CRA International Inc (CRAI) 2014 Q4 法說會逐字稿

Good day, everyone, and welcome to Charles River Associates fourth-quarter and fiscal year-end 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 CRA's website.

With us today are CRA's President and Chief Executive Officer, Paul Maleh, and Chief Financial Officer, Chad Holmes. At this time, I would like to turn the call over to Mr. Holmes for opening remarks. Please go ahead, sir.

Thank you, Christina. I would like to remind everyone that the statements made during this conference call concerning the future business, operating results, the financial condition of the Company, including those identified in our earnings release and statements regarding our future hiring and share repurchases, are forward-looking statements as defined in Section 21 of the Exchange Act.

Information contained in these forward-looking statements is based on management's current expectations and is inherently uncertain, and actual performance and results may differ materially from those expressed or implied in these statements, due to many important factors. Additional information regarding these factors is included in today's earnings release and in the Company's periodic reports with the SEC.

The Company undertakes no obligation to update any forward-looking statements after the date of this call. Additionally, we will refer to some non-GAAP financial measures on this call, including adjusted EBITDA. Everyone is encouraged 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 for his report. Paul?

Thanks, Chad, and good morning, everyone. CRA concluded fiscal 2014 with another strong quarter of performance and outstanding annual growth in profits. We continue to experience broad-based demand for our services.

On a full-year non-GAAP basis, our portfolio performed exceptionally well, with Litigation and Regulatory revenue growing by 9.2%, and Management Consulting revenue increasing by 16.2% as compared to fiscal 2013. This annual growth contributed to a fiscal 2014 non-GAAP adjusted EBITDA margin of 16.5%, our highest full-year margin since 2006. We are proud of these results and want to thank our colleagues for a great fourth-quarter and fiscal year 2014.

Let me first walk you through the quarterly performance highlights, followed by our full-year results. For the fourth quarter, non-GAAP revenue was $77.4 million, a 4.2% increase over a strong Q4 of fiscal 2013, led by solid contributions throughout our portfolio and double-digit growth in our Finance, Life Sciences, and Energy practices. This revenue performance drove a non-GAAP adjusted EBITDA margin for the fourth quarter of 16.3%. Non-GAAP net income for the fourth quarter of fiscal 2014 was $3.5 million, or $0.37 per diluted share, compared with $3.7 million, or $0.37 per diluted share, for the fourth quarter of fiscal 2013.

Our performance during the fourth quarter was driven by several factors. Project lead flow across the organization remains strong as we continue to be presented with our client's most challenging problems. Our colleagues are converting these opportunities into revenue generating projects at an ever improving rate. This resulted in as healthy a project backlog as we've seen in the past few years.

As a result of these accomplishments, Q4 utilization was 75%, a particularly notable result given the heavy holiday calendar that fell during the quarter. Fourth-quarter results capped off a terrific 2014 performance for CRA. Specifically, for the full-year 2014, CRA grew non-GAAP revenue by 10.3%, principally through organic expansion.

Non-GAAP income from operations grew at nearly three times that rate at 28.5%. Non-GAAP earnings per diluted share for fiscal 2014 equaled $1.37, reflecting a 21.2% year-over-year improvement. For fiscal 2014, cash flow from operations of $30.2 million was reinvested into the business for staff development, recruiting, and infrastructure improvements, as well as for share repurchases.

We grew the business, and at the same time, repurchased approximately 971,500 shares of common stock for $25.5 million during the year. We are focused on continuing to drive organic profitable growth by deepening client relationships and creating new revenue-generating opportunities via natural extensions of our current offerings.

This foundation has proven to be an effective platform for welcoming new colleagues. We are pleased with the contributions of senior-level professionals who joined us during fiscal 2014, and expanded our offering in areas that include Antitrust & Competition Economics, Energy, Finance, Life Sciences, and Marakon. For example, Maria Blanco, who joined in October of 2014, supported our vision of growing Marakon's Management Consulting offering and Financial Services.

Earlier this year, we announced that Michelle Burtis and Steven Tenn joined our Antitrust & Competition Economics Practice. In addition to Michele's expertise in antitrust litigation, she is one of the most highly regarded class certification experts in the US, and adds depth to an area of the practice that we are looking to grow. Steve joined us from the Federal Trade Commission and deepens our merger-related expertise.

Looking ahead, CRA's performance in 2014 has positioned the Company for continued success in fiscal 2015. We are introducing full-year fiscal 2015 non-GAAP revenue guidance in the range of $312 million to $320 million, with revenue growth anticipated to be more weighted toward the latter half of the year, as new hires joined the Company through our normal recruiting efforts.

