CRA International, Inc. (CRAI) Q4 2018 Earnings Conference Call Transcript

CRAI earnings call for the period ending December 29, 2018.

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CRA International, Inc.  (NASDAQ:CRAI)
Q4 2018 Earnings Conference Call
Feb. 28, 2019, 10:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good day everyone, and welcome to Charles River Associates Fourth Quarter and Fiscal Year 2018 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. Homes for opening remarks. Please go ahead, sir.

Chad Holmes -- Chief Financial Officer, Executive Vice President & Treasurer

Thank you, Brenda. I would like to remind everyone that the statements made during this conference call, including guidance on future revenue and non-GAAP EBITDA margin for fiscal 2019, 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 filed this morning 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 for a reconciliation 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 A. Maleh -- President & Chief Executive Officer

Thanks, Chad, and good morning everyone. CRA ended fiscal 2018 with continued strong performance across our entire portfolio, delivering the best full-year results in the Company's history. During the fourth quarter of fiscal 2018, we experienced broad-based demand across our portfolio of services, delivering double-digit year-over-year revenue growth for the ninth consecutive quarter. This growth reflects our continued investment in our consulting headcount, which has grown by 27%, since the end of fiscal 2016 to 687, combined with an increase of utilization from 74% to 76% over this same period.

What is even more impressive is the rate of profit growth over that period. For example, fiscal 2017 revenue grew by more than 14% compared with fiscal 2016, while non-GAAP EBITDA and non-GAAP net income increased by 22% and 42% respectively. Building on this strong performance, fiscal 2018 grew by 13% year-over-year, while non-GAAP EBITDA and net income increased 24% and 45% respectively.

Looking more closely at the fourth quarter, our performance was driven by double-digit revenue growth in our Energy, Finance, Forensic Services, and Life Sciences practices with solid contributions from our Antitrust & Competition Economics practice. We also experienced strength across geographies, with North American operations growing 9% and European operations growing 26% year-over-year.

Within legal and regulatory, the Antitrust & Competition Economics practice enjoyed another strong quarter, while continuing to support ongoing merger-related engagements. For example, the practice advised on the merger of CVS and Aetna, CRA consultants prepared extensive economic analysis that address competitive concerns raised by the U.S. Department of Justice and departments of insurance in a number of U.S. states.

The DOJ ultimately concluded that the merger did not raise any other horizontal or vertical competitive concerns subject to Aetna's divestiture of Medicare Part D prescription drug plan business for individuals. The Finance practice continued to provide expert testimony on valuation issues in two Delaware Chancery Court appraisal trials, one for Columbia Pipeline Group and another for Stillwater Mining Company. CRA's senior consultant Mark Zmijewski provided expert testimony on valuation issues in both cases. Industry issues were addressed by CRA, Vice President, Seabron Adamson, in the Columbia case, and CRA Vice Chairman, Jim Burrows in the Stillwater case.

Our Forensic Services practice experienced strong growth across a variety of industries, as clients seek independent assistance when responding to allegations of fraud, misconduct, and non-compliance. For example, the practice was retained to provide cyber incident response and specialized eDiscovery solutions on behalf of a multinational inventory services company that was hit by ransomware. In addition, our consultants were engaged to help a multi-state hospice provider respond to ongoing government investigations into alleged violations of the False Claims Act, and the Anti-Kickback Statute.

Within Management Consulting, our Energy practice continued to grow in its areas of energy litigation support, strategy consulting, and transactional support. In the fourth quarter, CRA consultants supported dissenting shareholder litigation in the renewable energy industry, and worked in an international arbitration matter, centered around oil refining. In addition a cross practice collaboration between our Energy and Finance practices, assisted TransCanada in gas pipeline litigation. Finally, the practice continued its work supporting commercial clients by assisting NextEra Energy in its acquisition of Gulf Power, and regulated utilities such as Empire District with analysis of resource planning alternatives.

