CRA International Inc (CRAI) 2015 Q2 法說會逐字稿

Good day, everyone, and welcome to Charles River Associates' second-quarter fiscal 2015 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, Mr. Paul Maleh, and Chief Financial Officer, Mr. 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, Manny.

I would like to remind everyone that the statements made during this conference call concerning the future business, operating results and financial condition of the Company, including those identified in our earnings release and statements regarding guidance or hiring activities, or using the terms focus, expect, outlook, position, anticipate, believe and similar terms 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 the 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 and certain measures presented on a constant currency basis. 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 and a description of the process for calculating the measures presented on a constant currency basis.

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

Thanks, Chad, and good morning, everyone.

Q2 fiscal 2015 marked a special time for CRA. Fify years ago, on June 1, 1965 was the formal start of our business. To celebrate, last month we joined employees in the New York City office to ring the opening bell for NASDAQ. Colleagues celebrated from other offices as we recognized the people, past and present, who have contributed to this milestone.

Also during June we hosted a very successful client appreciation event in New York City at the New Whitney Museum of American Art. This event brought together approximately 450 clients and friends of the firm, as well as members from across CRA's practices and geographies.

Moving on to CRA's Q2 fiscal 2015 performance, we're pleased with the quarter's results and the progress we're making in executing our growth strategy. Overcoming continued currency pressure, we achieved the following results:

Non-GAAP quarterly revenue of $75.6 million in Q2 of 2015. On a constant currency basis relative to Q2 of 2014, non-GAAP revenue would have increased by approximately $1.9 million to $77.5 million.

Non-GAAP gross profit of $25.3 million, or 33.5% of revenue. On a constant currency basis relative to Q2 of 2014, non-GAAP gross profit as a percent of revenue would have decreased slightly to 33.4%.

Non-GAAP Adjusted EBITDA of $12.8 million, or 16.9% of revenue. On a constant currency basis relative to Q2 of 2014, non-GAAP Adjusted EBITDA would have increased by approximately $500,000 to $13.2 million or 17% of revenue.

Non-GAAP net income was $3.5 million, or $0.38 per diluted share. On a constant currency basis relative to Q2 of 2014, non-GAAP net income would have increased by approximately $200,000 to $3.7 million, or by approximately $0.02 per diluted share to $0.40 per diluted share.

We have positioned the Company for growth in the quarters ahead through our ongoing recruiting efforts, all while maintaining a companywide utilization of 75%.

CRA's financial performance was led by the Antitrust & Competition Economics practice, which recorded the highest quarterly revenue ever, with strong contributions across both North America and Europe. The practice has terrific momentum for both its antitrust and M&A related expertise in a wide range of sectors. Engagements during the second quarter were distributed among more rainmakers within the practice as compared to a year ago, and also included ongoing collaborations with the leading network of academic affiliates.

In addition, during the second quarter of fiscal 2015 the Financial Economics and the Auctions & Competitive Bidding practice generated double-digit growth compared to a year ago. The expanding regulatory and enforcement activities of the Consumer Financial Protection Bureau contributed significantly to the demand for financial economic services, and we experienced increased activity in Europe around a range of new international arbitration assignments.

The Auctions & Competitive Bidding practice continued to manage the leading global dairy trading platform with more than $17 billion worth of products transacted on this exchange since its inception. In addition, the practice continued to manage the trading platform for the sale of Ocean Spray's cranberry concentrate and the auction process for various utility clients to procure electricity generation supply and services for their customers.

We continue to invest in our business, welcoming new senior talent to Antitrust & Competition Economics, Finance and Marakon. For example, in Q2 we added a vice president to Marakon, TT Badrinath, to build upon the hiring of Maria Blanco in the fall of 2014. They join a growing financial services group at Marakon that includes two vice presidents we hired last year, John Rolander and Srini Venkateswaran. To give you an idea of our bench strength, just these four VPs have a combined financial services and consulting experience of over 100 years.

The team has hit the ground running and is helping CEOs and senior executives at banks and financial institutions with creating shareholder value while addressing some of their most important strategic issues in the context of an increasingly regulated environment. For example, optimizing their balance sheet given regulatory, funding and risk restraints; profitably adopting digital technologies to deliver a richer customer experience and address the risk of disruption of fin-tech startups; and redesigning their sales and services approach to drive growth in the post-crisis world of banking.

