CRA International Inc (CRAI) 2014 Q1 法說會逐字稿

Good morning, and welcome to Charles River Associates' first-quarter fiscal year 2014 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, Mr. Paul Maleh; and Chief Financial Officer, Mr. Wayne Mackie. At this time for opening remarks and introductions, I'd like to turn the call to Mr. Mackie. Please go ahead, sir.

Thank you, Manny. Statements made during this conference call concerning the future business, operating results, tax rates, and financial condition of the Company; its pursuit of additional consulting talent and the effect of such additions may have on growth, revenue, profitability and cash flow; and statements using the terms anticipates, looking ahead, goal, target, remain steady, optimism, 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 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 including adjusted EBITDA. I would encourage everyone to refer to today's earnings release for a full reconciliation of these non-GAAP items to the GAAP equivalents as well as the calculation of adjusted EBITDA based on GAAP and non-GAAP results.

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

Thanks, Wayne, and good morning, everyone. My remarks for today's call are fairly short.

Q1 was a good quarter for CRA and continued the momentum we experienced in the second half of fiscal 2013. Overall performance was very balanced, and the results were straightforward.

CRA began fiscal 2014 on a strong note, marking three consecutive quarters of strong consulting productivity, revenue growth, and profitability. In terms of productivity, utilization was 78% for the quarter, up from 67% year ago, and down from 80% in the sequential fourth quarter.

As the quality of our portfolio continues to improve, our goal in fiscal 2014 is to continue operating above the 73% utilization achieved in fiscal 2013. Our Q1 revenue performance improved and reflected broad-based contributions.

Our litigation, regulatory, and management consulting businesses, as well as our North American and European regions, performed well year over year and sequentially. On a non-GAAP basis, revenue grew 21% compared to the first quarter of last year and 1% compared to the sequential fourth quarter. Antitrust in competition economics, financial economics, life-sciences, Marakon, and transfer pricing generated more than 20% year-over-year revenue growth compared with Q1 of a year ago.

Sequentially, antitrust in competition economics, energy, finance, labor and employment, and transfer pricing each delivered more than 5% revenue growth over Q4 of fiscal 2013. In terms of profitability, our non-GAAP adjusted EBITDA margin was 16.1% in Q1 of 2014, continuing the trend of solid performance in recent quarters.

Looking ahead, our focus continues to be on generating broad-based, profitable growth for fiscal 2014. While the strong start to 2014 gives us optimism with respect to CRA's annual performance, we continue to be cautious about clients' spending patterns.

(inaudible) activity and conversion rates for revenue-generating projects remains steady, consistent with levels experienced during the past three quarters. We will work hard to continue the momentum that began in Q3 of last year and to achieve our annual goal of profitable growth in fiscal 2014.

We are pleased with the talent additions we welcomed during the first quarter in antitrust and competition economics, energy, life-sciences, and Marakon, and we will continue to pursue opportunities to add leading individuals in groups of consulting and talent to further drive growth in revenue, profitability, and cash flow.

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 in the investor relations section of our website. Right now, I'll cover a few key metrics.

First, in terms of headcount, we ended the first fiscal quarter with 449 consulting staff, which consisted of 336 senior staff and 113 junior staff. This is an increase of 7 consultants from the 442 we reported at the end of Q4 of fiscal 2013. We continue to anticipate modest organic headcount growth in fiscal 2014.

Q1 2014 non-GAAP gross margin was 31.4%, compared to 32.9% in Q1 of fiscal 2013 and 31% in Q4 of fiscal 2013. Adjusted EBITDA based on non-GAAP results was $12.1 million, or 16.1% of revenues, compared to $8.7 million, or 14.1% of revenues, for Q1 of fiscal 2013 and $11.9 million, or 16% of revenues, for Q4 of fiscal 2013.

Turning to the balance sheet, DSO at the end of the first quarter were 100 days, compared to 94 days we reported in Q4 of fiscal 2013. DSO in Q1 of fiscal 2014 consisted of 64 days of billed and 36 days of unbilled, compared to 65 days of build and 29 days of unbilled in Q4 of fiscal 2013. We continue to target a DSO level of 100 days or less.

In terms of our cash position, we concluded the first fiscal quarter of 2014 with approximately $32.5 million in cash and cash equivalents. As expected, this is down from the $51.3 million we reported at the end of Q4 of fiscal 2013, as we paid approximately [$30 million] in 2013 bonuses to our employees in March of 2014.