Life Sciences 2018 performance clearly benefited from the talented investments made over the past two years. For example, CRA consultants helped develop launch blueprints for 10 country markets to support the introduction of a blockbuster Alzheimer drug. These blueprints were crucial in helping the pharmaceutical companies' global and country teams understand the patient opportunity effectively targeting the commercial efforts and educate governments and advocate groups. Excuse me. CRA is also helping a leading pharmaceutical company to develop a global go-to-market strategy for the late-stage development asset in multiple sclerosis. The engagement involves working closely with the client cross-functional team to defined strategic options and ensure optimal product positioning.

Recapping 2018, on a constant-currency basis relative to fiscal 2017, we exceeded our non-GAAP revenue guidance of $404 million to $410 million and came in the upper end of our non-GAAP EBITDA margin guidance range of 8.8% to 9.8%. To summarize, fiscal 2018 non-GAAP revenue on a constant-currency basis is $415 million, consisting of $417.6 million of reported results and a $2.6 million adjustment for currency tailwinds. Full-year non-GAAP EBITDA on a constant-currency basis is $40.9 million, consisting of $41 million of reported results and a $0.1 million adjustment for currency tailwinds, resulting in a non-GAAP EBITDA margin of 9.8% on a constant currency basis.

Our fiscal 2018 performance demonstrates our continued success in the marketplace. New business opportunities, and new project originations grew significantly over fiscal 2017, and improved throughout the calendar year. We look to build on our trend of broad-based profitable growth in 2019. For the full-year of fiscal 2019, on a constant-currency basis relative to fiscal 2018, we expect revenue in the range of $430 million to $445 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 2018, we remain mindful that 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, Executive Vice President & Treasurer

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 and fiscal 2018.

In terms of headcount, we ended the year with 687 consulting staff, which consisted of 124 officers, 375 other senior staff, and 188 junior staff. This is a net increase of 56 consultants or 8.9% growth compared with the 631 total headcount that we reported at the end of fiscal 2017.

Non-GAAP selling, general and administrative expenses, as a percentage of revenue, excluding the 2.6% attributable to commissions to non-employee experts with 17.4% for the fourth quarter of fiscal 2018, compared with 19.1% a year-ago. The effective tax rate for the fourth quarter on a non-GAAP basis was 19.2% compared with 9.5% on a non-GAAP basis for the fourth quarter of 2017. The higher rate in the fourth quarter of 2018 was primarily attributable to a smaller excess tax benefit related to the stock-based comp, offset by the lower statutory rate in the U.S. For the full-year 2018, our non-GAAP effective tax rate was 21.8% compared with 30.9% for fiscal 2017. The lower rate during 2018 was largely driven by the new statutory rate in the U.S.

Turning to the balance sheet, we concluded fiscal 2018 with $38 million in cash and cash equivalents. DSO at the end of the fourth quarter was 104 days compared with 112 days at the end of the third quarter of fiscal 2018. DSO in the fourth quarter consisted of 74 days of billed and 30 days of unbilled compared with 74 days of billed and 38 days of unbilled in the third quarter of fiscal 2018.

We remain committed to maximizing long-term value per share by reinvesting in our business and returning capital through both share repurchases and quarterly dividends. During the quarter, we repurchased approximately 163,000 shares of our common stock for a total value of $7.5 million. For the full-year, share repurchases totaled $27.9 million or approximately 542,000 shares. 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 $21.6 million.

In the fourth quarter, we also paid a quarterly cash dividend of $0.20 per common share, up 18% from the third quarter. For the full-year, total dividend payments equaled $6 million. In total, we returned $33.9 million to our shareholders through share repurchases and quarterly dividends, demonstrating our confidence in our long-term outlook and our commitment to returning capital to shareholders. We announced earlier today that our Board of Directors declared a quarterly cash dividend of $0.20 per common share payable on March 22, 2019 to shareholders of record as of March 12, 2019.

That concludes my prepared remarks. Brenda, we'd now like to open up the call for questions.


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Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first questions are from the line of Tim McHugh with William Blair.

