Q1 2020 Earnings Call
Good day, everyone and welcome to Charles River Associates first quarter 2020 conference call.
Today's call is being recorded today's release and prepared remarks from CRH Chief Financial Officer.
Posted on the Investor <unk> Investor Relations section theories web site at C.R.A. I Dot com.
With us today, our theories President and Chief Executive Officer pull Mally, Chief Financial Officer, Dan Mahoney, and Chief Corporate Development Officer chat homes at this time I like to turn the call up to Mr. homes.
Turning remarks. Please go ahead Sir.
Thank you, Rob and good morning to everyone joining on the line I hope everyone is doing well staying safe and healthy during these unusual times.
And I are joined today by Dan Mahoney series recently appointed Chief Financial Officer, We're pleased to have joint Dan on board and would like to take this opportunity to offer a brief introduction.
Dan joined US last month, right Spirit investment group, where he was SVP and head of finance, we welcome Dan to our call. This morning, and look forward towards his participation in the quarters ahead.
I would like to remind everyone that the statements made during this conference call, including statements concerning the future business operating results or financial condition of sea ray, including those statements using the terms expect outlook or similar terms are forward looking statements as defined in section 21 of the exchanges.
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, including the extent in duration of the impact of the cobot 19 and.
On our financial condition and results of operations additional information regarding these factors is included in today's release and in series periodic reports.
You know most recently filed.
Annual report on form 10-K, and quarterly reports on form 10-Q filed with the FCC.
Theory 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 and certain measures presented on a constant currency basis. On this call. Every one is encouraged to refer to today's release and related CFO remarks for reconciliations of these non-GAAP financial measures to their gap comparable measures and descriptions of the calculation of EBIT da.
Right and measures presented on a constant currency basis before I turn the call over to Paul I would like to mention that we're conducting today's earnings call remotely and our speakers are all joining from different locations. What we hope to call was executed seamlessly we ask everyone for their patients patients should we run into any technical difficulties or challenges in.
Connectivity, we think you in advance for your understanding.
Let me now I'll turn it over to Paul for his report Paul.
Thanks, Chad and good morning, everyone. Thank you for joining US today, So race financial results for our first quarter 2020 demonstrate the continued strengths of our portfolio with that said our world has changed dramatically over the past two months I want to take this opportunity to address how this new environment as effect.
See all right.
First priority is the health and wellbeing of our people and providing them with the foundation of stability in safety. During this unprecedented time beginning on March 16th we asked her colleagues to work from home wherever possible within a matter of days, 100% of our colleagues were working from home.
With access to networks and infrastructure that possess the same power capacity and security as they had available out there death within our offices. We have continued to provide effective services to our clients and comply with stay at home orders and other local mandates that require movement restrictions and sold.
Distancing, thank you to see arrays corporate resources for a job exceptionally well done.
We are committed to supporting the needs of our personal and professional communities as we help our clients address critical business challenges.
Grateful to all of my colleagues for their hard work throughout these difficult times, we had a great company prior to the work at work from home order and we have a great company today.
People that drove our performance in the first quarter are the same people, who will drive the business forward in the future returning to the first quarter, we reported the highest quarterly revenue in the company's history and year over year head count growth of 16.3% across our practices and geographies.
Our Q1 performance was driven by more than 35% year over year growth and new project originations. These new projects contributor to the strong Q1 results and also provide us with a solid foundation for the month ahead from the beginning of March through last Friday, a period that.
Has been impacted by the Koeppen 19 pandemic new project originations have slowed but are still up 4% relative to the same period of 29 team.
This data only provides us with a snapshot of activity over the preceding eight weeks, which may or may not be indicative of our future performance. Another metric. We are monitoring as we assess the impact of covered 19 on our business is weekly labor billings this productivity metric.
Presents the dollar value of time incurred by our consultants on client projects to move from labor billings to net revenue a number of adjustments are made to account for items, such as Reimbursable expenses Nonemployee consultant billings fixed price projects and write offs in the first quarter of twice.