In addition, we purchased about 96,000 shares of common stock this quarter for a total of approximately $2.1 million.

Net cash used in operating activities was $14.5 million. This includes approximately $5 million in forgivable loans to employees and non-employee experts with future services to support CRA's focus on growth and recruitment and retention of key revenue generators, and it reflects the bonus payment I just mentioned.

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

(Operator Instructions) Tim McHugh, William Blair.

Good morning. This is Matt Hill in for Tim McHugh. I had a question around the headcount growth. You spoke about modest organic growth and also probably looking at some other groups out there. Just wondering what areas you are kind of looking in and what the competition -- what the market looks like for some of these individuals you are looking at targeting out there.

Sure. I'm going to try to be as specific as I can, Matt. Right now, I like the composition of our portfolio, and our growth is really focused on both lines of business; both the litigation and regulatory area and the management consulting piece.

We are pleased with the way the pipeline is shaping up in terms of candidates. We have good candidates across both lines and across some of our more profitable, faster-growing units. So we'll continue to pursue those opportunities where we believe they are value enhancing.

The market for talent is very tight, particularly when you're talking about individuals or groups that have revenue that can be transferred to another organization. But I think the one thing we've showed in the past few years is we're very disciplined and will not chase revenue for revenue's sake. It has to be economical both in terms of prices paid and in terms of the fit with the existing portfolio.

Okay, great. And then also couple of questions on the management consulting piece. It sounds like it's been performing better in the past couple of quarters. Just kind of wondering how sustainable is some of the strength you're seeing there? And what do you attribute that to? Is it just lead flow turning into actual work and revenue? And then also kind of its impact on the strong utilization rate we've seen in the past couple of quarters.

Sure. management consulting, both year over year and sequentially to the fourth quarter, has seen a marked improvement. And that is across our Marakon business unit, our life-sciences business unit, auctions and competitive bidding, and some of the other management consulting offerings.

The frustrating part for my colleagues in the management consulting space, particularly Marakon during the early part of last year, is their lead flow never really dropped off significantly. There was the time to close that was getting stretched out and left them sort of with some valleys during the revenue lifecycle.

But the lead flow continues to remain strong, the conversion rate has been quite healthy, and we're seeing that success not just in North America but in also the European operations and management consulting. So we're going to stick with the focus across our sectors -- industry sectors that we have and try to do more of the same.

I think particularly when you're talking about a boutique offering, it is susceptible to choppiness. And that's where the rest of the portfolio needs to chip in and smooth that choppiness out for the overall organization.

Sure. And then just one final one on -- the tax rate was a little bit lower than we had thought. I'm assuming that has to do with Europe doing little bit better. Any updated expectations of what we should be looking for for the year there?

Sure. In terms of a Q1 rate, it was a little bit lower than we anticipated. But we do expect rate for the full year to be in that vicinity of the high 30s -- 38% or so that we mentioned in Q1. There was a slight positive effect in Q1 up from the activities in Europe, and that is what was said there.

Okay, great. Thank you very much.

Thank you, Matt.

Jeff Rossetti, Janney Montgomery Scott.

I was just wondering if you could comment a little bit on your pricing on your bill rates. It looked like maybe that was improved significantly this quarter year over year. I just wanted to see if you could attribute that to any shift in your portfolio and what kind of build rate increases you've put in this year.

I think the bill rate increases this year is actually pretty consistent with the bill rate increases that were put forth in 2013. We target bill rates in the low single digits. In 2013, those bill rates as the year progressed have stuck, meaning we're actually realizing those increases, and early signs in 2014 are very much the same. We put bill rates in the low single digits, and early signs are that they are sticking. The key there is as your portfolio gets stronger, your ability to leverage your brand and the value of your services increases. And part of that return is ability to put forth reasonable bill rates for our services.

Okay. Thanks. And you mentioned antitrust and competition was strong again. I was wondering was there any kind of headwind from -- I think you had pointed out last quarter the US Airways, American Airlines, and also Office Depot, OfficeMax, they kind of concluded. Was there any headwind from that, or did you see anything in the quarter from the wind-down of those projects?

I can't really say enough positive things about our competition in antitrust economics practice both here in North America and in Europe. Their brand is really synonymous with CRA's 50-year history. And whether we are seeing some movement or volatility in the overall merger marketplace, they seem to get theirs, so to speak.

