Q2 2023 FTI Consulting Inc Earnings Call
Welcome to the F. T I consulting second quarter 2023 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note that this event is being recorded I would now like to turn the conference over to Mollie Hawkes head of Investor Relations.
Go ahead.
Good morning, welcome to the STI consulting conference call to discuss the company's second quarter 2023 earnings results as reported this morning management will begin with formal remarks, after which they will take your question.
Before we begin I would like to remind everyone that this conference call may include forward looking statements within the meaning of section 27, a of the Securities Act of 1933 and section 21 of the Securities Exchange Act of 1934 that involve risks and uncertainties forward looking statements include statements concern.
Any plans objectives goals strategies future events future revenues future results and performance expectations plans or intentions relating to financial performance acquisitions share repurchases business trends ESG related matters and other information.
Or other matters that are not historical including statements regarding estimates of our future financial results and other matters.
For a 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 Dot F T I consulting dotcom as well.
As other disclosures under the headings risk factors and forward looking information in our quarterly report on Form 10-Q for the quarter ended June 30th 2023, our annual report on Form 10-K for the year ended December 31, 2022, and in our filings with the SEC.
Investors are cautioned not to place undue reliance on any forward looking statements, which speak only as of the 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 total adjusted segment EBITDA adjusted earnings per diluted share adjusted net income adjusted EBITDA margin and free cash flow.
For a discussion of these and other non-GAAP financial measures as well as our reconciliations of non-GAAP financial measures. The most directly comparable GAAP measures investors should review the press release and the accompanying financial tables that we issued this morning, which includes the reconciliation.
Lastly, there are two items 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 second quarter 2023 results.
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 they provide the same details as they have historically and as I've said are available on the Investor Relations section of our website.
With these formalities out of the way I'm joined today by Steven Gunby, Our President and Chief Executive Officer, and others suffer ball, our Chief Financial Officer.
At this time I will turn the call over to our President and Chief Executive Officer, Steve Gunby. Thank you Mollie and welcome everyone and thank you once again for joining us this morning.
I'm sure many of US on this call saw the earnings announcement. This morning are Jay will take you through the performance in more detail, let me try upfront to share a few perspectives on the results.
The first is the terrific strength.
We continue to show in terms of revenue growth.
In particular in terms of organic revenue growth.
As well as the terrific strength, we are showing in terms of attracting and retaining top professionals.
We've talked about these in the past I'm going to underscore them again, both today and the consistency we have shown in delivering on both of them in the last few years in the face of Covid booms and busts in the market.
The consistency we have shown in terms of both organic revenue growth and in terms of attracting and retaining top talent are the two elements that I think ultimately have been the core of our success. So I'll emphasize that.
But I'm also going to talk about our second point, which is the fact that we have not met our earnings expectations for the first half of the year. In fact, we missed our expectations sufficiently that we are lowering our full year guidance.
The third point I'd like to share some thoughts on is how do those two points come together.
Yes in terms of how they come together for the year.
But perhaps more important what it means for the multi year trajectory that this company has been on.
And as I'll come back to I believe we continue.
To be on.
So let me talk to those three points within our Jay will take you through the details of the quarter and then as usual we look forward to opening the floor for your questions.
Yeah.
In terms of the first point I want to underscore that the strength of our topline results year over year or this quarter. Our revenues grew 15% organically and for the year to date, it's 13% growth and that is even before you normalized for FX.
And as you might expect given that level of overall strength the contributions to our revenue growth were multifaceted every segment every segment delivered year over year revenue growth in the quarter and in the first half of the year.
Jay will talk to each of the segments. So let me just highlight two here first as I'm sure. Many of you have noticed our tech business continues to soar that.
<unk> Tech team has now delivered multiple years of strength and this year, it's notwithstanding muted M&A activity globally.
We are winning major jobs in multiple places around the world with major corporations and with prominent law firms.
The second business I'd like to point out is LLC.
As many of you know we have been investing in <unk> for a while and we've seen it underperformed our expectations in some quarters and importantly in last year as a whole.
