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Industrials - Consulting Services - NASDAQ - US
$ 186.26
-1.58 %
$ 1.26 B
Market Cap
30.09
P/E
EARNINGS CALL TRANSCRIPT
EARNINGS CALL TRANSCRIPT 2015 - Q3
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Executives

Chad Holmes - Executive Vice President & Chief Financial Officer Paul Maleh - President & Chief Executive Officer.

Analysts

David Gold - Sidoti Tim McHugh - William Blair.

Operator

Good day everyone, and welcome to Charles River Associates Third 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 Web site.

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..

Chad Holmes Executive Vice President & Chief Corporate Development Officer

Thank you, Christine.

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, our estimated non-GAAP tax rate in the fourth quarter of fiscal 2015, or using the terms expect, 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 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 a 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.

Now let me turn it over to Paul for his report.

Paul?.

Paul Maleh Chairman, President & Chief Executive Officer

Thanks, Chad and good morning, everyone. We are excited about our achievements during the third quarter of fiscal 2015. During the past few years, we have been successful in building demand for our services and maintaining strong utilization and driving profitable growth.

The resulting strong demand for our services provided CRA the opportunity to welcome 77 new professionals during the third quarter and position the company for future organic growth.

These additions were a combination of junior and senior staff and increased consulting headcount, relative to the second quarter of fiscal 2015 by 13% to 507, surpassing our previously announced expectations of 8% to 10%. Amid this large influx, we achieved companywide quarterly utilization of 73%.

In the months ahead, we will remain diligent in helping our new colleagues ramp up and integrate into the firm. We concentrated our staffing investments in areas with opportunities for expansion focusing on practices with strong market presence as well as strengthening our portfolio to meet growing market demands.

It is an exciting time at CRA as our success is driving demand for our services and attracting and retaining top talent. This validates our strategy and rewards all stakeholders. During the third quarter of fiscal 2015, non-GAAP revenue increased 4.5% to $75.5 million.

Year-over-year revenue growth was led by the antitrust and competition economics, financial economics and intellectual property practices which all achieved double-digit growth. Overall, we are pleased with CRA's organic revenue growth during the third quarter which is even stronger when adjusted for the FX, foreign currency headwinds.

On a constant currency basis, relative to Q3 of 2014, non-GAAP revenue would have increased by roughly 7% to $77.1 million. Non-GAAP gross profit was $23.8 million or 31.5% of revenue compared with 32.1% a year ago.

The decrease is primarily related to onetime hiring costs and the ramp up associated with the on-boarding and integration of the new hires during the quarter. Non-GAAP adjusted EBITDA was $11.8 million or 15.6% of revenue on a constant currency basis relative to Q3 of 2014.

Non-GAAP adjusted EBITDA would have increased by approximately $400,000 to $12.2 million or 15.8% of revenue. Non-GAAP net income was $2.9 million or $0.32 per diluted share.

On a constant currency basis relative to Q3 of 2014, non-GAAP net income would have increased by approximately $300,000 to $3.2 million, or by approximately $0.03 per diluted share to $0.35 per diluted share.

Approximately 30% of the new consultants joined our largest and most prominent practice, antitrust and competition economics which enjoyed its second consecutive quarter of record performance.

Together with the antitrust and competition economics practice, additions to forensic and cyber investigation, labor and employment, life sciences and financial services accounted for roughly 75% of the new consultants.

The healthy M&A environment and our industry-leading expertise has both regulators and merging parties regularly calling upon our antitrust and competition economics practice. Although we cannot cite clients due to confidentiality restrictions, during the third quarter we worked on several large global transactions across a range of industries.

The practice continues to deliver excellent performance and I want to congratulate the team on another outstanding quarter. In forensic and cyber investigations, we added three Vice Presidents to enhance our service offering to meet a growing market demand and create a broader platform for future expansion.

Kris Swanson, Bill Hardin, and Scott Solomon have worked together for many years and bring decades of experience and high profile investigations and information security assignments. Two factors differentiate them from their competitors. First, their forensic team is comprised of individuals with multi-discipline backgrounds.

For example, some members have chosen to develop expertise in both forensic accounting and computer forensics. This allows them to deliver deeper insights to clients more quickly, which in turn enables clients to assess exposure and take defensible corrective actions more rapidly.

Second, this new team's arrival strengthens CRA's ability to provide a continuum of services to clients, from incident response to the resolution of the litigation. In Q3 we also added two Vice Presidents, Elizabeth Becker and Charles Diamond, to the labor and employment practice in New York City.

