CRA International Inc (CRAI) 2013 Q4 法說會逐字稿

Good morning, and welcome to the Charles River Associates fourth quarter fiscal year 2013 conference call. Today's call is being recorded. 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 LaTanya. 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, goals encouraged, optimism, opportunities, momentum, will continue, positions will continue to grow, seek, 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 the 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 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, as well as adjusted EBIDTA. I would encourage everyone to refer to today's earnings release for a full reconciliation of non-GAAP items to their GAAP equivalent, as well as calculation of adjusted EBIDTA based on GAAP and non-GAAP results.

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

Thanks Wayne. Good morning everyone. CRA ended fiscal 2013 strong with non-GAAP year-over-year revenue growth of 12.6% in the fourth quarter. In addition on a fiscal year basis non-GAAP revenue grew 3.2% in fiscal 2013 as compared to fiscal 2012. Throughout the past year we emphasized the quality of our existing portfolio, and the confidence we had in its ability to deliver strong results. Our second hand performance brings this point to bear, as many areas across the portfolio and internal operations delivered solid results.

A few highlights demonstrate the strength of our performance. Company-wide utilization during the fourth quarter was 80%, as compared to 78% in the third quarter of fiscal 2013. For the entire year Company-wide utilization was 73% as compared to 68% in fiscal 2012. Q4 Revenue grew on year-over-year basis in both our North American and European geographies. Six practices in particular delivered exceptionally strong Q4 year-over-year revenue growth. Antitrust and competition economics, auctions and competitive bidding,Financial economics, Intellectual Property, Life Sciences, and Transfer pricing.

Non-GAAP adjusted EBITDA margin was 16% in Q4, and 15.4% for the fiscal 2013, ourhighest full year results since 2007. Q4 cash flow from operations was $35.6 million, a substantial increase from Q3 driven in part by our 20 day improvement in DSOs to 94 days. We concluded fiscal 2013 in a strong cash position with $51.3 million on the balance sheet.

Turning to our top line performance in more detail. Litigation and regulatory revenue grew by 13.2% year-over-year in the fourth quarter, and by 8.6% for the full year compared to fiscal 2012 on a non-GAAP basis. Antitrust and competition economic practice has consistently delivered outstanding results for CRA, and it achieved growth in both North America and Europe during fiscal 2013.

In North America for example, the practice of buys on two high profile M&A cases that were settled during the quarter, including US Airways and American Airlines matter, and the Office Depot and Office Max mergers. We Europe we advised on a range of antitrust and competition matters, including a joint venture in the chemicals sector. The Finance and Antitrust competition economics practices continue to work together to assist financial decisions that are being investigated by global competition authorities and financial market regulators for trading activities in markets for commodities, interest rates, and credit products.

In other highlights from Litigation and regulatory business during the fourth quarter our intellectual property practice advised large multinationals in a range of industries, including the analysis of economic damages due to patent and trademark infringement, as well as valuations of IP assets such at copyrights and trademarks, and transactional and corporate restructuring purposes.

Despite Management consulting revenue declining by 15.8% for the full year of fiscal 2013, Q4 revenue increased approximately 10.4% on ayear-over-year basis. Fourth quarter sequential growth was driven by our Life Sciences practice, which advised on many of the major issues being faced by drug companies and others in the pharmaceutical industry, from reverse payment litigation involving generics to future drivers of decisions around pay or coverage.

In addition, Marakon continued to improve it performance during the fourth quarter. The team advised clients in its core sectors of chemicals, oil and gas, financial services, and consumer products, on such matters as product strategy, portfolio assessments, wealth and core in adjacent markets and pricing. Consultants have focused on leveraging CRA's brand and portfolio of talented consultants to broaden client relationships and generate new business for CRA.

Despite general sluggishness in the Legal industry and M&A forecasts, as well as the general business environment, we are pleased with the level of lead flow activity, and the conversion rate into revenue generating projects. I should note that the colleagues whom we welcomed during the year continue to meet our expectations. I could not be happier with their contributions to the fabric of the organization, and their strong financial performance. We will continue to seek opportunities to add leading individuals and groups of consulting talent, to further strengthen our portfolio and drive growth in revenue, profitability, and cash flow.

Looking ahead, we are encouraged by the trends we have seen in the second half of 2013 which gives us confidence as we enter fiscal 2014. While we remain cautious about our clients' spending patterns, the broad-based demand for our services and the solid foundation we have put in place, gives us optimism the momentum experienced during the past six months will continue into fiscal 2014, and that our portfolio is positioned for continued growth. I want to thank our consultants and our administrative colleagues for their efforts, teaming, and contribution.

With that, I will turn the call back over to Wayne.