To me it is terrific to see <unk> beginning to show the tremendous potential it has particularly this quarter with strong performances actually in the first half of the year from our investigations sub business or data analytics businesses.
So those are just two examples RJ and little bit you will talk to the others.
Because across the board every segment.
So let me turn to what I guess is the key question I would have if I were listening to this.
With that level of revenue growth.
How can you not also show earnings growth.
I think for most people on this call you know that Corp. Fin is an incredible business of ours.
And in the first half of the year it had a terrific performance.
8% revenue growth.
But in the face of the 13% revenue growth, our adjusted EBITDA actually declined.
3%.
Does that happen.
There are several reasons.
First.
Our total head count was up 14% higher than the 13% revenue.
For the same period in general if your revenue was up less than your head count you of course see pressure on margins.
But that pressure these days gets accentuated because of inflation.
We are no longer in an environment of 2% or less inflation in the U S or globally.
In the U S over three years I suspect there has been about 20% inflation cumulatively this year, depending on what metric or whose forecast you use it might be about 5%.
Inflation, it was up 17%, which of course is quite a bit higher than 13% and as a consequence, our adjusted segment EBITDA didn't grow.
Yeah.
If you look beyond inflation, what else has surprised us during the year. One is that we've had lower attrition.
Yeah.
We expected attrition to be a couple of points higher this quarter. If it had been our head count instead of being up 14% would have been up 12%, 13% and that would have closed the gap somewhat.
So we can point out attrition I think many companies are pointing out attrition.
I want to also be clear.
We hired people this quarter and this half year.
Okay.
Because we found terrific talent.
Terrific talent to join the Corp fin business and when we find terrific talent we hire.
At least as long as we believe in the business and we certainly do here.
So we continue to hire and as you know when you hire senior people that typically is not profitable initially.
The third point.
Is it slightly different one which is as strong as the revenues were in this quarter in this first half of the year for Corp fin.
We actually expected even stronger revenues.
If you think back.
A year ago or when the budgets were being set in the fall and most of US thinking about what we were thinking about in the economy and bankruptcy forecasts I think most people expected a faster pace of bankruptcies.
This year in multiple places around the world.
Some folks who are outside observers expected a boom we.
We didn't expect a boom, but we certainly did expect strengthening in multiple places around the world.
And we are seeing strength in some places around the world.
But we're certainly not seeing a boom and we're not seeding strength every place and we have some weaknesses in different places.
And just to put in perspective, how sensitive the corp. Fin results are to a few points change in revenue if instead of 13% revenue gain we had had 17% revenue gain our corp fin adjusted segment EBITDA instead of being down 3%.
It would have been up 15%.
So I share the Corp. Fin example, because it's of course, the largest of our segments and it's important to understand what happened there.
But it also illustrates.
General set of principles that happened various places around the firm at the company level. We grew revenues, 15% this quarter and 13% year to date, but our cost structure actually grew faster.
The weighting of the various reasons changes when you look at different sub segments in different regions essentially.
That story reflects the three themes I just highlighted in the Corp. Fin example.
First is lower attrition.
The second that even in places, where we were slow.
When we found terrific talent, we jumped on it.
And the third is some places not every place, but some places we did have a revenue shortfall not versus last year, but versus our expectations.
And.
So those three reasons are the basis for why even though as RJ will say it was a solid quarter actually a terrific quarter in terms of revenue.
The adjusted EBITDA and EPS for the first half of this year worked us.
Disappointing.
I hope that clarifies Ajay will go through some more details on some of the other segments. So let me take a moment to turn so maybe what I think is the most important third point.
Which is where does that leave us.
And the guidance gives you some sense of where it leaves us for the year, but where does that leave us more generally with respect to the medium and long term.
Look am I disappointed to lower guidance for the year.
Of course, absolutely am I hate lowering guidance.
Having said that it is hard for me to look at what I just talked about.
And so any of what we just talked about changes the fundamental positive long term trajectory that this company has been on.
