CRA International, Inc. (CRAI) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day, everyone and welcome to Charles River Associates First Quarter 2021 Earnings Conference Call. Today’s call is being recorded. The company’s earnings 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; Chief Financial Officer, Dan Mahoney; and Chief Corporate Development Officer, Chad Holmes. At this time, I would like to turn the call over to Mr. Mahoney for opening remarks. Please go ahead, Dan.
Dan Mahoney: Thank you, Rob and good morning to everyone. Please note that the statements made during this conference call, including guidance on future revenue and non-GAAP EBITDA margin and any other statements concerning the future business, operating results or financial condition of CRA, including those statements using the terms expect, outlook 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.
Paul Maleh: Thanks, Dan and good morning everyone. Thank you for joining us today. I hope you are staying safe and healthy. The first quarter of fiscal 2021 demonstrated our resiliency and continued momentum in the business as broad-based demand for our services drove CRA’s strong performance. Building on a record-setting fiscal 2020, CRA reported the highest quarterly revenue in the company’s history, increasing 16.1% year-over-year to $146.5 million. Fueling this growth was a combination of headcount expansion and improved utilization. During the first quarter, we welcomed more than 30 new colleagues, increasing quarter end consulting headcount by 4.8% year-over-year. At the same time, we saw utilization increase to 76% from the 71% observed in the first quarter of fiscal 2020 and up from 70% in the fourth quarter of 2020 as weekly utilization trended upward over the course of the first quarter. CRA’s top line expansion during the first quarter resulted in accelerating profit growth. Specifically, profit measures increased year-over-year at rates more than double the growth in revenue as non-GAAP net income, earnings per diluted share, and EBITDA grew year-over-year by 59%, 63% and 38%, respectively. This growth resulted in the highest quarterly levels for each of these 3 profit metrics. It was truly an exceptional quarter from top to bottom. I would now like to highlight some of the services provided during the quarter. Within legal and regulatory, our Antitrust & Competition Economics practice grew revenue by approximately 30% year-over-year. The practice established its new high for quarterly revenue as demand for antitrust and merger-related services remains strong. M&A markets continue to rebound from pandemic lows. Worldwide M&A activity increased 94% during the first quarter of 2021 compared to year ago levels and represented the strongest first quarter period for M&A since records began in 1980. Against this backdrop, CRA worked on transactions across a range of industries and geographies. For example, during the first quarter, the competition practice provided economic advice to a U.S. regulatory agency regarding likely economic effects arising from the merger of 2 multinational industrial parts manufacturers and the impact on multimillion-dollar bid markets. Additionally, colleagues from our European competition practice advised Microsoft in a successful $7.5 billion acquisition of Zenimax, a video game publisher.
Chad Holmes: Thanks, Paul. I want to provide a few comments about our capital deployment during the quarter. CRA remains committed to maximizing long-term value per share through the prudent deployment of capital. Given CRA’s strong cash flow generation, we expect to invest in the business for profitable growth while simultaneously returning meaningful capital to our shareholders. Against a challenging economic backdrop, CRA continues to generate strong cash flows. For the trailing 12 months through the first quarter of fiscal 2021, CRA’s adjusted net cash flows from operations were $101.7 million or 19.2% of trailing 12 months revenue. These adjusted net cash flows from operations were 57% higher than the $64.9 million observed a year ago, driven primarily by the growth in our business and reduced SG&A spending. As Dan will describe in greater detail, we concluded the quarter with $31.6 million of cash and $40 million of borrowings under our revolving credit facility, resulting in a net debt position of $8.4 million. This compares to the first quarter of 2020 when CRA had $70 million of outstanding borrowings and $15.8 million of cash for a net debt position of $54.2 million. The borrowings during the first quarter were primarily to fund bonus payments, which is consistent with our practice in prior years.