20, labor billings were up 12% year over year relative to the first quarter of 2019 for the month of March through last Friday weekly labor billings are up 8%.
Relative to the same period of 29 team again. This represents only eight weeks and data. So it's not an assurance of our growth going forward.
The trend in new project originations and weekly labor billings seem to have been negatively impacted by the decline in M&A activity and delays in the U.S. Court system.
Global merger and acquisition activity fell sharply in the first quarter of 2020, both in terms of the number of deals and reported transaction value.
In the litigation market during March 2020, and the first two weeks of April K filings worst we're not significantly impacted year over year. This suggests that litigants. We're moving forward with plan litigation. However case activity is down for example court judge.
Rents in March of 2020 were down more than 40% relative to 29 team.
Suggests that why a little while litigants are moving forward with filings court rooms have been impacted in their ability to handle lot normal litigation loads.
Shifting gears I would like to spend a few minutes on two of CR raise larger practices that performed well during the first quarter and continue to see strong demand for their services first I want to highlight our forensic services practice. Despite the ongoing health crisis. This practices not missed a beat.
They continue to help companies on matters involving forensic accounting anti money laundering, cyber security discovery and information security.
Drawing upon our forensic accounting capabilities. The practices. Recent engagements include an investigation into allegations of embezzlement of $100 million by a former chief financial Officer, and an investigation into a 245 million alleged securities fraud scheme leveraging our.
Money laundering capabilities practices performing an independent review of the AML compliance program at a nationwide retailer that serves as an agent for a money services business drawing upon our cyber incident response and Ediscovery competencies. The practice continues to investigate numerous.
Business email compromise is fraud by corporate executives and ransomware events affecting client operations in multiple countries.
In the area of information security the practices, serving as an independent monitor for a multi billion dollar nonprofit health system, which has suffered a series of data breaches and then entered into a corrective action plan with the U.S. Department of health and Human services. The practice was also recently honored.
In the National lot journals best of 2020 for being one of the top three forensic accounting providers in the country.
And by Global investigation review as one of the top 10 forensic practices for handling sophisticated cross border.
Government, driven and internal investigations, congratulations to our forensic practice.
Life Sciences is the second practice I would like to highlight today.
It also performed well during the first quarter and continues to see strong demand for services across a range of strategy analytics and litigation assignments. During the first quarter strategy work in the practice was led by global product development and a launch project in oncology in diabetes analytics.
Work was led by a large client project regarding the development and use of data warehouse to integrate patient pay your physician data. This information coupled with advanced analytics end user friendly data visualization is an integral part of the process to drive the client to more patients.
Centric approach.
Litigation work was led by projects involving opioids intellectual property and an assessment of commercially reasonable efforts associated with the development of in oncology product.
As our first quarter results demonstrate our portfolio of services is highly valued by our clients on a constant currency basis, we grew revenue by 19.5% to $126.5 million and achieved non-GAAP EBITDA margin of 10.3%.
Although we are pleased with our performance in the first quarter as I stated previously we saw our rate of growth in both new project originations and labor billing slow over the past eight weeks.
Given the challenges and uncertainties that accompany the covered 19 pandemic at this time sea ray cannot forecast with reasonable accuracy, the full duration magnitude and pace of the economic impact on our business and across our end markets. Thus we are withdrawing our previously issued guidance for fiscal.
2020.
We remain confident that the same factors that have driven our success in recent years, we'll continue to drive outperformance in the month and years ahead, 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 questions. Let me provide a few additional metrics related to our performance in the first quarter fiscal 2020 into.
Terms of head count we ended the quarter with 799 consulting staff, which consisted of 135 officers 442, other senior staff and 222 Junior staff. This is a net increase of 16.3% year over year compared with the 600.
87, total head count reported at the end of the first quarter fiscal 2019.
Non-GAAP selling general and administrative expenses as a percentage of revenue excluding the 2.2% attributable to commissions to Nonemployee experts was 16.9% for the first quarter of fiscal twentytwenty compared with 18.3% a year ago.
