CRA International Inc (CRAI) 2014 Q3 法說會逐字稿

Good morning, and welcome to Charles River Associates' third 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, 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. In addition, we have on the call this morning Chad Holmes, who will become the Chief Financial Officer of the Company shortly, as I think everybody knows.

Statements made during the conference call concerning the future business, operating results, tax rates, and financial condition of the company, including statements regarding being positioned to deliver growth for future increases to its consulting staff and statements using the terms expect, believe, estimate, focus, 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 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 and risk factors related to our 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, including 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 the call over to Paul for his report. Paul?

Thanks, Wayne, and good morning, everyone. We are pleased with our third quarter performance. Our portfolio continued to perform well, further contributing to our strong year-to-date performance.

Highlights of our Q3 performance are as follows. Non-GAAP revenue was $72.2 million. Companywide utilization was 75%. Profitability and our margins remained healthy, including our non-GAAP adjusted EBITDA margin of 16.9%.

Cash flow from operations was $25.9 million, driven in part by our 10-day improvement in DSOs to 98 days. And we concluded the third quarter in a strong cash position with $44.7 million on the balance sheet.

Despite the summer months in Q3, when the demand and supply side of our equation can be impacted and where we welcomed more than 50 colleagues for a net quarterly increase of 25 people, the business performed well.

In terms of project activity and lead flow, the broad-based demand for our services continued during the third quarter. Within our litigation and regulatory business, antitrust and competition economics continued to deliver strong results. Other key contributors include energy, finance, and financial economics, which all generated solid year-over-year growth in the quarter.

Our management consulting business achieved approximately 5% revenue growth compared with the quarter of a year ago, with Marakon and life sciences leading the way. Within Marakon, we focused on growing select core sectors such as financial services. To help achieve this objective, we added three senior-level management consultants who bring decades of experience advising companies in the financial services sector.

John Rolander and Srini Venkateswaran, who joined us earlier this year, specialize in working with financial institutions. Maria Teresa Blanco, who joined us in September, advises companies in the banking industry on strategic regulatory and risk issues. As financial institutions face a range of strategic issues, these senior leaders will play a key role in building a comprehensive financial services offering within Marakon.

Within life-sciences, four senior-level consultants have joined us. They support our vision of expanding in several key areas, including strategy and litigation consulting in Europe. In London, we welcomed in October Anne Baker, a leading life sciences strategy consultant, and Andrew Butcher, expert in stakeholder engagement and communications. They work with many leading pharmaceutical companies to advise on strategy and to support effective implementation of bringing new drugs to market.

In Munich earlier this year, we welcomed Michael Mueller and Urs Wiedemann. Their scientific and clinical knowledge, and increasingly valuable capability for our consulting and life sciences, round out our areas where we have been looking to expand our international expertise. We are pleased with the talent acquisitions we have welcomed across the firm.

With regard to our third quarter hiring activity, we ended the quarter with 449 consultants, consistent with the anticipated staffing levels announced during the Q2 earnings call. As part of our growth strategy, we expect to add -- to expand, excuse me -- our consulting staff by roughly 5% during the next 3 to 6 months. We also expect to continue to grow our consulting staff beyond this period through our standard campus pursuits and other opportunities.

Looking ahead, we expect to build upon strong year to date performance. Our lead flow and new project conversion activity are healthy and our financial position is very strong. We believe that CRA is positioned to deliver profitable growth in the quarters ahead through organic expansion and strategic acquisitions.

Before I turn the call back to Wayne for the financial review, I would like to take a moment to acknowledge that this will be Wayne's final call as CRA's Chief Financial Officer. Earlier this month, we announced that Wayne would be stepping down from his role and that Chad Holmes, CRA's global leader of Corporate Development and Vice President, has been named as his successor.

I want to personally thank Wayne for his exceptional financial insight and management perspective during more than nine years as CFO. I also want to congratulate Chad, who is on the call with us today. Chad has been with CRA for 10 years, heading up various growth-oriented initiatives, including practice and geographic expansion as well as talent acquisition. Chad's promotion to CFO was well-deserved and we look forward to his future contribution at CRA.

An orderly transition is underway as Chad takes over as CFO effective November 10, and Wayne will remain with the Company on a full-time basis until the end of the year, and provide advisory services on a part-time basis for a portion of fiscal 2015.

With that, I will turn the call over to Wayne for the CFO remarks. Wayne?

