Q1 2023 FTI Consulting Inc.Earnings Call

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Speaker 1: We have an alternate line.

Speaker 1: We can call it.

Speaker 2: Is Molly Hawks available?

Speaker 3: Yes. Are you there? Yes.

Speaker 2: Yes, please go ahead.

Speaker 3: Welcome to the FDI Consulting Conference call to discuss the company's first quarter, 2023, earnings results as reported this morning. We'll begin with formal remarks after which they will take your questions.

Speaker 3: Before we begin, I would like to remind everyone that this conference call may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21 of the Securities Exchange Act of 1934 that involve risks and uncertainties.

Speaker 3: Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, future revenues, future results and performance, expectations, plans or intentions relating to financial performance, acquisitions, share repurchases, and future events.

Speaker 3: business trends, ESD-related matters, and other information or other matters that are not historical, including statements regarding estimates of our future financial results and other matters.

Speaker 3: For discussion of risks and other factors that may cause actual results or events to differ from those contemplated by forward-looking statements, investors should review the Safe Harbor Statement in the earnings press release issued this morning, a copy of which is available on our website at www.sticonsulting.com.

Speaker 3: as well as other disclosures under the headings of risk factors and forward-looking information in our quarterly report on Form 10-Q for the quarter ended March 31, 2023, our annual report on Form 10-K for the year ended December 31, 2022, and in our other filings with the SEC.

Speaker 3: Investors are cautioned not to place undue reliance on any forward-looking statement which speaks only to date of this earnings call and will not be updated. During the call, we will discuss certain non-GAAP financial measures such as Total Segment Operating Income, Adjusted EBITDA, and

Speaker 3: Total Adjusted Segment EBITDA, Adjusted Earnings Per Diluted Share, Adjusted Net Income, Adjusted EBITDA Margin, and Free Cash Flow.

Speaker 3: For discussion of these and other non-GAAP financial measures, as well as our reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures, investors should review the press release and the accompanying financial tables that we issued this morning, which include the reconciliation. For more information on GAAP financial measures, visit www.gaap.gov.

Speaker 3: Lastly, there are two items that have been posted to the investor relations section of our website for your reference. These include a quarterly earnings presentation and an Excel and PDF of our historical, financial, and operating data, which have been updated to include our first quarter 2023 results.

Speaker 3: Of note, during today's prepared remarks, management will not speak directly to the quarterly earnings presentation posted to the investor relations section of our website. To ensure our disclosures are consistent, these slides provide the same details as they have historically and, as I've said, are available on the investor relations section of our website.

Speaker 3: With those formalities out of the way, I'm joined today by Stephen Gumby, our President and Chief Executive Officer, and Aljai Sabrawal, our Chief Financial Officer.

Speaker 4: At this time, I will turn the call over to our President and Chief Executive Officer, Steve Gumby. Thank you, Molly. Welcome, everyone, and thank you all for joining us this morning. I am pleased to say that we reported record revenues.

Speaker 4: to our President and Chief Executive Officer, Steve Gumby. Thank you, Molly. Welcome, everyone, and thank you all for joining us this morning. I am pleased to say that we reported record revenues yet again this quarter.

Speaker 4: And in fact, we reported double digit revenue growth year over year once again.

Speaker 4: As Adjay will talk about, that level of revenue growth was despite the fact that we had FX headwinds this quarter and we had some revenue deferrals.

Speaker 4: Disaggregating that revenue performance, each of our segments, each of our segments, once again, grew year over year.

Speaker 4: STRATCOM's revenues grew mid single digits despite some significant FX headwinds.

Speaker 4: Econ, for reasons I'll describe later, only reported modest revenue growth.

Speaker 4: But all of the rest of our segments revenues grew at double-digit levels and when you adjust for FX headwinds strong digit levels.

Speaker 4: Below that sort of terrific revenue story, as you might imagine, are enormous numbers of success stories. I'm going to leave it to Ajay to share some of them, and if you'd like some further details or elaboration, we can go into more depth during the Q&A.

Speaker 4: But today I want to move from the revenue story to the bottom line story.

Speaker 4: Because notwithstanding that strong top-line performance,

Speaker 4: Our bottom line, in fact, underperformed our expectations this quarter.

Speaker 4: in fact underperformed our expectations this quarter and did so substantially.

Speaker 4: IJ will discuss the reasons for those shortfalls in some depth, but I'd like to give you a few top level reasons.

Speaker 4: First, let me come back to Econ.

Speaker 4: Our econ business, as I think everybody on this call knows, is an incredibly powerful business that has for many years delivered strong results for our shareholders and at least as importantly for our clients. We've averaged about 15% average annual adjusted EBITDA margins in that business for the last many, many years, at least 10.

Speaker 4: For a number of factors, including some slowness in parts of the business in the beginning of the year, some revenue deferrals, a few other things, we happen to deliver an 8% EBITDA, adjusted EBITDA margin this quarter.

