Yahoo Finance FTI Consulting, Inc. (NYSE:FCN) Q1 2024 Earnings Call Transcript
FTI Consulting, Inc. (NYSE:FCN) Q1 2024 Earnings Call Transcript April 25, 2024
FTI Consulting, Inc. beats earnings expectations. Reported EPS is $2.23, expectations were $1.76. FTI Consulting, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the FTI Consulting First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] 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 first quarter 2024 earnings results as reported this morning. Management will begin with formal remarks, after which they will take your questions. Before we begin, I would like to remind everyone that this conference call may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21 of the Securities Exchange Act of 1934 that involve risks and uncertainties. Forward-looking statements include statements concerning plans, initiatives, projections, prospects, policies, processes and practices, objectives, goals, commitments, strategies, future events, future revenues, future results and performance, future capital allocation and expenditures, expectations, plans or intentions relating to acquisitions, share repurchases and other matters, business trends, ESG-related matters, new or changing law, brand regulation, scientific or technological development 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.fticonsulting.com, as well as other disclosures under the heading of Risk Factors and Forward-looking Information in our quarterly report on Form 10-Q for the quarter ended March 31, 2024, our annual report on Form 10-K for the year ended December 31, 2023, and in our other filings with the SEC. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as 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 reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures, investors should review the press release and the accompanying financial tables that we issued this morning which include the reconciliation. Lastly, there are two items that have been posted to the Investor Relations section of our website for your reference. These include a quarterly earnings presentation and an Excel and PDF of our historical, financial and operating data, which have been updated to include our first quarter 2024 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, these slides provide similar 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 Ajay Sabherwal, our Chief Financial Officer. At this time, I will turn the call over to our President and Chief Executive Officer, Steve Gunby.
Steve Gunby: Thank you, Mollie. Welcome, everyone. Thank you all for joining us this morning. As I'm sure many of you saw in our press release this morning, we again delivered terrific results this quarter. In fact, we delivered results, which exceeded our expectations, and I suspect many of yours as well. What I would like to do is to make two points before I turn the call over to Ajay, who will, as usual, go through the details of the quarter. The first is to talk about some things, we have always believed is important to talk about, after bad quarters, but also after good ones, which is that individual quarters, but they do tend to reflect the core strengths we work every day to create, and are often influenced by transient elements as well.
And hence, we always urge caution about taking any given quarter, multiplying it by four and thinking, wow, that's a great representation of where the company is. That's the first point. The second point is on a different subject, but one that an important way ties to the first. And in any case, something very important going on, which is the rich set of investment opportunities that we are seeing right now across our segments and across the world. Let me start with the first point. Why it is that quarterly results can deviate from what we would see as the true durable underlying economic power of the business. One reason is that certain P&L elements can sometimes have somewhat of a random feel. Sometimes they happen to have negative FX in the quarter, or higher bad debt than is typical or happen to have lower success fees.
And sometimes it's the opposite, where those factors in a given quarter cut more positively than we would typically expect them to do, to operate. This quarter, the sort of factors we typically discussed didn't all cut positive. For example, as Ajay will talk about, we had some major revenue deferrals in e-com. But as Ajay will also talk about the factors on average this quarter cut more positively. For example, our tax rate happened to be significantly lower than we expected. And in this quarter, we had lower FX remeasurement losses as well as higher success fees compared to the prior year quarter. So the seating randomness of those factors is one reason, I believe we should never overweight a quarter. The second reason I'd like to discuss is more subtle, but it's also one that has turned out to be powerful in some quarters, which is the degree to which the business ebbs and flows coincide.
As I think everyone knows, all of our businesses can have substantial real underlying swings from quarter-to-quarter. Those swings can have a more multitude of causes. Sometimes they reflect overall forces; by COVID or geopolitical tensions. Other times of market-specific conditions that drive our business, such as whether the restructuring market or deal markets are booming. And yet other times, it can be factors that are more idiosyncratic for us. For example, whether business happens to be conflicted out of that quarter's largest job or if the big jobs in any one segment happened to start or in that quarter. We have, across our business, enough disparate businesses across FTI, but those business influencing factors rarely cut all the same way across all of our businesses at the same time.
