CRA International's (CRAI) CEO Paul Maleh on Q1 2016 Results - Earnings Call Transcript

| About: CRA International,Inc. (CRAI)

CRA International, Inc. (NASDAQ:CRAI)

Q1 2016 Earnings Conference Call

April 28, 2016 10:00 AM ET

Executives

Chad Holmes – Chief Financial Officer

Paul Maleh – President and Chief Executive Officer

Analysts

David Gold – Sidoti

Tim McHugh – William Blair

Operator

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 the time, I would like to turn the call over to Mr. Holmes for opening remarks. Please go ahead sir.

Chad Holmes

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 a 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?

Paul Maleh

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 2015 help drive growth with strong contributions from both our recently hired consultant and our legacy portfolio of services resulted in a company-wide utilization of 75%. In addition, I am pleased to report that the 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 and shareholder disputes as well as disputes over valuation, a specific business ventures. In addition, our consultants began to see renewed activity in matters alleging manipulation of the financial markets. All of these areas have been at the core of our practice in prior quarters, but we have 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, improving credit exposure, find information and control of systems. Our consultants investigates such breaches, assess the magnitude and work on the mitigation. Financial economics practice continue to serve clients on a broader way – on a broad array of consumer lending matters in the first quarter.

In addition to that focus through their largest engagement featured work on international arbitration and consumer product matters. CRA’s energy practice had a great first quarter steaming from an increase in major litigation engagements including a U.S 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 & Employment practice. So this fits 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 equities. Its increased activity is resulting in more employers turning to CRA to assist in proactive analysis of their pay practices and responding to notices of violation.

During the first quarter of fiscal 2016, let me just cover 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 have 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 exist 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 announcements. 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 amounts 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 and 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’ll turn the call over to Chad, for the CFO remarks. Chad?

Chad Holmes

Thanks, Paul. As a reminder, more expansive commentary on our financial results is available on our Investor Relations section of our website. Before covering some additional financial metrics, I want to discuss our recent development with respect to our major 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 buyers assumption of certain liabilities. The specific terms of the deals 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’s 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 inactive subsidiary after the second quarter and will only reflect wind down effects through its dissolution. This transaction streamlines are 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 yield.

Non-GAAP selling, general and administrative expenses, as a percent of revenue, excluding approximately 4% attributable to commissions to non-employee experts, was 19.0% for the quarter – first quarter of 2016, compared with 19.0% a year ago. The fourth quarter of 2016 continued to see non-recurring 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 expire. With each location, we strive to create a more efficient and cost effective work place. In New York City, the build out of the office is completed and we moved in February. In the second half of fiscal 2016, we expect the 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 and New York City and London to approximate $8.1 million with an offset of approximately $500,000 in tenant improvement allowances for the reminder 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 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.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from David Gold with Sidoti. Please go ahead with your questions.

David Gold

Hey good morning.

Paul Maleh

Good morning Dave.

David Gold

I would like to go over a couple of things first some sense or some commentary if you can pull on the hiring front, may be 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?

Paul Maleh

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, its normal attrition. its normal management of our professional staff. So we didn’t see anything that was troubling any trend, we didn’t not lose any revenue generating sources in that quarter, so it’s just more business as usual. For the fiscal 2016 it’s a little so far out, but we probably would expect to have a net increase year-over-year of about 4% to 5% in our compressional staff.

David Gold

And is that broad based or senior versus junior?

Paul Maleh

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.

David Gold

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

Paul Maleh

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

David Gold

Got you. Okay, thank you very much.

Paul Maleh

Thank you, David.

Operator

Our next question is coming from the line of Tim McHugh with William Blair. Please go ahead with your questions.

Tim McHugh

Hi. Just want to ask, you commented and I apologize I jumped on maybe a few minutes late but so if I missed this sorry, but you talked an acceleration and kind of 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 heading the market and bringing more of that in there or do you think the market demand environment has changed?

Paul Maleh

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 pick up in project lead flow in new project originations in the second half of 2015. I believe they were around 6% and 7% respectively year-over-year comparisons. So we are pretty pleased with that pick up. Going into the first quarter we saw that actually accelerate to where we are 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 gone stronger. Two, I’m seeing growth yes, definitely from some of our new colleagues I noted some of the contributions we’ve got from cyber and forensic investigations, we are fairly seeing contributions there. But we are seeing contributions across the portfolio and across our geographies. So there is not one overly weighted segment at our business that is driving that increase.

Now the next question 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 to-date legal spend is not going up. In terms of the M&A environment particularly heavy M&A year, now I think M&A for 2016 should be just fine, one was rather soft. So I think players are finding niches to accelerate in, but I wouldn’t necessarily say that the overall markets particularly in the legal regulatory space that’s growing….

Tim McHugh

Okay, and I guess the – you mentioned the M&A market have you – there is a tail in terms of one it hits your business a little bit I guess but how you’re thinking about how that – has that translated the recent M&A choppiness I guess the narrow weakness even that you saw in the first quarter what’s happening with your kind of M&A and competition practice relative to that.

Paul Maleh

Sure, sure. So there is always a little bit of a lag. And we were very happy that we had very strong contributions from practices other than our Antitrust & 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 is not the greatest or tied for the best quarter ever in its history. Q1 of 2016 they actually vested that by a little bit. So it was a very hard comparison quarter but by no means did we see the activity for the entire business units declined.

These flow into that sector, we didn’t see a decrease there we are looking at it carefully because the drop in volume but at least from an aggregate practice we have not seen a drop off here.

Tim McHugh

Okay, great. Thanks.

Paul Maleh

Thank you, Tim.

Operator

[Operator Instructions] 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.

Paul Maleh

Again, thank you to 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 months and we look forward to updating you on the progress next quarter. With that, this concludes today’s call. Thank you everyone.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

About this article:

Expand
Tagged: , Management Services, Earnings,
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.