Speaker 4: As we will discuss later, we do not expect adjusted EBITDA margins and ECON to remain at that level for the rest of the year. The second factor is one that we've talked about a lot in the past. In any given quarter, there are a lot of factors that can happen to cut one way or another. The second factor is one that we've talked about a lot in the past.

Speaker 4: We have cell phones. You might grab that and take it out. Thank you.

Speaker 4: Unless anybody thinks that's somebody on my team's fault, that was my cell phone that went off.

Speaker 4: The second factor, as we've talked about a lot in the past, is one that we've talked about a lot in the past. In any given quarter, there are a lot of factors that can happen to cut one way or another, like FX transaction losses, or the timing of marketing, or client events, or the amount of bad death in a quarter.

Speaker 4: This quarter, those items happened in total to cut more negatively than they often do.

Speaker 4: I want to spend some time though on the third reason, which is different.

Speaker 4: As high as our revenue growth was this quarter, we actually staffed ourselves up in terms of billable and non-billable headcount and the compensation associated with that for an even higher level of revenue growth than we delivered.

Speaker 4: That resulted in expense growth that actually exceeded those terrific revenue growth. So let me talk about that and how that happened because it's not totally random.

Speaker 4: In a few places, it is a little random. It's the sort of thing that happens every quarter. You can't predict exactly how much revenue growth you'll have in any particular area around the world. And this quarter, we had revenue growth shortfalls in parts of STRATCOM, our health solutions business with an FLC, and some of our businesses in the me and Asia-Pacific.

Speaker 4: But that is pretty typical. It happens every quarter some places. You can't ever predict exactly where. We don't consider any of that part of a long-term trend. Just normal quarter to quarter variations.

Speaker 4: More systemically, this quarter, our employee turnover was lower than in recent quarters. And even though we expected it to be lower, it was even a bit lower than we expected.

Speaker 4: On top of those factors, however, we also had something else important happen.

Speaker 4: Which is that we continue to find terrific talent looking to join us.

Speaker 4: And we took advantage of that in multiple key markets.

Speaker 4: including the Middle East, Australia, Hong Kong, continental Europe and elsewhere.

Speaker 4: and to support the businesses we're building in those jurisdictions and elsewhere.

Speaker 4: support the businesses we're building in those jurisdictions and elsewhere, we continue to add non-billable headcount.

Speaker 4: So though we had record revenues, we actually staffed ourselves up for an even higher level of revenue growth than we delivered. As Ajay will discuss, we do expect that gap between expense growth and revenue growth to gradually normalize.

Speaker 4: record revenues we actually staffed ourselves up for an even higher level of revenue growth than we delivered. As Ajay will discuss we do expect that gap between expense growth and revenue growth to gradually normalize as the year goes on.

Speaker 4: Let me talk to something, an important point that I find very important.

Speaker 4: When I look at the bases for the bottom line shortfall this quarter,

Speaker 4: They do not give me pause in any way with respect to my confidence about the powerful future of this company or even my outlook for the year. FX issues cut against us some quarters, but typically not all. In some quarters, they go the other way. Due to hurdles, we typically get recognized.

Speaker 4: If attrition continues to be lower, we can gently reduce our hiring. And of course we can moderate our non-billable headcount growth to match the billable headcount growth.

Speaker 4: The important point is though the bottom line is what not what we wanted this quarter or we'd ideally want in any quarter, the shortfall is not the result of us being unable to grow revenues or that the majority of the bets that we've been making suddenly stopped working.

Speaker 4: Rather, we had strong top level growth.

Speaker 4: and a series of things this quarter that happened to hit us negatively, coupled with a series of things we chose to do, because we believe they will allow us to continue to build a fundamentally more attractive enterprise over time.

Speaker 4: Before I close, let me focus a little bit more on that choice part of the prior sentence.

Speaker 5: Is it possible?

Speaker 4: that we continue to have great talent looking to defect to us, and we decide to invest ahead of demand.

That is always a possibility. But to me that would be a great thing.

If we took advantage of it, could it hurt quarters? Of course it could. But as those of you who have been following this company for years now,

No, it's been by making those sorts of bets that we've been able to get this company on the terrific multi-year trajectory we've been on now for almost a decade. We have hired some of the best people in this firm, people who have helped transform our businesses in quarters when the businesses they join were slow. We've talked about some of those examples over time.

excited about them joining us. And I am excited about the professionals that I'm hearing right now want to join this company. Molly slipped in some data into my script. Apparently, during this first quarter, I knew we were hiring some great people. Apparently, we announced 44 senior hires this quarter, 44 combination of SMDs and MDs, which I think is unfair.

and our company can always be volatile. And I don't ask management here to focus on reducing that volatility. I ask them to focus on building powerful, sustainable growth engines, not one that will never be impacted by short-term volatility, but one that can demonstrate over time that powerful multi-year trajectory.girl

And to do that by having our teams focus on client needs, making bold bets where the needs are great and where we believe we have a right to win.

and ensuring that every day

We attract, develop, and promote great professionals who can deliver on those needs.

and we support them as they build those businesses.

I believe we have now shown that when we maintain that commitment and focus over any extended period of time, our business soars, our people develop and they soar.