We're typically, if one region or business on a big set of jobs roll off, another is facing set of jobs that are just beginning. But occasionally, there is more alignment with those factors, more coincidence either positively or negatively than is typical. Many of you have been following us for a while. For those of you who have, you might remember the first-half of 2017. I would say that was a period where we had a whole lot of negative coinciding going on. We happened to swing in this on some big jobs. We were conflicted out of some others. Some of the investments we have made have not yet worn out, and we were cycling in the first-half that happened to be particularly strong. And so we had a couple of very poor quarterly results. At that time, however, we were quite confident that the coincidence of bad factors did not reflect the true underlying strength of our business.
We reaffirmed guidance for the year. And as you know, that confidence was subsequently borne out by the results in the second-half of 2017 and beyond. Nonetheless, it was still painful. We were sitting there in the beginning of 2017, with 42-packed two quarters that were pretty terrible. That's negative coincide. On the other hand, in 2019, some quarters felt like Camelot. With us coming the closest we've ever come to everything going right, across every business in every region at the same time. When Ajay and I talk about this quarter, it doesn't quite feel like 2019, and it does feel closer to Camelot than typical. We have had just so many things go right so far this year. I'll give a few examples. In Corp Fin, as you know, when restructuring is up, there's often a partial offset in some of the other businesses.
This quarter, all three of the major businesses in Corp Fin, Restructuring, Business Transformation and Strategy and Transactions grew at double-digit rates year-over-year. In e-com, we have won some of the biggest jobs that we have ever won. And we're seeing strength not only in non-M&A and M&A-related antitrust, but also in Financial Economics. And International Arbitration and not just in big regions, but in smaller geographies like us, for us, like Asia Pacific and LatAm. I'm sure you saw FLC had terrific results this quarter, year-over-year coming from -- and it came from powerful contributions across investigations, disputes, construction solutions, health solutions, essentially almost all of our practice lines pulled in the right direction.
Tech, Tech is in a business that is facing industry backdrop with some significant challenges. Yet in the face of that, we continue to gain share. Winning large M&A second requests for some engagements, and we're also seeing the results of forward-looking investments in areas like emerging data. And Strat Comm, we also delivered double-digit revenue growth, and that's from a segment perspective. If you look at it from a geographical perspective, this quarter, we saw growth in all four regions, with North America and EMEA both growing revenues at double-digit rates year-over-year. The strength of this quarter clearly reflects the multiyear progress we have made and the focus we've had on building stronger businesses that are durable, more powerful, able to sustain growth year-over-year after year.
But I think both Ajay and I thought that in terms of the ebbs and flows of the underlying businesses, it does feel a little closer to Camelot than we would typically see in the quarter. The consequence of these observations, as Ajay will talk about, is that notwithstanding the strong quarter, we are not revising guidance, we are not assuming Camelot will lasts forever. But let me use that to bridge to something I feel is a far more fundamental point. It's nice to be in Camelot, to report these sorts of results in the quarter. But our success over these last years has not required us to be in Camelot. In fact, our success has had little to do with the short-term factors I was just talking about. It has never involved us trying to make sure every business only Finance and the zigs of its business and avoids the zags every quarter.
To the contrary, our success these last five to 10 years has, in fact, actually been characterized by choppy lines in every business. Restructuring has gone up hugely in some quarters, and gone down substantially in others. Transactions is in variability as is Antitrust Clearance. We've got testifying business near 0 during COVID. We had so many ebbs and flows across the businesses. Our success has not been because we tried to get rid of that variability. Instead what we have focused on is making sure that variability oscillates around powerful upward sloping lines at every one of our businesses. It is the change in the trajectory of those underlying lines, business by business, region by region, not the elimination of oscillation that has made the difference.
