Q4 2024 FTI Consulting Inc Earnings Call
Speaker Change: Welcome to the FTI Consulting 4th Quarter and Full Year 2024 Earnings Conference Call.
Speaker Change: All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero.
Speaker Change: After today's presentation, there will be an opportunity to ask questions.
Speaker Change: To ask a question, you may press star then 1 on your telephone keypad. And to withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Ms. Mollie Hawkes, Head of Investor Relations. Please go ahead, ma'am.
Mollie Hawkes: Good morning. Welcome to the FTI Consulting Conference Call to discuss the company's fourth quarter and full year 2024 earnings results as reported this morning.
Mollie Hawkes: Management will begin with formal remarks, after which they will take your questions.
Mollie Hawkes: Before we begin, I would like to remind everyone on this conference call
Mollie Hawkes: 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 risk and uncertainty.
Mollie Hawkes: Forward-looking statements include statements concerning plans, initiatives, projections, prospects, policies, processes and practices, objectives, goals, commitments,
Mollie Hawkes: Strategies and Future Events, Future Revenues, Future Results and Performance, Futureiecapital Allocations and Expenditure, Expectations, Plans or Intentions relating to acquisitions, shared purchases and other matters.
Mollie Hawkes: Business Trends, New or Changes to Laws and Regulations, Scientific or Technical Development, and other information or other matters that are not historical, including statements regarding estimates of our future financial results and other matters.
Mollie Hawkes: 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.fticonsulting.com.
Mollie Hawkes: As well as other disclosures under the headings of risk factors and forward-looking information in our quarterly report on our annual report on Form 10-K for the year ended December 31st, 2024. And in other recordings with the FDC.
Mollie Hawkes: Investors are cautioned not to place undue reliance on any forward-looking statements which speak only at the date of this earnings call and will not be updated.
Mollie Hawkes: During the call, we will discuss certain non-GAAP financial measures, such as total segment operating income, adjusted EBITDA,
Mollie Hawkes: Total Adjusted Segment EBITDA, Adjusted Earnings for Diluted Share, Adjusted Net Income, Adjusted EBITDA Margin, and Free Cash Flow.
Mollie Hawkes: 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 includes the reconciliations.
Mollie Hawkes: 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, an Excel and PDF of our historical financial and operating data, which have been updated to include our fourth quarter and full year 2024 results.
Mollie Hawkes: 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 similar details as they have historically. And as I've said, are available on the investor relations section of our website.
Mollie Hawkes: With these formalities out of the way, I'm joined today by Steve Gunby, our President and Chief Executive Officer, and Ajay Sabherwal, our Chief Financial Officer.
Mollie Hawkes: At this time, I will turn the call over to our President and Chief Executive Officer, Steve Gunby. Thank you, Mollie. Welcome, everyone, and thank you all for joining us today.
Mollie Hawkes: I'm sure many of you have already seen some of the results we've reported this morning.
Mollie Hawkes: What I'd like to do is to start by sharing some perspective on 2024.
which was a year with some terrific elements.
Mollie Hawkes: It's also a year, particularly towards the second half of the year, where we have some shortfalls versus our expectations.
Mollie Hawkes: And then I'd like to spend the bulk of the time...
on 2025.
Mollie Hawkes: A year where, I have to say, we are probably facing as serious headwinds as we have had in a while.
Mollie Hawkes: In that connection, I'll try to communicate both what we see the potential headwinds are and, important, try to share a sense of the potential magnitude of the headwinds because together they are creating about as serious a challenge for the P&L for a year as we've seen in a while.
Mollie Hawkes: So, I will spend a fair amount of time on the potential challenges for 2025.
Mollie Hawkes: But I will also, with your permission, take a moment to close the session by reiterating something fundamental.
something important
Mollie Hawkes: which is that the success of this company over the last 10 years
Mollie Hawkes: has never been about optimizing a given quarter or even optimizing a year.
Mollie Hawkes: What has driven our success has been continually focusing on building in a stronger business.
Mollie Hawkes: A business ever more able to deliver for our clients and ever more attractive for great professionals to be part of.
and as a result delivering a multi-year trajectory of growth.
Mollie Hawkes: At the end of the talk this morning I will reiterate though I am somewhat sober about the headwinds we're facing in front of us for 2025. I do remain incredibly bullish about the company, about the multi-year trajectory the company has been on, and the multi-year trajectory that I believe we will continue to be on.
All right, let me start with 2024.
Mollie Hawkes: As I think many of you know, we had a terrific, terrific first half of the year.
Revenues, you may recall, were up 12%.
Mollie Hawkes: and EPS grew 48% compared to the first half of 2023. Now, some of that strong performance in the first half was because we were cycling a slow first half of 2023.
but it's also somewhat because of what we did.
Mollie Hawkes: As I think you know, many other firms did not report anywhere near as good results during that period.
Mollie Hawkes: Our teams were winning big jobs in the marketplace and some of the bets we had made in prior years came to fruition at this time.
Mollie Hawkes: And those results were notwithstanding the fact that we continue to attract during the year and invest in great talent, which always costs us some money in the first year.
Mollie Hawkes: Let me turn to the second half of the year. We always expected that year-on-year growth would be slower, mainly because we knew we were cycling a much stronger second half of 2023. But the sales we actually got in the second half of 2024 turned out to be even a bit slower than we expected.
Mollie Hawkes: which is among the slowest growth we have seen in a while.
This quarter, we were actually down year-on-year.
and down sequentially.
Mollie Hawkes: Now I think most of us on this call know that our multi-year growth, the performance of this company over time has never been a straight line up and we never expected to be.
Mollie Hawkes: However, I did want to point out that we did expect the business to be a bit better in the second half. We knew it was going to be slow, and it actually turned out to be worse.
Mollie Hawkes: That's somewhat important for explaining 2024 results, but it's also important because it presents a revenue trajectory that is carrying into 2025 as a headwind. So I'll turn to 2025 in a minute, but before I get to 2025, let me try to sum up 2024.
Mollie Hawkes: I'm going to talk about the fact that we were a little disappointed about because of the cumulative second-and-a-half effect.
But I think it's appropriate to point out that.
It was yet another year of record revenues.
and it was the 10th year in a row.
the 10th year in a row of adjusted EPS growth.
Mollie Hawkes: So, look, there's a lot to be proud of for 2024, but it's also true that relative to our expectations, the second half of the year disappointed, and as a consequence, the year as a whole, though certainly not terrible, didn't fully meet our expectations.
Mollie Hawkes: With that on 24, let me turn to 2025 and some of the headwinds we are facing. Obviously, the slowed growth trajectory is an issue we bring into 2025, but in addition, there are several other important headwinds that I want to make sure we talk to.
Mollie Hawkes: Probably the most important, which I'll talk to at some length, is that we're in the process of seeing a number of senior departures in our U.S. competition, part of our Compass Lexicon subsidiary, which in turn, as you may remember, is part of our econ business.
can create some substantial headwinds.
Mollie Hawkes: particularly for that subset of the business but are sufficient magnitude that it will create headwinds for us as a company as a whole this year.
Mollie Hawkes: A second issue is a much more technical issue, which is we happen to be cycling a particularly low tax rate in 2024, which is not technically a headwind, but it does create some tough comparisons year on year, so it's akin to a headwind.
Mollie Hawkes: And then, not really at all a headwind, in fact a very good thing.
Mollie Hawkes: But a headwind in terms of near-term financials is the fact that we continue to see great opportunities.
Mollie Hawkes: And as we've always done, we're committed to take advantage of those opportunities when we see them, notwithstanding the near-term financial pressures we may feel. So let me talk about those in a little bit more depth so you can get a sense of the magnitude.
As Ajay talked about in October,
Mollie Hawkes: We did see the revenue momentum slowing in the third quarter, and we thought that the slowdown might persist.
Mollie Hawkes: And it has, and in fact it's worsened year on year into the fourth quarter.
Mollie Hawkes: It is hard to pinpoint one thing that has caused that slowdown, apart from what I mentioned before, that we were cycling an incredibly strong second half of 2023. As I think many of you know, we were not alone in seeing slower performance in parts of 2024, so some of it appears to be market forces.
