Q3 2019 Earnings Call

Good day, everyone and welcome to be Charles River Associates third quarter fiscal 2019 conference call. Today's call is being recorded today's release in prepared remarks from CRH Chief Financial Officer are posted on the Investor Relations section of theories web site at C.R.A. <unk> dot.

With us today, our senior Vice President and Chief Executive Officer, Paul Mally.

Chief Financial Officer, Chad Holmes at this time I'd like to turn the call over to Mr. Mr homes for his opening remarks. Please go ahead Sir.

Thank you Michelle I.

I would like to remind everyone that the statements made during this conference call, including guidance on future revenue non-GAAP EBITDA margin for fiscal 2019 in any other statements concerning the future business operating results or financial condition of sea ray, including those using the terms expect.

Outlook or similar terms or 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.

These statements due to many important factors additional information regarding these factors is included in today's release and then see arrays periodic reports, including our 10-K for the year ended December 29, 2018 filed with the FCC theory undertakes no obligation.

Uh huh.

Her blade.

Or more.

Her.

So the de <unk>.

[laughter].

Uh huh.

[laughter].

Oh.

The burden.

And <unk>.

Sure.

HM.

Uh huh.

Hey.

A key D.A.

<unk>.

Mobile or a little HM.

Uh huh.

You're right.

Oh so.

Hey news.

Oh.

[laughter].

[laughter] really.

<unk>.

Me too.

HM.

For purposes.

HM.

[laughter] a little.

Cool.

Oh for Citi.

A lot of [laughter].

HM.

[laughter].

[laughter] Louie.

<unk>.

Mhm.

Mhm.

Matt Hooper spur <unk>.

Yeah.

Locations SaaS software medical devices dental products and transportation. These matters showcase series expertise and economic damages assessment valuation and IP transactions for example series retain to provide expert witness testimony on damages.

And commercial success in patent litigation involving mobile real estate applications. The assessment of damages in this matter highlighted series expertise and complex profit apportionment and the economics of digital media platforms.

Within our life Sciences practice, we help the client in the US launch an innovative digital health offering that automatically links together.

Patients medication use and physiological data into a web based dashboard that can be viewed by the patient their physician and other members of their health care team. The patient can also add self reported information via a connected smartphone app, adding another layer of information that can lead.

To more personal lives care launch of this innovative technology required and intensive market research to identify the ideal creative platform to optimize key messages and to anticipate concerns across stakeholders. In addition, the life Sciences team assisted a glut.

Global Biopharma clients with transforming its an organization to be both patient centric and agile Siri developed an integrated data and analytics strategy to support these goals. The strategy work as led to on glowing ongoing implementation support over the past 15 months as the Cline.

Adapts processes and systems to fully leverage integrated patient payer provider data throughout its commercial and medical operations.

In summary, I'm grateful to all of my colleagues for their hard work during the quarter as we help our clients address their most important challenges.

Looking forward, Syria is well positioned to build on the momentum we have achieved through the first three quarters of the year.

We are also encouraged by project lead flow and trends in new project originations as a result on a constant currency basis relative to fiscal 2018, we are narrowing and raising our 2019 revenue guidance to the range of 446 million to 452 million.

Dollars from 430 million to $445 million and we expect to be in the upper half of our previously announced non-GAAP EBITDA margin guidance range of 9.2% to 10.2%.

Year to date non-GAAP revenue on a constant currency basis is $335.9 million, reflecting a 3.8 million. Dollar addition, due to currency effects year to date non-GAAP EBITDA on a constant currency basis is $32.8 million.

Or 9.8% of non-GAAP revenue on a constant currency basis, reflecting an adjustment of less than $50000 due to currency effects and now I'll turn the call over to chat for a few additional comments chat.

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 third quarter fiscal 2019.

In terms of head count we ended the quarter with 741 consulting staff, which consisted of 121 officers 412, other senior staff and 208 Junior staff. This is a net increase of 8.2% year over year.

non-GAAP selling general and administrative expenses as a percentage of revenue excluding the 2.6% attributable to commission.

This to Nonemployee experts was 16.8% for the third quarter fiscal 2019, compared with 18.7% a year ago.