Thanks, Paul. As a reminder, a more detailed report of my remarks of 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, as Paul mentioned, we ended the third quarter with 449 consulting staff, which consisted of 331 senior staff and 118 junior staff. This net increase of 25 consultants from the 424 we reported at the end of Q2 of fiscal 2014 is in line with the plan we announced at that time.

Our Q3 2014 non-GAAP gross margin percentage, which excludes NeuCo's operations, was 32.1% compared to 31.2% in Q3 of fiscal 2013. The approximate 1 percentage point improvement is due to lower reimbursable expenses in Q3 of 2014 compared to Q3 of last year.

Our Q3 2014 non-GAAP SG&A expenses, excluding commissions to our nonemployee experts of $2.1 million, was 19.0% of revenue. Our Q3 2013 non-GAAP SG&A expenses, excluding commissions to our nonemployee experts of $2.3 million, was 17.6% of revenue. The increase over Q3 of last year is primarily driven by recruiting expenses incurred in connection with the recruitment of senior-level revenue generators, and to a lesser degree, travel costs associated with business development activities.

Adjusted EBITDA, based on non-GAAP results, was $12.2 million or 16.9% of revenue, compared to $12.5 million or 17.2% of revenue for Q3 of fiscal 2013 and $12.9 million or 16.8% of revenue for Q2 of fiscal 2014.

The effective tax rate for the third quarter of fiscal 2014 on a non-GAAP basis was 41.6%. For the full 2014 fiscal year, we estimate our non-GAAP tax rate to be in the low 40% range, including the effect of the $750,000 non-cash tax expense item recorded in Q2 of 2014. Excluding the effect of the $750,000 non-tax cash expense, we expect the tax rate to be in the high 30% range.

Turning to the balance sheet, we improved our DSO at the end of the third quarter to 98 days compared to 108 days that we reported in Q2 of fiscal 2014. We are pleased with this 10-day improvement and continue to target a DSO level of 100 days or less. DSO in Q3 of 2014 consisted of 62 days of billed and 36 days of unbilled compared to 74 days of billed and 34 days of billed in Q2 of fiscal 2014.

In terms of our cash position, we concluded the third quarter of fiscal 2014 with approximately $44.7 million in cash and cash equivalents. This is up from $27.6 million reported at the end of Q2 of fiscal 2014.

CRA also announced today that its Board of Directors has authorized an expanded share repurchase program for an additional $30 million of CRA common stock. During the third quarter of fiscal 2014, CRA repurchased approximately 279,000 shares of common stock for approximately $7.2 million. Subsequent to the end of the third quarter, CRA has repurchased approximately 145,000 shares of common stock for $3.7 million, largely exhausting the prior stock repurchase authorization and bringing the fiscal 2014 year to date total repurchase amount to approximately 677,000 shares for $16.4 million. CRA will finance the expanded repurchase program with available cash.

That concludes my remarks and I would like to thank all for your support over the years here at Charles River Associates. Kevin, we would now like to open the call for your questions.

(Operator Instructions) Joe Foresi, Janney Montgomery Scott.

This is Jeff Rosetti in for Joe. Wayne, I wanted to say congratulations and best wishes on your semi-retirement. I am sure you will be missed, although I know you will still be involved with CRA. And I also want to say congratulations to Chad.

Thanks, Jeff.

If I could just start, Paul, on your comments regarding lead flow and project conversion remaining healthy, I just wanted to see if there was any comparison to last quarter. And would you call out any areas of strength in terms of lead flow? I know you called out a number of terms of revenue strength in the quarter. Just want to also get a feel for the IP and labor employment practices as well.

Sure. With respect to lead flow, during these last 15 to 18 months, we really have experienced a nice consistent lead flow across our entire portfolio and across our geographies. When I talk about lead flow and conversion rates being healthy, I'm comparing it relative to that strong period that we had enjoyed over the last year and a half or so.

It has been contributions across that portfolio. It would be remiss on any call not to highlight the extraordinary performance by our competition and antitrust practice, who consistently performs at a high level. Even if there is not growth on a quarter to quarter basis, it is because sometimes it is hard to expand from those lofty productivity points.

We are also seeing nice expansion within our life sciences Marakon practice, which we are enjoying now and expect to continue to see expansion there. We mentioned energy, finance, financial economics. We are very happy with the production over the summer months.