Mollie Hawkes: For example, we had a fourth-quarter slowdown in our activity in our M&A-related businesses in Econ, Tech, and Corp Fin, where we had a number of large jobs roll off and not as many large jobs start.
Mollie Hawkes: And we believe that that was at least in part driven by the U.S. M&A market slowing in the fourth quarter.
Mollie Hawkes: And there is, as you probably know, a fair amount of pressure on different economies around the world. For example, in the UK.
Mollie Hawkes: and we believe in that case some of those pressures on the economy as a whole has affected several of our businesses.
Mollie Hawkes: So market forces clearly appeared to be one of the factors. But I also think that some things that drove our slowdown in sales were idiosyncratic to us.
Mollie Hawkes: like for example our strategy business in Corp Penn which had several large jobs roll off over the first last few quarters which we haven't yet replaced.
Thank you. Thank you.
Mollie Hawkes: As we have talked about, the nature of our business, the core nature of our business is that we can always have substantial lumpiness quarter to quarter.
in individual segments and for the company as a whole.
Mollie Hawkes: And when we've had that in the past, it has never been a permanent condition.
Mollie Hawkes: and important. There is no belief today that it is a permanent condition.
We are currently forecasting solid revenue growth.
Mollie Hawkes: for every one of our business segments except for econ which of course is because of the headwinds I'll talk about in the US competition practice.
Mollie Hawkes: But, one of the reasons for our caution is, it's also the case that right now, except for FLCs, the parts of STRATCOM, a little pick up in the PAWS and M&A activity we saw in the fourth quarter in Corcoran and Tech, to date, we haven't yet seen
Mollie Hawkes: the major resurgence of our overall revenue trajectory. So I hope that one is clear.
Mollie Hawkes: Let me talk to the second headquin, which is clearly idiosyncratic to us, which is...
Mollie Hawkes: In addition to whatever market headwinds there are in Econ, we are in the process of experiencing some dislocation in our Compass Lexicon subsidiary.
Mollie Hawkes: in particular with the part of the business that deals with U.S. competition work.
Mollie Hawkes: In that part of the business, so far in the first quarter, we've had the departures of a number of senior professionals.
and potentially into early 26.
Mollie Hawkes: So we talked a little bit about how we dimensionalize this for you, and the problem is it's very early days, and so we cannot be certain about the exact magnitude of the effects. So one possibility for this call was simply to use the word substantial.
Mollie Hawkes: We think it could have a substantial effect and hence we're talking about it I think the problem with that is as I'm sure many of you know the word substantial can mean so many different things So let me try
Mollie Hawkes: given, which is hard in the context of it being early days, to at least give you some sort of dimensionalizing using a historical analogy.
Speaker Change: When I first started, in my first year in that same Compass Lexicon subsidiary, 11 years ago...
Speaker Change: We had a dislocation. It wasn't the exact same dislocation, but it was a substantial dislocation.
Speaker Change: The dislocation that handed me in my first year a $35 million decline and adjusted EBITDA in that segment.
Speaker Change: So, I want to say, even though we don't know the exact numbers here, it could be in the order of that same magnitude as this unfolds.
Speaker Change: Now, just to be a little redundant, the issue with that sort of dimensionalizing is we are very much at the early stages. We don't know exactly how many senior departures we will have, how many junior people will end up leaving. More important, how many great people will see this as a great opportunity to join our firm?
Speaker Change: So it's hard to estimate the exact effect, but what we wanted to do is to communicate here that we do not expect the effect to be trivial. I'm going to take a risk here, which my general counsel is going to stare at me and my,
for my comms and maybe ad lib a couple comments.
Speaker Change: I tell you, 11 years ago when I got handed a $35 million hit, which nobody had told me about when I was interviewing, it hit.
But it hit also because...
The business at that time
was a business that had no growth engines.
Speaker Change: There wasn't a single business that had been growing the past few years. We had not extended overseas.
Speaker Change: We didn't have the leadership team that we had today, we didn't have the quality, the vast quality of people and the hunger and the drive and the energy and the conviction that characterizes this company today. I think we are less than half the current size, so that really hit me.
Today. Thank you for joining us. Today.
Speaker Change: This is not something I like to report. It's not like something I like to forecast. It's not something I like to talk about. We have to talk about because it's significant enough that we should disclose it to you. But we are nowhere near in that situation. This company is a vibrant growth engine and it's a pain.
and some of the circumstances around it are a pain.
Speaker Change: and that it led to us having a lawsuit around some of the circumstances around it.
I was leveling a lawsuit around the circumstances around it.
Speaker Change: The other point I want to describe is that yes, this hits that business, it is a fabulous business.
Speaker Change: FTI's econ practices under the Compass Lexicon brand and the FTI brand together constitute the leading group of economists around the world.
Speaker Change: The best group of economists around the world today, and even after these departures. Even after these departures I believe we will still have the single most powerful vibrant, respected economic consulting firm with the best collective group of practitioners in the world.
Speaker Change: So, our point is not that this business is going away. It's a great business and will still be a great business.
Speaker Change: but we can't ignore the fact that it'll have a big effect on this business and is big enough to have an effect on the company so we thought we'd spend a little bit of time describing that. I hope that is clear. The third issue is a much simpler and more technical point which Ajay will turn to which is we had a particularly low tax rate in 2024.
Speaker Change: which is largely due to non-recurring factors and we will be cycling that. I mean that's the sort of stuff that happens from year to year but we should point it out.
The fourth headwind.
Speaker Change: has mentioned before, is not really a headwind at all, but really a terrific thing.
Speaker Change: but represents a headwind in terms of near-term financial results, which is that we continue to get a tremendous level of interest from top talent.
Speaker Change: And we of course are continuing our multi-year commitment to take advantage of those opportunities to build the businesses as those people become available.
Speaker Change: As you know, we do have a responsibility to be disciplined.
Speaker Change: And that likely took some significant corrective action last quarter and this quarter.
in areas of sustained low utilization.
That discipline is essential.
Speaker Change: to find great people, to invest in them, to attract them, to support them as they build businesses independent of any current potential P&L stress. So, we have a team that is going to continue to do it, even if it does have some initial P&L cost.
Speaker Change: So what does that all add up to? Ajay will talk about it in more depth and more quantitatively. Conceptually, it adds up to more headwinds for this year than we've typically had.
more than we've seen in a while.
As a consequence, our guidance for this year
Speaker Change: It's not up as much as we typically have. It's more muted.
Speaker Change: So, it's not likely, our current view, to be the easiest year we've seen.
Speaker Change: But before I close, let me see if I can step back from the details of those and all the issues that we wanted to make sure we brought to your attention and maybe offer a little perspective on them.
Speaker Change: and on the year, which may not be as good as we had in the last few years.
Speaker Change: But also on the multi-year trajectory we have been on and we believe we are going to stay on.
Thank you very much.
At one point,
Speaker Change: I'm not sure how many of you on this call have been covering us for long enough to remember this, but at one point, I suspect a few of you do remember this.
Speaker Change: This company was never up more than two years in a row.
Speaker Change: We'd be up two years and down a year, or sometimes up one year and then down a year.
Thank you. Thank you.
Speaker Change: We have now had a period of 10 years in a row.
Speaker Change: of Adjusted EPS Growth. And if we hit the midpoint of our guidance, even if our guidance isn't as bullish as we have been in previous years, if we hit the midpoint of that guidance, it'll be 11 years.
Thank you.
Speaker Change: Yes, this year may be the toughest year we've had in a while. We have market forces against us, idiosyncratic forces against us.
None of those forces challenge the underlying strength.
of the people.
in our firm, or what they've shown.
Speaker Change: for the power of the ways we have shown we can help clients sometimes in the most critical times in their existence.
Speaker Change: Nothing in those market forces or this year's idiosyncratic forces challenges the fundamental strength that has driven this company, that has allowed us to grow, to allow us to become the vibrant growth engine that attracts the sort of people we do.
Speaker Change: Market forces do of course affect us. Idiosyncratic forces do affect us.
As we've talked about before, market forces come and go.
Speaker Change: And idiosyncratic forces do as well, at least if you manage them right.
Speaker Change: Well, we have believed, and I think the data show that, yeah, over short periods of time, market forces and idiosyncratic forces can impact us, potentially have a major impact.