I so look forward to us continuing on that journey.

Good morning everybody. In my prepared remarks, I will take you through our company-wide and segment results and discuss guidance for the full year.

As Steve mentioned, today we reported yet another quarter of record revenues with all of our segments growing year over year.

Of note, restructuring activities strengthened in the quarter.

In fact, according to S&P Global, in the U.S. through March, monthly bankruptcies have increased sequentially for four consecutive months.

Conversely, the pace of M&A-related services in several of our segments was slower than we anticipated. Bloomberg reported that global quarterly deal volume declined nearly 50% year-over-year in Q1 2023, making it the third lowest quarter for M&A in the last 10 years.

Pronged revenue growth did not sufficiently offset the increase in direct costs, SG&A, FX transaction losses, and a higher tax rate compared to the prior year quarter.

As a result, EPS and adjusted EBITDA decline year over year.

Overall, our first quarter results were below our expectations. Now, turning to the details for the quarter.

up $83.1 million, or 11.5% year-over-year. Excluding the estimated negative impact of FX, revenues increased $99.7 million, or 13.8%.

$1.66 in the prior year quarter.

Net income of $47.5 million compared to $59.3 million in the prior year quarter.

The decrease in net income was primarily due to an increase in compensation.

including the impact of an 11% increase in billable headcount.

higher sGNA expenses, and FX remeasurement losses.

SG&A of $184.2 million was 22.8% of revenues.

and compares to SDNA of $149 million or 20.6% of revenues in the first quarter of 2022.

The increase in sGNA was primarily due to higher compensation.

which included a 14.4% increase in non-billable headcount.

increased travel and entertainment expenses, and higher bad debt. First quarter 2023 adjusted EBITDA of $78.4 million decreased 13.3% compared to $90.5 million in the prior year quarter. Our first quarter 2023 effective tax rate of 24%

compared to 22.2% in the prior year quarter. The higher tax rate this quarter was primarily due to an increase in foreign taxes.

and a lower discrete tax adjustment related to share-based compensation from fewer shares resting.

For the balance of 2023, we continue to expect our effective tax rate to be between 24 and 26 percent.

Weighted average shares outstanding, or WESO, for Q1 of 35.5 million shares compared to 35.6 million shares in the prior year quarter.

For the quarter, our convertible notes had a potential dilutive impact on EPS of approximately 1.3 million shares in Waco.

As our share price on average of $173.80 this past quarter was above the $101.38 conversion threshold.

Billable headcount increased by 614 professionals, or 11% year-over-year. Sequentially, billable headcount increased by 123 professionals, or 2%.

Non-billable headcount increased by 14.4% year over year. We added non-billable employees to support a larger business, especially outside of North America, in areas such as recruiting, HR, finance, and marketing.

Sequentially, non-billable headcount increased by 36 professionals, or 2.3%.

Now, turning to our performance at the segment level.

In corporate finance and restructuring, record revenues of $300 million increased 18.4% compared to the prior year quarter.

The increase in revenues was primarily due to higher demand for restructuring and business transformation services, which was partially offset by lower demand for transactions services.

Business transformation and transactions represented 53% of segment revenues, while restructuring represented 47% of segment revenues in the quarter.

This compares to a split of 59% for business transformation and transactions and 41% for restructuring in the prior year quarter.

Year over year, restructuring revenues grew 38%.

as we successfully help clients in a variety of verticals, including retail, healthcare, financial institutions, and airlines.

adjusted segment EBITDA of $55 million or 18.3% of segment revenues compared to $53.5 million or 21.1% of segment revenues in the prior year quarter.

to higher revenues, which was partially offset by higher compensation, which includes the impact of a 13.9% increase in billable headcount and higher SPA expenses, including increased business development activity. Turning to Forensic and Litigation Consulting, or FLC.

with DA of $18.6 million, or 10.7% of segment revenues, compared to $17.3 million, or 11.2% of segment revenues in the prior year quarter.

The increase in adjusted segment D with DA was primarily due to higher revenues.

which was partially offset by an increase in compensation, which includes the impact of a 4.2% increase in billable headcount, as well as an increase in as-needed outside contractors' expenses and higher SVNA expenses.

In economic consulting, revenues of $169.6 million increased 2.2% compared to the prior quarter.

The increase in revenues was primarily due to higher demand for M&A-related antitrust services and higher realization for non-M&A-related antitrust services, which was partially offset by lower demand for non-M&A-related antitrust services. Adjusted Segment EBITDA of $14.2 million

increase in billable headcount and higher sDNA expenses.

We had expected higher revenues and adjusted segment DbDA in economic consulting. This is in part due to revenue deferrals that have resulted in, and may continue to result in, variations in the timing of revenue recognized on work already performed.

We believe that conditions to recognize these revenues will be met later this year, and could positively impact adjusted segment EBITDA by approximately $5 million.

Technology's revenues of $90.6 million increased 12.6% compared to the prior year quarter. The increase in revenues was primarily due to higher demand for investigations and litigation services, which was partially offset by the current year quarter.