The effective tax rate for the third quarter on a non-GAAP basis was 18.2% compared with 22.7% on a non-GAAP basis for the third quarter of 2018. The decrease in our effective tax rate was driven primarily by the release of certain tax reserves on a non.

GAAP basis, our fiscal 2019 year to date effective tax rate is 23.5% compared with 22.9% for fiscal 2018 year to date.

We estimate that our full year effective non-GAAP tax rate will be approximately 25% factors that may affect this estimate include our revenue apportionment by state and our stock price during the fourth quarter as it relates to our accounting for stock based compensation.

Last quarter, we introduced a non-GAAP metric adjusted net cash provided by operating activities. This metric begins with net cash provided by operating activities from our statement of cash flows and adds back net forgivable loan issuances, which are predominantly used for talent acquisition and talent maintenance.

Adjusted net cash provided by operating activities represents a discretionary pool of capital used to fund the items such as talent acquisitions office expansions and re distributions to shareholders for the 12 months ending in the third quarter 2019, CRH adjusted net cash provided by operating activities.

Was $58.2 million turning to the balance sheet Dsos at the end of the third quarter was 108 days compared with 105 days at the end of the second quarter fiscal 2019.

DSO in the third quarter consisted of 68 days, a build and 40 days of Unbilled.

We concluded the third quarter of fiscal 2019 with $19.8 million in cash and cash equivalents with the majority residing internationally at the end of the third quarter. We had an outstanding balance on early on our revolving line of credit in the amount of $36 million since the end of the third quarter as disclosed.

In the 10-Q that we filed this morning, we have paid down $10 million of this outstanding balance.

During the third quarter of fiscal 2019, we returned $8.1 million of capital to our shareholders consisting of $1.5 million, a dividend payments and $6.6 million for share repurchases of approximately 157000 shares at an average price of $41 in 69.

Sense.

Finally, we announced earlier today, a 15% increase in our quarterly cash dividend from 20 cents to 23 cents per site per common share. This dividend will be payable on December 13th 2019 to shareholders of record as of November 26, 2019.

This reflects our confidence in our long term outlook and our commitment to returning capital to shareholders.

That concludes my prepared remarks before we turn the call over for questions. Paul has one final announcement, Paul Thanks, Chad based on the request we have received over the past year from investors, we will be hosting our first investor day on Tuesday November 26 at the Saint Regis Hotel.

In New York City to discuss our business strategy and industry trends, we will have a number of practice leader joining us for the event to highlight and provide more details on our practices, including antitrust and competition economics energy forensic services and life Sciences, we look.

Forward to seeing many of you at this upcoming event.

Michelle we would like now to open up the for questions.

Thank you we will now be conducting a question answer session.

I'd like to ask a question. Please press star one on your telephone keypad.

Confirmation Tom will indicate your line is in the question Q you may Prestart Kale, if you'd like to all your questions in the queue for participants you think speaker equipment, maybe necessary to pick up your hands at the four patents turkeys one moment. Please let me pull for your questions.

Our first question comes from the line of Andrew Nicholas with William Blair. Please proceed with your question.

Hi, good morning.

I guess first I just wanted to ask you about your sassy pyramid embed it looks like the percentage of junior consultant has ticked up over the past couple of years as a percentage of the total headcount. So I'm just wondering one how you feel about where your staffing pyramid citizens as we are here today to what you expect.

If you'd expect that to continue over the next couple of years and then three if if you expect that to be a key driver of margin expansion going forward.

Uh huh.

Hey, good morning, Andrew.

I think hours, our delivery of pyramid has been improving with and defined as more junior staff assisting us to deliver services for the past number of years.

We are constantly seeking what the optimal balances for our clients.

And that differs depending on the line of business or the exact services were providing for example on our management consulting services tend to be more highly levered with respect to staffing than our legal regulatory businesses. So some of the ships that youre observing has to do with growth.

Of different parts of our organization.

It's not a hard strategy or go to continue to increase the staffing leverage, but we always look for up for opportunities to more optimally deliver these services to clients.

Okay.

Great. That's helpful. And then maybe just taking a step back obviously was a strong quarter across the board I'm. Just curious if any highlighted a bunch of of good examples of demand and strength, but if there any.