One of the most critical enablers of that change has been that we now have a leadership team at the ExCo level, but also far more broadly throughout this company that is focused not on quarters, but on the fundamentals that over time, trump all short-term factors, making a difference for core clients, developing those core clients into deep relationships. Attracting and promoting people you're proud to be associated with, we can build businesses. Investing behind those people. And important being willing to do so even if those investments come at a time that happens not to be convenient for your P&L. In that connection, let me move on to the second point I wanted to make, which is that right now, I believe we are staring at the richest set of investment opportunities that I have ever seen at the company.
The combination of a great set of people we've attracted over time, and the promotions we've made, the success we're having, the investments we've shown ourselves willing to make around the world even when others were cutting back or are cutting back. Get noticed by talent and have been noticed by a lot of terrific talent around the world. And so we have a great number of people calling us in a range of places around the world. And it happens to come at a great time for us when we have the leaders now in many places around the world and then across all of our segments and when we feel confident to that. So we have an enormous set of conversations going on. One can, as Ajay points out to me, never know exactly how many of those opportunities will come to fruition.
But assuming a good number of them do and then we add junior professionals behind those vets on senior talent, it could hurt our P&L in the second-half of the year or maybe even to 2025. But as I hope you know and remember, it is the equivalent analogous investigations that investments that we've made in the past. That has been the essence of the core vitality of this company. That has allowed us to achieve these multiple years of growth. My sense is that the history of these last five to 10 years shows that if we have these opportunities, and invest boldly. If we execute at the level of quality and conviction that we have in the past, we might, yes, we might hurt some quarters, but we will be building on and accelerating this powerful journey.
And that would reinforce my conviction, which is that this company as much success as we've had recently, that when they're much closer to the beginning of the fabulous journey we're on than we are to the end. With that, let me turn this over to you, Ajay, to take us to the next.
Ajay Sabherwal: Thank you, Steve. Good morning, everybody. In my prepared remarks, I will take you through our company-wide and segment results for the quarter. As Steve mentioned, today, we reported yet another quarter of record revenues with all of our segments growing year-over-year. 15.1% revenue growth, outpaced a 13.1% increase in direct costs and a 9.6% increase in SG&A expenses, compared to the prior year quarter. As a result, earnings per share grew by 66.4% to $2.23. We are, of course, pleased with these results, which exceeded our expectations as we benefited this quarter from an increase in both utilization and average billable rates. However, I must point out that the year-over-year increase in earnings is also in part, because of a number of factors that had particularly negatively impacted Q1 of last year, including higher FX remeasurement losses Investment in our public sector practice, which resides within our Corporate Finance & Restructuring segment, where we did not see significant revenues until the third quarter of ‘23.
And losses within our Health Care Business Transformation practice, which we have since realigned within our Corporate Finance & Restructuring segment. Additionally, in the first quarter of 2024. Our tax rate of 19.6% is particularly low, relative to 24% in the first quarter of ‘23. Now turning to the details for the quarter. First quarter of 2024 revenues of $928.6 million increased $121.8 million or 15.1% year-over-year. Earnings per share of $2.23 increased $0.89, compared to $1.34 in the prior year quarter. Net income of $80 million, compared to $47.5 million in the prior year quarter. SG&A of $201.9 million or 21.7% of revenues compared to SG&A of $184.2 million or 22.8% of revenues in the first quarter of ‘23. The increase in SG&A was primarily due to higher compensation and bad debt.
First quarter 2024 adjusted EBITDA of $111.1 million, compared to $78.4 million in the prior year quarter. Our first quarter ‘24 effective tax rate of 19.6%, compared to 24% in the prior year quarter. The lower tax rate was primarily due to a decrease in foreign taxes and a higher discrete tax adjustment related to share-based compensation. Due to the exercise of additional non-qualified stock options as compared to the prior year quarter. For 2024, we now expect our effective tax rate to be between 22% and 24%. Weighted average shares outstanding or we so for Q1 of 35.8 million shares, compared to 35.5 million shares in the prior year quarter. Billable head count increased by 180 professionals or 2.9% year-over-year. Sequentially, billable head count increased by 16 professionals or 0.3%.