Speaker Change: But I believe the same data also show that if we maintain our focus, we maintain our commitment to do the right things for the business. We have to monitor the market forces, we have to adjust what we do, but underlying that
We focus on what matters in professional services.
The fundamentals.
Speaker Change: Attracting great people, supporting those people, people who have a drive to make a difference for their clients, who have a drive to mentor and see grow the careers of people behind them. If we do all those things, actually, we still have substantial zigzags. We just have substantial zigzags in portions of the business and perhaps overall.
Speaker Change: But what we've also shown is that through those zigzags, over any extended period of time, those zigzags surround a powerfully upward sloping line for shareholders, for clients, and for our people.
Some years they slope up less.
Some years they slope up more.
Over time we've proven that
Speaker Change: That commitment delivers a powerfully substantial line-up that reflects the strength of what our teams do for our clients.
Speaker Change: and the excitement and the pride they have in doing so.
Speaker Change: and having other great colleagues join them in those enterprises. We intend to maintain that commitment.
Speaker Change: And I believe we've shown that with that commitment, even if we have some muted results this year or in a given quarter, this company has an extraordinarily bright future.
For you, the shareholder.
or clients.
Speaker Change: and the great people who join us and stay with us.
Speaker Change: I and the team look forward to sharing that with you as we go forward. With that, Ajay, let me turn it over to you.
Ajay Sabherwal: Thank you, Steve. Good morning, everybody. In my prepared remarks, I will take you through our company-wide and segment results and guidance for 2025.
Ajay Sabherwal: Gap earnings per share of $7.81 compared to $7.71 in the prior year.
Ajay Sabherwal: Adjusted EPS of $7.99 compared to adjusted EPS of $7.71 in the prior year.
Ajay Sabherwal: The difference between our GAAP and Adjusted EPS for the year reflects an $8.2 million fourth quarter special charge related to severance and other employee-related costs.
which reduced GAP EPS by 18 cents.
Ajay Sabherwal: Net income of $280.1 million compared to $274.9 million in 2023.
Ajay Sabherwal: Adjusted EBITDA of $403.7 million, or 10.9% of revenues, compared to $424.8 million, or 12.2% of revenues in 2023.
Ajay Sabherwal: For the year, 6% growth in revenue was not sufficient to offset higher direct costs and SG&A expenses.
Ajay Sabherwal: resulting in an adjusted EBITDA decline compared with full year 2023.
Ajay Sabherwal: Despite the decline in adjusted EBITDA, net income grew primarily because of a lower tax rate and FX re-measurement gains compared with FX re-measurement losses in the prior year.
Ajay Sabherwal: In 2024, we had a tax rate of 20.2%, which compared with 23.3% in 2023.
Ajay Sabherwal: The decrease was largely due to favorable discrete tax adjustments related to equity compensation.
Ajay Sabherwal: Conversely, bad debt for the year of 1.4 percent of revenues was higher than our average bad debt of approximately 0.8 percent of revenues over the prior five years.
Ajay Sabherwal: Even netting these items, though, both our full year and fourth quarter 2024 results were below our expectations.
Ajay Sabherwal: Year-over-year revenue growth that was 12.4% in the first half of the year slowed to flat revenues in the second half of the year with a negative growth rate of 3.2% in the fourth quarter.
Ajay Sabherwal: To better align capacity with demand, we reduced headcount in Q4, resulting in a special charge of $8.2 million related to severance and other employee-related costs.
Ajay Sabherwal: These actions continued after the new year, which will result in an additional estimated special charge of approximately $17 million in Q1.
Now turning to the details of the fourth quarter.
Ajay Sabherwal: Revenues of $894.9 million decreased 3.2% compared to the fourth quarter of 2023. The decrease in revenues was primarily due to lower demand in our corporate finance and restructuring and technology segments.
Ajay Sabherwal: which was partially offset by higher demand in our Forensic and Litigation Consulting, or FLC, segment.
Ajay Sabherwal: Worth noting, the fourth quarter of 2023 was an exceptional quarter.
Ajay Sabherwal: A quarter when three of our five segments, Corporate Finance and Restructuring, Economic Consulting and Technology, delivered, at the time, record quarterly revenues in what is typically our slowest quarter of the year.
Ajay Sabherwal: In contrast, as Steve said, in Q4 2024, revenue declined both year-over-year and sequentially.
Ajay Sabherwal: Fourth quarter net income of $49.7 million compared to $81.6 million in the fourth quarter of 2023.
Ajay Sabherwal: Gap EPS of $1.38 compared to $2.28 in the prior year quarter and included the special charge which reduced EPS by 18 cents.
SG&A of $208.1 million was 23.2% of revenues.
Ajay Sabherwal: This compares to SG&A of $194.6 million or 21% of revenues in the fourth quarter of 2023.
Ajay Sabherwal: The year-over-year increase was primarily due to higher bad debt, outside services and travel and entertainment expenses, which was not sufficiently offset by lower variable compensation.
Ajay Sabherwal: Fourth quarter 2024 adjusted EBITDA of $73.7 million or 8.2% of revenues compared to $127.4 million or 13.8% of revenues in Q4 of 23.
Ajay Sabherwal: Our fourth quarter effective tax rate of 16.9% compared to 20.8% in fourth quarter of 2023.
Ajay Sabherwal: The lower effective tax rate was primarily due to a higher discrete tax adjustment related to equity compensation and the lower than expected pre-tax income in the quarter.
Ajay Sabherwal: Weighted average shares outstanding or way so for Q4 of 35.9 million shares compared to 35.8 million shares in the prior year quarter.
Ajay Sabherwal: Billable headcount increased by 283 professionals or 4.5% compared to the prior year quarter.
Ajay Sabherwal: with the largest increases in FLC, technology, and corporate finance and restructuring.
Non-billable headcount increased by 101 professionals or 6.2%.
Ajay Sabherwal: Sequentially, billable headcount decreased by 26 professionals, or 0.4%, and non-billable headcount increased by 18 professionals, or 1%.
Ajay Sabherwal: The sequential decrease in billable headcount was largely due to headcounter actions taken in the fourth quarter, which particularly impacted our corporate finance and restructuring and FLC segments.
Ajay Sabherwal: Now turning to our performance at the segment level for the fourth quarter.
Ajay Sabherwal: In corporate finance and restructuring, revenues of $335.7 million decreased 8.2% compared to Q4 of 2023.
Ajay Sabherwal: The decrease in revenues was primarily due to lower demand for transformation and strategy and transactions services
In the fourth quarter, restructuring represented 47% of segment revenues.
Ajay Sabherwal: Transformation and strategy represented 31% of segment revenues and transactions represented 22% of segment revenues.
Ajay Sabherwal: This compares to 44% for restructuring, 34% for transformation and strategy, and 22% for transactions in Q4 of 2023.
Ajay Sabherwal: Adjusted segment EBITDA of $44.7 million or 13.3% of segment revenues compared to $65.4 million or 17.9% of segment revenues in the prior year quarter.
Ajay Sabherwal: The decrease was primarily due to lower revenues, which was partially offset by a decrease in contractor costs and compensation expenses.
Ajay Sabherwal: Sequentially, corporate finance and restructuring revenues decreased 1.7% as 7% growth in transformation and strategy revenues was offset by a 15% decline in transactions revenues.
Restructuring revenues were flapped sequentially.
Ajay Sabherwal: In FLC, fourth quarter revenues of $175.9 million increased 6.3% compared to Q4 of 2023.
Acquisition related revenues contributed 2.4 million dollars in the quarter.
Ajay Sabherwal: Adjusted segment EBITDA of $18 million or 10.2% of segment revenues compared to $19.2 million or 11.6% of segment revenues in the prior year quarter.
Ajay Sabherwal: The decrease was primarily due to higher compensation, which more than offset the increase in revenues.
Ajay Sabherwal: Sequentially, revenues increased 4.2 percent, primarily due to higher data and analytics and investigations revenues.
Economic Consulting's revenues of $206.1 million
Ajay Sabherwal: were flat compared to Q4 of 23 as higher merger and acquisition or M&A related antitrust revenues
Ajay Sabherwal: were offset by lower international arbitration and non-M&A related antitrust revenues.