In Finance, new VPs Steven Schwartz and Guler Wiefling expand our capabilities in the areas where we are seeing increased interest and demand from clients. With courts increasingly relying on economics when making critical decisions on damage claim, Steve helps clients with complex damage analysis and commercial disputes involving such areas as IP, financial instruments and antitrust. As regulations change, corporations are facing more compliance demands and Guler engages directly with corporate clients on their risk mitigation initiatives.

The success in our aggregate hiring efforts results from a combination of CRA's reputation as an attractive destination for top talent, active recruiting of leading talent in the secondary market and on-campus recruits. With strong demand for our services, CRA will continue to be active in the marketplace for hiring at all levels of the organization.

Based on committed hires at both the junior and senior staff levels, we expect overall headcount to increase by approximately 8% to 10% by the end of the third quarter of fiscal 2015 from the second quarter end of 447 consulting staff. These new hires are concentrated in areas with the most opportunities to generate revenue expansion with a significant portion of the hiring directed toward our Antitrust & Competition Economics practice. We expect the higher headcount to improve company-wide staff leverage and drive revenue growth in the quarters ahead.

We continue to focus on driving profitable growth by deepening client relationships and creating new revenue generating opportunities via natural extensions of our current offerings. CRA's outlook remains positive as project lead flow throughout the organization is healthy and the conversion rate for revenue-generating projects continue to strengthen.

Although the U.S. dollar continues to put downward pressure on the contributions of our international operations, we are pleased with our overall performance to date. On a constant currency basis relative to fiscal 2014, we are expecting 2015 non-GAAP revenue in the range of $312 million to $320 million, and non-GAAP Adjusted EBITDA margin between 16.3% and 16.7%.

When we initially provided guidance for fiscal year 2015, we could not have foreseen the movements and volatility associated with the world's major currencies. During Q4 of 2014 earnings call we provided fiscal year 2015 guidance of non-GAAP revenue between $312 million and $320 million, or roughly 3.5% to 6% growth over fiscal year 2014. Year-to-date, we have recorded $152.8 million in revenue, which would have been $3.7 million or 2.4% higher on a constant currency basis relative to fiscal year 2014. This 2.4% currency impact accounts for roughly 40% to 70% of our expected 3.5% to 6% growth rate in fiscal 2015.

Our business is performing well and, when adjusted for these effects of currency fluctuations, our results are in line with the expectations we had at the beginning of the year.

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

Thanks, Paul.

As a reminder, more expansive commentary on our financial results is available on the investor relations section of our website. So that we can get to your questions, let me cover just a few key metrics.

First of all, second quarter non-GAAP gross profit as a percent of revenue increased to 33.5% in fiscal 2015 from 32.0% a year ago. This improvement was largely driven by the rate of reimbursable expenses, which equaled 9.8% of revenue during Q2 of 2015 compared with 11.2% of revenue a year ago.

Non-GAAP selling, general and administrative expenses as a percent of revenue, excluding commissions to non-employee experts, was 20.9% of revenue compared with 18.0% a year ago. The increase in SG&A was due to nonrecurring real estate expenditures as we transition to new office space in Boston this summer and Washington D.C. later this year. We also incurred heightened marketing and recruiting-related fees during the quarter.

Building on Paul's comments, we ended the quarter with 447 consulting staff, which consisted of 342 senior staff and 105 junior staff. This is a net decline of 14 consultants from the 461 we reported at the end of Q1 of fiscal 2015. This decrease is largely attributable to the timing differences of when junior staff leave to return to school relative to when new junior staff hires arrive.

The effective tax rate for the second quarter of 2015 on a non-GAAP basis was 38.5%, compared with 49.3% for the second quarter of fiscal 2014 driven by the favorable geographical mix of earnings, as well as the benefit from the release of valuation allowances.

Turning to the balance sheet, our DSO at the end of the second quarter was 102 days compared with 100 days at the end of the first quarter of 2015. DSO in Q2 consisted of 66 days of billed and 36 days of unbilled, compared with 62 days of billed and 38 days of unbilled in Q1 of fiscal 2015.