Thanks Paul. As a reminder a more detailed report of my remarks on the financial results can be found in Investor Relations Section of our website. Now I will cover a few key metrics. In terms of head count we entered the fiscal fourth quarter with 442 consulting staff. Which consists of 327 senior staff, and 150 junior staff. This is a net increase of 14 consultants from the 456 we reported at the end of Q3 of fiscal 2013. As Paul mentioned,our company-wide utilization reached 80% for Q4 of fiscal 2013, compared with 68% in Q4 of fiscal 2012, and 78% in Q3 of fiscal 2013. For the full year company-wide utilization increased to 73% in fiscal 2013 versus 68% in fiscal 2012.

Looking ahead, we anticipate modest organic head count growth in fiscal 2014. As the quality of our portfolio continues to improve, our goal in fiscal 2014 is to improve upon the 73% utilization we achieved in fiscal 2013. On a non-GAAP basis our international revenue for the fourth quarter was 24%. Slightly lower than the 26% we recorded in Q4 last year, and up from the 19% we recorded in Q3 of fiscal 2013. The sequential increase of CRA's international contribution further enhanced our profitability and helped to lower our Q4 overall tax rate to 27.9% on a non-GAAP basis versus 35.9% for the full fiscal year of 2013.

As we continue to benefit from profitable international operations, we believe or non-GAAP tax rate should be in the high 30% range in fiscal 2014. Q4 fiscal 2013 non-GAAP gross margin was 31%, down from 34% in Q4 of fiscal 2012. Although the percentage of cash compensation to our consultants did not vary, our increased use of forgivable loans to attract consultants accounted for approximately 2.9 percentage pointsof the decline, offset by a reduction in stock compensation of 0.4 percentage points. In addition, our reimbursable expenses as a percentage of revenue increased by approximately 1.2 percentage points. For the fourth quarter of fiscal 2013 adjusted EBIDTA based on non-GAAP results was $11.9 million, or 16.0% of revenue compared to $10.8 million or 16.3% of revenue for Q4 of fiscal 2012. Fiscal 2013 non-GAAP adjusted EBIDTA increased by 1.6 percentage points to 15.4%, compared to 13.8% in fiscal 2012.

Q4 non-GAAP SG&A expenses after adjusting for commissions to non-employee experts of $2.2 million in Q4 of 2013, and $1.7 million in Q4 of 2012 decreased to 18.6% of revenue, compared to 19.3% of revenue in the fourth quarter of 2012. Fiscal 2013 non-GAAP SG&A expenses after adjusting for commissions to non-employee experts decreased to 19% compared to 21.1% in fiscal 2012.

Turning to the balance sheet, as Paul mentioned, our improvement in DSO was clearly one of the highlights of the quarter at 94 days, down from 114 days reported in Q3. DSO in Q4 2013 consisted of 65 days of billed, and 29 days of unbilled, compared to 77 days of billed, and 37 days of unbilled in Q3 of fiscal 2013. Going forward we are driving to keep DSO under 100 days. In terms of our cash position, we concluded fiscal 2013 with approximately $51.3 million in cash and cash equivalents, in line with the approximately $55 million that we had at the end of fiscal 2012. Our year end cash position was achieved principally by the improvement in our cash flow from operations due to excellent collections and working capital management. During the fourth quarter we repurchased about 85,000 shares of common stock for approximately $1.6 million.

At announced today our Board of Directors has expanded our stock repurchase program by authorizing $15 million for share repurchase in addition to the approximately $1.4 million remaining under our existing share repurchase program. Our Board of Directors has also authorized management to enter into a Rule 10-B-51 plan on behalf of CRA. CRA expects the plan once effective will be in place through the end of fiscal 2014. The plan will allow CRA to repurchase its shares at times when it otherwise might be prevented from doing so under insider trading laws, or because of self-imposed blackout periods.

On a final note our credit line remains unused during the quarter. Our unused line of credit and strong cash position give us the financial flexibility to deploy capital and execute our growth strategy. That concludes my remarks. We would like to open the call up for questions now.

(Operator Instructions). Our first question from David Gold with Sidoti and Company. Please proceed with your question.

Good morning.

Hi David.

Can you speak a little bit more on thoughts on the sustainability on the utilization side, the gains that you have made in the second half year-to-year? Extremely impressive. The question there is, do we think an 80% level which is a high, certainly in my recent memory, is sustainable for any period, or where there any sort of one-time or large project factors that played into that?

Let me begin by saying we are really happy with the utilization that we had both in Q3 and Q4. We don't believe that type of utilization run rate is steady state for the organization. There are costs to running at that higher rate, namely, that sometimes you forego revenue or attempted expansion of your position in the marketplace. The great news about the last six months is that the improvement in utilization has not been driven by one large project, or one practice dominating our performance. We continue to stress that the improvement was broad-based, and we found almost every single consultant, every single practice contributing to that upward trajectory. We ended the year at 73%. We are going to strive to try to improve on thatin fiscal 2014 although I will always welcome an 80% run rate, that is not our target.