Ajay Sabherwal: Adjusted segment EBITDA of $15.8 million or 7.7% of segment revenues compared to $38.3 million or 18.6% of segment revenues in the prior year quarter.
Ajay Sabherwal: The decrease was primarily due to higher bad debt, as previously discussed, and an increase in compensation compared to the prior year quarter.
Ajay Sabherwal: Sequentially, economic consulting's revenues decreased 7.2%, primarily due to lower M&A-related antitrust revenues, which were partially offset by higher financial economics revenues.
Ajay Sabherwal: Adjusted segment EBITDA decreased 19.4 million dollars primarily due to lower revenues and higher bad debt.
Ajay Sabherwal: In technology, revenues of $90.6 million decreased 10.2% compared to Q4 of 2023.
Ajay Sabherwal: The decrease in revenues was primarily due to lower demand for M&A related second request services.
Ajay Sabherwal: The decrease was largely due to lower revenues, which was partially offset by a decrease in SG&A expenses.
Ajay Sabherwal: Sequentially, technology revenues decreased 17.9 percent, primarily due to lower M&A-related second requests and litigation revenues.
Ajay Sabherwal: Adjusted segment EBITDA decreased $9.9 million primarily due to lower revenues which were partially offset by a decrease in contractor costs and lower SG&A expenses.
Ajay Sabherwal: Of note, in the first three quarters of 2024, we saw exceptional M&A related second request activity in our technology segment, and M&A related antitrust work in our economic consulting segment.
Ajay Sabherwal: In contrast, in Q4, some of the large jobs that drove record M&A-related revenues in the first nine months of 2024 wound down.
Ajay Sabherwal: Lastly, strategic communications revenues of 86.6 million dollars were flat as higher demand for financial communication services were offset by lower demand for corporate reputation services.
Ajay Sabherwal: Adjusted segment DVDA of $13.8 million or 15.9% of segment revenues compared to $15.6 million or 18% of segment revenues in the prior year quarter.
This decrease was primarily due to higher SG&A expenses.
Ajay Sabherwal: Sequentially, strategic communications revenues increased 4%, primarily due to higher financial communications revenues.
Ajay Sabherwal: Adjusted segment EBITDA increased 1.7 million dollars primarily due to higher revenues which were partially offset by an increase in compensation and SG&A expenses
Thank you.
Ajay Sabherwal: I will now discuss certain cash flow and balance sheet items.
Ajay Sabherwal: Net cash provided by operating activities of $395.1 million for the year ended December 31st, 2024 compared to $224.5 million for the year ended December 31st, 2023.
Ajay Sabherwal: The year-over-year increase in net cash provided by operating activities was primarily due to an increase in cash collections.
Ajay Sabherwal: which was partially offset by an increase in compensation, forgivable loan issuances, operating expenses, and income tax payments.
Ajay Sabherwal: Cash and cash equivalents and short-term investments of $660.5 million at December 31, 2024 compared to $328.7 million at December 31, 2023.
We had no debt outstanding in either period.
Ajay Sabherwal: We generated free cash flow defined as operating cash flow less capital expenditures of $360.2 million in 2024 which compares to $174.9 million in 2023.
Ajay Sabherwal: During the quarter, we repurchased 51,717 shares at an average price per share of $197.53 for a total cost of $10.2 million.
Ajay Sabherwal: As of December 31st, 2024, approximately $450.4 million remained available under our stock repurchase authorization.
Turning to 2025 Guidance.
We are, as usual, providing guidance for revenues and EPS.
Ajay Sabherwal: We estimate that revenue will range between 3.66 billion dollars and 3.81 billion dollars.
We estimate adjusted EPS will range between $7.80 and $8.60.
The estimated 36...
St. Varian's
Guidance for Full Year 2025.
Ajay Sabherwal: is because of the estimated special charge in the first quarter of 2025 related to the continued headcount reductions to align staffing with demand.
Ajay Sabherwal: You will notice that the midpoint of our Revenue and Adjusted EPS Guidance reflects growth of 1% and 2.6% year-over-year, respectively.
Our 2025 guidance range is shaped by several considerations.
Ajay Sabherwal: First, as Steve said, though we are entering the year with an overall slow growth trajectory,
Ajay Sabherwal: Our guidance is based on an increase in growth in many of our businesses over the course of the year.
We expect demand to remain steady for restructuring.
Ajay Sabherwal: and to see a pickup in our M&A and transformation and strategy related businesses.
Ajay Sabherwal: We also assume a pickup in demand for our disputes and investigations related businesses in FLC.
Ajay Sabherwal: Our expectation is based on matters where we are already engaged.
Investments we have made in attracting top-level talent.
Ajay Sabherwal: and growing dislocation in the world, which is typically a catalyst for our services.
Ajay Sabherwal: Second, we have taken targeted headcount actions in areas with sustained low utilization, resulting in an approximately 4% reduction in our total headcount from these actions.
Ajay Sabherwal: We expect these actions to result in cost savings of approximately $70 million in 2025.
Ajay Sabherwal: However, we also expect to continue investing in areas where we see exceptional opportunities to hire talent, which typically results in a negative adjusted EBITDA impact at least through the first year after hiring.
Ajay Sabherwal: Third, for the full year, we expect SG&A expenses to be flat compared with 2024, based on a few key assumptions.
and Net of Settlements, we expect reduced legal expenses.
Ajay Sabherwal: Conversely, we will continue to invest, including in upgrading our HR systems and enhancing our AI capabilities.
Speaker Change: Quote, as Steve discussed, during the first quarter of 2025, we've had a number of senior departures in our U.S. competition part of our Compass Lexicon subsidiary in our economic consulting segment.
Ajay Sabherwal: And we currently believe a number of less tenured professionals may also depart.
Ajay Sabherwal: We expect that the resulting increased competitive pressures may impact our ability to attract and retain clients, and will increase compensation costs to retain staff in the segment.
Ajay Sabherwal: We expect these factors will result in substantially reduced revenue and erosion of adjusted segment EBITDA margin in economic consulting compared to 2024.
Ajay Sabherwal: Fifth, we expect our effective tax rate for 2025 to be between 23% and 25%.
Ajay Sabherwal: As I mentioned, our assumptions define a midpoint, and we provide a range of guidance around such midpoint, which I characterize as our current best judgment.
Ajay Sabherwal: Often we find actual results are outside of such range because ours is largely a fixed cost business in the short term and small variations in revenue may have an outsized impact on earnings.
Ajay Sabherwal: Before I close, I want to emphasize a few key themes that I believe underscore the attractiveness of our company.
Ajay Sabherwal: First, we have a deep bench of experts that are helping clients navigate through exceptionally volatile times globally.
Ajay Sabherwal: Second, we are attracting top talent in areas including transformation and strategy, transactions, risk and investigations, construction solutions, and corporate reputation, and in geographies such as Australia, Germany, Spain, and France.
Ajay Sabherwal: Third, our management team is focused on both growth and utilization.
Ajay Sabherwal: And finally, we have an enviable balance sheet that provides us the flexibility to boost shareholder value through organic growth, share buybacks, and acquisitions when we see the right ones.
With that, let's open the call up for your questions.
Speaker Change: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad.
Speaker Change: If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. And at this time, we'll pause momentarily to assemble our roster.
Speaker Change: And the first question will come from Andrew Nicholas with William Blear, please go ahead.
Andrew Nicholas: Hi, good morning. Thanks for taking my question. I wanted to start on Economic Consulting Outlook. Steve, you provided
Speaker Change: You know, pointed us to the 2014 year as a potential, you know, outsized impact or reference point, and I think you said $35 million. I'm just curious in terms of.
of the guidance.
Speaker Change: These actions or current developments on 26 and kind of how this could potentially bleed into next year, if at all.
Ajay Sabherwal: Yeah, look, as I said, thanks, Andrew. Look, I think it's very early days. The reason I use the $35 million number is to give you a dimensionalized, because if we had said substantial, sometimes, you know,
Ajay Sabherwal: We have accountants, good accountants, who think $350,000 is substantial, and $3.5 million is substantial, and $35 million is substantial, and I just wanted to...