With respect to labor, labor of course is much smaller than our competition practice, but also has the same kind of challenge in that they operate at productivity levels significantly north of the Company average. So we are actively looking to expand our labor presence both in terms of headcount and in terms of geographic expansion. And, hopefully, during 2015 we can announce some successes there.

And IP is actually still north of the Company average in terms of utilization numbers. We are seeing nice activity flow, but you have some volatility quarter to quarter. So they did not experience a year-over-year growth from a very strong Q3 of 2013. But we are, nonetheless, pleased with the performance.

Okay. Great. And just for your hires going forward, the 5% that you are targeting in the next 3 to 6 months, it sounds like there is going to be broad-based hires across the practices. I just wanted to say see if there was anything that you would highlight. I know Marakon has been active.

We have been fortunate enough to add some senior professionals across the practice and across our geographies. And now that we think they are well through their integration to the firm, we are looking to expand the teams beneath them in order to service the revenue that we see flowing in.

In addition, we are seeing some organic expansion in other parts of our practices. So we have some committed hires already that we expect to continue to join us during Q4, and we are active in the marketplace looking to add other professionals.

Okay. Great. And, finally, just on the use of cash, you announced the increased buyback authorization. I just wanted to see if there was any change in the strategy going forward. I know you had a change within your Board. I just wanted to see if there was any kind of update, continue to buy back and hire organically. Just wanted to get an update on that. Thanks.

Sure. The Board has been fully supportive of these actions pre- the changes that we have seen during the Board -- during the summer months and now post. Given our outlook for the business and the current valuation, quite frankly, it is sort of a no-brainer for us to be active purchasers for our shares. It is hard to find expected returns north of what we are experiencing through these share buybacks for shareholders. So we will continue to do that until we start seeing a closing of the value gap that can be observed in the marketplace.

Tim McHugh, William Blair.

First, a numbers one; the headcount -- how did that breakdown between junior and senior consultants?

Hold on. Tim, the numbers as of the end of the quarter broke down between junior and senior -- the 449 -- is 331 senior and 118 junior.

Okay. And then, as you talked about the 5% expansion, is that focus more senior-level people? Are you filling in the bottom end of the pyramid? How is that going to balance out?

The 5% will probably be more weighted to the senior staff. We're looking for juniors, but the majority of our junior additions come in summer months, so we are also on campus right now recruiting actively. And we would love to expand our junior resources, but the majority of those contributions will come in the summer of 2015.

Okay. How do we think about margins the next couple of quarters? A 5% jump in your headcount in a fairly short order, is that going to have an impact on margins the next -- for a couple of quarters here until you have time for those people to get on board and get ramped up?

I think it may have a slight impact as we try to incorporate the resources, but, for example, we added more than 50 new colleagues during the summer months. And we were able to effectively integrate them into the firm and get them on new projects with a pretty minimal productivity impact, dropping utilization to 75%. So we are hoping to observe the same kind of integration process in the quarters ahead.

Okay. From a demand perspective, can you talk -- you talked to antitrust -- it sounded like it was strong, but necessarily grow, just off of tough comps. I guess, in general, though, the M&A environment -- the headlines of large megadeals, particularly even pushback on inversions and things like that don't seem as frequent as we saw earlier this year. Is the M&A driven work as strong for those guys or has there been a little softer demand there? And how much is just perception versus what you guys are actually seeing?

Sure. I mean, the remarkable thing -- and I have commented on this in the past, that our competition practice has enjoyed extraordinary performance, really during this entire period from 2008 forward, of growing organically, being able to grow inorganically, and that is because of their dominant position. So, even as mergers may drop, we are getting our fair share of the remaining activity.

Year over year, competition in Q3 of 2013 had an extraordinary quarter, really fueled the rebounding of the Company during that time period. We had a couple of very significant mergers that we were working on at that time. And, really, for them to even be flat relative to the year over comparison, is an extraordinary feat by itself.

A lot of the head expansion that we are planning actually resides within our competition practice. So we are still quite bullish and feel there is great opportunity for growth within that business unit.

One number -- because Wayne, in the prepared remarks, referenced the reimbursable expenses being a fair amount lower in helping the gross margin. I didn't see the exact kind of reimbursable expense number, how much lower that was.

The reimbursable expenses went from 13.0 in Q3 of 2013 to 11.9 in Q3 of 2014, Tim.