With respect to profitability, as we pursue topline growth, CRA expects full-year fiscal 2015 non-GAAP adjusted EBITDA margin in the range of 16.3% to 16.7%.

Fiscal 2015 also marks a special time for CRA. We are celebrating the Company's 50th anniversary. Fifty years ago on February 19, 1965, CRA was incorporated. So you are sharing some unique history with us today.

Many people have contributed to CRA's success. It has never been the result of one individual, one practice, or a single geography. We are incredibly proud of everyone's accomplishments, and I want to thank our people, past and present, for their contributions.

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

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. Consulting productivity continued to drive fourth-quarter non-GAAP gross profit as a percent of revenue to 31.5% in fiscal 2014 from 31.0% a year ago. For the full fiscal year 2014, non-GAAP gross margin percentage increased to 31.7% compared with 31.3% in fiscal 2013.

Fourth-quarter non-GAAP selling, general and administrative expenses as a percent of revenue, excluding commissions to non-employee experts, increased to 19.2% in fiscal 2014 from 18.6% a year ago, primarily due to the heavy holiday calendar that fell during the fourth quarter of 2014. For the full fiscal year, non-GAAP SG&A expenses as a percent of revenue, excluding commissions to non-employee experts, was 18.7% in fiscal 2014 compared with 19.0% in fiscal 2013. The annual improvements in gross margin and SG&A drove non-GAAP income from operations as a percent of revenue to 7.9% in fiscal 2014 compared with 6.7% in fiscal 2013.

In terms of headcount, we ended the fourth quarter with 451 consulting staff, which consisted of 347 senior staff and 104 junior staff, compared with 442 consulting staff a year ago. We have continued to make hires following the close of fiscal 2014, and seek to increase headcount in Q1 and beyond.

The effective tax rate for the fourth quarter and for the full-year fiscal 2014 on a non-GAAP basis was 36.5% and 41.2%, respectively. For fiscal year 2015, we estimate our non-GAAP tax rate to be in the low 40's percent range.

Turning to the balance sheet, our DSO at the end of the fourth quarter was 99 days compared with the 98 days that we reported in Q3 of fiscal 2014. DSO in Q4 of fiscal 2014 consisted of 68 days of billed and 31 days of unbilled, compared with 62 days of billed and 36 days of unbilled in Q3 of fiscal 2014.

In terms of our cash position, we concluded fiscal 2014 with approximately $48.2 million in cash and cash equivalents, in line with the approximately $51 million at the end of fiscal 2013. During the fourth quarter of fiscal 2014, CRA repurchased approximately 440,000 shares of common stock for $12.8 million. After these purchases, we have $20.9 million remaining under our current share repurchase program announced last quarter. We expect to remain an active purchaser of our shares.

During 2015, our Boston and Washington, DC offices will undergo renovations to make for a more efficient and inviting workplace. As a result, we expect the expenditures related to these reinvestments in our business to total approximately $12 million, net of tenant improvement allowances. The renovations began this month.

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

(Operator Instructions) David Gold, Sidoti.

A couple of points of clarification I could use a tiny bit of help on. First one is, in looking at your guidance, as we think about EBITDA guidance, you know, the range that you had given, Paul, I think, 16.3% to 16.7% -- on an adjusted basis, presumably that excludes the forgivable loans, right?

Correct, yes.

Okay. Can you give a sense or maybe -- can you give a sense for how significant you expect the forgivable loan piece to be? I'm trying to bridge it to an EPS number.

Going forward, it's really hard to say what we expect the forgivable loan balance to be. The forgivable loans are a form of investment capital we use to bring on new revenue-generating sources into the organization. Sometimes they are used as straight acquisition accounting. Sometimes we use the loans. I think it's a safe assumption to say the mix in 2015 will look similar to the mix of capital we use in 2014 and prior to that.

Okay. Well, I guess let's back up a second. So, for the mix, I mean, you're not saying take a fourth-quarter run rate and keep going with it? Presumably you have some new hires that you'll be using forgivable loans for, right?

No. What I'm saying is if you look on average for fiscal 2014, and it's probably as good a predictor as to the mix of investment capital that we would use in 2015 as we have right now.

Okay. So, no guideposts maybe that you can give?

I'm sorry, can you repeat that, David?

I asked if there were any maybe guideposts that you can give, even if it's a wider range. I guess, I mean part of what makes this difficult from the outside looking in, and maybe you could help us here too, is thinking about hiring plans. And so maybe that's a good segue.