And what I believe will stay on in the face of this economic environment. We grew revenues in the face of this economic environment and the global situations. We face we grew revenues and not a little we grew revenues 13% year to date.
And yes, we have lower attrition and in the face of that we found great talent that was available in the market. So we invested.
And we did invest some places even where the current utilization is less than our ultimate aspirations.
And of course, some of those moves hit you.
In the short term in terms of the economics.
But for me, it's hard to see how any of those factors great people wanting to join you.
Investing behind great talent growing topline revenue.
Is anything other than incredibly positive in terms of the potential for this company.
We have been able to drive revenue growth not only this year, but over the past or the prior five years through so many different circumstances through COVID-19 to boom times in restructuring, but also downtime and restructuring to active M&A market in slow M&A markets in a way that has allowed us to average double digit organic growth to me.
That has allowed this company to rediscover the most important formula in professional services. If you attract great people, who do highly valuable work for clients, who will care about doing highly valued will work for clients.
Can you support those great people.
And if you're willing to invest behind them.
And significant areas of client need.
As a firm you grow.
And prosper you attract other great people.
And you get into the virtuous loop of professional services.
So if you ask me am I disappointed by the earnings this year of course I am.
Am I disappointed by the revenue performance note.
Am I disappointed by the way, we are serving our clients and getting ever better at serving our clients on their most important needs no way.
Am I thrilled about the way, we were able to attract great talent.
Absolutely.
These last few points to me are.
By far the best indicators of the bright future.
But this company has.
With that let me turn this over to Ajay to take you through the quarter in more detail.
Thank you, Steve and good morning, everybody and.
In my prepared remarks, I will take you through our company wide and segment results.
And discuss guidance for the full year.
Beginning with our second quarter results in summary, we had a solid quarter with record revenues at the company level. We delivered 14, 5% revenue growth with all segments growing year over year, our net income increased 21, 3%.
And adjusted EBITDA increased 31, 6%.
We achieved those financial results, while continuing to add talent globally with billable head count growing 11, 3% year over year.
Those solid our results for the first half were weaker than our internal expectations.
As Steve mentioned midway through the year, we are lowering the top end of our revenue guidance and lowering our EPS guidance range.
I will discuss factors shaping this revised guidance towards the end of my prepared remarks.
Turning to our second quarter 2023 results in more detail revenues of $864 $6 million increased $109 6 million compared to $755 million in the prior year quarter.
Earnings per share of $1 75, compared to $1 43 in the prior year quarter.
Net income of $62 $4 million compared to $51 4 million in the prior year quarter.
This increase was due to higher revenues, which was partially offset by an increase in direct compensation cost higher SG&A expenses, a higher effective tax rate and an unfavorable impact from FX.
SG&A expenses of $186 $4 million were 21, 6% of revenues. This compares to SG&A of $167 $9 million or 22, 2% of revenues in the second quarter of 2022.
The year over year increase in SG&A expenses was primarily due to compensation and outside services expenses.
Second quarter 2023, adjusted EBITDA of $502 million.
Our 11, 6% of revenues compared to $76 2 million or 10, 1% of revenues in the prior year quarter.
Our second quarter effective tax rate of 26, 7% compared to 26% in the prior year quarter.
The higher effective tax rate was primarily due to a lower discrete tax adjustment related to share based compensation from fewer shares vesting and an increase in foreign taxes.
We expect our effective tax rate for full year 2023 to be between 25, and 26% which includes our first half 2023 tax rate of 25, 5%.
Weighted average shares outstanding are way so for Q2 of $35 7 million shares compared to 35 9 million shares in the prior year quarter.
Our convertible notes that mature on August 15th 2023, and the potential dilutive impact on EPS of approximately one 4 million shares for the quarter.
Included in ratio as our average share price of $189 in <unk>. This past quarter was above the $101 38 conversion threshold price.
As a reminder, on January one 2022 reelected to settle the principal amounts of the notes in cash.
And during the second quarter of 2023, we disclosed that we have elected to settle that premium in shares.