We concluded the second quarter of fiscal 2015 with approximately $15.8 million in cash and cash equivalents. As planned, we redeployed cash both into our business operations and towards equity repurchases. During Q2 we repurchased approximately 119,000 shares of our common stock for a total of approximately $3.4 million, bringing the total fiscal 2015 year-to-date repurchased shares amount to approximately 264,000 shares of common stock for $8 million.

We also continued our investments to create more efficient and welcoming workplaces. The buildout of Boston is nearing completion and the buildout of the D.C. office is well underway. The related cash outlays during the quarter totaled approximately $3.4 million, net of tenant improvement allowances. Additional expenditures for these two locations of approximately $3.8 million, net of tenant improvement allowances are anticipated for the remainder of this fiscal year.

We have also recently executed a new lease associated with the New York City office. The design process has begun. Construction and related capital expenditures will commence in the fall of fiscal 2015 once the plans have been finalized, with an anticipated move in during the first quarter of 2016.

In addition to these capital outlays, it is important to note that we have been burdened by an additional rent expense in Boston since 2015 and, similarly, will be burdened in New York City as we occupy our legacy office spaces at the same time as building out the new spaces. These heightened expenditures will end in Boston in Q3 of this year. The additional rent expense associated with New York City will begin in Q3 of this year and end in the first quarter of 2016.

For the second quarter of fiscal 2015 the additional rent expense amounted to approximately $600,000. Additional rent expense of approximately $700,000 is anticipated for the remainder of fiscal 2015. In total, we expect additional rent expense of approximately $1.8 million for 2015.

CRA's overall liquidity and the cash outlays for share repurchases and workplace improvements position us well for the years ahead.

That concludes our prepared remarks. Manny, we would now like to open up the call for questions.

(Operator instructions). David Gold, Sidoti.

Hi. Good morning. Was hoping to delve a little bit more into the planned headcount addition and sort of where we are in the process. I guess it sounds like -- I think the word you used, Paul, was committed hires of 8% to 10%, so just want to be sure I fully understand that. And then, too, where we sat at the end of the quarter was a little lower maybe than -- certainly than we would have thought given commentary earlier in the year, and so curious if there's much happening there by way of attrition or if it's just been more difficult to hire maybe than you had anticipated.

Okay. So, let me try to start with the beginning set of questions and work my way down your list. The 8% to 10% growth over the quarter end of 447, the way I got the 8% to 10% growth is we have a list of people that have committed to CRA. We have names, we have start dates of when those individuals are joining CRA. The main reason for the range is it's always difficult to try to estimate precisely the level of attrition in any given period of time. So thus, we believe with the new individuals joining us that we'll be able to increase heads by the end of Q3 in the 8% to 10% range. We're in the market and we would be thrilled if we're able to go north of that figure, but we feel comfortable with that range at this time.

With respect to are we having difficulty in the marketplace, we've had some timing challenges, as we've discussed during Q4 and Q1, on the hires. But, quite frankly, things have gone pretty much according to plan of where we thought we would be at this stage of the year. Where we could not provide additional information during the Q1 call was really the uncertainty around the level of attrition in terms of our analysts and associates going back to graduate school. Many of them don't get notice until April and May and thus don't communicate to us their decision to go back to graduate school so, thus, I couldn't give you and the shareholders a more accurate estimate of quarter headcount at the end of Q2 and Q3.

So, we're pleased. We've been successful on campus, we've been successful on the secondary market and our pipeline looks pretty rich right now with really qualified candidates so we're hopeful for some positive happenings in the quarters ahead.

Gotcha. Okay. And then on the 8% to 10%, can you give a sense for what that looks like junior to senior, even if it's just -- not exact numbers, but percentagewise, the weighting?

The weighting is going to be more heavily weighted to the juniors just because of--.

This is college hiring time.

Correct, correct. So, we'll improve our leverage. I'm going to hold off on giving you the exact split just because of the uncertainly between 8% and 10% and the attrition rates, but it is more heavily weighted to campus recruits. But with that said, we also had a successful recruiting year recruiting MBAs and PhDs from campus recruiting and also had some nice hits. And we highlighted a few of those on the officer ranks in terms of lateral hires.