Ajay Sabherwal: give people an order of magnitude of what I thought this could be. And that was the comparability.
Ajay Sabherwal: point and it just happened to be interestingly a comparable number. There's a huge amount of uncertainty around this number. It's really early stages.
Ajay Sabherwal: and how that number shows up, even if it was close, could be very different ways. If we attract a lot of people, it could be in the cost of signing those people. If we lose people, it's the revenue you drop. And so, obviously, you know...
Ajay Sabherwal: We threw that number out and we built in some sort of number akin to that, but we also, as Ajay always points out, have a range around our numbers to try to
Ajay Sabherwal: account for some of the variability around it. But yes, we didn't throw out a $35 million number and build 3 million into our budget for this year and to what we're giving you as guidance. Does that help a little bit, Andrew?
Andrew Nicholas: Yeah, that's helpful. I guess, I think there was a comment about it.
Andrew Nicholas: potentially impacting the 3rd 26-2. Could you touch on just maybe how how that happens? Is it people?
Andrew Nicholas: that would potentially be leaving, you know, over the next couple months and sticking around through the beginning of next year to finish off projects or just trying to figure out how much is isolated to 25 and if 26 can be, you know, a rebound year, all else.
Thank you.
Andrew Nicholas: in the beginning of next year. If people leave earlier and it starts hitting right away, then you would be cycling it a year from now. It's so early days that we don't know, and therefore.
Yeah, that's helpful. Thank you.
Andrew Nicholas: And then maybe just taking a step back on overall headcount growth plans in 2025, there's a lot of moving pieces here between
Andrew Nicholas: You know, the Cubs left the con, headwinds. You have recent headcount actions, but you've also...
Andrew Nicholas: announced a ton of senior-level hiring over the past several months. Is there any way to frame how you're thinking about headcount growth in 25 and maybe some of the puts and takes on how that develops throughout the year?
Andrew Nicholas: And we have a right to be focused on growth. Even in our econ practice, which is having a setback, we have a fabulous group of people in Camilla. We have a fabulous group staying in this subsegment in the U.S. We have a great group based out of Chicago. I mean, so we have lots of growth opportunities. So.
Andrew Nicholas: I suspect we will hire many more senior people than we will lose this year.
Andrew Nicholas: We've had dislocations at different points in time. I can't remember a time in recent years that we haven't hired...
Andrew Nicholas: Some departures. I think for many of our businesses a lot of that comes in the second half of the year just for the natural hiring cycles
Andrew Nicholas: and I don't know whether we get more detail than that, but we have not turned into a, and notwithstanding the discipline actions we took or complex down, we are expecting growth and headcount. So that, and because we are a growth company.
Andrew Nicholas: Even if you have setbacks, it's painful, but these are setbacks as opposed to fundamentally changing the fundamentals. Does that help, Andrew?
Andrew Nicholas: Definitely, and maybe if I could just squeeze one more in on the M&A side, I mean it sounds like there were some headwinds on...
Andrew Nicholas: on some projects falling off in the fourth quarter, but there is some optimism for that to pick up as the year continues. Can you just speak to M&A trends as a whole and maybe any color on kind of large scale M&A versus middle market M&A from what you're seeing in your businesses?
it. Thanks again.
Andrew Nicholas: Look, I think there's a lot of uncertainty about anything that has to do with, uh...
Ajay Sabherwal: potential government policies, right? I think the general thrust is that people expect M&A to pick up and then the question is, of course, antitrust scrutiny on those. But Ajay, do you want to elaborate on that? And we are seeing some of it.
That's all I can say. Namaste.
Did that help Andrew?
Yes, thank you.
Thank you.
Speaker Change: The next question will come from Toby Sommer with Truist. Please go ahead.
Thanks. Within the competition practice...
Speaker Change: Is there any particular industry vertical that's being impacted more than another, or is it just a sort of a subset of people across different industries? And what does...
Speaker Change: If you could, give us your pitch for sort of the network effect of perhaps having the other segments resident in FTI that you would convey to an economist you were recruiting.
Thank you.
Speaker Change: Okay, those are two different levels of question. So the first one was, no, I don't think there's particular industries. I mean, this is...
Speaker Change: This is driven by an individual, and I think the common thread between the people who he's been able to recruit is his relationship with those individuals, I think, is the main common thread, is what I would say. And let me be clear.
Speaker Change: So this is a hit. It's a sign of how strong our compass lexicon business is, is that
The people who are not...
Speaker Change: leaving are just a fabulous group of people. So I still think we cover, as far as I know right now,
Speaker Change: Dennis Carlton is the leading I.O. economist in the world, or at least in the U.S. And Jorge and his colleagues in Europe and so forth. So this is a hit. It's a hit, a slice that's been taken out. And I think the common theme is some personal connections.
Speaker Change: Look, I think the reason economists join us is a couple different things.
Speaker Change: One is just the terrific group of people it has working behind them who can help them become more effective and we hire PhD Students a plus PhD students who don't want to become academics and they get trained in what is required to do antitrust clearance and it used to be that the academics relied on their graduate students
Speaker Change: And as having had a son who was a graduate student, I love my son, but performance can be variable. You know, once you get them in, you train them, you know, they become incredibly effective. The other thing that Compass Lexicon has distinguished itself on is really having rigorous academic
Speaker Change: academics, who, these are folks who, who, you know, the origins of this are people who are scholars who really dove deep into
Figuring out what's really going on.
Speaker Change: and therefore wrote insightful pieces. Many of them originally weren't so good testifiers because they knew how to explain it in math symbols that didn't actually work for judges and juries, and they had to learn how to talk to a jury. But these were rigorous...
Speaker Change: scholars who brought that discipline and insight to complex problems and that's the origins of Compass Lexicon and that's why we recruit people and so in Dan Fischel you know has historically not recently been focused on the competition in the U.S.
Speaker Change: Dan, because of these developments over the last few weeks, has started to recruit people in this area.
Speaker Change: I think we signed up in the last month, five academic affiliates, maybe only a few of them, Mollie's mentioning, waving at me, only a few of them are on the website.
Speaker Change: But terrific academics respect the rigor and discipline and integrity of compass lexicon and so when we approach the right people, Dan does, we get receptive audiences. Does that help, Toby?
Speaker Change: It does. Thank you. And I was curious if you could comment on the...
Speaker Change: puts and takes of the administration change on various end markets. I know it's a fluid situation and it's early days but maybe you have some observations already you could share with us.
Speaker Change: Over any extended period of time, my experience is people over
Speaker Change: If you have the right set of people, there is a need and you have to shift with the market, but it doesn't affect any multi-year growth thing. Can a near-term regulation change affect a sub part of our business significantly in the near time? It can be.
Speaker Change: And so you monitor those things and you have to figure out how you shift resources and deal with it. And so we're deep into that. But like most people right now, we're actually, that's a third order consequence of regulations.
Speaker Change: When the regulations aren't yet fully implemented, how deep they are, cascading, you know, the specifics around them aren't
Speaker Change: and you know there's changes going on right now so we're into it but for me to predict exactly how that's going to be on this call I think is premature at this point. It's a great question and we are focused on it.
Speaker Change: And as we have great wisdom on that, I suspect we will share it, but that's not where we are today. Does that at least talk to your question?
Speaker Change: What sort of assumption may there be embedded for headcount growth, billable headcount growth in 2025?
Speaker Change: Toby, we do expect headcount growth in 2025 but we have headcount reductions of 360 folks between Q4 and Q1.
Speaker Change: We're, you know, aggressively hiring talented folks as they become available. We have the campus recruitment net, and then the Compass Texacon competition piece you heard about. Net of all that, we do expect reasonable headcount growth.
Thank you. Thank you.
Thank you, Toby.
Thank you.
Speaker Change: The next question will come from James Yarrow with Goldman Sachs. Please go ahead.
James Yarrow: Yeah, look, I think as I tried to allude to a little bit on my script, I think it's a combination of market forces. There have been some idiosyncratic forces.
James Yarrow: We haven't yet got them back, and that's more idiosyncratic to us.
James Yarrow: but there are different types of market forces that affected us.
James Yarrow: You know, our transactions practices and M&A practices were slower in the fourth quarter. We think that was a market force.