Billable head count increased by 634 professionals are 11, 3% compared to the prior year quarter non billable head count increased by 171 professionals are 11, 8% for the same period.
Sequentially billable head count increased by 45 professionals non billable head count increased by 14 professionals.
Now I will share some insights at the segment level in corporate finance and restructuring revenues of $304 million increased eight 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 transaction services.
Adjusted segment EBITDA of $50 million or 16, 7% of segment revenues compared to $55 million or 19, 8% of segment revenues in the prior year quarter.
The decrease in adjusted segment EBITDA was primarily due to higher compensation.
Which includes the impact of a 15, 5% increase in billable head count.
And higher SG&A expenses.
The restructuring revenues grew 32% year over year as we successfully help clients in a variety of verticals, such as healthcare utilities software and services media and entertainment and Airlines.
And business transformation revenues grew 8% year over year and transactions revenues decreased 19%.
The share of restructuring revenues increased from 14% in Q2 of 2020 due to 49% in Q2 of 2023.
The share of business transformation and transactions revenues declined from 60% in Q2 of 2020 due to 51% in Q2 of 2023.
On a sequential basis revenues increased half a million dollars or 0.2%.
Growth and restructuring revenues.
Slowed.
Two 4%.
While transactions revenues increased 9% from the low level, we saw in Q1 2023.
This growth was offset by a 13% sequential decline and business transformation revenues.
As there was a slowdown in activity with several significant matters.
Adjusted segment EBITDA decreased $5 million as increased compensation, which includes the impact of annual salary increases.
And a 2% increase in billable head count more than offset the increase in revenues.
Turning to <unk> revenues of $182 $2 million increased 10, 9% compared to the prior year quarter.
The increase in revenues was primarily due to higher demand and realized bill rates for investigations and data and analytics services.
Adjusted segment EBITDA of $21 1 million or 11, 6% of segment revenues compared to $16 7 million or 10, 2% of segment revenues in the prior year quarter.
The increase in adjusted segment EBITDA was primarily due to higher revenues, which was partially offset by an increase in compensation higher contractor expenses and an increase in SG&A expenses.
Sequentially revenues increased $8 $8 million or five 1%, primarily due to increased demand for investigations and health solutions services, which was partially offset by lower demand for data and analytics services.
Adjusted segment EBITDA increased by $2 $5 million.
Our economic consulting segment revenues of $201 $8 million increased 23% compared to the prior year quarter. The increase in revenues was primarily due to higher realized bill rates.
Primarily from the recognition of revenues previously deferred.
And higher demand for non M&A related antitrust M&A related antitrust and international arbitration services.
Adjusted segment EBITDA of $35 5 million or 17, 6% of segment revenues compared to $21 6 million or 13, 2% of segment revenues in the prior year quarter.
The increase in adjusted segment EBITDA was primarily due to higher revenues, which was partially offset by an increase in compensation primarily related to higher variable compensation and an 11, 1% increase in billable head count.
As well as higher SG&A expenses.
Sequentially revenues increased $32 2 million or 19% and adjusted segment EBITDA increased by 21 $3 million.
Revenue growth was led by our non M&A related antitrust M&A related antitrust and international arbitration services.
As I mentioned on our Q1 earnings call last quarter, we experienced more than typical deferral of revenues from conditions for revenue recognition not being met.
This quarter, we experienced more than typical reversals of deferred revenue, including one large matter in which we recorded $7 6 million in revenues from prior periods, which benefited adjusted segment EBITDA by $5 3 million.
In technology revenues of 97 $4 million increased by 25, 3%.
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 lower demand for information governance privacy and security services.
Adjusted segment EBITDA of $21 million or 26% of segment revenues compared to $8 4 million or 10, 8% of segment revenues in the prior year quarter.
The increase in adjusted segment EBITDA was primarily due to higher revenues, which was partially offset by an increase in compensation, which includes the impact of a 16, 2% increase in billable head count.
Sequentially revenues increased $6 8 million or seven 5%, primarily due to increased demand for investigations and litigation services.
