CRA International Inc (CRAI) 2016 Q1 法說會逐字稿

Good day, everyone, and welcome to Charles River Associates first-quarter fiscal 2016 conference call. Today's call is being recorded. Today's news release and prepared remarks from CRA'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, Rob. 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 our future share repurchases, or using terms look forward, expect, believes, should, aim, estimate, anticipate, intend, or 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 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 reconciliation of these non-GAAP items to their GAAP equivalents, as well as the calculation of adjusted EBITDA 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. In the first quarter of fiscal 2016, CRA reported its highest quarterly revenue in the past five years, growing more than 12% sequentially and approximately 4% year-over-year. These results would have been even stronger if adjusted for the headwinds arising from foreign currency. The investments made in the second half of 2016 helped drive growth, as strong contributions from both our recently hired consultants and our legacy portfolio of services resulted in a companywide utilization of 75%.

In addition, I am pleased to report that successes realized during the first quarter were driven by double-digit revenue growth in our finance, financial economics, energy, and labor and employment practices. During the first quarter, the finance practice saw casework in shareholder disputes as well as disputes over valuation of specific business ventures. In addition, our consultants began to see renewed activity in matters alleging manipulation of financial markets. All of these areas have been at the core of our practice in prior quarters, but we started to see broader activity during Q1.

Cyber and forensic investigations accounted for a large increase in activity within the finance practice. The details of these engagements vary, but these matters frequently involve providing support to firms that may have suffered possible breaches of data security including credit card exposure, client information, and control of systems. Our consultants investigate such breaches, assess the magnitude and work on the mitigation.

Financial economics practice continue to serve clients on a broader -- a broad array of the lending matters in the first quarter. In addition to that focus, two of their largest engagements featured work on international arbitration and consumer product matters. CRA's energy practice had a great first quarter, stemming from an increase in major litigation engagements, including a US federal case involving environmental compliance in the power sector and an ongoing large damages matter in international arbitration.

More and more employers are turning to CRA's labor and employment practice to assist in proactive analysis of their pay practices. For example, the Office of Federal Contract Compliance Programs has been more aggressive with companies on their pay equity. This increased activity is resulting in more employers turning to CRA to assist in proactive analysis of their pay practices and responding to notices of violations.

During the first quarter of fiscal 2016 -- let me just covers some facts. Non-GAAP revenue increased by approximately 4% to $80.2 million. On a constant currency basis relative to the first quarter of 2015, non-GAAP revenue would have increased by approximately $1 million to $81.2 million or 5.2% relative to the first quarter of 2015. Non-GAAP adjusted EBITDA was $12.7 million, or 15.8% of revenue. On a constant currency basis relative to the first quarter of 2015, non-GAAP adjusted EBITDA would have increased by approximately $300,000 to $13.0 million, or 16.1% of revenue.

Non-GAAP net income was $2.7 million or $0.30 per diluted share on a constant currency basis relative to the first quarter of 2015. Non-GAAP net income would've increased by approximately $200,000 to $2.9 million, or approximately $0.02 per diluted share to $0.32 per diluted share. Given the strength of our business and its ability to generate strong cash flows, we believe that we can both invest in the business for growth and return capital to our shareholders. We intend to continue returning capital to shareholders via repurchases as long as we believe a gap exists between the firm's intrinsic value and the observed market price of our shares.

Since the beginning of fiscal 2013, we have repurchased approximately 1.6 million shares for a total of approximately $40.5 million. During this period, CRA has reduced its share count by 1.2 million to approximately 8.9 million shares outstanding as of the end of fiscal 2015. During the first quarter of fiscal 2016, we launched a modified Dutch auction tender offer to repurchase up to $30 million in value of shares of our common stock, of which 1,164 shares were tendered. CRA remains committed to returning capital to its shareholders. We intend to be in the market purchasing our shares following this earnings announcement.

Following the expiration of the tender offer, CRA's Board of Directors authorized an expansion to our existing share repurchase program of an additional $20 million of shares of common stock, bringing the total amount then available under our share repurchase program to $28.1 million. In connection with this expanded share repurchase program, our Board of Directors recently authorized CRA in its discretion to adopt a Rule 10b5-1 trading plan in connection with this repurchase activity.