I think you were on record looking to take up the headcount by something like 5% by the end of the first quarter, if we go back a few months ago, and I guess I would love an update on that. It looks like this quarter from headcount perspective, the hiring activity was a little softer maybe than we would have expected. So just curious where we are on that, maybe an actual headcount, and if you still think that's an achievable goal.

Sure, let me break up the question into a couple of parts. First, the majority of the hiring that we've been talking about and in terms of expanding headcount will not require the use of forgivable loans. Forgivable loans are typically a source of investment capital that we use only when bringing on revenue-generating sources into the firm.

A lot of the individuals who will help us increase headcount are really individuals who will help fill out our delivery pyramid within the organization. So, that's one.

Two is, you know, the 451 quarter-end is not that big a surprise. It's always difficult to get new recruits to start during the holiday calendar. I've been very pleased with the level of hiring activity that we've had in the first six weeks. And we're working hard to continue on that. I still think our initial goal is achievable and it's not at Q1 -- that is not going to stop our pursuit to bring on these professionals.

Got you. Okay, so is that to say maybe you could broaden the answer a little bit, two things. One, a hiring goal maybe for the year then. And then two, I guess from where you sit, would you -- when you say maybe the 5% is achievable for the first quarter, it's 5% from where we are today from the 451, right? Using that as a base?

I believe when the 5% was quoted, it was based on the headcount that we were talking about at the end of Q3, which was 449. 451 is roughly the same. And that was sort of our initial headcount goals. We still anticipate to add more heads to our normal on-campus recruiting that had been going on through the fall and through the winter months.

And, as we've talked about in prior calls, in terms of the level of aggregate added heads, it's probably going to mirror that terms of a year-over-year basis pretty closely to the revenue ranges that we achieve, you know, adjusted for when they join the firm.

Okay. All right. Got you. Got you.

So I'm just I guess what I'm trying to say, Dave, is that the rate of growth in heads will probably look similar -- again, adjusting for when these people joined to the rate of growth in revenue.

Got you. Okay. So again there, no year-end guideposts that you would be comfortable giving at this point?

The only difficulty in giving the guideposts is that the heads start at very different times. So, I may give you a target guidepost for the year end, but the waiting of when they will join our firm really impacts the revenue and profit contributions from those individuals. That's one of the reasons we decided to go with the revenue guidance and a profit guidance range to give a little more transparency to our investors, as opposed to trying to do the math of headcount and billings and utilization, given the timing of these additions.

Okay, all right. Fair. And then, I guess one or two other things I'd just like to hit on. First when you think about where you'd like to add or if you want to look at it in terms of revenue, that's fine too, from a practice perspective, can you give some color there?

Sure. I think the planned headcount additions will pretty much mirror the size of the practices that we currently have in our portfolio. The four largest practices that we have in CRA is our Competition practice, the Finance practice, Life Sciences and Marakon. So, I think the majority of staffing additions will be across these four areas.

Got you. Got you. Okay. And then one last one. It's a little bit more challenging question to ask, given what's happening on the headcount side in the hiring -- nut utilization. As we think about it, very decent showing 2014. Is there still potential there, putting aside the fact that the new hires presumably weigh on utilization near-term?

I think we're going to aim for utilization in the mid-70s. I think we can be a very profitable organization with utilization in that range. And what we will not do is I will not forgo us taking market share and pursuing revenue opportunities to maximize short-term utilization. Well, there is always a trade-off with adding new colleagues, integrating them and the impact on utilization. But I think this trade-off is going to be value-creating for the organization as a whole.

Got you. Okay, perfect, thank you.

Okay. Thank you, David.

(Operator Instructions) Tim McHugh, William Blair.

Just kind of following up on the hiring question, can you kind of elaborate a little bit more where in particular you are focused, I guess, for 2015 in terms of, I guess, where you see opportunity for either kind of incremental growth within the business or new hiring opportunities that you want to build out more? Just so we understand kind of where you are headed?

Okay. Let me try to give a little more color on that. So we were very fortunate to add some very senior professionals in the Marakon business unit. Some were working off restricted covenants over 2014, and some were ramping up with just joining us in the fall of 2014. So for these professionals, we feel very good about their revenue-generating potential. So the hiring for our Marakon colleagues, a lot of it is going to be focused on building out their delivery teams for these professionals.

We also have within that group quite an active pipeline of very senior professionals we're also trying to build on. And that's going to focus on continued expansion in the Financial Services sector. We are seeing opportunities in the Energy and the Consumer Product sector that we will also continue to pursue.

