CRA International (CRAI) Q4 2019 Earnings Call Transcript

CRA International (CRAI 4.50%)
Q4 2019 Earnings Call
Feb 27, 2020, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to Charles River Associates fourth-quarter and fiscal year 2019 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.

Chad Holmes -- Chief Financial Officer

Thank you, Rob. 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 2020 and any other statements concerning the future business, operating results or financial condition of CRA, including those 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, 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-K 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 and related CFO remarks for reconciliations 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?

Paul Maleh -- President and Chief Executive Officer

Thanks, Chad, and good morning, everyone. Thank you for joining us today. With each year and with each decision, CRA sets out to maximize long-term value per share. Such a goal requires an optimal distribution of capital that is directed between investments that drive value-creating growth and a return of capital to our shareholders.

During the past five years, we have increased our consulting headcount by more than 70% while maintaining an average utilization of 75%. This has translated into revenue growth of 50% over the past five years. During this time frame, our assets have become more productive as demonstrated by the average revenue per vice president increasing by more than 25%. This has contributed to non-GAAP EBITDA, net income, and EPS growth of 43%, 77%, and 113%, respectively, over the five-year period.

In addition to reinvesting in our business, we have also returned substantial capital to our shareholders. Since fiscal 2015, we have repurchased $97 million of our common stock at an average price of approximately $35 per share and reduced our shares outstanding by 15%. Dividend payments provided an additional $18 million to our shareholders for a total redistribution of $115 million over the past five years, equating to a shareholder yield of approximately 7.5%. Following a record-setting 2018, CRA delivered an encore in fiscal 2019 with 8.1% year-over-year revenue growth and 13.4% headcount growth, while at the same time recording utilization of 75% for the full year.

I'm especially pleased in the way we continue to position the firm for future success. During fiscal 2019, we made several talent investments to augment our teams in antitrust and competition economics, finance, forensic services and our new risk, investigations and analytics practice. These efforts continued in the fourth quarter as we welcomed a group hire of approximately 25 consultants in our antitrust and competition economics practice. Next month, we look forward to consolidating this with our colleagues from our Oakland and Pleasanton offices into new office space in downtown Oakland.

This new consolidated office will house approximately 75 colleagues and three CRA practices. Turning to a few highlights of the quarter. Within our antitrust and competition economics practice, our colleagues in Europe advised Uber in a recent high-profile case. The Supreme Court of the State of New York annulled a regulation that would have required for-hire vehicle basis such as Uber and Lyft to limit the time drivers on their platform spent cruising without a passenger in the vehicle to 31% of total driving time in Lower Manhattan.

The court ruled in Uber's favor that the cruising cap was without sound basis in reason and imposed without regard to the facts. Within our finance practice, CRA continues to work on matters stemming from the government's heightened activity, investigating and prosecuting institutions and individuals for spoofing and related manipulative activity in financial markets. In addition, CRA has worked and continues to work on large securities litigation matters in the U.S. and other countries.

Our forensic services practice continues to experience strong demand from companies that need our help responding to allegations of fraud, misconduct and noncompliance. The team recently investigated a ransomware event at an international healthcare company that impacted operations in multiple countries. CRA determined the source of the intrusion, provided information associated with the e-crime syndicate, assisted the client with remediation efforts and provided a security map to the company's board. In addition, the practice performed a similar investigation at a global media company that also experienced a ransomware event affecting its global operations.

Our labor and employment practice continues to assist clients facing nationwide discrimination litigation and state and federal wage and hour issues across a variety of sectors, including professional services, information technology and transportation. As clients start their annual compensation review and incentive pay processes, the practice is regularly engaged to assist with privileged proactive audits to ensure decisions are consistent with an unbiased process. I'm grateful to all of my colleagues for their hard work throughout the year as we help our clients address their most important challenges. Recapping fiscal year 2019, revenue on a constant currency basis was $455.3 million, consisting of $451.4 million of reported results and a $3.9 million adjustment for currency headwinds relative to fiscal 2018.