Adjusted segment EBITDA increased by $4 $7 million.
Revenues in strategic communications segment of $82 $7 million increased 15% compared to the prior year quarter.
The increase in revenues was primarily due to higher demand for corporate reputation and public affairs services.
Adjusted segment EBITDA of $12 $3 million or 14, 8% of segment revenues compared to $11 $5 million or 16% of segment revenues in the prior year quarter.
The increase in adjusted segment EBITDA was primarily due to higher revenues, which was partially offset by an increase in compensation, which includes the impact of a 13, 1% increase in billable headcount and higher SG&A expenses.
Sequentially revenues increased $9 6 million or 13, 1%, primarily due to higher demand for public affairs and corporate reputation services as we assisted clients across a broad range of industries.
Adjusted segment EBITDA increased by $2 $7 million.
Let me now discuss key cash flow and balance sheet items.
Net cash used in operating activities of $11 million compared to $35 million of net cash provided by operating activities for the second quarter of 2022.
The year over year increase in net cash used in operating activities was primarily due to an increase in salaries largely related to head count growth and higher operating expenses and income tax payments, which was partially offset by an increase in cash collections.
Cash collections in the quarter did not keep pace with the growth in revenues in part due to a transition of billing during the quarter to our new ERP system.
Free cash flow was an outflow of $22 million in the quarter.
Total debt net of cash of $137 $2 million on June 32023, compared to $65 million on June 32022, and $122 7 million at March 31 2023.
Turning to guidance.
Even with the recognition of significant prior deferred revenue in our economic consulting segment.
Relative to our expectations our results this quarter did not adequately offset a weaker than expected first quarter.
And with two quarters behind US we are now lowering our guidance for the year.
We now expect revenues will range between $333 billion and $3 4 billion.
Taking the top end of our range down from our previous range of between 333 billion and $3 47 billion.
We now expect the EPS to range between $6 50, <unk> and.
And $7 21.
Which is down from our previous range of between $6 87.
$7 70.
While we are lowering the top end of our revenue range, our EPS range for the year and our EPS range for the year the midpoint of our updated guidance ranges for revenue and EPS still imply a straw.
Longer second half of 2023 compared to the first half of the year.
Our updated guidance is shaped by five key factors.
First.
We are operating against a backdrop of uncertain economic forecasts.
Credit is now becoming more available, thereby possibly slowing the pace of restructuring grow.
Though not yet loose enough for corporations to become less hesitant on M&A.
As I said in my earlier remarks.
Sequential growth in restructuring from Q1 2023 to Q2 2023 was 4%.
Which is down from 6% growth from Q4 2020 due to Q1 2023.
And down from 18% growth from <unk> 2020, 224, <unk> 2022.
We are reflecting this slowed restructuring growth trajectory in our guidance.
Second we continue to face cost pressures from both inflation and the impact in the short term of having more head count than we anticipated from lower staff attrition among other things.
Total attrition of six 7% in the first half of 2023 compares with nine 9% in the first half of 2022.
Third.
We are moderating hiring and practices with low utilization.
While still remaining steadfast in our commitment to attract talented professionals, even if it negatively impacts our earnings in the short term.
In the fall we are set to welcome 320 graduates from campus.
And we are seeing opportunities to hire superb senior talent across the globe.
We expect SG&A in the second half of the year to be lower than in the first half of the year, we had several client and partner meetings in the first half that will not recur in the second.
Offsetting that annual salary increases were effective across the company on the first of April .
And finally typically the fourth quarter is a weaker quarter for us because of both an increase in time off during the holidays for our employees and is seasonal business slowdown.
Before I close I want to emphasize a few key themes that I believe distinguish our company first.
First it is frightening testimonial for our practitioners and their relationships and their relevant software expertise in these times that all our segments reported record revenues this quarter.
Second both in our core and adjacent practices, we are finding opportunities to grow globally.
Third we view, our lower attrition and the quality and quantity of professionals coming to us as verification that SDI is a great place to work.
