CRA International Inc (CRAI) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to the Charles River Associates Fourth Quarter and Fiscal 2017 Results Conference Call. Today's call is being recorded. Today's release and prepared remarks from CRA's Chief Financial Officer are posted on the Investor Relations section of CRA's website at crai.com.

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, including guidance on our revenue and non-GAAP EBITDA margin for fiscal 2018, our estimate of our fiscal 2018 full year non-GAAP effective tax rate and any other statements concerning the future business, operating results and financial condition of CRA, including those using the terms, looking forward, expect, believe, anticipate, look to, target, seek, projected, position, continues, estimate, should 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 release and in CRA's periodic reports with the SEC. CRA 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 non-GAAP EBITDA margin, non-GAAP adjusted EBITDA and certain measures presented on a constant currency basis. Everyone is encouraged to refer to today's release or the Investor Relations website noted above for a reconciliation of these non-GAAP measures to their GAAP equivalents, including descriptions of the calculations of adjusted EBITDA and 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. CRA ended fiscal 2017 with continued strong performance across our entire portfolio. Year-over-year, fourth quarter of fiscal 2017 non-GAAP revenue and non-GAAP adjusted EBITDA grew 22% and 23%, respectively. Non-GAAP net income nearly tripled due to our strong performance and the tax benefits associated with our continued stock appreciation.

Companywide utilization increased to 75% from the 71% reported in the fourth quarter of last year, and quarter-end headcount was up 17% from a year ago.

Year-over-year, Legal and Regulatory Services grew more than 10% and Management Consulting Services grew more than 50%, largely aided by the contributions from our acquired C1 business. We experienced this strength across geographies, with North American operations growing nearly 15% and European operations growing more than 50% year-over-year. We again enjoyed broad-based contributions during the fourth quarter, with the increase in revenue balanced between organic and inorganic growth.

Our strong performance was driven by double-digit revenue growth, year-over-year, in our Energy, Forensic Services, Labor & Employment, Life Sciences and Marakon practices, with solid contributions from our Antitrust & Competition Economics and Finance practices.

Within Legal & Regulatory, the Antitrust & Competition Economics practice continued to support ongoing antitrust engagements. For example, CRA experts advised Visa Europe throughout a case involving allegations that the corporation restricted competition through its multilateral interchange fees.

Demand for Forensic Services also continues to build as clients seek independent assistance in response to allegations of fraud, misconduct and noncompliance.

In the area of cybercrime, we assisted one of the largest residential mortgage companies in the U.S. in its response to a data breach caused by a sophisticated e-mail phishing campaign. In addition, we have been assisting a foreign government to evaluate and strengthen its anti-money laundering and counterterrorism compliance programs.

Within Management Consulting, our Energy practice continued to build upon its work with electric and gas utilities, energy investment groups and industrial.

In the fourth quarter, projects for these clients included generation strategy, merger support and gas contract analysis.

In our Life Sciences practice, the advanced analytics teams continued to innovate using new patient level claims data sources to model the complex interactions of health care providers, patients and payers in the U.S. market.

CRA was engaged to help a leading global pharmaceutical company to completely rework the way it segments its customers across all 4 of the company's branded medications marketed in the U.S. The results of the project will provide the foundation for marketing strategy, tactical implementation and performance monitoring. The Life Sciences team anticipates leveraging this analytical approach on similar projects for other clients in 2018.

Marakon delivered another strong quarter with solid results in both Europe and North America. The practice has been generating new and expanded project work from top clients who continue to see our experts as strategic partners when it comes to driving sustainable growth in enterprise value.

For the full year, we grew non-GAAP revenue, non-GAAP adjusted EBITDA and non-GAAP net income by 14%, 12% and 42%, respectively. Our success was driven by strong contributions across our portfolio and a balance of organic and inorganic contributions.

We exceeded our non-GAAP revenue guidance of $360 million to $370 million and achieved our non-GAAP adjusted EBITDA guidance in the range of 15.8% to 16.6%, both on a constant currency basis relative to fiscal 2016. All of this achieved -- all of this was achieved while returning nearly $25 million to our shareholders.