Sure. And actually, with that would you have handy the number maybe at quarter end of seniors versus juniors?

Sure. For the quarter end of 2015 -- I think Chad may have cited this. I think we ended the quarter at 447 total.

Right.

The junior composition is 105 and the senior staff, which would include the officers, is 342.

Perfect. One other, and I'm just -- as we think about the remainder of the year and cash position and repurchases, presumably -- you've been quite active in the past presumably with shares at a higher level than here, so just curious as to thinking on a go-forward basis.

As long as our price is trading where it's trading and our outlook is where it is, we're going to be active repurchasers of our shares. The timing of those repurchases are of course impacted by other capital requirements that we have, both in terms of reinvesting in our professionals, recruiting new professionals, and also the real estate that Chad has outlined for you on that. But we have not become bearish in terms of our shares and I think our actions over the last year and a half address that quite loudly.

Perfect. Thank you so much.

Thank you.

Thank you. Joseph Foresi, Janney.

Hi. I was wondering if you could identify us with the hiring that's taking place what particular skill sets are most attractive to you at this point and what you're focused on?

I want really smart people. It's sort of a flippant answer, but for as long as I've been at CRA, what you're trying to do is you're trying to create an environment for smart people to do special things. So first and foremost, we look there. We look for dominant share of our -- in terms of academic majors. It happens to be in the field of economics, but we have people in the sciences and biology. I have history majors, I have math majors and a whole array of different PhD and master-level expertise. So, our core expertise is always going to be economics, finance and strategy and the educational backgrounds does vary amongst our professionals.

Got it. So I guess maybe to ask it a different way, what particular end market, if you would, do you feel like most of these hires will go into or is this spread across the board?

I think if you look at the distribution of our revenue right now across our practices and our lines of business, it's pretty proportional to that distribution. Well, I think I touched upon that Competition has continued its outstanding performance and they will get a very large share of the incoming hires. We're thrilled about that because we think we are leaving money on the table with respect to opportunities. The other large recipients are going to be our Finance and Marakon practices. But really, every practice is going to have an influx of new talent. But the top three practices, I would say, are Competition, Finance and Marakon.

Got it. Okay. And then how should we think about utilization over the long term, particularly when these new hires start? Any thoughts? I know you've given sort of a general directional color around utilization, but I'm just wondering what your thoughts would be kind of--.

I think long term our goal is always to try to run this corporation in the mid-70s. I think it's a good mix of productivity and also enables us to actively get out in the marketplace. When we're introducing the kinds of new hires that we're talking about in Q3, there's definitely going to be a little volatility through the integration of those staff, getting them oriented, getting them on new projects. But we believe medium to long term we'll be right back at the utilization rates of the mid-70s. So, we're going to try to make this as efficient a transition as possible, but I think we're going to be welcoming 50 or 60 new colleagues during Q3 and, clearly, not everyone starts at 100% utilization on their first day.

Okay. And just real quickly, how long do you think that ramp is, six months usually with a new hire?

I would really hope it's faster than that if I look at the transition in the past. This is a large influx, so I would hope by the end of our quarter, end of Q3, that people are pretty much integrated into their practices and working effectively on projects for clients.

Okay. Thank you.

Thank you.

(Operator instructions). Tim McHugh, William Blair.

Thanks. Just some numbers questions maybe to start. The $1.8 million of additional rent expenses, is that I guess the excess expense because you're double occupying space this year? So in other words, I guess it would continue in 2016 because of the New York space, but that's kind of -- it should go away at some point or is that a structural step up because you're taking on bigger space at these things?

Tim, this is Chad. It's not a structural step it. It's exactly the way you described it at first. It's a doubling of rent that is for a finite period that does end. It's ending in Boston this quarter. New York begins now and will end in the first quarter of 2016.

But will -- it ends in the first quarter of 2016.

Yes.

Okay, got it. And how do we think I guess qualitatively -- you got asked about time to ramp on the new consultants, but what about from a margin perspective as we think about this? I guess how much of an impact would you expect naturally? As you said, they don't start off productive on day one. Is there -- as we think about 3Q versus 4Q, even, is there a margin impact on 3Q we should be thinking about here?