Would it be safe to expect if we look back at 2013 basically there was a bit of a stair step where the first half obviously a bit lower, and second half much higher. Would you expect 2014 to be a more level year on the utilization side?

We are certainly going to try awfully hard to make it a level year. It is a lot more fun to work at this Company when you have more consistency in performance. The fact is throughout the first two quarters we never lost confidence in the quality of the asset we had. We thought that 67% utilization marks being registered were not representative of the lease flow we were seeing, and representative of the quality of consultants that we had. We knew that improvement was coming. Did we believe it was going to be as dramatic as we experienced? Probably not. That is something we are working hard to deliver for our investors is a more consistent performance. I think, secondly, is that we feel good about just improving on the overall average of fiscal 2013 going forward.

Got you. Looking at that utilization taking it hand in hand with the hiring plans that I think was modest organic head count growth in 2014, what is keeping you from taking a more aggressive stance on hiring? Is it just at this moment it is optimism, but you would rather wait and see, or is it a function of not being able to find as many professionals around to hire?

Our goal is to grow. The year-over-year growth we experienced from 2012 to 2013 is not adequate. Our goal is to grow at a figure north of that level. Any growth for it to be profitable and sustainable has to be a mix of both organic pursuits and inorganic pursuits. You will see us hiring organically and trying to fill out some high performing practice areas, and inorganically, we are not going to chase revenue. Some of the lessons learned from the successes that we have had over the past couple years in hiring is we are going to hire quality, and quality that improves the depth of our portfolio, and helps our practices to be successful in the marketplace. That is always challenging to find people that are going to improve on the average quality of this organization. We have lots of prospects we are pursuing. We think we can be successful in those pursuits in 2014.

Perfect. One last. I didn't catch the head count number for quarter end if you gave it.

I did. Let me go back to it, David. The head count growth at the end of, the number, David you are asking for?

Right.

At the end of the year it is 442 consultants.

Got it. Part two. What did we do differently on the DSO side in the fourth quarter?

What frankly happened is that we all looked at that 114 days that we ended up Q3 at, and everybody agreed it was unacceptable. There was a large effort across the Company on the part of not just administrative staff, but the consulting staff to get bills out, and frankly as needed to work with the clients on getting some of the most significant payments made. It culminated in the 94 days that you saw. It is the old story though, it is every week and every month we have to continue to keep that DSO up, and our very, very favorable cash collections at those levels.

Not to sound like a broken record here, but we talk about the quality of the portfolio. One of the other benefits to having a high quality portfolio is that our collection efforts are actually going to be very successful when we go out there. The write-off rates for our projects are very low. They have actually improved relative to past years. The goal is getting the bills out in a timely manner, and our experience has been if we do that our clients pay accordingly, and give us this attractive cash flow we had in 2013. A lot of credit is to the consultants. They are leading the way there.

Perfect. That is helpful. Thank you both.

Thank you, David.

Next question comes from Joe Foresi with Janney Capital Markets. Please proceed with your question.

Good morning. This is Jeff Rossetti on for Joe. Congratulations on the results. Paul, I just want to follow up on your comments regarding you mentioned two large M&A cases that you worked on. Is there any kind of a slowdown that you might expect from the work that you did? How much do those contribute to the utilization picking up to the level it was at?

Sure. A large part of the effort, for example, on the American Airlines merger took place during Q3. The momentum that you saw during Q4, yes, the American Airlines matter contributed to it. But was not an overriding driver of the overall performance of the firm. As I mentioned, I literally saw every practice improve. For the second half over the first half from our litigation regulatory practices to our management consulting practices. Even though management consulting may have declined on a year-over-year basis, they had real improvement that contributed to the improvement on utilization that we experienced during the second half of 2013. It was not just one case which gives us a little more confidence that things are clicking, the parts are clicking together, but with that said we need to still drive our opportunity flow, get leads in the door, because backlog is relatively short lived in the legal regulatory space in our business. We can't rest on the successes. We need to continue to push forward. I feel good about our chances to continue to improve in 2014 there.

Thanks. Were there any kind of settlements that might kind of impact on those M&A cases that might impact you in the beginning of this year or going forward? I realize that you had strength across the portfolio.

You don't want me to say that again? We are pretty happy with the way the year ended and we are pretty happy with the way the year has started. The year in 2014. We are working on that. Again, the focus is on continuing to look in the months ahead to keep that lead flow coming, so we don't see a precipitous drop-off in the rates. Thus far, we are relatively pleased. Some of the practices may have seen a little drop-off heading to 2014. I have full confidence that they are going to deliver strong performance as the year progresses. As we said cautiously optimistic now. It is all about keeping the flow moving to have that consistency.