Though our billable head count increase is small year-over-year and flat sequentially. We expect the most significant additions to our employee base in 2024 to occur in the second-half of the year, when we expect to welcome approximately 300 campus hires. Non-billable head count increased by 81 professionals or 5% year-over-year. Now turning to our performance at the segment level. In Corporate Finance & Restructuring, revenues of $366 million increased 16% and revenue growth was driven by double-digit top line growth across each of our Restructuring, Business Transformation and Strategy and Transactions businesses. In the first quarter, Restructuring represented 47%. Business Transformation and Strategy represented 31% and Transactions represented 22% of segment revenues.
This compares to a split of 45% for Restructuring, 32% for Business Transformation and Strategy and 22% for Transactions in the prior year quarter. Year-over-year, Restructuring revenues grew 20%. Business Transformation and Strategy revenues grew 12% and Transactions revenues grew 13%. Adjusted segment EBITDA of $75.2 million or 20.6% of segment revenues, compared to $51.8 million or 16.4% of segment revenues in the prior year quarter. The increase in adjusted segment EBITDA was primarily due to higher revenues, including success fees, which was partially offset by higher compensation and SG&A expenses. Sequentially, Corporate Finance and Restructuring revenues were flat. Restructuring revenues grew 5%, and Transaction revenues grew 2%, while Business Transformation and Strategy revenues declined 8%, as we saw some large jobs in the Business Transformation and Strategy business conclude.
Industries where we have been helping clients with restructuring, where we saw sequential increases in revenues include diversified metals and mining, chemicals financial services and real estate, among others. Adjusted segment EBITDA increased $9.8 million sequentially, primarily due to lower compensation and contractor costs which was only partially offset by an increase in business development expenses related to annual client events. Turning to Forensic and Litigation Consulting, or FLC, revenues of $176.1 million increased 11.6%. The increase in revenues was primarily due to higher demand and realized bill rates for investigations and dispute services. Adjusted segment EBITDA of $33.7 million or 19.1% of segment revenues, compared to $21.8 million or 13.8% 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. Sequentially, FLC revenues increased $10.6 million or 6.4%, primarily due to higher demand for Construction Solutions and Dispute services. Adjusted segment EBITDA increased by $14.5 million sequentially, primarily due to higher revenues, as well as a decrease in compensation and bad debt. In Economic Consulting, revenues of $204.5 million increased 20.6%. The increase in revenues was primarily due to higher demand and realized bill rates for non-M&A-related antitrust and Financial Economic Services. Adjusted segment EBITDA of $14.2 million or 6.9% of segment revenues, compared to $14.2 million or 8.4% of segment revenues in the prior year quarter.
The increase in revenues was more than offset by higher compensation, contractor costs and SG&A expenses. The increase in compensation was primarily related to higher variable compensation and the impact of a 5.8% increase in billable head count. The increase in SG&A expenses was primarily related to higher bad debt. Similar to recent years, in the first quarter, we experienced revenue deferrals that have resulted in and may continue to result in variations in the timing of revenue recognized on work already performed. We believe that conditions to recognize these revenues will be met later this year and could positively impact adjusted EBITDA by approximately $6 million. Sequentially, Economic Consulting revenues decreased $1.5 million. Adjusted segment EBITDA decreased $24.2 million, primarily due to higher compensation and bad debt.