So large cases have come and gone, but their base-load demand has remained really steady. Their revenue increase is not just because we've had a full quarter of Chicago partners in Q1. But if I look at the productivity of their consultants in Q1 relative to a year ago, it is also up considerably. So we're real pleased with that.

It's a nice mix of merger work, of antitrust work, and also North American and European type assignments. So it's really well-balanced. And in order to get that kind of consistency and performance, you need that well-balanced offering.

And I would just add, Jeff, that the competition practice just continues to do so well. Frankly, we believe it is principally because of the high quality of our people and the world-class talent that we have within that vertical.

Okay, great. And finally just the SG&A can kind of stuck at a nice dollar level and percentage of revenue level. I just want to see if that's something that you expect to see remaining going forward and if you kind of expect to continue to see a maybe adjusted EBITDA level of around 16% going forward. Thanks.

On the SG&A, yes, I think we're at a level that we think, in terms of absolute dollars, should pretty much continue; and as a percentage of revenues. On the adjusted EBITDA, I think that range of 16%-plus is what at this performance level we would expect to continue to perform at.

Thank you.

(Operator Instructions) David Gold, Sidoti & Company.

Just a couple of quick ones for you. I guess first is -- I know we tried to hit on this one with you before. But when I think about your business performance today versus, say, the first six months of last year in the term that sort of happened in the third quarter, what would you say are the biggest factors to the improved utilization?

And obviously, I know we've talked about tighter utilization management. But I'm curious how much you attribute to better execution, how much you attribute to the new hiring and doing a better job there, and how much do you attribute to maybe the market just really starting to work for you.

I think it starts with the -- I'm not trying to use blanket statements here, but it starts with that quality of that portfolio. The assets that we have today over the last five years have grown mid-to-high single digits every single year. So these are assets that have demonstrated an ability to grow at attractive rates irrespective of the market conditions.

And what we try to do is we've tried to do is we have tried to reinvest in our core strengths. So I think that is a big contributor to getting back to those core strengths. Some of the restructuring actions that have been done over the last two years were efforts to get back to those core competencies. So that's part one.

Part two is even during the slow start of 2013, the lead flow across this portfolio was really very healthy. And it took a little while to replenish the inventory that was depleted through the restructurings of 2012. But once that project inventory was replenished, we've seen a real steadiness and week-to-week, month-to-month performance across this entire portfolio.

So the improvement in utilization management, of productivity, that's basic blocking and tackling that this firm should always be doing. But it really begins and ends with the quality of the offering. It's a strong offering, and clients during challenging markets are always going to move to value. And I think we have the value they are looking for, and we are enjoying some of those returns.

Got you. Okay, fair enough. And then another question is when you think about uses of cash -- the balance between hiring, forgivable loans, and signing bonuses or what have you versus share repurchases and broader acquisitions -- how are you thinking about that today?

Right now, we instituted a little more aggressive share repurchase program. We believe our stock is trading at a significant discount to our sector peers, and we understand we have to continue to deliver this kind of performance; and that GAAP should be closing in the coming quarters. So we're going to continue to be aggressive purchasers of our shares over the next number of quarters. So, first and foremost, we're going to lead with that.

Second is we are looking for opportunities -- talent acquisition opportunities to add to this portfolio. We're not capital constrained by any means. We're not capital constrained by the cash that's been generated. We have an untapped line of credit that offers sufficient access to capital if we wanted to do a much more substantive deal. But we're trying to be very prudent in the additions of talents to this firm.

So we're going to -- a combination of the share repurchase and of the talent acquisitions or the leads. And, of course, you mentioned bonuses. As you recruit top talent, you've got to compensate top talent; and we always strive to reward our colleagues with attractive compensation packages. So that's not going to change going forward.

Got you. And when you talk about talent acquisitions, should we be looking more for -- by one-hires, group hires, or would you do something bigger?

We're very open to doing something bigger, but it has to be the right fit to the firm. I'm not looking to go into a non-related area of business at this time for CRA, so I want something that complements the existing portfolio. We are not filtering out larger opportunities because of size or potential capital needs for those. Again, we're not constrained on the capital side. And we're pretty pleased with the way our integration efforts have gone with the last few deals. So we feel, not just from the financial side but the operating side, we can digest deals at the same size of CP or even much larger than that deal.

Perfect. Thank you much.

Thank you. We have no further questions in queue at this time. I'd like to turn the floor back over to Mr. Maleh for any closing remarks.

Thank you. 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. This concludes today's call.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.