Verification that has also been validated by external recognition from Forbes and consulting magazine among others.
And finally, our balance sheet remains exceptionally strong and we have the ability to boost shareholder value through share buybacks organic growth and acquisitions, when we see the right ones with that let's open up the call for your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Today's first question comes from Andrew Nicholas with William Blair. Please go ahead.
Hi, good morning, Thanks for taking my questions.
I wanted to first ask on the cost side.
I think you both mentioned inflation.
Inflation pressuring cost as it's costing more obviously to hire people and keep people Im wondering if theres any kind of mismatch there as.
It relates to bill rates also going up is that pressuring the first half more so than you would expect it to pressure second half or even looking ahead to 'twenty four or are you, having a harder time than expected passing through.
That dynamic.
Through on the bill rate side.
Let me, let me take a crack at that.
Look I think obviously, we're a complicated business with.
Ton of sub parts in different parts around the world I would have said last year.
We had trouble.
We were a little slow to raise bill rates.
I don't think Thats. The main factor of the shortfall. This year. There has been a couple of places where we're not getting the realization.
I think a lot of it actually has been utilization has been lower like for example.
Restructuring business hasn't been as strong its not that we didn't.
Raise the rates and commensurate with inflation, it's not that they don't know how to get realization there, but if youre lower utilization that shows up on the revenue line. It's obviously a mixture of all three but last year I would've said, we were slow to raise rates and then there was a little less commitment to realization in there should've been not sure Thats the primary cause of the short.
Fall in the first half of the year.
Understood that's helpful and then.
Wanted to ask on guidance. It sounds like you are lowering your expectation for the pace of restructuring growth, which makes sense I'm wondering if there is kind of an offsetting.
Increase assumption on the M&A front, if we do kind of thread the needle in terms of a soft landing here or what level of kind of conservatism is there.
In terms of larger deal activity. It seems like the transaction practice picked up a bit often easier first quarter comp.
Wondering kind of how you're seeing that or if the back half.
Not only is expecting slower restructuring growth, but also still relatively modest acceleration on that front.
Andrew that's exactly it.
At the midpoint, we're expecting exactly what you said.
Slower restructuring growth and moderate growth in transactions and there is a range around that midpoint.
Alright, great. Thank you very much.
Thank you.
The next question comes from James <unk> with Goldman Sachs. Please go ahead.
Good morning, and thank you for taking my questions.
Our pleasure James.
So we just received proposed antitrust guidelines in the U S as well as some changes to Hart Scott Rodino, how do you see these as a catalyst for your business broadly and maybe if you could just help us understand in which segments. You think you might benefit and then outside of the U S. Just any update on the antitrust dialogue and how that.
Should or should not affect your business.
Look let me make a general statement and then I'll see if Jay wants to go into more details look I think we have.
I think it's fair to say we have a.
Around the world the leading group of antitrust experts.
Of any firm and I think by a significant margin at least most places around the world.
So any sort of dynamics in the world of antitrust, whether it's private litigation public litigation or just investigations by regulatory authorities.
Stimulates.
Demand because the stakes of these things are incredibly high.
So I think.
I think many people would have thought.
Sure.
Our econ business would would've been slower this year because of.
The M&A market is not as robust I mean, our econ business. It had a slow start to the year and it had some deferrals and all that sort of stuff, but we are we have a terrific E com business and I think as all of these regulatory changes continue it just tends to.
In general the specifics are always different by the individual specific country litigation legislation in general it just stimulates more and more demand for the best professionals in the world, which is ours.
Okay, that's very clear thank you Steve.
Touched on Econ consulting a little bit there is obviously a tremendous sequential growth in the business this quarter, which is great.
Is this the right normalized level to build off going forward or were there any.
Sort of one time factors in there related to deferred revenue in the first quarter, just trying to figure out what we should put in our models going forward there.
So there clearly were onetime factors, let me have RJ talked to you about that but that's an important point.
James the better way to do it is at the first two quarters and divided by two that's on the revenue side that that's the launch pad that you should have going into the third quarter.
