the world have launched investigations into trading activity in markets where commodities, foreign exchange, interest rate, and credit products. CRA has been retained for our competition and finance expertise on behalf of a variety of financial institutions being investigated by these authorities.

On behalf of two multibillion-dollar global pharmaceutical companies, the life sciences practice provided rule of reason analysis of their settlement and other agreements alleged to involve paper delay. In June of this year the US Supreme Court ruled that reverse payment cases in which the branded and generic drugmakers settled patent cases can violate antitrust laws, even if the settlement is within the scope of the litigated patents.

Turning to Management Consulting. Although this business revenue declined in the third quarter on a year-over-year basis, it grew by 60% from the second quarter of fiscal 2013. This sequential growth was driven by our Marakon practice, whose revenue more than doubled compared to Q2 of fiscal 2013.

While clients remain cautious about starting large consulting engagements, we began several new projects in the third quarter. For example, we advised a multibillion-dollar industrial company on its overall corporate strategy as well as the repositioning of its largest business to drive sizable performance enhancements.

In the oil and gas sector we helped a major oilsands developer and operator in Alberta to understand its performance against its peers in the industry and identify opportunities to improve its capital efficiency and project economics. In Europe, we advised a European bank on its business banking strategy to help it secure a leading market share in its home country.

In terms of our operations, we continue to focus on leveraging our infrastructure. Our non-GAAP SG&A expense for the third quarter of fiscal 2013, after adjusting for commissions to non-employee experts, were relatively flat compared with the prior year on a dollar basis, but declined to 17.6% of revenue compared with 21.4% for the third quarter of last year.

As we have described in the past, we are presenting SG&A expenses without commissions to non-employee experts so that our SG&A is more comparable to our peers. We believe there is additional opportunity for us to enhance margins and improve profitability as we grow our top line.

A final point to highlight about the third quarter involves our new consultants. Over the past year we added senior professionals across seven practices and we benefited from their continued substantive contributions during the quarter. They contributed to our growth in the third quarter, bringing in new engagements and introducing several cross-selling opportunities.

We are very happy with the recent additions to our team and we will continue to pursue other new talents in order to further expand our practices and enhance our competitive service offering. While the first half of fiscal 2013 was challenging, looking ahead we remain encouraged by our prospects for generating broad-based, profitable growth at attractive margins. We will also continue to focus on growing organically.

Our team of consultants is expanding client relationships and generating new business. Throughout most of 2013 we experienced healthy lead flow and strong project conversions and we began to realize dividends from these activities during the third quarter. We expect this trend to continue across our Litigation/Regulatory and Management Consulting lines of business.

With that I will turn the call over to our CFO, Wayne Mackie. Wayne?

Thanks, Paul. As a reminder, a more detailed report of my remarks on the financial results can be found on the Investor Relations section of our website. Right now I will cover a few key metrics.

In terms of headcount, we ended the third fiscal quarter with 456 consulting staff, which consisted of 336 senior staff and 120 junior staff. This is a net decrease of 19 consultants from the 475 we reported at the end of Q2 of fiscal 2013, the majority of which were junior staff members. No key revenue generated departed during the quarter.

As Paul mentioned, our companywide utilization was up significantly at 78% for Q3 of fiscal 2013 compared with 67% in both Q3 of fiscal 2012 and Q2 of fiscal 2013. The momentum we experienced during the end of the second quarter continued throughout the third quarter. We continue to target utilization level in the mid-70%s going forward.

Our international revenue contribution for the fiscal quarter was 19%, down from the 22% recorded in Q3 of fiscal 2012 and 21% we recorded in Q2 of fiscal 2013. Q3 2013 non-GAAP gross margin was 31.2%, up sequentially from 30.2% in Q2 of fiscal 2013. The increase in gross margin percentage in Q3 of our fiscal 2013 compared with Q2 of fiscal 2013 was due principally to a decrease in reimbursable expenses coupled with the increase in net revenue.

For the third quarter of fiscal 2013 adjusted EBITDA, based on non-GAAP results, was $12.2 million, or 16.7% of revenues, compared with $9.6 million, or 14.8% of revenue, for Q3 of fiscal 2012. As Paul mentioned, we are pleased with this adjusted EBITDA margin during the third quarter of fiscal 2013.

