CRA International Inc (CRAI) 2018 Q3 法說會逐字稿

Good day, everyone. Welcome to Charles River Associates' Third Quarter Fiscal 2018 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, Brenda.

I'd like to remind everyone that the statements made during this conference call, including guidance on future revenue and non-GAAP EBITDA margin for fiscal 2018, and any other statements concerning the future business, operating results or financial condition of CRA, including those using the terms "expect," "outlook," "estimate," "looking ahead" 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, including our 10-Q filed this morning 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 and certain measures presented on a constant currency basis. Everyone is encouraged to refer to today's release for a reconciliation of these non-GAAP financial measures to their GAAP comparable measures and descriptions of the calculation of EBITDA and 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.

Broad-based contributions from my colleagues have led to strong results during the past several years. The third quarter proved to be no different. For the eighth consecutive quarter, CRA delivered double-digit year-over-year revenue growth. Revenue during the quarter grew by 14% on an entirely organic basis, and non-GAAP net income and non-GAAP EBITDA grew by 61% and 18% respectively compared to the third quarter of last year.

During the quarter, we achieved companywide utilization of 76%, even while welcoming nearly 100 new colleagues. Strong performance within Legal & Regulatory and Management Consulting was led by double-digit revenue growth year-over-year in the Antitrust & Competition Economics, Finance, Forensic Services, Labor & Employment and Life Sciences practices. These practices represent approximately 80% of CRA's third quarter revenue.

Further highlighting the strength of our portfolio, North American and International operations grew by 13% and 15% respectively. Looking more closely at our practices, colleagues in Antitrust & Competition Economics provided expert testimony and antitrust analyses on a groundbreaking case representing an independent door manufacturer. This case was the first successful jury trial in the past 40 years involving the challenge of a consummated merger. Work on this case was led by CRA Senior Consulting Carl Shapiro, Vice President Bharati Mandapati, Marissa Beck and Julian Manasse-Boetani.

In another project, CRA's Senior Consultant, Fiona Scott Morton, was retained by the U.S. Federal Trade Commission to provide testimony in its case opposing Ottobock's acquisition of its rival, Freedom. Both companies make microprocessor control prosthetic knees. Professor Scott Morton, supported by Vice President Jeffrey Prisbrey, Stephanie Riche and Susan Yeh prepared a series of reports that discussed the relevant antitrust market and the likely anticompetitive effects of the acquisition.

During the third quarter, we also announced that CRA economists and affiliated experts in our Antitrust & Competition Economics practice contributed to the first edition of the publication of "Antitrust Economics for Lawyers." In addition, Serge Moresi, a Vice President in the practice, was a co-author of a paper that won the Best Theoretical Paper Award for 2018 from the International Journal of Industrial Organizations.

Within the Finance practice, consultants continued to support universities and related parties involved in litigation over their employee retirement plans. Our experts have been engaged to opine on the response of universities to IRS regulations that were implemented in 2009 related to the 403(b) retirement plans.

Our Forensic Services practice once again posted the largest percentage revenue gain of any practice in the third quarter. The practice was retained to support a criminal investigation into allegations of financial fraud and misrepresentation, delivering digital forensic solutions to identify assets, forensic accounting solutions to determine the sources and uses of funds, and the overall impact of the misconduct. In addition, the practice provided cyber incident response and eDiscovery solutions to a major university that experienced a cyber-attack. Our consultants determined the nature and extent of the breach while providing support for communications to regulators and law enforcement.

In the Labor & Employment practice, employees increasingly engaged our consultants and affiliated senior consultants to assist in high-profile litigation matters across sectors including Education, Transportation, IT and Professional Services.

Finally, within the Life Sciences practice, they were engaged in a multi-country market assessment to underpin a startup client's go-to-market strategy for a new breakthrough product. The practice also helped an international pharmaceutical company plan the European launch of a unique oncology drug. In addition, the practice assisted with designing a next-generation platform for patient-monitoring business of a large international medical device manufacturer. New monitors will use artificial intelligence to sense complex trends in patient data and to predict critical conditions.

CRA is well positioned to build on the strong momentum we achieved through the first 3 quarters of the year. As a result, on a constant-currency basis relative to fiscal 2017, we are narrowing and raising our 2018 revenue guidance to the range of $404 million to $410 million, from $398 million to $406 million and we expect to be in the upper half of our previously announced non-GAAP EBITDA margin guidance range of 8.8% to 9.8%.

To summarize, year-to-date non-GAAP revenue on a constant-currency basis is $305.6 million, reflecting a $3.3 million reduction due to currency tailwinds. Similarly, year-to-date non-GAAP EBITDA is $29.3 million, reflecting a $100,000 reduction due to currency tailwinds or 9.6% of non-GAAP revenue on a constant-currency basis.

And now I'll turn the call over to Chad for a few additional comments. Chad?

Thanks, Paul.

As a reminder, more expansive commentary on our financial results is available on the Investor Relations section of our website, under Prepared CFO Remarks.

