CRA International, Inc. (NASDAQ:CRAI)
Q2 2016 Results Earnings Conference Call
July 28, 2016, 10:00 am ET
Paul Maleh - President, Chief Executive Officer, Director
Chad Holmes - Chief Financial Officer, Executive Vice President, Treasurer
Tim McHugh - William Blair
Mark Riddick - Sidoti & Company
Good morning. Welcome to Charles River Associates second 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 at crai.com. With us today are CRA's President and Chief Executive Officer, Paul Maleh and Chief Financial Officer, Chad Holmes.
At the time, for opening remarks and introductions, I would like to turn the call to Mr. Holmes. 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 CRA, including those identified in our earnings release and statements regarding guidance or using terms forward-looking, expect, trends, 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 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 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. Building on the momentum generated over the past several quarters, CRA delivered strong financial results in the second quarter of fiscal 2016 highlighted by the highest quarterly revenue in the past six years, our highest quarterly adjusted EBITDA margin in more than eight years and a companywide utilization of 76%. Our strong second quarter performance resulted from the continued strength of our legacy operations and returns on targeted portfolio investments made over the past couple of years. These results would have been even stronger if adjusted for headwinds arising from foreign currency.
Our legal regulatory and management consulting lines of business grew year-over-year by approximately 6% and 25% respectively. Our performance was led by more than 20% revenue growth year-over-year in each of our energy, finance, Marakon, intellectual property and auctions and competitive bidding practices. International operations also continued to deliver solid performance, led by our antitrust and competition economics and Marakon practices.
The energy practice had a great second quarter, driven by our traditional work utilities and investors in combination with dispute engagements. Changing oil and natural gas prices and dynamics in energy markets have provided opportunities for CRA to play a key advisory roll in related disputes. These disputes have been conducted in Federal and state courts and include class action proceedings, regulatory proceedings and domestic and international arbitration.
Building on the momentum we saw in the first quarter, the finance practice experienced an expansion of legacy services and continued growth of forensic and cyber investigations. Revenue from our legacy finance services grew more than 40% year-over-year driven by projects involving financial markets, fair market value disputes and the value of assets in tax related litigations. Within the forensic and cyber investigation offering, project work continues to build and involves analyses on a range of issues including breach of data security, credit card exposure, client information and control of systems.
The financial economics practice continued to serve clients on a broad array of consumer and mortgage lending matters in the second quarter, with increases in the indirect auto lending space as well as in analysis requested for student lending and online and marketplace lending. The practice also continued to be heavily involved in litigation matters, testifying on issues related to subprime lending, FHA False Claim Act and VA mortgage matters and credit scoring impacts in mortgage loan modification.
During the second quarter client turned to Marakon for expert advice on portfolio strategy to understand matters, including resource allocation and investment opportunities, as well as business unit strategy to address underperforming units. These engagements were performed across both North America and Europe in a broad range of industries. For example, we advised a leading electronic payment provider in evaluating its overall business strategy to understand the company's operating model and sales channel mix in an effort to build brand loyalty. Marakon was also hired by an international healthcare company to analyze the value drivers of its business and identify opportunities for business model evolution and geographic expansion.
During the second quarter of fiscal 2016, non-GAAP revenue increased by 9.2% to $82.5 million. On a constant currency basis relative to the second quarter of 2015, non-GAAP revenue would have increased by approximately $1.1 million to $83.6 million or by 10.6% as compared with the second quarter of 2015. Non-GAAP Net income was $3.5 million or $0.40 per diluted share. On a constant currency basis relative to second quarter of 2015, non-GAAP net income would have increased by approximately $300,000 to $3.8 million or by approximately $0.03 per diluted share to $0.43 per diluted share. Non-GAAP adjusted EBITDA was $14.3 million or 17.3% of non-GAAP revenue. On a constant currency basis relative to the second quarter of 2015, non-GAAP adjusted EBITDA would have increased by approximately $400,000 to $14.7 million or 17.6% of non-GAAP revenue.
We strive to be good stewards of the firm's financial resources with a balanced capital allocation strategy. Given the strength of our business and its ability to generate strong cash flows, we believe we can both invest in the business for growth and return capital to our shareholders. During the second quarter, we repurchased approximately 673,000 shares of common stock for approximately $16.2 million. We also continued to expand our team of highly talented consultants and expect year-end fiscal 2016 headcount to increase by roughly 5% relative to year-end fiscal 2015.
While we are encouraged by our performance in the first half of 2016, we remain mindful that uncertainties around global economic conditions and short-term challenges arising from the integration of newly hired professional can negatively affect our business in the quarters ahead. On a constant currency basis relative to fiscal 2015, CRA is affirming its previously provided guidance for non-GAAP revenue in the range of $312 million to $322 million and non-GAAP adjusted EBITDA margin in the range of 15.8% to 16.6% for fiscal 2016.
With that, I will turn the call over to Chad for the CFO remarks. Chad?
Thanks, Paul. Before we get to your questions, let me provide a few additional metrics related to our second quarter 2016 performance. In terms of headcount, we ended the second quarter with 493 consulting staff which consisted of 117 officers, 254 other senior staff and 122 junior staff. This is a net increase of 46 consultants or 10.3% growth from the 447 total consulting headcount that we reported at the end of the second quarter of fiscal 2015.
Non-GAAP selling, general and administrative expenses as a percentage of revenue, excluding the approximately 2% attributable to commissions to nonemployee experts was 18.1% for the second quarter of fiscal 2016 compared with 20.9% a year ago.