James Yarrow: There are some economic forces. I mean, we've expanded a lot in different economies in EMEA. I'd say we've expanded our services in the U.K. And I think most professional services firms, all the data I've seen, have had a slow year in the U.K. for almost all of their services. So, you know...
We have some market forces.
James Yarrow: You know, my sense is that I've hesitated to over-talk about market forces, because my experience is that they do have short-term effects, but if you are the leading firm, you tend to outperform the markets, and so that's what I like us to focus on.
fourth quarter growth to be persisting through this year for
James Yarrow: I mean, I think we have solid growth forecasts for every one of their businesses.
except for the one that's affected by it.
James Yarrow: The Compass Dislocations, for everyone, notwithstanding what we think the market forces are.
James Yarrow: reflecting of the power and the confidence we have in our businesses. But we're hoping for some market tailwinds in addition, but right now we're actually making the solid growth forecast based on what we believe we can do. Does that help, James?
James Yarrow: Look, I think we have over the last few years assembled, you know, just the U.S., particularly the U.S. team has just come into its own and.
James Yarrow: and we have a great group of leaders in that practice.
James Yarrow: You know, the practice always had great talent. I think we have some leaders who are a little more commercial too, because you can have great people who are
James Yarrow: sometimes despite ourselves gets to know that enough, even though many of those jobs are actually very confidential. I think we've also got the right places where we're investing abroad.
James Yarrow: You know, some places abroad, we don't have the breadth of capability, but we have really good people who are more focused investing behind. And so I feel pretty good about that business. Now that is a business that some would say could be affected by regulatory changes in the US and we'll see. But I think.
James Yarrow: What I focus on is the capability of our teams, and I've got to tell you, I've never been as excited about that business as I am today. Does that help, James?
James Yarrow: Did any of the departures affect the fourth quarter revenue for Econ Consulting, or is that all on the come in the 2025 guide?
James Yarrow: None of the departures affected the fourth quarter and none of them, to my knowledge, happened. They're all first quarter departures.
Thanks a lot.
James Yarrow: All right, listen, thank you all for your support over the time.
This is the most muted guidance we've ever given.
James Yarrow: It's because there's a ton of headwinds over here, none of that challenges the fundamental strength that I think we've created in this company and we look forward to getting back on that track through the year and into next year, but we'll keep you informed on how we do that. Thanks very much for your time.
James Yarrow: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: This is a story about a man who had a dream He had a dream that he was going to be a doctor He had a dream that he was going to be a doctor He had a dream that he was going to be a doctor
Speaker Change: Welcome to the FTI Consulting 4th Quarter and Full Year 2024 Earnings Conference Call.
Speaker Change: All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero.
Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. And to withdraw your question, please press star, then 2. Please note, this event is being recorded. I would now like to turn the conference over to Ms. Mollie Hawkes, Head of Investor Relations. Please go ahead, ma'am.
Mollie Hawkes: Good morning. Welcome to the FTI Consulting Conference Call to discuss the company's fourth quarter and full year 2024 earnings results as reported this morning.
Mollie Hawkes: Management will begin with formal remarks, after which they will take your questions.
Mollie Hawkes: Before we begin, I would like to remind everyone on this conference call, you 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 risk and uncertainty.
Mollie Hawkes: Forward-looking statements include statements concerning plans, initiatives, projections, prospects, policies, processes and practices, objectives, goals, commitments,
Mollie Hawkes: Thank you for joining us for today's webinar. I'm Mollie Hawkes and I'll see you next time.
Mollie Hawkes: Business Trends, New or Changes to Laws and Regulations, Scientific or Technical Development, and Other Information or Other Matters that are Not Historical, including Statements regarding Estimates of our Future Financial Results and Other Matters.
Mollie Hawkes: Investors should review the Jay Sabher statement in the earnings press release issued this morning.
Mollie Hawkes: A copy of which is available on our website at www.sticonsulting.com
Mollie Hawkes: As well as other disclosures under the headings of risk factors and forward-looking information in our quarterly report on our annual report on Form 10-K for the year ended December 31, 2024. And in other reference with the FDC.
Mollie Hawkes: Investors are cautioned not to place undue reliance on any forward-looking statements which speak only at the date of this earnings call and will not be updated.
Mollie Hawkes: 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 for Diluted Share, Adjusted Net Income, Adjusted EBITDA Margin, and Free Cash Flow.
Mollie Hawkes: 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 includes the reconciliations.
Mollie Hawkes: 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 fourth quarter and full year 2024 results.
Mollie Hawkes: To ensure our disclosures are consistent, these slides provide the similar details as they have historically, and as I've said, are available on the Investor Relations section of our website.
Mollie Hawkes: With these formalities out of the way, I'm joined today by Steve Gunby, our President and Chief Executive Officer, and Ajay Sabherwal, our Chief Financial Officer.
Mollie Hawkes: At this time, I will turn the call over to our President and Chief Executive Officer, Steve Gunby. Thank you, Mollie. Welcome, everyone, and thank you all for joining us today. I'm sure many of you have already seen some of the results we reported this morning.
Mollie Hawkes: What I'd like to do is to start by sharing some perspective on 2024.
which was a year with some terrific elements.
Mollie Hawkes: It's also a year, particularly towards the second half of the year, where we have some shortfalls versus our expectations.
Mollie Hawkes: And then I'd like to spend the bulk of the time...
on 2025.
Mollie Hawkes: A year where, I have to say, we are probably facing as serious headwinds as we have had in a while.
Mollie Hawkes: In that connection, I'll try to communicate both what we see the potential headwinds are and, important, try to share a sense of the potential magnitude of the headwinds. Because together, they are creating about as serious a challenge for the P&L for a year as we've seen in a while.
Mollie Hawkes: So, I will spend a fair amount of time on the potential challenges for 2025.
Mollie Hawkes: But I will also, with your permission, take a moment to close the session by reiterating something fundamental.
something important
Mollie Hawkes: which is that the success of this company over the last 10 years has never been about optimizing a given quarter or even optimizing a year.
Mollie Hawkes: What has driven our success has been continually focusing on building a stronger business.
Mollie Hawkes: A business ever more able to deliver for our clients and ever more attractive for great professionals to be part of.
and as a result delivering a multi-year trajectory of growth.
Mollie Hawkes: At the end of the talk this morning I will reiterate though I am somewhat sober about the headwinds we're facing in front of us for 2025. I do remain incredibly bullish about the company, about the multi-year trajectory the company has been on, and the multi-year trajectory that I believe we will continue to be on.
All right, let me start with 2024.
Mollie Hawkes: As I think many of you know, we had a terrific, terrific first half of the year.
Revenues, you may recall, were up 12%.
Mollie Hawkes: and EPS grew 48% compared to the first half of 2023. Now, some of that strong performance in the first half was because we were cycling a slow first half of 2023.
but it's also somewhat because of what we did.
Mollie Hawkes: As I think you know, many other firms did not report anywhere near as good results during that period.
Our teams were winning big jobs in the marketplace.
Mollie Hawkes: And some of the bets we had made in prior years came to fruition at this time.
Mollie Hawkes: And those results were notwithstanding the fact that we continue to attract during the year and invest in great talent, which always costs us some money in the first year.
Mollie Hawkes: When we turn to the second half of the year, we always expected that year-on-year growth would be slower, mainly because we knew we were cycling a much stronger second half of 2023. But the sales we actually got in the second half of 2024 turned out to be even a bit slower than we expected.
Mollie Hawkes: Last quarter we talked about the fact that we only had revenue growth of 3.7% year on year.
Mollie Hawkes: which is among the slowest growth we have seen in a while.
This quarter, we were actually down year-on-year.
and down sequentially.
Mollie Hawkes: Now I think most of us on this call know that our multi-year growth, the performance of this company over time has never been a straight line up and we never expected to be.
Mollie Hawkes: However, I did want to point out that we did expect the business to be a bit better in the second half. We knew it was going to be slow and it actually turned out to be worse.
Mollie Hawkes: That's somewhat important for explaining 2024 results, but it's also important because it presents a revenue trajectory that is carrying into 2025 as a headwind. So I'll turn to 2025 in a minute, but before I get to 2025, let me try to sum up 2024.