Full-year non-GAAP EBITDA and non-GAAP EBITDA margin were $44.1 million and 9.8%, respectively. On a constant currency basis, non-GAAP EBITDA decreased by $0.1 million to $44 million or 9.7% of revenue. If we add back the foreign currency loss of $1.3 million, non-GAAP EBITDA margin would have been 10% on a constant currency basis. Our fiscal 2019 financial performance demonstrates our continued success in the marketplace.

New business opportunities and project originations grew significantly over fiscal 2018 and improved during the calendar year 2019. We look to build on our trend of broad-based profitable growth in the years ahead. For full-year fiscal 2020, on a constant currency basis relative to fiscal 2019, we expect revenue in the range of $495 million to $510 million and non-GAAP EBITDA margin in the range of 9.2% to 10.2%. While we are pleased with CRA's strong performance in 2019, we, of course, remain mindful that the short-term challenges arising from uncertainties around global economic and political conditions can affect our business.

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

Chad Holmes -- Chief Financial Officer

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 fourth quarter of fiscal 2019. In terms of headcount, we ended the year with 779 consulting staff, which consisted of 128 officers, 434 other senior staff and 217 junior staff.

This is a net increase of 13.4% year-over-year, compared with the 687 total headcount we reported at the end of fiscal '18. Non-GAAP selling, general and administrative expenses as a percentage of revenue, excluding the 2.7% attributable to commissions to nonemployee experts, was 18% for the fourth quarter of fiscal 2019, compared with 17.5% a year ago. Also worth noting is that profits were negatively impacted by approximately $920,000 of foreign currency losses in the fourth quarter, which resulted from net losses on foreign-denominated transactions and the revaluation of working capital balances. These losses arose mainly from fluctuations in the euro and pound exchange rates, which were affected by the ongoing political uncertainty surrounding Brexit.

For the year, FX losses negatively impacted profits by a total of $1.3 million. The effective tax rate for the fourth quarter on a non-GAAP basis was 22.8%, compared with 19.2% on a non-GAAP basis for the fourth quarter of 2018. For the full-year 2019, our non-GAAP effective tax rate was 23.3%, compared with 21.8% for fiscal 2018. The increase in our effective tax rate both for the fourth quarter and full year was driven primarily by our jurisdictional mix of earnings.

Turning to the balance sheet. We concluded fiscal 2019 with $25.6 million of cash and cash equivalents and no outstanding borrowings. DSO at the end of the fourth quarter was 105 days, compared with 108 days at the end of the third quarter of fiscal 2019. DSO in the fourth quarter consisted of 77 days of billed and 28 days of unbilled.

In the fourth quarter, we paid a quarterly cash dividend of $0.23 per common share, up 15% from the third quarter. For the full year, dividend payments equaled $6.8 million. In total, we returned $24.9 million to our shareholders through a combination of share repurchases and quarterly dividends, demonstrating our confidence in our long-term outlook and our commitment to returning capital to our shareholders. Further supporting this view, as announced earlier today, CRA's board of directors authorized an expansion to our existing share repurchase program of an additional $20 million in value of shares of common stock, bringing the total amount available under our share repurchase program to $23.5 million.

Finally, we announced earlier today that our board of directors declared a quarterly cash dividend of $0.23 per common share payable on March 20, 2020, to shareholders of record as of March 10, 2020. That concludes my prepared remarks. Before we turn the call over to questions, Paul has a few final comments. Paul?

Paul Maleh -- President and Chief Executive Officer

Thanks, Chad. In addition to this morning's earnings and dividend announcements, CRA communicated a few organizational and governance changes intended to build on the successes that we have enjoyed over the past several years and to continue the momentum in the quarters and years ahead. First, we are dividing the responsibilities of the CFO and chief corporate development officer into two executive officer positions reporting directly to me. Chad has led our corporate development efforts since 2009 and will transition to this new role full-time as executive vice president and chief corporate development officer once we identify a new CFO.

We have also announced that current Board Chairman Row Moriarty plans to retire at our annual meeting scheduled for July. Board member Bill Concannon will become Independent lead director and I will assume the chairman role. We will forever be grateful to Row for his thoughtful and dedicated leadership over the past 34 years. And with that, I would like to turn the call over to Robert who's going to be fielding some questions.