Looking ahead on a constant currency basis relative to fiscal 2015, we are affirming our guidance of 2016 non-GAAP revenue in the range of $312 million to $322 million and non-GAAP adjusted EBITDA margin in the range of $15.8 million to $16.6 million. We are encouraged by the strong start to the year. Positive trends and project lead flow and new project originations observed in the second half of 2015 have accelerated in the first quarter, delivering double-digit growth year-over-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. Before covering some additional financial metrics, I want to discuss a recent development with respect our majority-owned NeuCo subsidiary. Earlier this month, NeuCo entered into a contract with General Electric to sell substantially all of its business assets for cash and other considerations, including the buyer's assumption of certain liabilities. The specific terms of the deal have not been disclosed.

During the next 12 months, NeuCo will be winding down its affairs and the residual return, if any, will be distributed to the shareholders of NeuCo once certain contingencies are satisfied. The accounting for this transaction will be reflected in the second quarter of 2016. While we will still have NeuCo on our accounting books, it will not be an active subsidiary after the second quarter and will only reflect wind-down efforts through its dissolution. This transaction streamlines our financial statements and simplifies our communications with investors.

Before we get to your questions, let me address a few additional metrics related to our first quarter 2016 performance. In terms of headcount, we ended the first quarter with 499 consulting staff, which consisted of 118 officers, 261 other senior staff members, and 120 junior staff. This is a net decrease of 12 consultants from the 511 total consulting headcount that we reported at the end of the fourth quarter of fiscal 2015. This net decrease is consistent with our normal attrition pattern during the year.

Non-GAAP selling, general, and administrative expenses as a percent of revenue, excluding the approximately 4% attributable to commissions to nonemployee experts, was 19.0% for the first quarter of 2016, compared with 19.0% a year ago. The first quarter of 2016 continued to see nonrecurring real estate expenditures as we completed our office transition in New York City, which I will discuss in more detail in a few moments.

Turning to the balance sheet, as of the end of the first quarter, we reduced our DSOs to 98 days compared with 105 days at the end of the fourth quarter of 2015. DSO in the first quarter consisted of 59 days of billed and 39 days of unbilled, compared with 73 days of billed and 32 days of unbilled in the fourth quarter of fiscal 2015. We concluded the first quarter of fiscal 2016 with $22.6 million in cash and cash equivalents. Our first quarter is typically a period of lower cash levels as it coincides with the timing of a significant portion of our bonus outlays.

As mentioned in prior earnings calls, our real estate portfolio continues to undergo a transition. The office moves over the last 12 months were necessary as individual leases expired. With each location, we strived to create a more efficient and cost-effective workplace. In New York City, the build-out of the office was completed and we moved in February. In the second half of fiscal 2016, we expect to transition for our London office with the lease for this location expected to be signed during the second quarter.

The real estate investments during the first quarter totaled $4.5 million with an offset of $1.6 million in tenant improvement allowances. Although the plans for our London office are still not finalized, we currently estimate total expenditures for Washington, DC; New York City; and London to approximate $8.1 million, with an offset of approximately $500,000 in tenant improvement allowances for the remainder of fiscal 2016.

In addition to these capital outlays, as previously announced, we were burdened by temporary additional rent expense in New York City as we occupied our legacy office space at the same time as building out the new space. This additional rent expense began in August 2015 and ended in the first quarter of 2016. The temporary additional rent expense for the first quarter of fiscal 2016 amounted to approximately $200,000. Although we are still finalizing plans associated with our London office, we anticipate additional rent expense for fiscal 2016 from that office to be approximately $1 million.

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

(Operator Instructions). David Gold, Sidoti.

I just wanted to go over a couple of things. First, some sense or some commentary if you can, Paul, on the hiring front. I note that senior headcount is down by a few heads sequentially, so curious if you can give some commentary there. And then also thinking for the rest of the year, both senior and junior.

Sure. The change in headcount from the end of Q4 to the end of Q1 is really just part of normal fiscal year fluctuations that we get. It's normal attrition, it's normal management of our professional staff. So, we did not see anything that was troubling, any trend. We did not lose any revenue-generating sources from the quarter. So it is just more business as usual. For fiscal 2016, it's a little still far out, but we probably would expect to have a net increase year-over-year of about 4% to 5% in our professional staff.