Cut.
Mollie Hawkes: I'm going to talk about the fact that we were a little disappointed about because of the cumulative second and a half effect.
But I think it's appropriate to point out that.
It was yet another year of record revenues.
It was the 10th year in a row.
the 10th year in a row of adjusted EPS growth.
Mollie Hawkes: So, look, there's a lot to be proud of for 2024, but it's also true that relative to our expectations, the second half of the year disappointed, and as a consequence, the year as a whole, though certainly not terrible, didn't fully meet our expectations.
Mollie Hawkes: With that on 24, let me turn to 2025 and some of the headwinds we are facing. Obviously, the slowed growth trajectory is an issue we bring into 2025, but in addition there are several other important headwinds that I want to make sure we talk to.
Mollie Hawkes: Probably the most important, which I'll talk to at some length, is that we're in the process of seeing a number of senior departures in our U.S. competition, part of our Compass Lexicon subsidiary, which in turn, as you may remember, is part of our econ business. And we currently believe that a number of less tenured people may also depart, which together
can create some substantial headwinds.
Mollie Hawkes: particularly for that subset of the business, but are sufficient magnitude that it will create headwinds for us as a company as a whole this year. A second issue is much more technical issue, which is we happen to be cycling a particularly low tax rate in 2024.
Mollie Hawkes: which is not technically a headwind, but it does create some tough comparisons year on year. So it's akin to a headwind. And then not really at all a headwind, in fact, a very good thing.
Mollie Hawkes: But a headwind in terms of near-term financials is the fact that we continue to see great opportunities.
Mollie Hawkes: So let me talk about those in a little bit more depth so you can get a sense of the magnitude.
In terms of revenue slowdown,
Because Ajay talked about in October.
Speaker Change: We did see the revenue momentum slowing in the third quarter, and we thought that the slowdown might persist.
Mollie Hawkes: And it has, and in fact it's worsened year on year into the fourth quarter.
Mollie Hawkes: It is hard to pinpoint one thing that has caused that slowdown, apart from what I mentioned before, that we were cycling an incredibly strong second half of 2023. As I think many of you know, we were not alone in seeing slower performance in parts of 2024, so some of it appears to be market forces.
Mollie Hawkes: For example, we had a fourth quarter slowdown in our activity in our M&A related businesses and Econ and Tech and Corp Fin Where we had a large number of large jobs roll off and not as many large jobs start
Mollie Hawkes: and we believe that that was at least in part driven by the US M&A market slowing in the fourth quarter.
Mollie Hawkes: And there is, as you probably know, a fair amount of pressure on different economies around the world. For example, in the UK.
Mollie Hawkes: and we believe in that case some of those pressures on the economy as a whole has affected several of our businesses.
Mollie Hawkes: So market forces clearly appeared to be one of the factors, but I also think that some things that drove our slowdown in sales were idiosyncratic to us.
Mollie Hawkes: Like, for example, our strategy business in Corp Penn, which had several large jobs roll off over the first last few quarters, which we haven't yet replaced.
in individual segments and for the company as a whole.
Mollie Hawkes: And when we've had that in the past, it has never been a permanent condition.
Mollie Hawkes: and important. There is no belief today that it is a permanent condition.
We are currently forecasting solid revenue growth.
Speaker Change: For every one of our business segments, except for econ, which of course is because of the headwinds I'll talk about in the U.S. competition practice.
Speaker Change: But one of the reasons for our caution is it's also the case that right now, except for FLCs, the parts of STRATCOM, a little pickup in the pause in M&A activity we saw in the fourth quarter in Corporate Benentech, to date we haven't yet seen
Speaker Change: the major resurgence of our overall revenue trajectory. So I hope that one is clear.
Speaker Change: Let me talk to the second headquarter, which is clearly idiosyncratic to us, which is
Speaker Change: In addition to whatever market headwinds there are in Econ, we are in the process of experiencing some dislocation in our Compass Lexicon subsidiary.
Speaker Change: In that part of the business so far in the first quarter, we've had the departures of a number of senior professionals
Speaker Change: We currently believe that quite a number of less tenured people may also depart as well, which together will create a headwind for revenue and profitability as the year goes on.
and potentially into early 26.
Speaker Change: So we talked a little bit about how we dimensionalize this for you And it's if the problem is it's very early days, and so we cannot be certain about the exact magnitude of the effects So one possibility for this call was simply to use the word substantial
Speaker Change: We think it could have a substantial effect, and hence we're talking about it. I think the problem with that is, as I'm sure many of you know, the word substantial can mean so many different things. So let me try...
Speaker Change: which is hard in the context of it being early days to at least give you some sort of dimensionalizing using a historical analogy.
Speaker Change: We had a dislocation. It wasn't the exact same dislocation, but it was a substantial dislocation.
Speaker Change: The dislocation that handed me in my first year a $35 million decline and adjusted EBITDA in that segment.
Speaker Change: So, I want to say, even though we don't know the exact numbers here, it could be in the order of that same magnitude as this unfolds.
Speaker Change: Now, just to be a little redundant, the issue with that sort of dimensionalizing is we are very much at the early stages. We don't know exactly how many senior departures we will have, how many junior people will end up leaving. More important, how many great people will see this as a great opportunity to join our firm?
for my comms and maybe ad lib a couple comments.
Speaker Change: I tell you, 11 years ago when I got handed a $35 million hit, which nobody had told me about when I was interviewing, it hit.
but it hit also because
The business at that time
was a business that had no growth engines.
Speaker Change: There wasn't a single business that had been growing the past few years. We had not extended overseas.
Speaker Change: We didn't have the leadership team that we had today, we didn't have the quality, the vast quality of people and the hunger and the drive and the energy and the conviction that characterizes this company today. I think we are less than half the current size, so that really hit me.
Today...
Speaker Change: and that has led to us having a lawsuit around some of the circumstances around it.
Speaker Change: of leveling a lawsuit around the circumstances around it. But the company is in a fundamentally better shape. And so we will get through it. It is just something that we thought we should disclose to you. The other point I want to describe and is that yes, this hits that business. It is a fabulous business.
Speaker Change: FTI's econ practices under the Compass Lexicon brand and the FTI brand together constitute the leading group of economists around the world.
Speaker Change: The best group of economists around the world, today and even after these departures. Even after these departures, I believe we will still have the single most powerful, vibrant, respected economic consulting firm with the best collective group of practitioners in the world.
Speaker Change: So our point is not that this business is going away, it's a great business and will still be a great business.
Ajay Sabherwal: but we can't ignore the fact that it'll have a big effect on this business and is big enough to have an effect on the company so we thought we would spend a little bit of time describing that. I hope that is clear. The third issue is a much simpler and more technical point which Ajay will turn to which is we had a particularly low tax rate in 2024.
Ajay Sabherwal: which is largely due to non-recurring factors and we will be cycling that. I mean that's the sort of stuff that happens from year to year but we should point it out.
The fourth headwind.
Ajay Sabherwal: but represents a headwind in terms of near-term financial results, which is that we continue to get a tremendous level of interest from top talent.
Ajay Sabherwal: And we of course are continuing our multi-year commitment to take advantage of those opportunities to build the businesses as those people become available.
Ajay Sabherwal: As you know, we do have a responsibility to be disciplined.
Ajay Sabherwal: In that light, we took some significant corrective action last quarter and this quarter.
in areas of sustained flow utilization.
That discipline is essential.
Ajay Sabherwal: We now have a management team, an aligned group of people that realize that while being disciplined is essential, that the key driver of our powerful multi-year success has been the commitment through that discipline
Ajay Sabherwal: To find great people, to invest in them, to attract them, to support them as they build businesses independent of any current potential P&L stress. So we have a team that is going to continue to do it, even if it does have some initial P&L cost.
Ajay Sabherwal: So what does that all add up to? Ajay will talk about it in more depth and more quantitatively. Conceptually, it adds up to more headwinds for this year than we've typically had.
more than we've seen in a while.
As a consequence, our guidance for this year
Ajay Sabherwal: is not up as much as we typically have. It's more muted.
Ajay Sabherwal: So, it's not likely, our current view, to be the easiest year we've seen.