Dan Mahoney: Thanks, Chad. 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 questions, let me provide a few additional metrics related to our performance in the first quarter of fiscal 2021. In terms of consulting headcount, we ended the first quarter of fiscal 2021 at 837, which consisted of 145 officers, 497 other senior staff and 195 junior staff. This represents a 4.8% increase compared with the 799 consultant headcount reported at the end of Q1 fiscal 2020. Non-GAAP selling, general and administrative expenses, excluding the 2.6% attributable to commissions to non-employee experts, was 13.2% of revenue for the first quarter of fiscal 2021 compared with 16.9% a year ago. This quarter’s ratio was positively impacted by the strong revenue for Q1 and effective management of our overhead. Additionally, travel and entertainment expenses were significantly lower year-over-year, primarily due to ongoing travel restrictions in various jurisdictions and work from home policies. We will continue to monitor our discretionary expenses to proactively mitigate the financial impacts related to the pandemic and to efficiently manage our transition back to a more normal operating environment. The effective tax rate for the first quarter of fiscal 2021 on a non-GAAP basis was 24.5% compared with 29.3% on a non-GAAP basis for the first quarter of fiscal 2020. The lower rate in the first quarter of 2021 was primarily attributable to a greater benefit arising from the accounting for stock-based compensation.
Operator: Thank you. Our first question comes from Andrew Nicholas with William Blair. Please proceed with your question.
Andrew Nicholas: Hi, good morning. Thanks for taking my questions. The first one was just on utilization. I think you mentioned it trending upward throughout the quarter seemingly would imply near record level utilization in March. So with that in mind, how do you think about the upper limit of utilization and the sustainability of those levels? And then as an offshoot to that, how are you considering those factors as you think about hiring expectations through the remainder of this year?
Paul Maleh: Thank you, Andrew and good morning. So, we saw strong lead flow in new project originations during Q4 and that trend continued during Q1. And with those increase of flow of new projects, we also saw the activity of our consultants steadily improved to where I think it’s safe to assume that the utilization we observed in March is north of the average of 76% that we reported for the quarter. Going forward, I think steady state in a normal world we would like to operate CRA in the mid-70s on a utilization mark. We think as it goes higher, yes, we enjoy a short-term boost to profitability when you are operating near 80% utilization. But I think you risk jeopardizing the quality of the overall services you are delivering to clients and also foregoing all the revenue opportunities that exist in the marketplace. So we are going to continue to strive for the mid-70 utilization. So what does that mean with respect to headcount growth in 2021? We are trying to as closely match the demand for the services and the supply that we have to deliver on those services. And that’s a challenge, given the uncertainty that we are observing in the overall market. We expect by year end to have year-over-year headcount growth to be in the mid-single digits, but if we see demand start to continue to rise we will just increase our hiring in the secondary market going forward.
Andrew Nicholas: Great. That’s helpful. And then maybe as a follow-up to that, is there anything you could say about the recruiting environment broadly right now? Obviously, it seems like there is a lot of opportunity and demand to try and capture and you are leaning into that, but how easy is it to bring on new talent right now given what I expect is a pretty competitive market?
Paul Maleh: I think the market is getting tighter. I would break up my response to your question, Andrew, with respect to the hiring we do at the university level both undergraduate and graduate level students and then what we experienced in the secondary market for talent. On the university level, we have kept open our university recruiting throughout the year. So, we typically focus primarily in the fall months, but we did that in 2020, but we’ve kept our university recruiting open all the way through the spring. Our quality of the candidates we’re getting still remains very high, and the yield with respect to the offers we’re making and the acceptances we’re getting are consistent with what we’ve enjoyed in years past. So we haven’t seen any diminution in that. On the secondary market, you have to work a little harder because everything is done in a virtual world with respect to the recruitment of senior level candidates. But we are still enjoying that success of hiring people on that market. It just takes some more effort from our human capital department and from Chad Holmes and his team.
Andrew Nicholas: Understood. And if you wouldn’t mind me squeezing one more in, just on kind of the differences in growth by geography or different market environments in the U.S. versus international, if you could just speak to that and how you’re thinking about COVID and some of the different dynamics around recovery between those two regions impacting your business? Thank you.