Okay, that's extremely clear my.
And my last one is just around the U S presidential election.
We're entering into an election year in the U S. Next year and historically you have had a step down in revenue in and forensic and litigation consulting around those events, maybe you could just speak to what you think.
This coming election could mean for the business growth for next year.
James look I have no idea what I have found let me let me say this.
I used to.
Run lead a big chunk of BCG when BCG was not performing we talked a lot about.
The external markets when we started performing.
We stopped talking about the external markets and it doesn't mean markets can't affect us affect us but.
I don't know that.
The election results from from 2008 actually have relevance today, when we attract great people.
They monitor the markets, we can have slow periods because of Dislocating event, and we were it is Brexit going to cause us low mark in Europe , and all these sorts of things.
My experiences over time, we.
We determine our future over any 12 to 18 months and Thats kind of what we focus on it otherwise you spend your entire time trying to look at Crystal balls. When I don't know what your Crystal ball is about who is going to get elected or even who is going to get nominated right. At just two third order in fourth order, we spend our time, saying, we feel like we have the right propositions for our <unk>.
Clients, how could the world change on election, so we're positioning ourselves against the right needs for the clients and make sure people are out in the market and then leave it.
If there are short term dislocations, we live with it I wish I had a better answer James but that's our that's my my crack at it.
Totally understood. Thanks, so much Stephen Ajay.
Thank you.
The next question comes from Tobey Sommer with <unk> Securities. Please go ahead.
Thank you good morning.
Will there be G&A leverage in 'twenty, three and if not when.
So.
<unk>.
Answer is we do expect lower G&A in the second half than the first half, which and we do expect.
Revenue growth at the midpoint. So so so yes, we do expect G&A leverage in the second half.
And would that be true for 2023 versus <unk> 22.
Just to add on an annualized basis, rather than just looking at the discrete guidance period of half half of the year.
I am not sure whether for 'twenty three to 'twenty, two I'd love to think about that a little bit more SG&A has been has been up.
And that's where you see some of those inflationary pressures those flights cost the same flight cost a lot more in the same hotel cost a lot more in in terms of the pay increases which are very justified you can pass those on to the clients. So so you do have those.
But I think it's stunning.
Let me just add something on that look I think there are SG&A costs like flights and so forth a lot of our SG&A costs are driven by our billable head count.
Add a lot more billable head count opened a new office you have to do real estate you have new computers, you have travel and all that sort of stuff.
Whether our SG&A gets leverage is a lot historically.
Used to be a rule of thumb in professional services. If your revenue goes up faster than your head count than you've gotten leverage on your SG&A unless you're managing it stupidly.
Over an extended period of time and in the reverse the issue today is your revenue has to go up.
Easter than head count plus inflation in order to actually have a big leverage point and the issue. This year, if not better SG&A went out of control. We had some expenditures on things, which we chose to do is that we expect we had head count growth and we didn't get as much revenue growth and once we can get the revenue growth ahead of our.
Billable head count and inflation will get a lot of leverage but we have to get there and I think we have uncertainty about the second half of the year revenue, which we put our guidance around does that help tobey.
It prompts a follow up Steve.
Does that mean revenue needs to grow.
At.
Our rates.
Including inflation above head count growth. So this year for example, using your own numbers that would be five points is that right.
I think I think look I think there are millions of specific things that the accountants will tell you can Trump all this on a short term basis right.
Exchange rates and you got out of it.
And so I haven't looked at that Ajay.
<unk> has in detail I think over any multi year period.
In order to get a lot of leverage out of SG&A you want your your revenue to grow faster than billable head count plus inflation.
And that's absolutely a truism that actually is fly through many professional services companies for very long periods of time.
Does that help.
It does maybe you could dig into what are the things internally you're toggling.
That are your control that are under your discretion.
Differently in response to the changing conditions, so either slowing office growth I understand you've got a higher billable head count, particularly senior people, who can generate revenue when they are available, but you could hire less junior staff to improve your utilization so describe some of those.
Yes.