Ajay Sabherwal: But before I close, let me see if I can step back from the details of those and all the issues that we wanted to make sure we brought to your attention and maybe offer a little perspective on them.
Ajay Sabherwal: on the year, which may not be as good as we had in the last few years.
Ajay Sabherwal: but also on the multi-year trajectory we have been on and we believe we are going to stay on.
Thank you. Thank you.
At one point,
Ajay Sabherwal: I'm not sure how many of you on this call have been covering us for long enough to remember this, but at one point, I suspect a few of you do remember this.
Ajay Sabherwal: This company was never up more than two years in a row.
Ajay Sabherwal: We'd be up two years and down a year or sometimes up one year and then down a year.
Thank you.
Ajay Sabherwal: We have now had a period of 10 years in a row.
Ajay Sabherwal: of adjusted EPS growth. And if we hit the midpoint of our guidance, even if our guidance isn't as bullish as we have been in the previous year, if we hit the midpoint of that guidance, it'll be 11 years.
Speaker Change: Yes, this year may be the toughest year we've had in a while. We have market forces against us, idiosyncratic forces against us.
Thank you.
None of those forces challenge the underlying strength.
of the people.
and our firm, or what they've shown.
Speaker Change: for the power of the ways we have shown we can help clients sometimes in the most critical times in their existence.
Speaker Change: Nothing in those market forces or this year's idiosyncratic forces challenges the fundamental strength that has driven this company, that has allowed us to grow, to allow us to become the vibrant growth engine that attracts the sort of people we do.
Speaker Change: market forces do of course affect us idiosyncratic forces do affect us
As we've talked about before, market forces come and go.
Speaker Change: and idiosyncratic forces do as well, at least if you manage them right.
Speaker Change: What we have believed, and I think the data show that, yeah, over short periods of time market forces and idiosyncratic forces can impact us, potentially have a major impact.
Speaker Change: But I believe the same data also show that if we maintain our focus, we maintain our commitment to do the right things for the business. We have to monitor the market forces, we have to adjust what we do, but underlying that
We focus on what matters in professional services.
The fundamentals.
Speaker Change: Attracting great people, supporting those people, people who have a drive to make a difference for their clients, who have a drive to mentor and see grow the careers of people behind them. If we do all those things, actually, we still have substantial zigzags. We just have substantial zigzags in portions of the business and perhaps overall.
Speaker Change: But what we've also shown is that through those zigzags, over any extended period of time, those zigzags surround a powerfully upward-sloping line for shareholders, for clients, and for our people.
Some years they slope up less.
Some years they slope up more.
Over time we've proven that
Speaker Change: That commitment delivers a powerful, substantial lineup that reflects the strength of what our teams do for our clients.
Speaker Change: and the excitement and the pride they have in doing so.
Speaker Change: and having other great colleagues join them in those enterprises. We intend to maintain that commitment.
Speaker Change: And I believe we've shown that with that commitment, even if we have some muted results this year or in a given quarter, this company has an extraordinarily bright future.
For you, the shareholder.
or clients.
Speaker Change: and the great people who join us and stay with us.
Speaker Change: I and the team look forward to sharing that with you as we go forward. With that, Ajit, let me turn it over to you.
Ajit: Thank you, Steve. Good morning, everybody. In my prepared remarks, I will take you through our company-wide and segment results and guidance for 2025.
Ajit: Beginning with highlights from our full year 2024 results, revenues of $3.7 billion increased 6% compared to revenues of $3.49 billion in 2023.
Ajit: Gap earnings per share of $7.81 compared to $7.71 in the prior year.
Ajit: The difference between our GAAP and Adjusted EPS for the year reflects an $8.2 million fourth quarter special charge related to severance and other employee-related costs, which reduced GAAP EPS by $0.18.
Ajit: Adjusted EBITDA of $403.7 million or 10.9% of revenues compared to $424.8 million or 12.2% of revenues in 2023.
Ajit: Despite the decline in adjusted EBITDA, net income grew primarily because of a lower tax rate and FX re-measurement gains compared with FX re-measurement losses in the prior year.
Ajit: In 2024, we had a tax rate of 20.2%, which compared with 23.3% in 2023.
Ajit: The decrease was largely due to favorable discrete tax adjustments related to equity compensation.
Thank you.
Ajit: Conversely, bad debt for the year of 1.4 percent of revenues was higher than our average bad debt of approximately 0.8 percent of revenues over the prior five years.
Ajit: The increase was driven in part by a 12.8 million dollars of bad debt in the fourth quarter related to one completed matter in our economic consulting segment.
Ajit: Even netting these items though, both our full year and fourth quarter 2024 results were below our expectations.
Ajit: Year-over-year revenue growth that was 12.4% in the first half of the year slowed to flat revenues in the second half of the year with a negative growth rate of 3.2% in the fourth quarter.
Ajit: To better align capacity with demand, we reduced headcount in Q4, resulting in a special charge of $8.2 million related to severance and other employee-related costs.
Ajit: These actions continued after the new year, which will result in an additional estimated special charge of approximately $17 million in Q1.
Ajit: Revenues of $894.9 million decreased 3.2% compared to the fourth quarter of 2023.
Ajit: The decrease in revenues was primarily due to lower demand in our corporate finance and restructuring and technology segments, which was partially offset by higher demand in our forensic and litigation consulting, or FLC, segment.
Ajit: Worth noting, the fourth quarter of 2023 was an exceptional quarter.
Ajit: A quarter when three of our five segments, Corporate Finance and Restructuring, Economic Consulting and Technology, delivered, at the time, record quarterly revenues in what is typically our slowest quarter of the year.
Ajit: Gap EPS of $1.38 compared to $2.28 in the prior year quarter, and included the special charge which reduced EPS by 18 cents.
SG&A of $208.1 million was 23.2% of revenues.
Ajit: This compares to SG&A of $194.6 million or 21% of revenues in the fourth quarter of 2023.
Ajit: The year-over-year increase was primarily due to higher bad debt, outside services and travel and entertainment expenses, which was not sufficiently offset by lower variable compensation.
Ajit: Fourth quarter 2024 adjusted EBITDA of $73.7 million or 8.2% of revenues compared to $127.4 million or 13.8% of revenues in Q4 of 2023.
Ajit: Our 4th quarter effective tax rate of 16.9% compared to 20.8% in 4th quarter of 2023.
Ajit: The lower effective tax rate was primarily due to a higher discrete tax adjustment related to equity compensation and the lower than expected pre-tax income in the quarter.
Ajit: Weighted average shares outstanding or way so for Q4 of 35.9 million shares compared to 35.8 million shares in the prior year quarter.
Ajit: Billable headcount increased by 283 professionals or 4.5% compared to the prior year quarter.
Ajit: with the largest increases in FLC, technology, and corporate finance and restructuring.
Non-billable headcount increased by 101 professionals or 6.2 percent.
Ajit: Sequentially, billable headcount decreased by 26 professionals or 0.4% and non-billable headcount increased by 18 professionals or 1%.
Ajit: The sequential decrease in billable headcount was largely due to headcount actions taken in the fourth quarter, which particularly impacted our corporate finance and restructuring and FLC segments.
Ajit: In corporate finance and restructuring, revenues of $335.7 million decreased 8.2% compared to Q4 of 2023.
Ajit: The decrease in revenues was primarily due to lower demand for transformation and strategy and transactions services
In the fourth quarter, restructuring represented 47% of segment revenues.
Ajit: Transformation and strategy represented 31% of segment revenues and transactions represented 22% of segment revenues.
Ajit: This compares to 44% for restructuring, 34% for transformation and strategy, and 22% for transactions in Q4 of 2023.
Ajit: Adjusted segment EBITDA of $44.7 million or 13.3% of segment revenues compared to $65.4 million or 17.9% of segment revenues in the prior year quarter.
Ajit: Sequentially, corporate finance and restructuring revenues decreased one, 7% as 7% growth and transformation and strategy revenues was offset by a 15% decline in transaction revenues.
Ajit: Restructuring revenues were flat sequentially.
Ajit: Adjusted segment EBITDA decreased $13 $2 million sequentially, primarily due to lower revenues and increase in variable compensation and higher SG&A expenses.