Timothy John McHugh -- William Blair & Company L.L.C -- Analyst

Thank you. Just want to ask a little bit about Europe, I guess they are international more broadly for you -- I think that's mostly Europe. One, can you talk about the strength you're seeing there? I guess we've seen others also do fairly well in Europe lately it seems like. So it is the market growing? Is the market expanding in new ways or do you feel like you and others. I guess maybe just you are taking share in that market? And then following up on that if you look forward, there's choppier economic trends in Europe, how do you think about that, if at all impacting kind of outlook as we go on the '19? Thanks.

Paul A. Maleh -- President & Chief Executive Officer

Sure. Good morning, Tim. The performance in Europe is not a Q4 phenomenon. We've actually been experience nice growth in Europe over the past couple of years, that is driven by a number of practices. I guess you have to start with our Antitrust & Competition Economics practice in Europe has been incredibly busy in 2018 and even going way back into 2017. We have significantly expanded our Life Sciences presence. They continue to gain traction there. So we're seeing nice penetration into the marketplace and then other practices like Marakon Europe and our Energy practice also seeing success.

So it is not one particular segment or line of business, but we are seeing that success across the board. I can't -- it's harder for me to speak, whether we're taking share or whether the market is expanding on that basis, but I do find it impressive the strength across all these services. With respect to the outlook, I guess we're all trying to read the tea leaves as exactly how the broader global economic market is going to fare and specifically how Brexit may impact demand for our services. Our services are necessarily limited even though to the UK, even though London is our largest office in Europe, we're providing services to companies across the European Union and other countries. But all I can say is to date we have not seen any signs of slowdown for demand in those services.

Timothy John McHugh -- William Blair & Company L.L.C -- Analyst

Okay, thanks, that's helpful. When we -- the other question I had was just thinking about I guess is the pyramid that you use I guess the relative to senior versus junior consultants. I guess, just looking at this quarter and looking back even I go back three years so late there kind of 2015, the number of officers hasn't really grown that much, and yet you've grown your head count significantly. So obviously the pyramid's widened quite a bit over the last three years. Is that because of the nature of where the growth has come from I guess less from traditional antitrust and more from of Life Sciences and management consulting or are you managing the business differently? And again, how should we think about going forward from here what the plan is with regard to that?

Paul A. Maleh -- President & Chief Executive Officer

Sure. I guess the answer is yes. The improvement in our staffing leverage is really across the board. So we'll start with the legal regulatory side of the equation. Typically, our services in legal regulatory tend to be less levered meaning smaller number of non-VPs to VPs, but there's been a conscious effort by our leaders throughout the Company to try to provide as efficient a delivery mechanism for our clients over the past few years. It doesn't happen quickly, but we've made progress in the last three, four years on that side.

The other big driver of the changes that you're seeing is that practices like Life Sciences, practices like Forensic tend to be a more highly levered -- have more highly leveraged staffing model. So clearly the rapid growth of our Life Sciences practice is contributing to that improvement in leverage. And the other thing we're seeing is the average revenue per VP has been going up now. I don't know exactly the number of years, you guys can do probably do the math quicker than I can right now, but our productivity has been increasing. And as productivity per VP increases were able to more efficiently deliver those services.

Timothy John McHugh -- William Blair & Company L.L.C -- Analyst

Can I just -- separate from the mix shift dynamic, where are you at relative to I guess what we would think the steady state or the optimal level that pyramid or productivity as we think about that VP kind of number?

Paul A. Maleh -- President & Chief Executive Officer

Sure. I think there's still room for growth there. I don't have a hard number to provide you. I think right now our Life Sciences practice and our Forensic practice is growing rapidly. So we're oftentimes hiring ahead of demand there in order to meet the growing needs for our services. So as those assets become or integrated into the Company as revenue ramps, you're going to see staffing leverage continue to improve on that front.