Technologies revenues of $100.7 million increased 11.1%. The increase in revenues was primarily due to higher demand for M&A-related second request and information governance, privacy and security services, which was partially offset by a decline in demand for investigations services. Adjusted segment EBITDA of $14.6 million or 14.5% of segment revenues, compared to $15.4 million or 17% of segment revenues in the prior year quarter. The decrease in adjusted segment EBITDA was primarily due to an increase in compensation, which includes the impact of an 11.2% increase in billable head count, higher as needed consultant costs and an increase in SG&A expenses. Sequentially, technology revenues were flat. And adjusted segment EBITDA increased $2.2 million, primarily due to lower SG&A expenses, which was partially offset by an increase in compensation.
Strategic Communications revenues of $81.2 million increased 11.1%. The increase in revenues was primarily due to higher demand for public affairs and corporate reputation services. Adjusted segment EBITDA of $12.4 million or 15.3% intersegment revenues, compared to $9.6 million or 13.1% 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 and higher SG&A expenses. Sequentially, Strategic Communications revenues decreased $5.4 million or 6.3%, primarily due to lower demand for corporate reputation services. Adjusted segment EBITDA decreased $3.2 million, primarily due to lower revenues, which was partially offset by a decline in compensation and SG&A expenses.
Let me now discuss a few cash flow and balance sheet items. As is typical, we pay the bulk of our annual bonuses in the first quarter. Net cash used in operating activities of $274.8 million, compared to $254.2 million in the prior year quarter. The year-over-year increase in net cash used in operating activities was primarily due to an increase in salaries, higher annual bonus payments and an increase in forgivable loan issuances, which was partially offset by higher cash collections. Total debt net of cash and short-term investments of negative $39 million at March 31, 2024, compared to $122.7 million at March 31, 2023, and negative $328.7 million at December 31, 2023. The sequential increase in total debt, net of cash and short-term investments was primarily due to higher borrowings under the company's senior secured bank revolving credit facility, which were primarily used for annual bonus payments.
Turning to guidance. Though the end of first quarter is usually too early to revisit guidance. Let me remind you of a few of the determining factors. First, as I said at the beginning of the call, our tax rate was 19.6% in the first quarter of '24, but we expect it to be between 22% and 24% for the full-year. Second, let me remind everyone that last year, we had a weak first-half, followed by an exceptionally strong second-half of the year. Our Restructuring business this quarter was even stronger than we expected. Whether this level of strength will persist through the year may depend on factors that are difficult to reliably predict and include availability of funding for distressed companies, and the duration of our matters. Further, several of our other businesses can have significant ups and downs, based on large new matters stopping or ending.
As evidenced even in this past quarter in Business Transformation and Strategy where certain jobs ended. Third, as Steve mentioned, we have both the appetite and the wherewithal to make investments. Having said that, we cannot say with certainty when such investments will be made and therefore, how much impact they will have in this calendar year. Lastly, the fourth quarter is typically a weaker quarter for us because of a seasonal business slowdown and vacations at the end of the year. As Steve said, it is rare that we see the underlying ebbs and flows in our business coincide to the extent that they have so far this year. Our current guidance is in a range that encompasses both positive and negative scenarios and combinations for our various businesses.
At this time, our guidance remains unchanged. Before I close, I want to reiterate four key themes that I believe underscores the attractiveness of our business. First, our results illustrate the growing need for our services, as we assist our clients as they navigate through their most complex challenges and opportunities regardless of business cycle. Second, our leading practitioners and their continued ability to not only win business, but also attract top talent is our core strength. Third, we continually look to expand our portfolio of services to adjacencies related to our core competencies. Examples of such expansion range from Construction Solutions to cybersecurity and AI in FLC, Strategy Consulting and Digital Transformation and Corporate Finance, non-M&A-related antitrust and Economic Consulting, Blockchain, Digital Assets, Emerging Data and AI-based capabilities and Technology and Public Affairs Consulting and Strategic Communications.
Finally, our enviable balance sheet allows us the flexibility to continue to boost shareholder value. through organic head count growth, share buybacks and acquisitions when we see the right ones. With that, let's open the call up for your questions.
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