Is it broad-based or senior versus junior?

I would expect the mix to be largely the same proportions that we have now, possibly a little more heavily weighted to the junior staff. As we've talked about in the past, we are trying to improve on the staffing leverage of our portfolio.

Okay. That works. And then, obviously, presumably some frustration on your part on the tender offer. It cuts both ways. It was less successful than you'd like it to be, but the share price is reflecting value a little better than it was. Other thoughts there? Uses of cash? We know you increased your repurchase authorization. But I guess as we all know, with the shares being a little thin, it makes it a little hard for you to buy as aggressively as you would like. Would you consider a dividend at this point, or are you more committed to the share repurchases?

I think we start with a commitment to return capital to our shareholders. We are going to try to do that in the most cost-efficient manner possible. Where the price is currently at I still believe that there is a large enough gap that the most efficient vehicle is share repurchases. If we start closing that gap, we would most definitely consider a dividend. But at this point, our focus is on consuming shares outstanding.

Got you. Okay. Thank you much.

Tim McHugh, William Blair.

I just want to ask -- you commented -- and I apologize; I jumped on maybe a few minutes late, so if I missed this, sorry -- but you talked about an acceleration and the project lead flow from even what you saw last year. Can you elaborate on that? Is that just a reflection of you've got more people because the hiring and they are hitting the market and bring you more of that in there? Or do you think the market demand environment has changed?

It's a good question and it's a question that we have actually spent a lot of time trying to analyze. So, we saw a pickup in project lead flow and new project originations in the second half of 2015. I believe they were around 6% and 7%, respectively, year-over-year comparisons. We were pretty pleased with that pick up. Going into the first quarter, we saw that actually accelerate to where we were double-digit growth on both lead flow and new project originations. So there were a lot of encouraging things about that increase.

One, our conversion rate did not deteriorate, even though we are getting more leads. It actually has gotten stronger. Two, I am seeing growth -- yes definitely, from some of our new colleagues. I noted some of the contributions we got from cyber and forensic investigations. We are clearly seeing contributions there. But we are seeing conservations across the portfolio and across our geographies. So, there is not one that overly weighted segment of our business that is driving that increase.

Now, the next question is, is that due to an overall increase in demand? Always hard to tell, because the first indicator that I would look at is, for example, is legal spend going up? All indications, at least that we see, say legal spend is not going up. Turn to the M&A environment; no particularly heavy M&A here. And though I think M&A for 2016 should be just fine, Q1 was rather soft. So, I think players are finding niches to accelerate in, but I would not necessarily say that the overall markets, particularly in the legal regulatory space, is (technical difficulty) at least as I could observe.

Okay. And I guess you mentioned the M&A market. Have you -- there is a tale in terms of when it hits your business a little bit, I guess. But how are you thinking about how that -- has that translated the recent M&A choppiness, I guess, or weakness even, that you saw in the first quarter? What is happening with your M&A and competition practice relative to that?

Sure, sure. So, there is always a little bit of the lag. And we were very happy that we had really strong contributions from practices other than our antitrust and competition economics practice. I just wanted to say a few words about that practice. First of all, it is still the largest, it is still the strongest, and one of the most profitable business units at CRA.

Last year, Q1 of 2015, I believe our competition practice at that time posted I think if not the greatest or tied for the best quarter ever in its history. Q1 of 2016, they actually bested that my little bit. So it was a very hard comparison quarter, but by no means did we see the activity for the entire business unit decline. Lead flow into that sector, we did not see a decrease there. We are looking at it carefully because of the drop in volume. But at least from an aggregate practice, we have not seen a drop off yet.

Okay, great. Thanks.

(Operator Instructions). Thank you. At this time we have reached the end of the Q&A session. I will now turn the conference over to Mr. Maleh for any closing or additional remarks.

Again, thank you to everyone for joining us today. We appreciate your time and interest in CRA. We will be getting out and meeting with investors in the coming weeks and months, and we look forward to updating you on the progress next quarter. With that, this concludes today's call. Thank you, everyone.

Thank you. You may now disconnect your lines at this time. Thank you for your participation.