Within legal regulatory again change happens. Just a little bit more slowly than in the other side. So, I still think we have upside there and I think you know you're seeing it across a number of different profit margins both on the gross margin basis and also on the total operating margin basis. We're seeing that leverage lead to higher profits.

Timothy John McHugh -- William Blair & Company L.L.C -- Analyst

Okay, great and then one last one, the tax rate, do you have any sense of what you would think about for 2019 as a baseline?

Chad Holmes -- Chief Financial Officer, Executive Vice President & Treasurer

Tim, this is Chad what I'd say there is much like last year. We're currently estimating for fiscal 2019 on a full year non-GAAP basis an effective tax rate in the range of 28% to 30%, before taking into account discrete items like the impact from stock-based comp.

Timothy John McHugh -- William Blair & Company L.L.C -- Analyst

Okay, great. Thank you.

Paul A. Maleh -- President & Chief Executive Officer

Thank you, Tim.

Operator

Thank you. (Operator Instructions). Our next questions are from the line of Marc Riddick with Sidoti.

Marc Riddick -- Sidoti -- Analyst

Hey, good morning.

Paul A. Maleh -- President & Chief Executive Officer

Good morning, Mark.

Marc Riddick -- Sidoti -- Analyst

I was wondering if you could share a little bit as to any thoughts or maybe some of the things that you've seen or any impacts from the shutdown there either specific to the Company or commentary around maybe if you've seen much of anything from clients that we should be thinking about at all.

Paul A. Maleh -- President & Chief Executive Officer

Sure. That's always hard to measure because it was a very short window of time you have that in January in general tends to be a slower month in the calendar year as people come back from the holidays and cases ramp up. So the combination of the shutdown and January being traditionally slower month, is sometimes hard to disentangle there. You know we're seeing activity is solid in December. We're pleased with how the year is starting off. But so far, I have -- we've been unable to disentangle those two impacts.

Marc Riddick -- Sidoti -- Analyst

Okay, that's fair. And then I was also wondering if you could sort of talk a little bit about the sort of how utilization floated. Usually you think about utilization being down a little bit in the fourth quarter with the holidays and all, but certainly that ended up being a strong number, I just wanted to get your thoughts on sort of how that flowed through the quarter and then maybe any thoughts of the expectations going forward?

Paul A. Maleh -- President & Chief Executive Officer

Sure, lot of my colleagues gave up their holidays to deliver a utilization of 76% in a quarter that is very holiday heavy and vacation heavy. I had people both in Europe and here in the States giving up the holiday time with their families to deliver those kind of results. So you don't record a revenue figure of around -- $108 million, $109 million without people going above and beyond. So we're really pleased with that. But with that said, if you look out utilization in '18 and even over the last five years, it's been pretty tight. As we've talked about, we try to manage our utilization to the mid-70s range. So, you're going to have fluctuations around that point estimate, but truthfully I really wished it didn't happen in Q4 time periods.

Marc Riddick -- Sidoti -- Analyst

Okay, that's very helpful and that kind of where I was going with that. Also I was curious about some thoughts as to CapEx and how we should think about it for 2019 and what those -- the components of it might look like for -- as to sort of how we might be able to sort of breakup the maintenance versus the rest, if you will, or if any and tax spent or that type of thing.

Paul A. Maleh -- President & Chief Executive Officer

Yeah, I'll give a sort of a general answer to that and I'll let Chad try to contribute with some more specifics there. Our regular level of CapEx so the maintenance CapEx hasn't really changed significantly in 2018 relative to prior years. Really the main input of CapEx has been our expansion of our real estate. Growth is fantastic, but we need to find homes for all our new colleagues. So we are constantly expanding across our geographies and that require some capital to get it up and running. Chad, do you have any details you want to add there?