Other things you could say about which specific practices, maybe are running better than you had expected.

You know.

I don't think any of them are running better than we expected we've been seeing this kind of performance and well balanced contributions for really several years that hasn't been just a few quarters now.

You know anytime you have a quarter in which you have your two largest practices being the antitrust and competition practice in the life Sciences practice, both growing by double digit is always welcomed.

In addition to that we have a number of practices that we would say had been drivers of sort of entrepreneurial growth.

Continue to contribute so we have a lot of the or parts of the engine.

Looking for US and you know next quarter may be the same practices, but what you have a well we have observed is we constantly are getting contributions from the entire portfolio.

For that so I'm really happy with the mix of services.

And I don't necessarily seeing any one practice significantly outpacing the other in the quarters to come.

Got it and then maybe just last one from me.

One thing you could speak to consultant retention, how that's trending and then maybe with respect to the broader labor market. If you could touch on the competitiveness of our recruiting and anything unique to note there. Thank you.

Sure. Similarly, the way, we work hard to earn our clients dollars.

For consulting services, we work equally as hard.

To win our colleagues.

You know preferences here, we have enjoyed what I would consider to be below market rates of attrition for the past number of years, but you can never take that for granted right. Our colleagues are really the best and brightest and we need to earn that privilege.

Each and every quarter. So we're happy with the way things stand.

The attrition rates are low, but the other benefit to having a welcoming and environment is we've also seen a lot of inbounds both from the University level and also what I would call more lateral hires.

In the last number of quarters. So we're enjoying that and all of these factors are contributing to our growth into two the success.

Thank you.

Thank you. Our next question comes from the line of Kevin. Thank you with Barrington Research. Please proceed with your question.

Good morning, just following up on that last question can you just also a touch on what the recruiting pipeline for talent looks like for senior consultant talent.

Good morning, Kevin.

We're pretty happy with where the pipeline looks like I haven't seen any aberration positive or negative.

In this quarter and that's not to be down on what the prospects are but we've been seeing a full pipeline now for the last number of quarters and I'm pretty pleased in terms of the execution of converting these opportunities.

Into new colleagues, so we're seeing it on across both sides of.

Company, both legal and regulatory and management consulting and we're going to continue to pursue opportunities that make us a stronger organization.

Any addition is not in the pursuit of revenue.

Growth, it's really in the pursuit to make that portfolio a stronger.

Okay, Great and I wanted to circle back to an announcement.

You press release, you had earlier in the quarter.

Where are you announced the establishment of a risk investigations and analytics practice and you know you've talked you overtime of about sticking pretty closely to.

What you know and kind of expanding within your existing areas of expertise. So maybe if you just touch on what that new practiced brings to the table on how it's a related to the types of the type of work you're already doing.

No we're really excited to welcome some new leaders into the organization.

They have been test to help us to expand our legal regulatory services in the areas of risk investigations and analytics there.

This.

This undertaking is not really knew for CRH. Both in terms of a growth initiative, you've seen us do that now over the last number of years from the life Sciences practice to bringing on leaders in a nascent forensic services practice to expanding organically our energy practice so work.

Constantly trying to sort of plant seeds of growth.

While still maintaining productivity and high profit levels.

Specifically on this practice a one of the things we're trying to do is theorize since its inception more than 50 years ago has always offered analytics services right, providing insights into information, but it was always been sort of as a tool used across our practices.

I would like to try to more formalize that similar to the way our life sciences practices done with their analytics offering, but more formalize that analytics across.

Our entire platform.

Secondly on the investigation is the forensic services has done also some investigations, but this adds a level of depth.

That you know introduces a different set of opportunities for this firm.

It's in the early stages, but I'm really happy.

With the progress that this leadership group is making so I wouldn't necessarily say it is a new offering.

But again trying to go into the adjacent sees of the existing portfolio.

Okay, Great that's helpful and.

Chad if I can ask about the.

<unk> expenses.

They have been essentially flat year over year for the past couple of quarters here, what's what's enabling you to hold the line on expenses and you know.

Well should we expect similar levels to be maintained going forward.

Sure No we keep a a very close eye on our SGN a expenses the overhead.

Outlays that we make quarter to quarter. This quarter, we were able to keep it fairly flat on a dollar basis.