They bring deep expertise in applying econometric methods to employment issues and strengthen our bench of senior level consultants. Betsy and Charlie came to CRA because of our commitment to organic expansion as well as our support of marketing and business development activities.

Strengthening the labor and employment practice with these two leading and highly experienced economists positions CRA to capture market share in an increasingly fragmented environment. We are pleased with our third quarter performance.

On a constant currency basis relative to fiscal 2014, we expect 2015 non-GAAP revenue in the range of $312 million to $320 million and non-GAAP adjusted EBITDA margin between 16.3% to 16.7%. Lead flow throughout the organization and its conversion to revenue generating projects continue to be healthy.

The resulting project inventory from our current portfolio of services is as strong as I've seen during my tenure as CEO. With that, I will turn the call over to Chad for the CFO remarks.

Chad?.

Chad Holmes Executive Vice President & Chief Corporate Development Officer

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

Building on Paul's comments, we ended the third quarter with 507 consulting staff which consisted of 121 officers, 265 other senior staff, and 121 junior staff compared with 116 officers, 226 other senior staff and 105 junior staff in the second quarter of fiscal '15.

This is a net increase of 60 consultants from the 447 we reported at the end of Q2 of fiscal 2015. The majority of our new colleagues joined during the latter part of the third quarter. Non-GAAP selling, general and administrative expenses as a percent of revenue, excluding commissions to non-employee experts, was 19.2% compared with 19.0% a year ago.

This quarter continued to see non-recurring real estate expenditures as we completed our transition to new office space in Boston and began a new lease in New York City. The effective tax rate for the third quarter of 2015 on a non-GAAP basis was 33.8% compared with 41.6% for the third quarter of fiscal 2014.

The decrease in the tax rate this quarter compared with the third quarter of fiscal '14 primarily relates to the geographical mix of earnings, the release of valuation allowances and a discreet benefit resulting from the revaluation of U.S. deferred tax assets.

For the fourth quarter of fiscal 2015, we estimate our non-GAAP tax rate to be approximately 40%. Turning to the balance sheet. Our DSO at the end of the third quarter was 109 days compared with 102 days at the end of the second quarter of 2015.

DSO in Q3 consisted of 69 days of billed and 40 days of unbilled compared with 66 days of billed and 36 days of unbilled in Q2 of fiscal 2015. We are comfortable that there has been no deterioration in the collectability of our AR. We continue to target a DSO level of 100 days or less and expect to return to this level in the quarters ahead.

During Q3, we repurchased approximately 125,000 shares of our common stock for a total of $2.8 million. Fiscal 2015 year-to-date repurchases amount to approximately 389,000 shares of common stock or $10.8 million. We concluded the third quarter of fiscal 2015 with $21 million in cash and cash equivalents.

As I have mentioned in prior earnings calls, our real estate portfolio is in the midst of a significant transition. In Boston, the build out of the office is now complete and we relocated to our new space in late July. In Washington, DC, the build out of the office continues and is expected to be completed in the fourth quarter of this year.

In New York City, construction is scheduled to commence in the fourth quarter and we continue to anticipate a move-in during the first quarter of 2016. The related cash outlays for these office improvements during the third quarter totaled approximately $1.6 million net of tenant improvement allowances.

Additional expenditures associated with the Boston, Washington DC, and New York City build outs are anticipated for the fourth quarter of this fiscal year to be approximately $3.1 million net of tenant improvement allowances.

In addition to these capital outlays, as previously announced, we've been burdened by temporary additional rent expense in Boston and New York City as we occupy our legacy office spaces at the same time as building out the new spaces. In Boston, the temporary additional rent expense began in February 2015 and concluded in Q3 of this year.

And in New York City, it began in August 2015 and we expect it to end in the first quarter of 2016. The temporary additional rent expense for the third quarter of 2015 amounted to $400,000 and is anticipated to be about $300,000 for the fourth quarter of fiscal 2015. We expect approximately $1.8 million in total for fiscal 2015.

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

Operator

[Operator Instructions] Our first question comes from the line of David Gold with Sidoti. Please proceed with your question..

David Gold

I wanted to follow up a little bit on the hiring success which, obviously, we were pleased to see. A couple of questions there. One, talk about basically what was different this quarter given that we were so successful particularly relative, to say, last quarter.