Questions & Answers:

Operator

[Operator instructions] Thank you. Our first question is from the line of Andrew Nicholas with William Blair. Please proceed with your question.

Trevor Romeo -- William Blair and Company -- Analyst

Hi. Good morning. This is actually Trevor Romeo, on for Andrew. Thanks for taking my call.

Paul Maleh -- President and Chief Executive Officer

Hey. Good morning.

Trevor Romeo -- William Blair and Company -- Analyst

First of all -- good morning. First, I just wanted to kind of ask on the revenue guidance, which seems to imply accelerating growth in 2020, and at the same time you kind of talked about uncertainties in global economic and political conditions. So just, I guess, what gives you the confidence that you'll be able to achieve accelerating growth in 2020 despite the uncertainties you see right now?

Paul Maleh -- President and Chief Executive Officer

I mean you always have to be mindful of the uncertainties we're seeing across the globe. But with that said, I have not observed any kind of slowdown in CRA's business activities, both in terms of our ability to hire talented colleagues; second, by the business opportunities that are coming through the door; and lastly, our ability to convert those into revenue-generating projects. We've seen this consistency not just in 2019 but, quite frankly, for the past several years. So with that, we remain confident in the guidance that was communicated today.

Trevor Romeo -- William Blair and Company -- Analyst

OK. Great. And then given, I guess, what seems like pretty broad-based growth you've seen, I guess, over the past few years, as you said, where specifically would you see revenue growth accelerating in 2020? Would it be kind of similar, almost every practice across the firm accelerating? Or would that be concentrated in any certain pockets?

Paul Maleh -- President and Chief Executive Officer

We've enjoyed the broad-based growth. And by definition, that means I have different practices contributing at different points in time. This team effort has led to the consistency of our results and really the upward trajectory of our overall performance. In 2020, I really am expecting contributions from all my practices, of course, at different levels of that, but some of it to be expected and some of it will be pleasant surprises as we go along.

So if you're a member of our service portfolio, the expectation is you're going to be assisting us in creating value for our shareholders in 2020 and beyond.

Trevor Romeo -- William Blair and Company -- Analyst

Great. And then if I could maybe just ask one more, maybe particularly given the announcements today regarding the chief corporate development role, and congrats, Chad, by the way, on that. Could you just talk about your thoughts currently on the acquisition environment? Should we read this announcement as sort of an increasing focus there?

Paul Maleh -- President and Chief Executive Officer

I think the way to read the announcement, and quite frankly, the way it was intended is we're quite proud of the success that we've enjoyed over the last several years, but we also acknowledge that staying pat is not a recipe for future success. We would like to bolster our senior leadership team to provide us the bandwidth to both do what we have to internally with respect to our financial administration requirements, but also provide the bandwidth to take advantage of the hiring opportunities we're seeing in the marketplace.

Trevor Romeo -- William Blair and Company -- Analyst

OK. Great. Thank you very much. Very helpful.

Paul Maleh -- President and Chief Executive Officer

Sure.

Operator

Thank you. [Operator instructions] Our next question comes from the line of Kevin Steinke with Barrington Research. Please proceed with your question.

Kevin Steinke -- Barrington Research -- Analyst

Good morning.

Paul Maleh -- President and Chief Executive Officer

Good morning.

Kevin Steinke -- Barrington Research -- Analyst

Hey. Maybe it's been in the news a lot lately in terms of all the scrutiny on the big tech companies from an antitrust perspective. Do you see that playing a significant role in your outlook for 2020 and beyond? I know you're generally involved in the largest matters out there, so just wondering if you see that as a specific growth driver as you move over into 2020 and beyond.

Paul Maleh -- President and Chief Executive Officer

Sure. Without divulging any of the specifics of our engagements, as we have mentioned in the past, the increased regulatory scrutiny that we're seeing both here in the States and abroad is clearly a driver of our demand. We're seeing active matters as a result of this activity, and we expect to be a significant player in future matters going forward.