Given the ongoing health crisis, where scrutinizing, all discretionary expenditures to manage risk and proactively mitigate the financial impacts from covert 19.
As referenced in our earnings release. This morning profits were positively impacted by approximately $1.4 million a foreign currency gains in the first quarter, which resulted from net gains on foreign denominated transactions and the revaluation of working capital balances. These gains arose mainly from fluctuations in euro and pound exchange rate.
It's which saw increased volatility during the quarter.
The effective tax rate for the first quarter on a non-GAAP basis was 29.3% compared with 23.4% on a non-GAAP basis for the first quarter of 2019th the higher rates in the first quarter of Twentytwenty was primarily attributable to a smaller benefits arising from the accounting for stock based compensation.
In the quarter in the current quarter relative to last year.
For the trailing 12 months ending Q1 Twentytwenty series adjusted net cash provided by operating activities was $64.9 million or 32% higher than a year ago. As a reminder, this metric begins with net cash provided by operating activities from our statement of cash flows and add back.
Jack net forgivable loan issuances, which predominantly used for talent acquisition and talent maintenance adjusted net cash provided by operating activities represents a discretionary pool of capital used to fund items, such as talent acquisitions office expansions debt repayment and read distributions to shareholders.
Turning to the balance sheet Dsos at the end of the first quarter was 103 days compared with 105 days at the end of the fourth quarter fiscal 2019 DSO in the first quarter consisted of 71 days, a build and 32 days of Unbilled.
In the first quarter, we borrowed $70 million on our revolving line of credit to fund bonus payments recent talent investments and office build outs.
Accessing our line of credit to fund bonus payments follows a familiar pattern that we have observed in prior years as discussed in previous earnings calls series first quarter is typically a period of lower cash levels as it coincides with the timing of a significant portion of our annual bonus payments. Once bonuses are fully paid in Q2, we typically see.
And the remainder of the year repaying, our borrowings and replenishing our cash balance in addition to the normal bonus cycle. The first quarter of 2020 also saw outlays associated with previously announced talent acquisitions and office build outs, specifically, we issued $33.4 million forgivable loans and spent 7.9.
Million on capital expenditures, we concluded the first quarter fiscal 2020, with 15.8 million in cash and cash equivalents with the majority residing internationally.
During the first quarter fiscal 2020.
We returned $5.6 million of capital to our shareholders consisting of $1.8 million of dividend payments and 3.8 million for share repurchases of approximately 83000 shares finally, we announced earlier today that our board of directors declared a quarterly cash dividend of 23 cents per common.
Share payable on June 12, Twentytwenty to shareholders of record as of May 26, 2020.
That concludes my prepared remarks, Rob we would now like to open up the call for questions.
Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Information to indicate your line is in the question Q you May press star to if you'd like to remove your question from the Q4 participants uses speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Andrew Nicholas with William Blair. Please proceed with your question.
Hi, Good morning, you've actually got Trevor O'neill's from from William Blair and for Andrew Thanks for taking my questions. Thanks for providing some of the detail on.
Your early read on March and April trends and also wanted to get a welcome to Dan.
Have a few questions. Maybe first you just give us a sense maybe of which practices in the firm you would view as most resistant to cyclical pressures or our least impacted in your view and maybe the rough size or magnitude of those practices, particularly compared with what past downturns.
Sure.
Good morning, Trevor This is Paul Maui.
Let me try to start breaking down that question and if I get lost in between please interrupted remind me again.
The information that you're after.
First the two practices that we highlighted.
Are the two practices that we saw leased affected.
By the cover 19 impact over the last eight weeks and that being forensic services practice in our life Sciences practice.
Overall.
I think the aggregate portfolio performed well, but those two are sort of.
Like I mentioned in my remarks haven't missed a beat.
Whether they will be resistant going forward.
We have confidence that they will be but it all really depends.
What path this economic recovery or continued slide will take.