And then, two, speak if you can about plans go forward particularly the rest of this year, maybe a little bit on next year if you can..

Paul Maleh Chairman, President & Chief Executive Officer

Sure. Good morning, David. I thought we were pretty successful in the first two quarters too. We just didn't see an incremental headcount change. Last quarter we stated we were going to have an expansion of headcount of 8% to 10% and we gave 8% to 10% because we had committed hires with start dates in Q2 that were anticipated to join us during Q3.

The range was because of the uncertainty around attrition rates. So, we saw the wave of new colleagues joining as early as Q1 and Q2. The overage of the 8% to 10% is really success that we've been having on the secondary market and really lower attrition rates.

I think people are happy at CRA and are deciding to invest more of their time here at the firm before they move on for advanced degrees or even think about other professional opportunities. With respect to the quarters ahead, the inflow from the universities, both on the undergraduate and graduate level, is largely complete.

So we don't expect to have entry level hires joining us in Q4. What you may see in Q4 and Q1 is we try to build out some of the offerings. For example, the investigation and cyber offering, we are still building out that team, so I could see additions coming for that.

For the labor and employment offering in New York that we talked about with Charlie and Betsy, we can see additions coming there. And we are real happy with the progress we are making in the financial services space on both the legal regulatory and the management consulting side.

So don't expect 77 new people in Q4 but we are still going to be very active in the marketplace and looking to have a net add in that time period..

David Gold

Okay. Perfect.

And can you also comment on attrition during the quarter?.

Paul Maleh Chairman, President & Chief Executive Officer

Sure. The attrition rate ended up being on the low end of our expectation and that had a lot to do with many of our juniors are in the early stage of their stay here at CRA. So it just had to do with the experienced population of our analyst associates and consulting associates. So we benefited from that, people deciding to stay.

And the more attractive and the more successful you are, the less attrition you are going to have on the senior staff ranks. And each quarter we are pleasantly surprised of how attrition has been trending downward. So we're going to work hard to maintain that competitive advantage..

David Gold

Perfect. Okay. And then one other. As we think about repurchases, in the fourth quarter last year you were very aggressive and your share prices were meaningfully higher. Actually, a little surprised with, let's say the 400,000 shares year-to-date, given what we saw last year of almost 1 million shares.

And so I was just curious if you can give some color around that and thinking go forward?.

Paul Maleh Chairman, President & Chief Executive Officer

Sure. And I'm going to quote a number that I don't have the exact figure. So I know I quoted it in the past of Q4, so please excuse me if I'm slightly off. I think the average purchase price in 2014 was slightly south of $27.

I think that average purchase price of the shares in 2014 is still a bargain and it's still significantly below what we think the fair value and intrinsic value of CRA is. And I believe our trading price now with the assets we have and the expectations we have is also significantly below.

So our activity in the marketplace doesn't really have much to do with what we're seeing as the value gap. This year we have more demands on our capital. Everything we're doing is internally funded. So we are funding the repurchases, the hiring, the new real estate positions with funds from our internal operations.

So the scaling back this year has a lot more to do with the fact that we've been directly reinvesting back and supplementing our consulting staff and dealing with the expenditures associated with the real estate..

Operator

[Operator Instructions] Our next question comes from the line of Tim McHugh with William Blair. Please proceed with your question..

Tim McHugh

One question. Just can you help us, the guidance is on a constant currency basis.

I guess what, either through nine months or for a year, is kind of the full year currency impact so that we can normalize for that, I guess?.

Paul Maleh Chairman, President & Chief Executive Officer

Sure.

Do you have the year-to-date currency impact, Chad?.

Chad Holmes Executive Vice President & Chief Corporate Development Officer

Sure. Tim, good morning. This is Chad. Year-to-date, on an EPS basis, the currency effect is about $0.08 per diluted share and on a revenue basis we have $1.7 million in this quarter of revenue. Adjusted on a currency basis $1.7 million was in Q1 and $1.9 million was in Q2. So that would be the nine-month spread across the revenue line..

Tim McHugh

Okay. And you made the comment that a majority of the hires came late, I guess, in the third quarter. How much -- I mean what's the added costs as we think about the fourth quarter? And I know sometimes vacations hit you in the fourth quarter too.

So I guess I am trying to gauge the risk of taking time for those people to ramp up and the added cost in the short-term..