Paul Maleh: I think the growth has been pretty balanced across our geographies. So our legal regulatory services, has done well, both in North America and in Europe. And we found – we highlighted some of the cases on the management consulting side, particularly our energy practice on how it’s performed. But they both enjoyed double-digit revenue growth with respect to North America and the international operations. The rate or the pace for what we all hope is a return to normalcy differs, not just by domestic or international, but by every city that we operate in. So we’re closely monitoring that. Europe, particularly the UK may be a little ahead of North America as to their return to the office, but more to come on that topic.
Andrew Nicholas: Alright. Great, thanks.
Paul Maleh: Thank you, Andrew.
Operator: Our next question comes from the line of Marc Riddick with Sidoti & Company. Please proceed with your question.
Marc Riddick: Hi. Good morning.
Paul Maleh: Good morning, Marc.
Marc Riddick: So, clearly, a very strong result across multiple areas and I did want to sort of touch a little bit on – first of all, I really appreciated the commentary around multiple areas that were gaining. I wanted to touch a bit on market share gains because clearly, that’s been taking place in many practice areas, including M&A related. I wondered if you’d spend a little bit of time on some of the efforts that are taking place there and maybe what you’re seeing in – from competitors that may be allowing the opportunity to gain such market share in multiple practice areas simultaneously.
Paul Maleh: There is a lot of really formidable competitors out there in the legal regulatory space and also in the management consulting space. It’s hard to measure – to have a precise estimate of what your market share is in the markets for which we operate. What I can say is if you look at any broad-based measures, either for demand in our overall industry or for what we can observe from peers in that space, I think CRA’s growth rates over an extended window of time exceeds both. Thus, I would say it’s pretty safe to assume that we are taking share, both from organic expansion and also from the addition of new revenue-generating resources there. So we’re pretty pleased with that both in the recruitment and in the execution of our performance, we try to just focus on CRA and what we do best. I can’t really control what our competitors are doing in this space. So when we go in to recruit or we go to sell our services, we focus on the attributes of this company. And success has really made that quite easy for us in that there is a lot going on, both for new individuals entering the organization and for legacy individuals that are still enjoying expansion of their portfolios.
Marc Riddick: Okay, great. And then I was wondering if you could talk a little bit about the reduced expenses that you see. There was a mentioning as far as balancing with the travel and entertainment costs being down. But certainly, we expect them to come back over time. So wonder if you could talk maybe a little bit about – first of all, the magnitude, if you could quantify the travel and overall entertainment savings, I guess, maybe relative to where maybe it would have been or was a year ago? And then sort of as you begin to layer that in, do you think that there will be much in the way of a difference as to how that’s thought of going forward or is that sort of something that you’d be kind of working with your customers to kind of get a sense of kind of where – how they want to sort of function as they go forward?
Paul Maleh: Sure. There is a lot of pieces to that. So let me try to break it down. First, let me try to introduce a couple of cost benchmarks here. Pre-pandemic, if I look at SG&A, excluding performance payments, it hovered right between 17% to 18% of net revenue. During the pandemic, we have operated right in the 13% to 14% of net revenue range. So it is 400 to 500 basis point margin enhancement due to the lower SG&A over this period of time. There is a lot of learnings, right a lot of pain, but there also has been a lot of learnings over these past 15 months. I think some of those learnings relate to how you can just operate more efficiently as an enterprise, how you can deliver services to clients more expeditiously and more – with more of a cost consciousness there. We hope to take some of these learnings back to the office when that time comes. I don’t believe CRA will operate at 13% to 14% when we return to the office. But I do think there are opportunities for margin enhancement, the degree by which it’s harder to estimate and even harder to estimate the timing by which we will return to more steady state levels for the firm. But I do believe there is opportunities for margin enhancement tied to the more efficient delivery of SG&A services.
Marc Riddick: And then you touched on this a little bit in your prepared remarks, but I was wondering if you could expand a little bit about it. You made commentary around some new business wins and some segment work that you’re doing around SPACs. And I was wondering if you could sort of maybe broaden that a little bit and sort of talk about what that opportunity set may look like compared to traditional – maybe what the traditional M&A mix might be for CRA? Thank you.