Before we get to your questions, let me provide a few additional metrics related to our performance in the third quarter of fiscal 2018. In terms of headcount, we ended the third quarter with 685 consulting staff, which consisted of 125 officers, 367 other senior staff and 193 junior staff. This is a net increase of 46 consultants, or 7.2% growth compared with the end of the third quarter of fiscal 2017. Sequentially, we experienced a net increase of 57 compared with the end of the second quarter of 2018.

Non-GAAP selling, general and administrative expenses as a percentage of revenue, excluding the 2.7% attributable to commissions to nonemployee experts, was 18.7% for the third quarter of fiscal 2018, compared with 20.2% a year ago. The effective tax rate for the third quarter on a non-GAAP basis was 22.7% compared with 42.3% on a non-GAAP basis for the third quarter of 2017.

The decrease in our effective tax rate was primarily driven by the lower U.S. statutory rate coupled with an increased benefit related to the impact on accounting for stock-based compensation. On a non-GAAP basis, our fiscal 2018 year-to-date effective tax rate is 22.9% compared with 39.0% for fiscal '17 year-to-date.

Turning to the balance sheet. DSO at the end of the third quarter was 112 days compared with 107 days at the end of the second quarter of fiscal 2018. DSO in the third quarter consisted of 74 days of billed and 38 days of unbilled, compared with 74 days of billed and 33 days of unbilled in the second quarter of fiscal 2018.

We concluded the third quarter of fiscal 2018 with $11.9 million of cash and cash equivalents, with a significant portion residing internationally. Since the end of the third quarter, we paid down the outstanding balance on our line of credit of $5 million.

Finally, earlier today, we announced that our Board of Directors declared an 18% increase in our quarterly cash dividend from $0.17 to $0.20 per common share. This dividend will be payable on December 21st, 2018 to shareholders of record as of November 27th, 2018. This demonstrates our confidence in our long-term outlook and our commitment to returning capital to shareholders.

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

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

First, can I just ask about the Marakon piece, I think in the areas you highlighted, is double-digit growth. I know Life Sciences was in there. But I guess, just update us how the broader Marakon or Management Consulting side of the business is doing? Felt like more the strain sounded on the Legal and Regulatory side of the business.

The Management Consulting side of the business was up. Life Sciences makes up the predominant portion of that line of the business. Other areas contributing there are the Energy practice, our Options & Competitive Bidding practice, and the Marakon management consulting piece. So Marakon didn't post double-digit revenue growth in the quarter in question. But overall, we were quite happy with the overall management consulting portfolio.

And the headcount growth, was it in any one particular practice area as we look forward here?

Sure. Well, we're really pleased with the way this growth has been, Tim, over the last number of years now, is it's been balanced. And the way you get that balanced contribution is you're finding all the practices really grow from the grassroots organically. So the headcount growth continues that story, is that it's pretty well distributed across the different lines of business and across the practices, with nice balance across our junior hires and our senior staff hires. So we're hoping that that contributes to some further success in the quarters ahead.

And more broadly, I guess, at least in the last month or two, a more volatile kind of world here and a rising interest rate environment. So, can you talk at all about if there's any change in the near-term pipeline, but I guess more broadly, how you think about sensitivity or how the business will perform as we look forward to next year, extent this sort of volatility continues?

Yes, we're all watching closely. Clearly, most of the time uncertainty is good for any kind of professional services organizations, as clients seek advice to make better business decisions. Here, we're looking at whether the rising interest rates are going to affect the M&A marketplace, which has been relatively robust in the past 12 to 18 months. So, we're observing that. What I can say definitively, outside of our observations, is that the lead flow in new project originations coming into the firm have not seen any kind of dip whatsoever. In fact, we're continuing to see building strength as the year progresses. So although the future is uncertain, to date, CRA has not seen any change in its demand environment.

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

Wanted to touch on -- one of the things that kind of jumped out at me a little bit with the increased headcount is, normally during the third quarter, you kind of think of the college hires that would take place seasonally. And that certainly seemed to be part of it. But there was a pretty decent jump in senior staff as well during the quarter. And I was wondering if you could address that a little bit as to maybe some of the recruiting activity there on the senior side. I mean, it certainly seems as though the demand would necessitate that. But I was wondering if you could touch on maybe if there's sort of a bump up in recruiting efforts or just folks are willing to come over because of the activities that you're engaged in.

Our success has always been driven, of course, by our people and the quality of our back office of support services we provide to clients. We've been fortunate to see significant revenue growth across a number of our practices. And as you start seeing that revenue growth, the demand on having skilled project managers to execute on these projects and to deliver the quality our clients expect of CRA has never been higher. So we took that as really a charge to be very aggressive in both the college level recruiting for senior staff and also on the secondary market. But the move there was really try to bring in the next generation of skilled project managers and, eventually, our new VPs.