Yeah the percent of revenue dropped and I think the biggest story there was a.

The the spending by our practices was was a bit lower than an historical people who are busy they're focused on delivering client service as a result, they werent spending as much on travel or business development activities.

But as we indicated our lead flow and trends in new project originations are quite healthy. So we're quite happy with the overall activity, but the spending this quarter was down just a bit from where we've been historically as a percentage of revenue.

Okay got it and obviously it was it was a really nice quarter in terms of Ah.

Profitability in a non-GAAP EBITDA margin expansion I mean, what.

But kind of gives you the confidence to now say that the full year is going to be a in the upper half of the range. You provided obviously you have three quarters results here, but what's been going right on that front.

Yeah, I mean, I think the first part that you touched upon is we do have three quarters, a very strong performer.

Comments.

You know are cautiously optimistic about the revenue growth ahead.

Okay, sure makes sense and I I I.

Yes, I have to ask you know just and in terms of Ah you didn't mention it in your prepared comments about any <unk> economic uncertainty and if you're seeing any impact on your business. It certainly doesn't sound like it or look like it but you know whether it's a in Europe or elsewhere.

And just maybe the tone of business and then what you're seeing.

And the demand environment related to economic conditions.

No we're trying to follow as closely as everyone. All the happenings in our global economy, and but what I can say is from what we observed as a firm we're not seeing a slowdown in terms of active projects, we're not seeing a slow down in terms of inflow of new business.

Opportunities and we're not seeing a slowdown a in terms of new project originations up. So those are really the levers that were observing a to date.

You know.

What the overall economy will do in terms of GDP growth might impact us but.

To date, there's been no discernible change and the demand environment.

Okay. That's helpful and thanks for taking my questions and congratulations on a nice results. Thank you Kevin.

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

Hi, good morning, gentlemen.

Good morning, Mark.

I wanted to touch on some of 'em the practice areas that you've you've talked about as far as a future growth drivers and opportunities in a wide. The maybe if you could spend some time or you know talking about some of the you know the growth progress that you're seeing and somebody but somebody other areas that are not necessarily your largest at the moment, but some of the growth or is there.

Most excited about and have maybe invested in a little bit more so as a as of late and then they have a quick follow up on that.

Sure I mean look <unk> lesson learned through my whole career at Sea Ray is always embrace a you know the true intellectual property or the organization to me entrepreneurship.

Many of the practices were calling out today is just a few years ago was just made out both a couple of individuals forensic services as a perfect example, life sciences more than tripling, it's a consulting size in the past three years are all examples that just our lessons that don't overlook smaller.

Practices.

Because you don't know necessarily market shifts in demand or drivers of those unique businesses. So that we that's why we do embrace all aspects of the portfolio. A those that are growing rapidly now and those that are maybe just building on their intellectual property basis.

So I say it earnestly that I do like all aspects of our portfolio.

Okay. That's great and then you touched on it a little bit I just wanted to that if there was a numbers that you could share as far as a the growth of but North America bases Europe , I mean, certainly that the tone of what's going on over there is one thing about sort of wondering what what that contribution was like during the quarter and and what that breakout.

Okay. Thanks.

Yeah, well, we're thrilled with the growth of our international operations, a if you add the currency headwinds that we face to the European growth rate it will be even more impressive and you know I never really try to harp on this but be comparable base for Europe is also getting harder and harder but yet.

They're delivering growth quarter after quarter on that so the same aspects in terms of that I highlighted.

In terms of Ah you know activity in current projects lead flow and you project originations a exists for North American operations as well as they do and then in international operations. So work, having great contributions across both lines of business internationally.

And right now we don't foresee that changing.

Okay, great. Thank you very much.

Thank you Mark.

Thank you at this time, we have reached the end of our question and answer session I'd like to turn the call back over to Mr. mally for any closing remarks.

Again, thanks, everyone for joining us today, we appreciate your time and interest in CR rate, we look forward to seeing you at our upcoming Investor day in November and providing an update on our progress on our fourth quarter call. Early next year, a with that that concludes today's call. Thank you everyone.

Thank you. This concludes today's teleconference. You may disconnect your lines at the time. Thank you for your participation have a wonderful day.