Kevin Steinke -- Barrington Research -- Analyst

OK. Great. And maybe just to touch on the utilization rate in the quarter. It's a bit below your typical kind of mid-70s.

Is that just kind of reflective of the accelerated hiring in anticipation of the strong growth you see going forward?

Paul Maleh -- President and Chief Executive Officer

Yeah. I think your answer is about as good as I'm going to be providing you. Growth takes investments. Sometimes that investment takes the form of an acquisition that you bring on individuals at one time, and sometimes it's a little more grassroot on the hiring.

If we want to grow in the 10% to 13% range as implied by our guidance, we need to have the colleagues here and capable of delivering those services. So you always are going to have a little bit of a lag between bringing on the staff, and then it's just how quickly can you get those assets ramped up. We're quite happy with the level of utilization in Q4, given the fact that head count grew more than 13% year-over-year in that quarter. So we're not changing our overall expectations of productivity.

And as long as we have the upper trajectory for the business, that 72% utilization doesn't cause us any concern.

Kevin Steinke -- Barrington Research -- Analyst

OK. Great. And then can you just touch on the margin guidance for 2020. It implies kind of up or down in terms of where you came in versus 2019.

I know CRA is already operating as a pretty lean organization. But just maybe any comments on margin trends and expenses or investments as you move into 2020.

Paul Maleh -- President and Chief Executive Officer

Sure. We've been able, for now an extended period of time, as demonstrated by some of the statistics I gave earlier in my comments, we've been able to grow profits at a faster rate than revenue now for an extended period of time. Our goal is to continue to try to provide that expansion. The guidance range of 9.2% to 10.2%, I think, covers that range.

We're always looking to become more efficient, both in the way we deliver our selling, general and administrative services but also the way we deliver services to our clients. So we're not retreating from our desire to be creating value-creating growth by driving the top line and bottom line on our income statement.

Kevin Steinke -- Barrington Research -- Analyst

OK. And I believe in your prepared comments, you talked about average revenue per VP being up about 25%. I think that was over a multiyear period. But what is the opportunity, if any, that you see for that metric going forward? Is there still room to expand revenue per VP as you move forward?

Paul Maleh -- President and Chief Executive Officer

Sure. That expansion of revenue per VP has a couple of factors that, I guess, are important to highlight. The first is we're always looking for important affiliations with various experts, either in academia or in industry, and that is helping raise that revenue per consultant or revenue per VP figure. Secondly, the quality of our portfolio has been steadily improving.

If you look at the VP count over that extended window of time for the past five years, it has remained relatively flat but yet, CRA has enjoyed nearly 10% per annum growth rate. Those are all things that go into the comment of the quality of this portfolio is improving on that. So we still believe there is upside potential on that. I don't know whether you're going to enjoy the same level of growth in the next five years as we've seen previously, but I think there's still room to get better.

Kevin Steinke -- Barrington Research -- Analyst

Sure. Sure. Yeah, makes sense. OK.

And I suppose obligatory question, given the news headlines in terms of the coronavirus. I mean have you seen any impact at all in terms of your people's ability to travel or any impact on your clients' business activity to date, keeping in mind that obviously it's a fluid situation? But just any comment around that or your thoughts on any potential impact.

Paul Maleh -- President and Chief Executive Officer

Sure. To date, I can't say that we have observed a shift in the business activity as a result of the coronavirus on that. Our main concern right now is as to the safety of our colleagues who travel abroad regularly outside of their home office. So our monitoring is much more related to ensuring the safety of our colleagues, ensuring they get home without event.

Kevin Steinke -- Barrington Research -- Analyst

OK. That's helpful. And then, lastly, maybe Chad, what do you expect for tax rate in 2020? How should we think about that?

Chad Holmes -- Chief Financial Officer

Sure. For 2020, we're estimating a full-year effective non-GAAP tax rate to be in the range of 27% to 30%. That range could be affected by a few factors, most notably jurisdictional mix of earnings, discrete items such as stock-based comp, and of course, our stock price during the year as it relates to our accounting for stock-based compensation. All of these things can introduce volatility to our effective tax rate quarter-to-quarter.