With respect to which practices have been the most impacted.
I also tried to highlight that we're seeing a significant drop in M&A activity.
A large portion of litigation related work and also our merger work that is conducted in our antitrust and competition economics practice is clearly impacted.
By the dramatic drop off in that M&A activity.
So our competition practice I would say was probably one of the more severely impacted groups over the last eight weeks of time.
With respect to the comparison of this recession to the last recession.
You know, it's hard to compare because the origin of both the of the economic volatility back in 2008 forward and now have very different origins.
Yes, I think I'm going to have very different impact on our economy and thus different impact on the practices. Lastly, the portfolio. We have today is very different than the portfolio. We have had more than a decade ago. It is much stronger today that as much deeper.
I think the continued excellence at this portfolio has delivered.
In the past several years addresses that are speaks to that.
So I'm not sure if I got all your questions in there Trevor but I'm happy to try again.
Hi, good that was very helpful. Thank you.
And then.
Thanks, We're also providing some of the detail on the on the court judgment statistics.
To the extent that the courtrooms are or remain I guess physically closed I imagine many of those cases would just be kind of pushed out or delayed into future, but is there any risk of of actual lost revenue from those types of issues.
I wouldn't come back.
Yes, I mean, I'm seeing a lot of courts and litigations finding alternative means of proceeding with virtual depositions virtual pleadings happening.
The pace by which have that happens is I guess, a wait and see on that.
What I was encouraged with the statistics I gave you is that the number of cases continues to grow while we don't know about is the timing of those matters for us to really experienced a decline in revenue I would have to see those cases being withdrawn.
Or CRH, losing market share, which quite frankly, I see both of those things as unlikely.
Okay. Thank you and then maybe just one more if I could.
I guess I realize this is probably going to be it a tough question.
But it's encouraging to see that new product originations are still growing in recent weeks.
Based on what you're seeing right now kind of the client conversations you're having in the pipeline you observed at the moment would you expect that to slow further in the near term.
What I tried to do during my remarks is really share with you. The exact same data that I'm looking at on a day to day and week by week basis.
You know visibility is non existant right now so and that's what we're trying to manage to I think my colleagues have done an exceptional job.
Finding ways to still provide high quality services to their clients on thus were seeing a nice healthy.
You know inflow of new projects a lot of those projects right now are starting on a timely basis. So we also necessarily havent seen large delays between.
Retention and the beginning of that work.
But we are trying to keep abreast of the trends.
But to date I can't really give you much more insight into that Trevor.
Okay. No worries that was it was all very helpful. Thank you. Thank you Trevor.
Our next question comes from Kevin Saggy with Barrington Research. Please proceed with your question.
Good morning, Thanks again for the.
Metrics, you gave us on project originations and labor billings.
As you move through March and April I was wondering.
If you saw any.
Teary duration.
You move through March and April in those metrics or they stabilize as you move along moved along or potentially even improved.
As you progress through those.
Weeks.
Sure. Let me try that first let me say hi, Kevin Hope you and your family are doing well.
Through all this craziness.
That we're surrounded by with respect to trends one of the things and the reason we tried to use the eight week period of time is one try to increase the number number of observations and the other trick to doing.
Small sample comparisons.
With respect to lead flow or labor billings is that the holidays.
Across those two years don't line up perfectly.
So for example, if I'm looking at April the holidays, whether its Easter good Friday or Easter Monday in Europe, do not necessarily line up with those holidays that we're experience in March.
So it starts getting that you have to make a lot of manual adjustments to try to line up that comparability.
But you know where we're staying busy we're staying active.
And I think the figures I gave you are representative of the aggregate.
Performance.
Okay got it fair enough.
So.
Obviously.
Hiring was very strong in the first quarter.
Given the strong demand trends that you were seeing.
How do you think about consultant hiring plans.
Going forward in this environment or have you comp content later then.
Adjustments or reductions the consultant headcount at this point.
Yeah. Those are all good questions. So let me try to see if I could knock off a few of those points.