Turning to the balance sheet DSO at the end of the third quarter was 114 days compared to 98 days we reported in Q2. DSO in Q3 of fiscal 2013 consisted of 77 days of billed and 37 days of unbilled compared with 57 days of billed and 41 days of unbilled in Q2 of fiscal 2013.

The increase in DSO occurred despite a substantial collection effort by our administrative and client-facing staff, especially during the month of September. An indication of those efforts was the collection of five separate client balances for approximately $6 million in the first three days of October in addition to normal collections. Had the $6 million of payments reached us by the end of our September quarter, our DSO would have been 106 days instead of 114.

Also of note is that the aging of receivables improved during Q3. Going forward, we continue to target DSO of 100 days or less.

In terms of our cash position, we concluded the third quarter of fiscal 2013 with approximately $17.9 million in cash and cash equivalents. We purchased about 34,000 shares of common stock for approximately $630,000 during the quarter. Cash flow from operations was $8.6 million in Q3.

Finally, we paid off our line of credit which had a remaining balance of approximately $5.1 million at the end of Q2 of fiscal 2013.

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

(Operator Instructions) Joseph Foresi, Janney Capital Markets.

Good morning. I was wondering if you could talk a little bit more in detail about the uptick that we saw in business. How much of that is macro related and how much of that is just CRA performance?

Probably a little bit of both. I think we saw a slight thawing in the M&A marketplace, which I believe contributed to the improvement in performance.

The other thing, the other main factor is what I referenced during my section, is that a lot of these leads that we had during the first half of 2013 and the conversion into projects started to pay dividends. By that I mean started generating revenue in June and continued through the third quarter. So that was a final realization of a lot of effort for us to increase our market-facing activity.

The other part is the improvement was across practically every single one of our practices, so that I'm going to point to being more of CRA as opposed to driven only by one economic factor like increased M&A activity.

Okay. Maybe you could provide us a little bit more color around the numbers. Have you seen an increase in the number of engagements in totality? Is there any lumpy engagements in there that might end or begin?

And then if you can give us any color around how you ended the quarter from a momentum perspective.

Sure. We did not see a substantive increase in large engagements that I have said. This uptick -- clearly we have some large engagements serving as a foundation within the firm, but there are a number of those engagements and they are across several practice areas. So I wouldn't attribute the uptick to one large engagement that is improving productivity.

The outlook, as we mentioned, we are all focused on lead flow and opportunities and the conversion of those lead flows. That has been relatively healthy and activity since the end of the quarter has been pretty consistent with what we have seen during Q3.

Great, okay. Last question for me. On the margin front, you right-sized the business from a cost perspective I think over the last couple of quarters and SG&A has stayed pretty static from that perspective.

In order to continue to address these new opportunities, do you feel like you are going to have to add any costs, or is this a case of you having those resources available for you and now utilize them?

There will always be a slight increase in costs associated with our marketing-related expenses and I would bear those costs every day. We have made investments over the past couple years by both restructuring our real estate portfolio, improving the infrastructure underlying our financial administration systems.

Those investments don't need to be repeated in the years ahead and are actually capable of being scaled as revenue grows. So the large ticket items I think should remain relatively constant.

Thank you.

David Gold, Sidoti & Company.

Good morning. A couple of points of color, if you will.

First, was curious if you can give a sense -- I know you commented utilization outlook 70%s and obviously a nice jump sequentially at 78%. But as we look are you still holding a 70% target or is it more a function of fourth-quarter seasonality that will get you down some?

Sure, when we provide our target that is a target for our expectations for the next quarter. It is not meant to be an indication of what we think the weighted average for the entire year will be based on Q3 and Q4. So our target going into Q4 is try to achieve utilization in the low to mid 70%s. Year-to-date we are probably at about 70% or 71% cumulative utilization for the firm.

Got you, okay. Then, not sure how to ask this, but I guess when we go back to the last call one of the things that was a big topic was the forgivable loans and sort of thinking about that versus if you acquired the practice or if you hired them and gave them forgivable loans.

I guess would be curious on, if you can, is when we look at the growth that you saw in the third quarter if we thought about that group higher as an acquisition basically how much of the growth was coming from that? In other words, how much would you deem then organic versus acquired?

Sure, the largest component of the new consultants who joined us has to do with the addition of our Chicago partner's colleagues, which touches upon our competition and antitrust economics practice and our finance group. That group has basically been screaming or running pretty close to expectations since joining us.