Let me, let me start by describing what we're not doing right. I mean look if we were in in duress really company duress, we could pull the plug on the 300, some odd new hires that are supposed to show up.
From September and September right, I mean, and I guess, some people do where they postpone all of the things we're not doing that.
It Burns your brand on campus. It hurts junior people. It has a temporary benefit to European al and its a temporary benefit to your P&L. So what we're not doing is looking for.
Short term fixes that really help a couple of quarters and really don't help us I mean, we're hoping that all of you have enough confidence in the discipline of this company that we.
We shouldn't be doing short term things that are that hurt the company in the long term in order to.
It boosted a quarter or two and then in the opposite as you say, which you are supportive of US one of the weird things is that in.
Complicated times, often is when the best talent is available and one of the things we've committed to is to jump on that even sometimes where places are slow and utilization and that doesn't mean, we want.
To have sub parts of our businesses.
88% utilized go forever going forward, but if you find the best talent available and you believe in the business you jump on it and so.
What we're not doing is is doing a U turn on the core strategy of the company now do we fine tune things absolutely do we look at I mean.
My view is yes to your point about real estate I think bill handler words are not reflecting reality in terms of cutting rates at this point. So we're slow to slow to expand real estate at this point in time are we slowing backfill hires in really slow businesses of course, we are unless we find fabulous talent. So look.
We understand we have a responsibility on a multiyear basis to deliver value for our shareholders.
And we act accordingly to that.
But the core of it is to deliver growth.
And have enough discipline without choking off what is the wonderful thing that has led to the success of this company and so that's what we tried to balance does that help tobey.
Sure.
What was growth in health solutions, and what is the outlook.
We don't we don't provide specific sub practice numbers like that.
Well I understand what you said.
When describing the segment you said it was fueling growth.
I don't expect you to give a specific percentage, but could you speak to the question without numbers.
Yes.
As we said in our prepared remarks, we had growth in that sub practice within their subsea segments.
Okay.
In tech.
The strong performance.
Is that market share gains market growth and if market share gains what do you think is fueling it.
Look.
There's no hard data so I'm, giving you my judgment, but my sense is we are gaining share in that business and we have now been 444 years.
I think you know at.
At one point, we werent soaring the team changed the strategy put in place a new strategy went out and marketed aggressively it took a while before law firms that haven't worked with us for a while got gave us trial.
What they would tell you is that when the law firms gives us trial or the corporates give us trial. They say Wow. This is not a commodity and we get re buying and we get re buying and we increased market share within those individual law firms and that's happening not just in the U S. But in different places around the world.
Now our to market forces matter sure, but this is not a boom M&A market and we're continuing to win lots of terrific job. So I would say.
It's a lot of market share.
Okay.
And then last one for me is just kind of a gut check is is the basic risk here.
Company performance over the next few quarters that we're kind of in the shoulder period between.
A handoff into restructuring cycle that kind of didn't wasn't really strong in.
Waiting for a positive M&A cycle, I think chairman policy.
<unk> no longer models of recession.
Look I think thats that is the worry I mean look if you want look you can always paint incredible where you wanted to do the most significant worry you say that.
The economy works out exactly as People's hopes not only do we avoid a recession, but interest rates dropped back to where they were in the past and then everybody who has this big refinancing bubble in 25, just as that totally able to refinance.
You can and then the <unk> and then the bankruptcy market goes back to the loans that were in 'twenty one 'twenty.
22, you can run those scenarios.
Under those scenarios I think there would be M&A boom, but could there be often timing.
Look we feel like.
We have positions that allow us over any extended period of time.
To show growth in Corp, fin and more globally over any extended period of time.
Your guess is as good as my mind, whether you can get caught on the wrong end of that for a couple of quarters.
You just I don't have that good a crystal ball.
Thank you very much.
Ladies and gentlemen, the call has now concluded.
Let me say, thank you to all of you for the continued attention and support and we look forward to engaging with you all further down the road. Thank you.
<unk>.
Thank you for your participation you may now disconnect your lines.
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