Chad Holmes -- Chief Financial Officer, Executive Vice President & Treasurer

Sure. So, Mark, this is Chad. In 2018, we spent about $15 million on CapEx. And as Paul alluded, this was primarily directed toward build-outs and expansions to support the growth in our consulting headcount and in 2018, that was primarily in Chicago and London. Looking forward, we expect to make similar investments in real estate to support our growth, with Boston receiving the focus in fiscal '19. So in terms of estimating the magnitude of our CapEx outlays, I would say they're going to be consistent with our experience over the past couple of years. If you're looking for a more specific estimate for '19, I probably look at 2015 as a proxy for anticipated outlays, that's when we last touched the Boston office.

Marc Riddick -- Sidoti -- Analyst

Okay, great. That's very helpful. And then I guess the last piece for me and I appreciate it the sort of the detail and commentary on the opening remarks around some of the activity that you've had, and some of the things you guys have been working on. I was sort of wondering if you had any thoughts as to the flow of M&A and activity that you're seeing globally and sort of the -- or other economic opportunities that you're fairly positive on or (inaudible) still look out for? Thanks.

Paul A. Maleh -- President & Chief Executive Officer

Sure. Our general strategy, and this goes back to as we exited this past recession, number of years ago, was to make our assets stronger. I want to continue to add depth in the services that we provide our clients and that strength, we believe is going to assist us in times of good economic conditions like we've had now over the last number of years. But even more important, that's going to assist us during times of more economic volatility.

If you are the provider of choice of services, you are still going to be the clients' first to provider there. And we believe that a number of our services are in that realm there. So for example, our Competition practice, if you go back a dozen years has performed exceptionally well, irrespective of the overall economic conditions, and of the rates of market volatility, because they are a go-to-provider of those services. So we love it when we see, M&A activity go up, but I'm pretty confident in my colleagues in faring well during times of more volatility.

Marc Riddick -- Sidoti -- Analyst

Okay. And then one more from me, I thought (inaudible) but there's one more. I did want to sort of get your updated thoughts on what the acquisition pipeline looks like for you and also thoughts on kind of where you're seeing valuation and if there's -- maybe if Europe is presenting an opportunity given the uncertainty, just wanted to sort of get a bit of an update there as well? Thank you.

Chad Holmes -- Chief Financial Officer, Executive Vice President & Treasurer

Sure. So here's my opportunity to make a pitch for all potential recruits that are listening. We're working hard, but having a lot of fun. We're growing, we're able to offer that growth across both lines of businesses, across all our geographies and because of that, I think people are taking notice, clients are taking notice, potential new recruits, including companies are taking notice. So our pipeline of opportunities is quite full right now.

But with that, you have to maintain your diligence, because growth for growth sake is not where we're going. We want to provide value with the use of our capital. So I think we've done a good job of being good stewards of our shareholders capital, and we will continue to do that going forward. But any opportunity I have to reinvest back in this business for value creating growth, we're going to take it. We are not capital constrained, we produce great cash flows. I have an untapped line of credit. So we want to look for those value opportunities. So, nothing imminent to disclose, but I'm pretty happy with where we stand right now.

Marc Riddick -- Sidoti -- Analyst

Okay, great. Thank you very much.

Chad Holmes -- Chief Financial Officer, Executive Vice President & Treasurer

Thank you Marc.

Operator

At this time, we have reached the end of the Q&A session. I would now like to turn the conference back over to Mr. Maleh, for any closing or additional remarks.

Paul A. Maleh -- President & Chief Executive Officer

Great. Again, I want to thank everyone for joining us on today's call, and I also just want to put a thank you to all my colleagues, on both the corporate and consulting side of the house. It was a great year, a lot of hard work, and it's great to see that hard work turn into such positive results. We appreciate your time and interest in CRA. We'll be meeting with many investors in the coming months, and we look forward to updating you on our progress on our first quarter call. With that, that concludes today's call. Thank you again, everybody.

Operator

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

Duration: 30 minutes

Call participants:

Chad Holmes -- Chief Financial Officer, Executive Vice President & Treasurer

Paul A. Maleh -- President & Chief Executive Officer

Timothy John McHugh -- William Blair & Company L.L.C -- Analyst

Marc Riddick -- Sidoti -- Analyst

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