As these results demonstrate, we continue to see solid demand for our portfolio of services in fiscal 2017. Even after adjusting for the strong contributions of the C1 business, average weekly project lead flow and new project origination each increased by approximately 8% compared with fiscal 2016. More recent metrics indicate greater strength with project lead flow and new project originations for the second half of 2017, growing nearly 20% each compared with the second half of fiscal 2016. While the timing and size of these new projects cannot be determined in advance, CRA's business fundamentals and strategy positioned the firm for continued success.

Turning to our guidance. We look to build on our trend of broad-based profitable growth in 2018. For full year of fiscal 2018 on a constant currency basis relative to fiscal 2017, CRA expects revenue in the range of $380 million to $392 million and non-GAAP EBITDA margin in the range of 8.8% to 9.8%, given the change to our guidance profit metric from non-GAAP adjusted EBITDA margin to non-GAAP EBITDA margin. For reference purposes, our non-GAAP EBITDA margins in fiscal years 2015, 2016 and 2017 were 8.1%, 8.4% and 9.0%, respectively.

And now, I'll turn the call over to Chad for a few additional 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 we get to your questions, let me provide comments on a few additional metrics related to our fourth quarter and fiscal 2017 performance.

In terms of headcount, we ended the year with 631 consulting staff, which consisted of 124 officers, 352 other senior staff and 155 junior staff. This is a net increase of 91 consultants or approximately 17% growth from the 540 total consulting headcount we reported at the end of fiscal 2016.

Non-GAAP selling, general and administrative expenses as a percentage of non-GAAP revenue, excluding the 2.7% attributable to commissions to nonemployee experts, was 19.0% for the fourth quarter of fiscal 2017 compared with 19.3%, excluding 3.2% attributable to commissions to nonemployee experts a year ago.

The effective tax rate for the fourth quarter on a non-GAAP basis was 9.5% compared with 38.5% on a non-GAAP basis for the fourth quarter of 2016. The significant decline in our effective tax rate was driven primarily by the accounting for stock-based compensation. As our stock appreciated in value, we received a tax benefit from excess windfall benefits. For the full year, our non-GAAP effective tax rate was 30.9% compared with 39% for fiscal '16, again, benefiting from the impact relating to the accounting for stock-based compensation.

The Tax Cuts and Jobs Act was enacted on December 22, 2017, and other among things, lowered U.S. corporate income tax rate as of January 1, 2018.

As a result of the changes in statute, in the fourth quarter, we incurred a charge to the tax provision of $3.5 million related to the estimated remeasurement of our deferred tax assets and liabilities, which have been excluded from our non-GAAP metrics. Based on our initial assessment, we do not believe we are subject to the onetime repatriation toll tax.

Going forward, we estimate our fiscal 2018 full year non-GAAP effective tax rate will be in the range of 28% to 30%, before taking into account discrete items such as the impacts from stock-based compensation, which could cause volatility in our effective tax rate from quarter-to-quarter.

Turning to the balance sheet. DSO at the end of the fourth quarter was 101 days compared with 114 days at the end of the third quarter of fiscal 2017. DSO in the fourth quarter consisted of 69 days of billed and 32 days of unbilled compared with 73 days of billed and 41 days of unbilled in the third quarter of fiscal '17.

We concluded fiscal '17 with $54 million in cash and cash equivalents. This is nearly identical to last year's ending balance, despite continuing our investment in the business for both talent, including the acquisition of the C1 business and office expansions, as well as returning nearly $25 million of capital to shareholders during the fiscal year.

For the full year 2017, the return of capital to shareholders consisted of $5.1 million of dividend payments and $19.5 million for share repurchases of approximately 555,000 shares at an average price of approximately $35.23 per share.

As announced earlier today, CRA's Board of Directors authorized an expansion to our existing share repurchase program of an additional $20 million in value of shares of common stock, bringing the total amounts available under our share repurchase program to $29.5 million. In connection with this expanded share repurchase program, CRA's Board of Directors has authorized the company in its discretion to adopt a Rule 10b5-1 plan covering some or all of these purchases. Any such plan would allow CRA to repurchase its shares at times when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods.

In the fourth quarter, we also paid a quarterly cash dividend of $0.17 per common share, up 21% from the third quarter, which totaled $1.5 million in aggregate for the quarter. We announced earlier today that our Board of Directors declared a quarterly cash dividend of $0.17 per common share payable on March 16, 2018 to shareholders of record as of February 27, 2018.