On Life Sciences, there, the additions are really a combination of building out the delivery teams of some of the additions in 2014, but we're also seeing an active pipeline there. Finance -- it is really across the board in terms of senior and juniors. On our competition practice, we've been very fortunate that the pipeline of candidates is about as active as I've seen it during my tenure at CRA.

It seems like every time we have a recruiting success, we are getting twice as many new candidates inquiring about joining CRA. So, there is -- a lot of the effort is focused on the delivery team. We think there is opportunity to more efficiently deliver the revenue within that practice, improving on the quality and the value of that delivery for clients. So, there is probably low level non-VP staff more the focus.

Okay. And I guess so just to follow-up on that, that's a pretty -- basically you described most of the parts of the business that, I guess, you were adding within. Is that the way to think about it, that it's pretty broad across the business? Or is it going to -- is the hiring a lot heavier in one area than the other as we think across this year?

I've been really pleased to see, I'm having growth in revenue and improvements and profitability across these four areas. These four areas are also areas that we think we still have revenue opportunities in the marketplace. So, that's for putting our capital behind that.

I have several other practices that are growing. They are smaller and thus aren't going to impact headcounts as much, given the size of the great organization. But we are focusing our efforts on these four practice areas because of what we are seeing in the marketplace.

Okay. And then on the balance sheet, I think you stepped up share repurchases obviously this past quarter and you talked about looking at investments. But I guess how aggressive do you want to be at this point with, I guess, leveraging that balance sheet across this next year, in the absence of seeing some significant acquisitions? I mean, do you think about getting more aggressive with, I guess, taking that cash balance down a little bit and buying back more stock?

I think we were pretty aggressive throughout 2014 on the repurchase of those shares. Right there, our limit is really not as much on our appetite as opposed to our ability, given the trading restrictions on acquiring those shares. When we saw opportunities in the second half of 2014, we pursued them as vigorously as we could. There wasn't -- it didn't have anything to do with limitations on capital or reluctance to use the remaining cash balances for those pursuits.

We are going to approach 2015 in the same manner. What I see with what we've done, what I see in the prospects of the business, I still think CRA is a great value, and we're going to put our money behind that belief and continue to purchase those shares. Again, we face some restrictions, given the general liquidity of the stock, given what our repurchase ability is on a daily basis. But it really doesn't have to do with being capital-constrained there.

In 2014, we basically exhausted the cash generated by the business across the areas that were highlighted by Chad. Both reinvestments in the business, being able to drive growth there, and the share repurchase. And I see a lot more of that in 2015.

Okay, great. Thank you.

Thank you, Tim.

Joe Foresi, Janney Montgomery Scott.

This is Robert Steelman stepping in for Joe. Thanks for taking our questions. Sorry if you already addressed this, but do you have any commentary on the backlog you have now versus last year?

What we've been really pleased with is -- and I'm sorry if it sounds a little bit like rhetoric or a broken record, but our lead flow and conversion rates during the past two years are really at levels I haven't seen for quite some time. So, the level is impressive, and the consistency by which these leads are coming into the organization.

So, we haven't seen that kind of drop off occur yet. Fourth-quarter was healthy; beginning of 2015 is healthy. If I look at our project backlog, I think, as we referenced in the press release, our project backlog now is as healthy as I've seen in the last number of years.

So, we have to make sure that we're taking those opportunities, taking that project backlog and converting it into profitable revenue for this organization. But in terms of the contributions into the business, we're pretty pleased where we stand right now.

Okay, great. And how do you think about the M&A environment at this moment?

Your guy's guess is probably as good as mine. A lot of the factors that we are seeing in the M&A marketplace have been around for the last several years. Money is basically free. Cash balances are building at companies. It is not real GDP growth unless firms are looking for alternatives to grow their top and bottom lines. But with that, we've had sort of ebbs and flows on the M&A volume in the past number of quarters.

We've been very pleased with the pickup in activity over the past six to nine months. I don't have an opinion as to whether I expect that to continue into 2015. With that said, what I have found very impressive during my tenure as CEO and even before that, our competition gets theirs. Our Competition practice gets theirs.

By that I mean, even during periods of lower M&A activity, we seem to get a very large share of the deal flow that is out there in the marketplace. The level of productivity or utilization in our Competition practice has been strong throughout these ebbs and flows of the M&A marketplace. So, very impressive performance and I don't see that changing, particularly given the fact we keep adding to the quality and depth of that portfolio.

Great, thanks very much.

Thank you.

It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Again, thank you to everyone for joining us today. As always, we appreciate your time and interest in CRA. We'll be getting out meeting with investors in the coming months, and we look forward to updating you on our progress next quarter.

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

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