Okay. And then, one other thing, just from the prepared remarks, there is a comment in their about SG&A, about the recruiting expenses being up to retain people. I guess that confused me.

No. It wasn't to retain, Tim. It was new people that we added.

All right. That makes a little bit more sense. And then, I guess, lastly, just -- you talked about the summer months having somewhat of an impact on the quarter, just the vacation activity. It has only been a couple of years since you have been on this kind of calendar year reporting schedule. But, how do you think about that in the context of Q4, then, and impact of vacation activity, relative to Q3?

There are a number of variables that impact us during the summer months. One, it is the vacation rate is higher than what we typically observe in Q1 and Q2. My apologies. If we can hold for 30 seconds, I think that is over for the time being. We should proceed. Well, to show our conviction, we're going to stay here.

My question is really not that important.

Okay. So all I was going to say is we have a number of variables that impacted demand during Q3. Clearly, summer vacation rates impacted North America; higher in Europe. Also, on the demand side, because our clients also take vacation and tend to have a little dip in their client outreach during that time. But, also, is the transitioning of staff in and out of the organization that also impact our revenue levels.

What we have been pleased with is leaving August into September and now into October the lead flow has reappeared at where we think are healthy levels and utilization rates continuing with our expectations. So, all of that gives us some confidence heading into Q4. I think that is about the answer, Tim. I apologize for this.

David Gold, Sidoti and Company.

David, do you want to risk our lives some more with questions?

That is a tough one. Actually, in all fairness, we can regroup if you think you're better off following that signal.

No. We are having some pretty significant weather here in Boston. Residing in the Hancock Tower is always some excitement when these things move through.

Yes. The winds are very high and that is sort of a typical effect at the tower. But hopefully, it will be quiet now we can finish up.

Got you. I will try to make it quick. So really, and, Wayne, I echo the sentiments. It has been good fun working with you.

Thanks, David.

A couple of things -- one, on the hiring side, it sounds like on the 5% in the next six months, it sounds like perhaps you have identified those candidates already. Give a sense for what is sort of spurring, let's say, the push at this second.

I think we clearly have identified some of the candidates already who were looking to join us, but more importantly, I think, we have in mind the practice areas in which we want to invest in. So we are actively pursuing, expanding on those opportunities within the firm. But, we're going to be active in the marketplace. To say that I have 5% hires committed at this point is not the case, but we are pretty confident we can be successful in the labor pool out there.

Got you. I know you called out the competition practice. I am not sure -- were there other practices that would be prominent in that -- in the hiring?

Well, the four largest practices in the firm -- competition, finance, life sciences, and Marakon -- probably make up a little more than 80% of the firm revenue. So it is probably safe to assume that the majority of those hires will reside in one of those four practices. But, with that said, we are also looking to add heads in the other practices across the firm. They just won't have as large a headcount impact as those four leading practices.

Got you, okay. And just thinking about headcount for the last six months versus the projection for the next three to six months, is it confidence that is pushing you on the hiring? Is it demand? What sort of has you spurring that on just now?

As we laid out during the last earnings call we had in July, we have gone through sort of these phases of restructuring to improving the profitability of our firm, reinvesting into our practices, and we are gaining confidence by the successes we have had in each of those phases.

So we are seeing organic expansion. We are seeing our investments we have made in inorganic growth pay off, and we want to continue to pursue these opportunities while they exist. So clearly, our confidence is improved, but it has been improved because of the successes we have had along the way.

Got you, okay. And then, just one last one. When you think about utilization during the quarter, it was a little lower than we were expecting. How does it compare to what you are thinking? Were you surprised at all by the tick down or by, say, the effect of the summer months this year?

Quite honestly, no, we were not surprised. When we talked about having the headcount at the end of Q2, 424, we knew we would be bringing on many new colleagues, because we also had some additional exits during that time. And when you hire someone new, you just don't place them on a project from day one. There is an orientation. There is training that takes place.

So, the little drop in utilization was actually predicted in-house here. We are actually pretty pleased with the 75% run rate during those months.

Got you. Perfect, I appreciate it.

Okay. Thank you, guys. And, again, I apologize to everyone on this call for the interruption. They are not pushing us out the door, so I think we are safe.

(Operator Instructions) At this time, we have reached the end of our 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 on today's call. And, again, thank you to Wayne Mackie for all his years of invaluable contribution to the firm and service to all his colleagues here. 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.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.