Let me begin by saying, we have not institute at a hiring freeze that CR rate.
Were still looking to add high quality individuals.
To the C or a team.
We're doing our best.
Job, we can to try to match the supply with demand for our services.
And that will continue quite frankly forever more.
We have a.
A class of new hires that will be joining us over the next six months.
With that we are honoring all hiring commitments.
For Canada is joining us from universities, both on the undergraduate and graduate level.
And right now we are looking forward and planning on welcoming these new colleagues in Q3 Q4.
On that.
So.
With that.
Growth that we ended up enjoying in Q1.
I would say a good assumption Kevin is I would expect that year over year growth to be maintained as we move throughout the year.
We have worked.
Wait too hard to accumulate the quality of resources, we have at Crj.
And I think right now the best way to maintain value for our clients for our shareholders is to maintain that asset base going forward.
Okay makes sense.
What does the hiring pipeline.
Typically doing in environment like this you see more inbounds.
Does it slowed down just trying to any sense of what you're seeing your what you've seen in the past in terms of your ability to higher.
Consultants in this environment or the availability of consultants.
Yes, what I can say is our practice leaders and Chad Holmes have been really busy.
The pipeline is.
I guess is rich.
We're still getting inbounds on it.
And.
We're always going to look for those opportunities to make our portfolio even stronger.
With that so we're really pleased.
With the candidates were talking too.
And as soon as any of the actions are consummated.
You guys will be some of the first to now.
Okay great.
Okay.
So you are you contemplating any cost actions or have you taken any cost actions kind of on the gionee side of things.
You know is the last couple of months it progressed here.
As Chad referenced I think we immediately when we saw.
The environment shift towards the beginning of March we took actions to try to reduce discretionary spend to try to control.
SG in a cost as effectively as we can.
You started seeing some of those initial benefits if you look at SGN, a excluding purchased in Q1.
I don't think we've been south to 17% of revenue.
For quite some time, so we're seeing some of the benefit of those actions, we will continue to be diligent going forward.
But as of right now.
Do not have any planned.
Changes in directly impacting my staff my colleagues, whether through furloughs or salary cuts on it.
Im really quite proud of how my colleagues are responding.
In this environment.
Okay, great. Thank you and I hope all of you at all your families are doing well as well. Thanks. Thank you Kevin stay safe.
Our next question comes from Marc Riddick with Sidoti and company. Please proceed with your question.
Hi, good morning, everyone.
Good morning, Mark.
Dan Welcome and look forward to working with you going forward.
I did want to sort of touched on I think there was mention made around some of the the capex that you've got going on this year and I know that we're seeing some office expense just wonder if you could touch on that sort of how thats going and whether or not that youre seeing any delays there whether now I don't know there would be some construction delays or.
Or the timing of what you're looking at so I was wondering if you could give us a brief update on those efforts.
Sure Mark this is Chad.
You're right.
System with our prior quarters, our Capex outlays have been directed primarily towards office build outs and expansions to support the growth in our consulting headcount.
During the quarter the first quarter here in 2020, we spent about $8 million on such activities and that was focused on our build outs in Oakland Boston in New York, We Havent seen delays to date on on those projects and they are close.
So wrapping up we were able to finalize the Oakland project just before the sheltered in place order came down in the Bay area.
And work continues.
In New York.
The remainder of 2020, we expect to spend about $10 million. In addition on Capex as we wrap up our construction payments for that Oakland project and complete the Buildouts in New York and Toronto.
We expect the timelines to to stick, which would have us wrapping up those projects in Q2 and three.
Okay, great. Thanks, Thanks for that and then I just wanted to touch a little bit.
The head count additions I was wondering could touch on are there any particular concentrated practice areas or or areas that were invested in can seems as though is mostly senior hires at least sequentially. So I was wondering if you could touch a little bit on was that a.
A longer term opportunistic.
Hires or is that.
Something a little more specific things.
Well one of the large additions to the headcount Mark came.
When we had our new colleagues joined.