So the quarter-over-quarter contribution has been constant and, thus, the growth that we achieve from Q2 or Q3 is really attributable to other parts of the portfolio. That in no way is saying that they did not perform handsomely. They did, but the fact is they performed handsomely in Q3, they performed handsomely in Q2, and even going back to Q1.

So it is the contributions from other parts of the firm that are really creating these attractive results.

Got you, okay. Then one other. When we think about the lead flow that you have had through 2013, something we talked about earlier in the year, now starting to convert as you have seen it in the third quarter, what do you attribute that to?

Has anything changed? Is it just seasoning and the time it takes to bring the work in-house, or is there anything else out there? Do you see a climate change where more work is coming through and that is -- obviously we are a beneficiary?

You know I wish I -- you sort of know it when you see it, but I can't necessarily predict exactly what is driving it. I know there has been a lot of hard work by my colleagues to get in front of clients, present new IP to our clients, and try to enhance the clients' products that we are putting out there.

Clearly, the addition of the quality of these senior professionals over the past 12 months have helped our market-facing activity, but it is hard work by a lot of individuals getting out to the marketplace and seeing -- realizing these opportunities.

Got you. Got you, okay. Then just the last one I will just bother you with; I am not sure, I know you said it was down year to year, but did you give a harder number on the Management Consulting portion of the business?

David, in terms of the percentage of revenue this quarter we don't give specific segment information, but historically it has been in the 25%-plus range of total revenues. This quarter it is about in that range. It is perhaps a little bit below, but a very substantial improvement from the first half of the year.

So we are actually very happy with our Management Consulting contribution this quarter and hopefully moving on.

Very good. Thank you both.

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

Just a few follow-ups. One, I guess, as we are talking about Management Consulting, if we think about the full-year, again recognizing the lumpiness, how do you feel about the ability to have positive growth there this year? And I guess I am trying to make sense of the lumpiness we have seen and just smooth it out in terms of the full-year performance you are expecting now.

Sure. We are expecting growth in management consulting the second half relative to first half of 2013. I think with the slow start to 2013 we do not expect to see year-over-year improvement in that segment, but clearly the prospects that have been brought in in the past number of months indicate a much stronger second half of 2013.

Okay. Wayne, I apologize; I missed the headcount numbers. Can you give those again?

The headcount numbers?

Yes, the consulting.

Sure. The numbers at the end of Q3 are 456 consultants in total, of which 336 are senior consultants and 120 junior consultants. Would you like the Q2 numbers of this year?

No, no, I have those, thanks. I guess one of the things from a numbers perspective, so the cost of the forgivable loans especially as we think toward 2014, how do we how those costs trend? Is this a pretty consistent level of expense we have to model in here for another year or two, or does that level of expense gradually trend down?

I think right now if we keep our portfolio constant and we do not hirer or not recruit any other senior revenue-generating professionals I think for the next couple of years, I would expect that number to stay relatively constant. Because a lot of these new additions and for which we use the forgivable loans as acquisition capital, are relatively recent and their terms of their agreements are longer than the near-term horizon.

Okay. Then, lastly, I guess just at a high level. In terms of just the ups and downs you have seen in the last few years, obviously this feels better this quarter.

As you look at it is there anything that you look at in terms of the nature of the projects or the nature of the pipeline that gives you any additional, I guess, clarity or confidence that this may be the start of kind of a smoother upward trend? Or is it just too hard to tell?

I think it all has to do with the Red Sox. We worked hard in the past few years. We had to make some really difficult decisions, but the portfolio of practices and the portfolio of professionals that we have today is of a higher quality than it has been relative to past years.

What made the first half of 2013 so frustrating is that when we looked at our portfolio we knew it was a better asset, but we weren't delivering the performance that was commensurate with the quality of that asset. So what gives us confidence going forward is we are much closer to the core values of our brand and, thus, I think that should prevail in the marketplace. We just have to try to get some repeat performance here in the quarters ahead.

But it is the quality of the portfolio that has changed.

Okay. Thank you.

At this time we have reached the end of our question-and-answer session. I will now turn the conference over back to Mr. Maleh for any closing or additional 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 progress next quarter.

With that this concludes today's call. Thank you, everyone.

That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.