Turning to the balance sheet. DSO at the end of the second quarter was 101 days compared with 98 days at the end of the first quarter of 2016. DSO in the second quarter consisted of 68 days of billed and 33 days of unbilled compared with 59 days of billed and 39 days of unbilled in the first quarter of 2016.
We concluded the second quarter of fiscal 2016 with $12.2 million in cash and cash equivalents. As Paul mentioned earlier, we directed cash both into our business operations and toward our stock buyback program. During Q2, we repurchased approximately 673,000 shares of our common stock for a total of approximately $16.2 million.
As mentioned on prior earnings calls, our real estate portfolio continues to undergo a transition. The office moves over the past 12 months were necessary as individual leases expired. With each location, we strive to create a more efficient and cost effective work place. During the second quarter of fiscal 2016, we executed a new lease for our London office and we expect to move to our new location during the third quarter.
Total real estate investments during the second quarter totaled approximately $900,000 with an offset of approximately $400,000 in tenant improvement allowances. Year-to-date fiscal 2016 total real estate investments approximated $5.4 million with an offset of approximately $2 million in tenant improvement allowances. For the remainder of fiscal 2016, we estimate real estate expenditures to total approximate $5.2 million with an offset of approximately $100,000 in tenant improvement allowances.
In addition to these capital outlays, we were burdened by temporary additional rent expense in New York City in the first quarter of 2016 and in London during the second quarter of 2016, as we occupied our legacy office spaces at the same time as building out the new spaces. The temporary additional rent expense for London began in late May 2016 and amounted to approximately $200,000 for the second quarter of fiscal 2016. Total additional rent expense for New York and London have amounted to approximately $500,000 for the year-to-date 2016. We anticipate additional rent expense for the remainder of fiscal 2016 to be approximately $600,000.
As previously announced, during the second quarter NeuCo successfully completed the sale of substantially all of its business assets for cash and other considerations, including the buyer's assumption of certain liabilities. This transaction resulted in an after-tax gain of $2.1 million that was attributable to CRA. In the next 12 months, NeuCo will be winding down its affairs and will no longer be an active subsidiary. This transaction will streamline our financial statements and will simplify our communications with investors.
That concludes my prepared 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. Please go ahead with your question.
Thanks. I just want to ask one question, just to clarify the impact of currency. I am not sure if I read it right or not. But the comment that revenue would have increased $1.1 million year-over-year, is that in addition to what's reported? Or is that the, I guess I am trying to understand the growth because that would imply revenue on a reported basis was up more than that, so was currently actually additive to the revenue? Or maybe I am reading that wrong.
So the $82.5 million we reported for non-GAAP net revenue includes the full impact of the currency headwinds experienced during Q2 of 2016. If we had experienced the foreign-exchange that was present in Q2 of 2015, that revenue would have been $1.1 million higher than the $82.5 million reported.
Okay. All right. So that $1.1 million is the drag from currency. Let me ask, I guess, next on the finance practice that was obviously 40% growth is great. That's a pretty big number for a practice you had for quite a while, I guess. So I know you described some of the positive trends. Are there any big projects or anything that make you cautious about that level of performance, I guess, continuing?
I am not here to report that finance will be growing by 40% in Q3 or Q4. We take the kind of performance when it comes, but the general environment that they are operating in, have seen those positive trends continue, in terms of leads, conversion of those leads in new projects. So we expect finance to have a very solid second half, but I think it's unrealistic to expect that kind of year-over-year growth for the second half.
And is that it at all to the revenue guidance range, I guess, to -- we will have to figure out what the currency drag with the pound movement is, but it seems like you are implying a lower second half, I guess, versus what Q2 but even the first half were also? What is behind that? Or is it just cautiousness?
Tim, this is Chad. We are encouraged by the performance in the first half certainly and we are going to strive to maintain that momentum in the second half, but we are mindful that there are uncertainties around both the global economic conditions and the short-term challenges arising as we integrate new folks into our firm and how that can adversely affect our business in the quarters ahead. So it is a bit more of caution as we look forward to the next couple of quarters.
Okay. Thank you.
I will take fewer questions any day.
Thank you. We just had a question come in from the line of Mark Riddick with Sidoti & Company. Please go ahead with your question.
Hi Mark. Good morning. Sorry I tried to cut you off there.
No problem at all. I did want to touch on some of the headcount expectations going forward, having anniversaried the significant increase of last year, I was wondering if we were looking at any particular target areas for headcount growth for the remainder of the year? And then I have a quick follow-up.
Sure. I think when we were referencing year-end headcount growth of about 5%, that is probably going to be the allocation across the firm proportional to the advisors of the existing practice areas. So we feel good about the momentum of our practices as really is demonstrated by Q2, where we had contributions from such a broad array of practices. So the growth is going to be spread out across those practice areas. Targeted areas beyond that is really opportunistic, but given the fact that you have competition, finance, life sciences and Marakon practices comprise roughly 80%, you can probably assume that investments would be more heavily weighted to those four areas.
Okay. That's great. And is it reasonable to assume that the targeting would be somewhat similar, I suppose, to what you currently have between the mix of senior and junior staff?
I think with the addition of our new colleagues that are joining us in Q3 and Q4, it's probably more heavily weighted to what I would say non-VP recruits. On the secondary market, we are always looking for the addition of those VP level candidates. But the 5% is more on the non-VP senior staff and junior staff.
Excellent. I appreciate it. Thank you very much.
Thank you, Mark.
Thank you. At this time, we have reached the end of the Q&A session. I will now turn the conference back over to Mr. Maleh for any closing or additional remarks.
Okay. Again, thanks everyone for joining us today. We appreciate your time and interest in CRA and we will be getting out to meet 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. Thank you everyone.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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