Paul Maleh: Sure. A lot of times with respect to what drives our business, it’s oftentimes removed from what the funding source is of these acquisitions. It has a lot more to do with the complexity of the mergers or acquisitions being discussed and what may gain the eyes of the various regulators. If it is just the accumulation of assets, like sometimes you see in the private equity space or sometimes you see now what we’re seeing, the SPAC capital being used for, that normally will just have minimal impact for CRA. But as we’re starting to see, just like not all IPOs go well or not all acquisitions go well, we’re starting to see litigation arise and investigations arise out of some of these SPAC transactions. But I don’t think I would necessarily tie it to the vehicle itself, but just more that there is increased activity going on in both the generation of capital and the use of that capital in the market space.
Marc Riddick: Okay, great. Thank you very much.
Paul Maleh: Thank you, Marc.
Operator: Our next question comes from Kevin Steinke with Barrington Research Associates. Please proceed with your question.
Kevin Steinke: Hey, good morning. I wanted to start off by talking about consultant utilization a bit more. I think on the last call, we talked about just assuming a fairly gradual increase in utilization as the year progressed. So did utilization step-up in the first quarter, maybe a little more quickly than you had originally anticipated just based on the strong demand you’re seeing?
Paul Maleh: Yes. First, good morning, Kevin thanks for the question. So as I mentioned earlier, we saw strong lead flow and new project originations during Q4, and that trend sort of continued during Q1, right? New project originations were up a little less than 10% in Q4, but we saw that jump to more than 25% in Q1. So that is all positive. The uncertainty in this environment is, of course, whether the new demand will materialize immediately into project billings. Right? So we’re getting the new cases coming in. Our project inventory is growing, but the uncertainty because of all the core statistics that we’ve been citing now for several quarters is how quickly these new matters translate into new revenue-generating projects. What we enjoyed during Q1 is that many of these matters quickly moved, particularly on the M&A side to revenue-generating projects. And thus, we saw just steady improvement from January to February, February to March on the utilization front.
Kevin Steinke: Okay, got it. And so can you – you talked about the project lead flow and new project originations, utilization, I guess, all of these things would be informing you in enabling you to increase your guidance for the year after just one quarter. But could you maybe talk a little bit about what’s giving you the confidence to increase that guidance after just one quarter and maybe the kind of visibility you feel like you have for the remainder of the year as it progresses?
Paul Maleh: Sure. What I can say is for the last several months, we have just seen a steady improvement in our operations. So one, there is been a trend. I know there could be volatility in what we’re experiencing, but we’ve seen a steady trend of improvement over 6 months plus or so at CRA. So that is a positive. The other positive is that we’re talking about a lot of practices in each of these calls, which means I’m getting broad-based contributions, which should also yield more predictability and what the future may hold. It is not one practice that is driving performance in any one quarter, I think, a year ago, as an example, we had our competition practice was flat and our life sciences, forensics finance practice had stellar Q1s in fiscal 2020. Here we are, a year later, the portfolio is working with the competition practice growing 30% year-over-year to its best quarter ever, and life sciences is relatively flat. I think that is not a new story, right? We’ve been growing quarter year-over-year for 5 years plus now. And it’s because of the quality of the overall portfolio that we’re enjoying. So that definitely plays into the decision-making. And lastly, the project inventory is continuing to grow. Is it possible that they go dormant and revenue doesn’t materialize immediately? Absolutely, absolutely possible, but that is just a timing aspect with respect to the revenue. The revenue hasn’t disappeared, unless the value to the firm hasn’t disappeared. It’s just when it will come due. But I have not seen any indicators of those revenue flows going dormant. So I know I’m 4 months into the quarter – into the year. But so far, it’s been a pretty good 4 months.