On the West Coast joined the competition practice, so as a group of 25 or so people. So we're clearly seeing the year over year benefit in Q1 of those additions.
Anytime I can invest and our antitrust and competition economics practice I will do that on a heartbeat irrespective of what we're observing and then M&A marketplace.
So we're really happy with our new colleagues out west.
The other additions is really been a nice spattering across our service portfolio.
And that's I think consistent with what our overall strategy has been and it's also consistent with the question with respect to pipeline.
Seeing opportunities that exist.
Cross our service portfolio.
And if you're part of the series service portfolio that means we are willing to eager to try to invest behind you.
Okay, Great and then I do appreciate it thanks for giving the color around the increase and legal activity and the like I was wondering are there any places where you're seeing a it's hard to say benefit given what what's going on with the pandemic Boes wondering if there.
Our areas better maybe a little bit more more active.
Our leading youre seeing accelerated.
Activity.
That's directly caused by what's taking place within that thank you, yes. So the two practices I highlighted being the forensic services practice in the life Sciences practice I would like to say that they are enjoying what I would call abnormal growth.
But really quite frankly, what they experience in Q1, and what they've experienced over the eight week period that I referenced from March to April is a continuation of what we've been seeing for the last several years.
These practices have been excelling.
They are continuing to add.
Take market share.
Out there.
Whether incidences of everyone working remotely.
It gives rise to higher incident of cyber crimes are higher.
Equally hood of investigations of wrong doing that possibly yet.
And on the pharmaceutical side the World continues for a lot of these large companies.
In terms of try this provides services to their client base.
So where we're thrilled that their demand continues.
But the trend as not necessarily deviated from the excellence that they've enjoyed over the past several years.
Okay, Great and then one last thing for me as and I would sort of be curious as to maybe how this played out you mentioned as far as when you get in mid March the the process of getting everyone to into work from home and I was wondering you can touch a little bit on sort of.
The.
I would imagine you had done some business continuity work in the past, but I was wondering just touch on maybe how how things are are progressing with your your technology do you get a sense that you might have some additional technology needs and then maybe how you how might think about how much might end up working going forward when we sort of come out of this whether or not theres.
Some potential changes our benefits that can be learned out of what we're experiencing now thanks.
Sure.
We tried to make reference that we went on March 16.
Encouraging people to work from home and literally two or three days later, we had 100% of the workforce remotely working remotely our IP department.
Very early on expanded the capacity.
Of our network to enable people to try to connect seamlessly.
And have access to the same security and information and data resources, we have so.
That is gone.
Smoothly on that.
You know probably the biggest challenge was the fact that were blurring work and home.
And that took that took some effort and continues to take some effort.
To try to help people balance those two worlds there.
The other parts of that we've been trying to focus on is having people stay connected stay connected to their colleagues stay connected to their clients because in person working meetings.
Client updates are now done remotely.
And we need to make sure.
We're not lessening the communication during a period like this but increasing.
With respect to the world of Reemergence.
That is complicated for so many reasons.
Namely that reemergence is going to take a number of waves because it will differ by geography, it will differ by.
The specific needs of my colleagues, whether they have kids, whether they have childcare resources to assist them on that and whether they are safe.
We began the call by saying our priority is the health and wellbeing of our CRM community.
And it's going to take a little while this won't be the reemergence will not come as quickly as our work from home transition.
I think you're welcome.
And what we're trying to focus on right now is can we come out of this and even stronger organization.
A more efficient organization by what we are experiencing now during these eight weeks, but I welcome. The time when were talking about reemergence of our workforce.
As do I. Thank you very much thank you Mark stay safe.
We have reached the end of the question and answer session I will now turn the call back to pull mally for closing comments.
Thanks, Rob and again, thanks, everyone for joining us today, we appreciate your time and interest in theory, particularly in.
This environment that we're in.
We will be participating and 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 with that this concludes today's call. Thank you.
This concludes todays conference you may disconnect your lines at this time and we thank you for your participation.