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

(Operator Instructions) Our first question is from the line of Tim McHugh with William Blair.

This is actually Trevor Romeo in for Tim today. First is the 2-parter on the guidance. I know you guys guide for revenue on a constant currency basis, but kind of given the weaker dollar that we have seen thus far in the year, any more color on the lift from currency you're assuming or what exchange rates you've been modeling? And then second, why choose to change the profit guidance from adjusted EBITDA to regular EBITDA? And if you wanted to model the adjusted EBITDA metric, would you expect forgivable loan amortization and the stock-based comp to stay at similar levels this year?

Sure. Let me try to address the first question with respect to the constant currency. I guess, what we know best is the fundamentals and the economics of our business here at Charles River Associates. So I wanted to just take out any variability that may occur as a result of movements in the dollar or other foreign exchanges in which CRA operates within. So we just stayed with the constant currency measure. It by no means is an indication of what our expectations are for the strength of the dollar either up or down relative to 2017. Okay? So the second part of your question with respect to the guidance. While we still utilize the adjusted EBITDA measure for various internal purposes and in connection with the credit facility, we are no longer referencing adjusted EBITDA margin when providing our annual finance -- financial guidance. As some of you may have seen in our recent correspondence with the SEC, we have been asked to stop using this metric as a financial measure. We will still provide quarterly information on the amount of forgivable loan amortization and share-based compensation expense to assist current and prospective investors who find the information useful in analyzing the economics of CRA. With respect to outlook there, we're not going to be forecasting those measures. But they have been reported on historical quarters, and we will continue to provide that detail for all investors to analyze.

Okay. That's helpful. And then on the -- I guess, the $5.7 million adjustment for IQVIA, is that essentially the purchase price for the transaction? And why would that be falling through SG&A? And can you give us any idea of how much you expect the new hires to contribute going forward? And maybe how big Life Sciences practice is now as a result?

Take the SG&A part first?

Sure. It was the consideration that we did pay to the former employer of those individuals that came to us. It was not a transaction in the traditional acquisition sense. And therefore the outflow had to flow through our P&L. We isolated it in our financial summary that was provided in context to this earnings call. So it could be isolated and identified specifically for you all.

And with respect to the contributions of these colleagues. So a lot of exciting things happened during 2017 for CRA and more specifically for our Life Sciences practice. With the acquisition of the C1 business, we significantly expanded the breadth of services offered by our Life Sciences practice. We also added a small office in Lucerne, Switzerland, through that acquisition. So we were still seeking to provide a truly global base for our Life Sciences practice. When we found these senior consultants in Europe who are interested in joining, we jumped on that opportunity. And we think our clients are going to significantly benefit from having just a broad base platform for services. The contributions of those individuals are incorporated in the guidance that we have provided, $380 million to $392 million and the aforementioned profit margin. But we're going to do everything we can to help their ramp in the quarters ahead.

Okay, great. And then maybe just one more quick one. So obviously, some great revenue and utilization results in the quarter. I know you may have mentioned something in the prepared remarks, but was there any sort of unusual project activity that would make this quarter a tough comp a year from now?

No, that's really one of the wonderful things about this quarter. There is no contingency project. There is no one large project that dominated the revenue distribution across CRA projects. It was truly broad-based. And I'm happy to say that we've been singing that story now for several quarters, not just in 2017. We continue to get contributions from all parts of the portfolio. And the fourth quarter of 2017 just shows, when you start having a number of those practices sort of moving in unison, it produces really special results. So, yes, does it give us a difficult comp in 2018? I think we're going to take on that challenge going forward.

Our next question is coming from the line of Marc Riddick with Sidoti.

I wanted to pick up on the utilization rate for a moment. And I was wondering if you could take us maybe through the -- if there was anything around the cadence through the quarter sort of how that played out? And did -- was that sort of -- did it start at the beginning of the quarter? Or did it grow throughout the quarter? I was just wondering to get a sense of -- certainly, the revenue you covered that it was fairly broad-based. But I want to get a sense of that utilization rate and how that played through the quarter.

Sure. There was no real peculiar moment of utilization during the quarter. You do have Q4 is traditionally, and Q4 of 2017 is not any different, a very heavy holiday vacation quarter, with Thanksgiving and then the December holidays clearly impacted the activity level of our consultants and, for that matter, our clients. So we saw expected declines in productivity during those holiday stretches. But absent that, the utilization was pretty steady throughout our quarter.