33 point -- what are we at, 33.5% for the quarter was a really healthy gross margin for the firm. I would expect a little bit of decrease from that level as we integrate these people into the firm. Again, I don't see it as a long-term hit to the firm, so I would like to see margins back to our historical norms in Q4. So, I don't have an exact number for you as to the decrease in the gross margin during Q3. Most of the people start really joining us in the first couple weeks of August, so it's a little mixed in terms of the timing there.

Okay. And on the guidance, you gave the guidance on constant currency. And I apologize if you gave this and I missed, but -- so for the year, just based on were currency is now, I guess, what's the revenue impact for 2015 from currency? I guess so we could just do that math.

I think if you look at the revenue impact on 2015 -- we didn't forecast out, but right now we're not seeing the volatility in the currency markets and the levels wouldn't have me expecting something much different than what I experienced during the first half of 2015. But everyone's estimates on currencies, quite frankly, are as good as mine given the volatility that we've been observing in the marketplace.

Okay. And then I guess just -- you mentioned these hires. Obviously, I guess campus hires are what they are, but the senior hires you're bringing in there, why such an influx now, I guess? Is there something -- was it just you put more emphasis on? Is it just an unusual timing that it's coming together in one quarter or is there something -- I guess is there a trend or a signal from it?

Yes. Yes. No, that's a good question. For a while starting back in 2013 the focus was on improving productivity and trying to make more productive use of the assets I had in this firm. When we communicated out to the market almost a year ago about our desire to start expanding on the services, yes, more of a focus was happening during that time, building relationships with recruits, trying to find the right pieces and these courtships take a while to develop. And so would I prefer to see them more equally disbursed through 2015? Yes, of course. But with that said, we're thrilled that they've chosen CRA and joined us.

I'm also thrilled when I look at the pipeline of new recruits. It's really quite full. So not only are we able to bring on new recruits, it's when I look at the pipeline it is quickly getting refilled. And that's why we talk about CRA being an attractive destination. The pipeline is not getting depleted as these people are joining us. So, we're optimistic that hopefully you'll see a steady of some really nice talent in the quarters ahead.

Okay. Thank you.

Thank you, Tim.

Thank you. Manas Gautam, Osmium Partners.

Hi. Good morning, guys. This is actually John Lewis. Just a couple quick questions. I joined the call a few minutes late, but obviously you guys have had a pretty robust appetite for share repurchases over the last couple of years. Given where your stock is and how your cash cycle works, can you talk about your appetite for second-half share repurchases and give any color on how much cash -- what kind of cash flows will go on your balance sheet? Even a ballpark estimate in the back half would be helpful.

Sure. CRA tends to accumulate cash during the quarter three and quarter four and relative to Q1 and Q2 and the main reason for that is that bonuses are paid out to our administrative and consultants after Q1 and Q2, so there will be an accumulation of cash during those quarters.

And right now we're not lacking for reinvestment opportunities. It's been on the real estate, which I think positions us well for the future to run a more efficient operation. It's on reinvesting in this talent so we can drive revenue and profit. And also, John, as you've seen, we've been active repurchasers of our shares. It is just trying to balance all three in the quarters ahead.

I don't want to get too clever and ahead of myself here. We are not a financial engineering firm where I'm looking to come up with schemes to get ahead of these kind of requirements. But I think over the last 18 months we've been active repurchasers of the shares and I think shareholders should expect that kind of activity in the quarters ahead. We have not given specific levels in terms of expected repurchases, John, but the appetite is there; again, because of where we see the price and because of where of we see our prospects.

That's helpful. I guess my last point would be you guys invested pretty considerably in share repurchases in the high to mid-20s. The stock's $24 today. And just looking at what you can do on a cash flow per basis -- ability to grow your cash flow per share in light of the current prices, it seems like an excellent opportunity to put more capital to work in repurchasing cheap shares. So, thanks.

We agree with you, John. We agree.

Thank you. We have no further questions at this time. I would like to turn the floor back over to management for any closing remarks.

Again, thank you to everyone for joining us today. 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, that concludes today's call. Thanks again, everyone.

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