Paul Maleh Chairman, President & Chief Executive Officer

Sure. Sure. How about if I first start by giving you a breakdown of our new additions. We welcomed 15 new colleagues in the month of July. We welcomed 41 new colleagues during the month of August and 21 new colleagues during the month of September. So it was much more back-ended for the quarter.

Again the integration varies by the kind of professionals we're bringing in. I was pretty pleased with the fact we ended the quarter at 73% given this large influx and given just the pure administrative integration pressures that you have when you bring in so many people into the organization. So those are just adding flat capacity.

For example, we talked about 30% of these hires joined our competition and antitrust practice. I think that will have a faster integration ramp than, for example, professionals that we brought on to help us expand the services in our investigative and cyber services. So, we still have some integration to do in the coming quarter.

Our target is still to always operate in the mid-70s, but as you can see quarter to quarter, you are going to have some fluctuations. But the portfolio of services we have should continue to operate at the levels we've been doing over the past two years, which is in the mid-70s..

Tim McHugh

Okay. Let me just -- I guess, if I assume $7 million-$8 million of currency impact, you need to see a sequential pick up in the fourth quarter, I guess, to hit the low end of your guidance range.

Given the seasonality, I guess it's a little unusual, and I know you just hired a bunch of people, but is it the contribution from the new hires or is there something about the pipeline as well as you look at it that, I guess, makes you more optimistic than the normal seasonality might imply?.

Paul Maleh Chairman, President & Chief Executive Officer

I think it's a little bit of both. So there is definitely a seasonality impact going into Q4 with all the holidays in November and December but we're up, I believe, net 60 professionals quarter-over-quarter, and they are going to contribute to our performance.

The other thing I noted, hopefully everyone picked up on it, in terms of our project backlog, it is as strong as I've seen during my tenure and I don't say that statement lightly because I've been CEO now since the fall of 2009. So I am very pleased with the demand for the services.

One caveat I would say is, do I think that portfolio will generate revenue for this firm? No doubt. But sometimes the timing from when a project is consummated at CRA, the contract is consummated and when the revenue is realized, that varies just a bit. So that is the only caveat I'd put to the quarters ahead.

But I'm feeling pretty good about where we stand right now..

Tim McHugh

Okay. Fair enough. And one last question. I apologize if you made a comment about this but the cost to acquire talent and particularly, obviously, the senior talent.

What was it as you added these people, I mean were you paying signing bonuses? Were they trending up any different than what you seen in the past?.

Paul Maleh Chairman, President & Chief Executive Officer

No, I don't think they are any different. The undergrads we are bringing on are much more talented than I am, and you work hard to recruit them and you have to pay very competitive wages and that includes salaries but that also includes sign-on bonuses.

The levels of sign-ons aren't necessarily that different from what we've experienced in the past but we just had a lot of them during this quarter relative to past quarters. So that's where we were trying to comment on when we talked about the onetime expense associated with recruiting. It's really the sign-on compensation considerations..

Tim McHugh

Does that get amortized or did that all hit you in the third quarter?.

Paul Maleh Chairman, President & Chief Executive Officer

No. For our professionals joining us from undergraduate institutions that is all expensed during the third quarter. There's no amortization of those expenses..

Operator

[Operator Instructions] We did get a follow up question from David Gold with Sidoti. Please proceed with your question..

David Gold

Just a quick follow-up, if I can.

As we think about your guidance, can you give us some sense of how we should think about utilization headed into the fourth quarter given the significant number of new hires and the time it takes to put them to work?.

Paul Maleh Chairman, President & Chief Executive Officer

You are going to make me go into not answering you again, David..

David Gold

I can get credit for trying..

Paul Maleh Chairman, President & Chief Executive Officer

I know. I know. You know our -- the productivity levels for the firm have been pretty constant throughout the quarter and even during the start of Q3 -- I am sorry, let me try that again. The productivity levels that we experienced in Q3 were pretty constant as we introduced these new professionals and we've seen that remain relatively stable into Q4.

We are going to work hard on keeping up the levels of productivity trying to ramp up our new colleagues who are going to generate revenue for us in the quarters ahead. So I think on a steady state we should be back in the mid-70s.

You know, I would like to think on a run rate basis by the end of Q4, we are going to be at our goal levels but it's a little bit of a journey between now and then..

Operator

Thank you. At this time, we have reached the end of the question and answer session. I would now like to turn the floor back over to Mr. Maleh for closing comments..

Paul Maleh Chairman, President & Chief Executive Officer

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

Operator

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.

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