But for the year, 27% to 30% would be the range.

Kevin Steinke -- Barrington Research -- Analyst

OK. Great. Maybe I'll throw one last one in there, Chad, given your transition to the new role. Yeah, I see you hired one of the large search firms to assist in your search, but maybe do you have a kind of a timeline as to how quickly you'd like to find a new CFO and any characteristics of the person you'd be looking for?

Paul Maleh -- President and Chief Executive Officer

Sure. How about if I take that one, Kevin? We're actively searching for a new CFO, a new member to our senior corporate team on that. There is no defined timeline on it. We feel quite comfortable for Chad continuing the role of both CFO and chief corporate development officer until such time.

When we do identify an individual, all of you will be the first to know at which time that new CFO will report to me, the CEO, and also Chad's role as chief corporate development officer will also be reporting to the CEO's office.

Kevin Steinke -- Barrington Research -- Analyst

OK. Thanks for taking the questions, and congratulations on the nice results today.

Paul Maleh -- President and Chief Executive Officer

Thank you.

Chad Holmes -- Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Marc Riddick with Sidoti. Please proceed with your question.

Marc Riddick -- Sidoti and Company -- Analyst

Hey. Good morning.

Paul Maleh -- President and Chief Executive Officer

Good morning, Marc.

Marc Riddick -- Sidoti and Company -- Analyst

So a lot of what I was going to talk about was already covered. I did want to address just a couple of small items. I wanted to see if there was a follow-up on where you were with capex. I mean I know we were finishing up with increased spending on Boston facilities, so I was wondering if you could discuss where you're looking for capex for 2020 and if we're continuing to look to return to, I guess, more normal levels there.

Chad Holmes -- Chief Financial Officer

Sure. So consistent with prior quarters, our capex outlays have been directed primarily toward office build-outs and expansions to support the growth in our headcount. And our real estate investments have focused on efficient space planning, and in doing so, we've been able to maintain a relatively flat real estate cost per employee over the last handful of years. In fiscal '19, we spent around $17 million on property and equipment.

These investments focused primarily on our office build-outs in Boston and Cambridge. Our build-outs in Oakland and New York began in earnest in Q4 with the majority of those outlays shifting into 2020. We had originally thought they might start to materialize in 2019. So for the full year in 2020, we expect to spend around $18 million on capex as we wrap up our construction of our new office in Oakland and we complete some office expansions in both New York and Toronto.

Marc Riddick -- Sidoti and Company -- Analyst

OK. Great. That's very helpful. Thank you.

And then I was wondering if you could sort of touch on a little bit as far as maybe some trends around international activity, particularly Europe, to sort of maybe see what that marketplace is like, not just from business activity but also maybe the potential for acquisition targets there. Thanks.

Paul Maleh -- President and Chief Executive Officer

Sure. We've been really pleased with the performance of our European office. They have grown organically. They have grown from bringing on lateral resources in the marketplace, but the consistency of that growth has been quite impressive.

We have a number of practices represented or that represent our European operations, and I know each of those practices are actively looking for ways to improve their operations abroad.

Marc Riddick -- Sidoti and Company -- Analyst

OK. Great. Thank you very much.

Paul Maleh -- President and Chief Executive Officer

Thank you, Marc.

Operator

Thank you. We have reached the end of the Q&A session. I will now turn the call back to Paul Maleh for closing remarks.

Paul Maleh -- President and Chief Executive Officer

Again, thanks to everyone for joining us today. We appreciate your time and interest in CRA. We'll be meeting with investors in the coming months, and we look forward to updating you on our progress on our first-quarter call. With that, this concludes today's call.

Thank you, everyone.

Chad Holmes -- Chief Financial Officer

Thank you.

Duration: 31 minutes

Call participants:

Chad Holmes -- Chief Financial Officer

Paul Maleh -- President and Chief Executive Officer

Trevor Romeo -- William Blair and Company -- Analyst

Kevin Steinke -- Barrington Research -- Analyst

Marc Riddick -- Sidoti and Company -- Analyst

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