And is it reasonable, given the commentary you had earlier around lead flow and what you're seeing demand wise -- is it reasonable to expect that we could see another -- maybe not to the magnitude that we saw during the third quarter, but is it reasonable to say that we should see an increase during the fourth quarter as well on the senior side?

The majority of the inflow of hires, just because of the university calendar, comes during Q3. Headcount additions that you will see during Q4, Q1, and even some into Q2, tend to be on the secondary market side of things. So because of that, I wouldn't expect to see the same kind of headcount inflow during Q4 and Q1. We'll try to elaborate more on that during our Q4 call as we provide guidance and outlook into 2019.

And then, I know you mentioned during the -- I think it was the last earnings call, if not the one before that, but I wonder if you could touch a little bit on sort of how you're feeling about the utilization level as we're getting toward the end of the year, which has been running very strong throughout the year, and how we should be thinking about -- I mean, there is obviously the seasonality of utilization usually coming down a little bit during the fourth quarter. But wanted to get your sense of sort of how you're thinking about that, given how active everything seems to be across multiple practices.

Sure. As we've stated at numerous times to investors in our shareholder letter, our sort of long-term goal of utilization is low to mid-70s. That what we tried to calibrate our capacity at CRA to deliver those kind of productivity levels, which will then, I believe, yield attractive growth rates of both revenue and profit. Now with that said, you will have fluctuations around that target. And running around 76% year-to-date is a little higher than, say, of the target, but still within the range of comfort there. I think, again, it is indicative; you don't produce utilization points at that level by only having one practice or one line of business contributing. So I'm going to stick with our long-term target of low to mid-70s as our steady-state level here going forward.

And I was wondering if you could give some thoughts as to -- certainly, it's encouraging to see again the increase in the dividend. I was wondering if you could touch a little bit on the opportunity for share repurchase going forward, and maybe how you're thinking about that at the moment.

Yes. I think we take great pride on being strong stewards of this firm's capital. I think we have done a very effective job, trying to balance the amount of dollar reinvestment into the business for profitable growth and returning substantive capital to shareholders. Clearly, what has happened over the last 6, 7 weeks has been a surprise. Hasn't been driven by any information, any guidance that we have provided. So we're disappointed in that. We see, as I hope all investors see, an undervalued stock and an attractive buying opportunity. So we will continue to try to balance our capital distribution across those repurchases and on the reinvestment in the business. I wish I could say that they have both the same level of fungiblity and flexibility. But sometimes, reinvestment in the business happens at one point in time. And if you defer that reinvestment, it won't be there for you in 3, 6 months, 9 months later. So we're trying to weigh all of those demands on that capital. But there's no way I can argue about the attractiveness of the stock price, particularly given the 25% slide over these last 6, 7 weeks.

(Operator Instructions) Our next question comes from the line of David Cohen with Midwood Capital.

Yes, I was going to ask about the buybacks. So did the company buy back any stock in the third quarter?

There was no buybacks during the third quarter, David.

So I know the slide was relatively recent, but can you just give more color on the sort of choices you made to deploy capital elsewhere versus buy back stock in the quarter, when the average of the stock was still at a fairly attractive price?

It's still a fairly attractive price. There was no 10b-5 program in place during the third quarter so the other variable that you have to introduce into the investment or redistribution of capital decision was the blackout period. So for the majority of this quarter, for all of -- a big chunk of the time between the end of the quarter and now, we have been precluded from buying back equity. So that clearly was a factor entering into our decisions. The other part is we really do try to plan our buying decisions on a longer-term basis and not on shorter-term windows. So clearly it's something we're looking at now, David. But there's just a lot of other variables that we're trying to balance here to maintain our financial strength.

And given the pretty solid financial strength you have, has there been consideration given to a self-tender, which you've done in the past?

Yes. No, we've done it in the past. And my hesitation is trying to think of the right words here to use for you. So clearly, there's a consideration of that. I am not a believer of financial engineering and using debt as a means of buying back equity. All of our investments and redistribution of holders have been internally funded, as our 10-Q shows. And as communicated, we ended the quarter with no debt. So that is a foundation of the firm that if I will take on debt into the future, it is to build the asset strength of the company, and not really as a vehicle for share repurchases.

I hope you guys continue to make progress in educating the market about the sort of strength and the value in this company.

Yes, same here. Any help that our shareholders can give who are listening to that, I don't think it takes a lot of in-depth analysis to determine the attractive value of this. So we're going to do our best on the communication, and we're also going to do our best to continue to deliver these excellent results. But I appreciate the shout out there, David.

Thank you. At this time, we have reached the end of the Q&A session. I would like to turn the conference back to Mr. Maleh for closing remarks.

Again, thanks, everyone, for joining us today. We really do appreciate your time and interest in CRA. We're very excited about what is happening at the firm and the news we're able to report today.

We'll be meeting with investors in the coming months. And we look forward to updating you on our progress on the fourth quarter call next year.

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

This concludes today's teleconference. You may disconnect your lines at this time.