Kevin Steinke: Yes, certainly. Do you try to build – I assume you do, but some of that uncertainty around just the timing of when leads might materialize into revenue into your guidance? And maybe have you lessened that conservatism a little bit now that you’ve got more evidence of things moving forward or how are you trying to factor that uncertain environment into the outlook you are providing?
Paul Maleh: It’s more of a feel. We have lots of different models that try to estimate the expected revenue flow coming from the leads we’re getting and the types of projects we are getting, but the truth is that the around those arrow bands estimates are really quite large. So I could be enjoying $146.5 million or I could be enjoying $135.6 million. The estimators aren’t going to give me that level of precision. So I’m looking much more at the micro factors that we observed during the quarter in terms of making these decisions, what the trends have been, how broad-based the contributions are and whether I’ve seen any indicators of slowing performance there.
Kevin Steinke: Okay, that’s helpful. And I want to talk too about specifically the increase in margin guidance. It sounds like you haven’t yet nailed down some of these efficiency gains that – from the learnings that you got during the pandemic and you haven’t necessarily been able to quantify what those might be. So, is the margin guidance increase just being driven more by the higher revenue outlook and the operating leverage that’s going to create?
Paul Maleh: There is a number of factors that go into that estimation. One, we just produced a very strong first quarter that was very profitable, which is clearly going to contribute to the annual numbers that we’re expecting for fiscal 2021. Secondly that a return to normalcy is probably still 6 months plus out as companies are starting to return this spring and then we could see that increasing over the summer months into the fall. But there is still a leap from returning to the office to beginning travel and normal business activity. So I could see SG&A, excluding perfs, as a percent of net revenue still being below, considerably below historical levels, for the next two or three quarters. And lastly, the other thing that we’re going to be welcoming a new class of incoming consultants during the summer months into the fall, which also drives down utilization a bit as these people become integrated into the firm. And as utilization dips, so will profit margins be impacted. But this is more the normal seasonality of our business as opposed to anything permanent on the profitability outlook. With respect to nailing things down, we have a model of what the SG&A improvements may look like, but we need to actually put them into play and see how they work as we start traveling again, as we start attending conferences and marketing, but more to come on that. I am just not comfortable at this stage to give you what I would call a new target SG&A range for our operations.
Kevin Steinke: Okay, that’s fair. That’s helpful. And lastly, I wanted to ask about your goal of returning 50% of cash to shareholders and how that – your plans on how you’re going to accomplish it going forward and just your take on the outcome of the Dutch auction tender offer and how that also played into that 50% cash return to shareholders?
Paul Maleh: The goal of returning 50% of our adjusted cash flow from operations back to shareholders is aspirational and it’s not necessarily something you’re going to achieve every single quarter, right? The goal is over the long-term that that will be the steady state of capital given back to our shareholders. We’re off to a pretty good start. In fiscal 2021, we purchased about $10 million of equity, repurchased about $10 million of equity during Q1 and as you highlighted also completed a Dutch auction, which brings in-house more than $25 million of additional repurchases. So that’s up to $35 million. If I build in the anticipated dividend payments for the remainder of the year, we’re already over $40 million in total returns. So we will see how the operations continue to materialize and what are the reinvestment opportunities there are to see whether we will increase our repurchase activity later in the year. But it’s off to a pretty good start, not just with the repurchase. But the other important part of the Dutch auction was to make sure we are being heard by our current shareholders and prospective shareholders with respect to what we believe the intrinsic value of this enterprise is. So we’re not there yet, still trading at a discount, but a lot closer than where we were 3 months ago, Kevin.
Kevin Steinke: Great. Fantastic. Well, thanks for taking all the questions, and again congratulations on the strong results.
Paul Maleh: Thank you to everyone for the questions and for the support. And thank you for everyone who’s joining us on today’s call. We appreciate your time and interest in CRA. We will be participating in virtual meetings with investors in the coming months, and we look forward to updating you on our progress on our second quarter call. Be safe, everyone. And with that, that concludes today’s call. Thank you.
Operator: This concludes today’s conference. You may disconnect your lines at this time and we thank you for your participation.