Okay. So the pickup to the 75% was pretty -- at the very beginning of the -- if you're at the end of third quarter and going into the fourth quarter was already pretty strong?

I think that's fair to say, yes.

Okay. Okay, great. I was wondering if you could touch a little bit on Europe and what you're seeing there. Certainly, there is a significant increase, and you look at sort of a post-Brexit environment. I was wondering if you could spend a little more -- give a little greater detail around what you're seeing with the European operations and then maybe what you might anticipate going forward, some potential upside there.

Yes. The -- what we're going to anticipate going forward is always hard to read. But what I can say is, Brexit has introduced a lot of complexity for our clients, both in the legal regulatory side and also in the management consulting side. And my colleagues from the competition Europe segment and also Marakon specifically, and the continued ramp in Life Sciences, all are enjoying increased activity as a result. Whether it's directly related to the U.K.'s decision to exit the European Union or not, I don't know. But we are clearly seeing an increase in activity pretty much across the entire portfolio in Europe.

Okay, okay. And I was wondering how that -- I guess, maybe switching over more so on the mix. The -- with the -- I guess, the timing of C1 sort of rolling off, I guess, end of January, if I remember correctly. When you look at the guide on the -- for 2018 on the top line, I was wondering if you could sort of take us through a little bit -- I mean, I guess, as that rolls off and primarily looking at organic, so wondering if you could sort of give us a little bit more color on your thoughts behind the revenue guide into '18?

Sure. We're thrilled with the contributions of our C1 colleagues throughout 2017. The effort of integration is ongoing, right? A lot of times people will ask, is the integration complete? And we may be complete from an administrative standpoint. But we welcomed close to 90 new colleagues. And that integration is ongoing, not just to get them acclimated into the organization, but also to make sure that the unique skills and services that they brought to Charles River Associates are introduced to all of our clients, not just in the Life Sciences sector. But the analytics capabilities, I think, has broader applications in other services that CRA provides. So we're going to continue to work on that integration. We think there is still growth opportunity to be had through those unique set of skills. With respect to its impact on 2018 revenue here, it's -- we're going forward with it, 2018, that revenue range does not include any expectation of an acquisition or large inorganic contributions. It is organic on that expansion. So -- and C1, in 2018, is part of that organic expansion. We're also looking to help our new European Life Sciences colleagues and have their ramp, and their contributions will also be part of that organic expansion.

Okay. And I was wondering if you could share thoughts on potential headcount growth in '18? And maybe I would imagine certainly Life Sciences would maybe potentially one of the target areas, but if there are any other target areas that we should be thinking about?

Sure. So I'm going to go back to -- we have always stated that our medium- to long-term goal in terms of our financial metrics is to grow revenue in the mid-single digits to operate in the utilization area in the mid-70% range. And given the fact that we exited 2017 right in that mid-70% range, it's pretty safe to assume that increase in headcount will be roughly equal to the increase in revenue. Sometimes you have to hire a little bit ahead of that revenue arriving and sometimes you're lagging. But I think it's safe to assume that headcount growth is roughly equivalent to the revenue growth that we're going to realize in the year. Clearly, Life Sciences is going to be a main area of hire. But outside Life Sciences, we grew -- half of our growth in 2017 was organic. And that means it came from areas outside of the C1 acquisition. So they too need investments with respect to heads. Our competition practice continues to thrive in the marketplace, always looking to invest there. Our Energy practice, the Finance practice, I can go on through the list. So no particular areas targeted. But I'm just hopeful that we'll get the same kind of broad-based contribution in 2018.

(Operator Instructions) Let's turn the floor back to Mr. Maleh for closing or additional remarks.

Again, thanks, everyone, for joining us today. We truly appreciate your time and interest in CRA. And as sort of a close to 2017, I also just want to send out a special thanks to all my colleagues at CRA. To have this kind of success is really a true team effort, both on the corporate side of the equation and also on the consulting side of the equation. And I appreciate our investors being patient with us through the years as we're trying to deliver value for them on a sustained basis. So with that, that concludes my comments today. And we look forward to updating everyone in the quarters ahead. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.