Great. Just maybe a little bit more color. I think Wayne had mentioned international had picked up quite a bit sequentially. I just wanted to see if we can get more background about what was going on in Europe, a little more detail if possible?

Sure. Jeff, it did pick up during the year. We ended up in Q4 with 24% of our revenue internationally. That was spread both in our competition practice, which has always been quite strong as well as in management activities outside of the US. As you saw and I mentioned in my comments, it helped nicely the effective tax rate in Q4 and the full year down under 40%, which is what because of the lower statutory rates in Europe versus the United States, the profitability there is a real plus. In addition, we have a significant net operating loss carry forward that we get the benefit of outside of the US. So that the profitability that we have outside of the USis in general shielded from taxation here in the US,

One of the other things, David that we are really starting to enjoy the full benefits of that. You may recall we did some restructuring back in 2012. One of those restructurings was restructuring our lease portfolio in Europe. So the operation is much more efficient with a much lower administrative cost burden. As we have revenue driven by competition and antitrust economics in Europe that is led by Kristina Cassara and Marakon Europe led by Neal Kissel, both of those people have really driven our results in the past six months. With the progress that we have made on the administrative side, you are seeing it really impact the overall tax rate, so that cost structure. the administrative cost structure we don't expect to increase in the coming quarters, and hopefully our leaders continue to push forward on the revenue side.

I wonder if I could, Paul, you were talking about some increased effort to get those have consultants bill in a more timely manner. Is there any kind of incentive for them to continue doing that? I wanted to see just try to figure out how if you feel like you are on target to keep the DSO number below 100? Thanks.

I find constant pleading tends to work. Consultants are professionals. One of the biggest challenges we have is sometimes when we get really busy, the first priority goes to servicing our clients and then also trying to generate leads for future work. What we are trying to do right now is have our administrative unit to work in tandem with our consultants to make it easier for them to review the bills, get the bills out on time, and our consultants have responded really positively to that teaming effort. Our goal is if we can get our bills out in 30 to 35 day window, that is the unbilled. I think we should be able to stay below the 100 day mark, because history has shown for this portfolio, clients will pay in that 60 to 65 day window. We just need to get those bills out.

Thank you.

Our next question comes from Tim McHugh with William Blair. Please continue with your question.

Yes, thanks. I just wanted to ask on the margins given the utilization rates you have seen in the last two quarters, particularly this quarter, trying to relate that to the margin here, so the adjusted EBIDTA margin of 16%. Given everything you have done with G&A, and I guess that utilization rate, can you drive it much higher than that? It is hard to imagine utilization will be even better than we have seen this quarter?

If we can get utilization to be right in that mid-70s range, I think we will enjoy full year adjusted EBIDTA margins north of 16 for the full year. There are some one-off costs that we incurred during the quarter with that revenue. But on a steady state basis, we get utilization in that mid-70s range, we should be able to enjoy the full year EBIDTA rates north of 16.

Tim, I think what you saw in the margin, of course, is down. The major explanation on that in the GAAP margins is the forgivable loan amortization. But frankly we think that the forgivable loans we issued are really a key to how we are driving the business, and how we are going to grow the business by attracting some very, very strong talents to really bring in the kind of revenues that we are looking for. We think it is the right approach. As we have said in the last few calls we are focused perhaps more now on the cash flow aspects and the cash flow measures of our business as a better indication of what we can do over the next few years.

One thing that shouldn't be lost there, too. We talk a lot about improvements and adjusted EBIDTA. And improvements in adjusted EBIDTA just doesn't come around because we are issuing more forgivable loans. The base improvement comes because the asset is more profitable. Whether you are talking about the operating income line or the gross margin line, our asset is producing more profit and that is driving the adjusted EBIDTA. Adjusted EBIDTA we are fond of, because it makes quarter-over-quarter comparison more comparable, and closer to cash and that is ultimately what we are driving to do is to reduce cash from our operations.

You mentioned inorganic growth is something you focused on. How are you approaching that? What types of businesses would you be looking at? Geographic expansion? New service lines? Any insight?

Right now I am looking to add depth to the portfolio I have right now, both from a geographic footprint and a service portfolio. I think all of our lines would benefit from added depth and adding quality consultants. We are not looking to expand outside of those lines of business, and I am not looking to really go outside of North America and Europe at this time.

Great. Thanks.

Thank you.

We have reached the end of the Q&A session. I will turn the call over to Mr. Maleh for any closing or additional remarks.

Thank you to everyone for joining us today. As always, we appreciate your time and interest in CRA, and we look forward to updating you on our progress next quarter. With that this concludes today's call. Thank you everyone.

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