FTI Consulting, Earnings Call Insights: Change in Competition, Technology Segment,
On Wednesday, FTI Consulting, Inc. (NYSE:FCN) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Change in Competition
David Gold – Sidoti: I was hoping if you could give little bit more color just to start really on the change in competition, the bonuses and the acceleration there. Is it simple as an accounting change or is it something that you’ve changed your compensation program?
Dennis J. Shaughnessy – Chairman: David, it’s Dennis. It’s basically more a natural reaction of the contracts. So what happens, there is two elements to it. One, when people accumulate enough time in service and age, they can elect retirement. No one has done that, everybody is working. But once you do reach that then you no longer can amortize any of the expense even though they’re not vested in the actual payments, yet. You have to then book it, when they can theoretically retire, which would be instantaneously if they gave you notice. So that’s part of the equation. So again they don’t get the benefit, there is still a rolling three year time frame if they do retire. They have a noncompetition requirement that they would have to honor in order to get the benefit. So none of that has changed what’s changed is the way it has to be booked instantaneously once they achieve the time in service and age. And again to restate that no one, some of these people have had this now for several years and no one has retired nor have they given us any intention of retiring. Secondly in the first group of SMB contracts, ICP contracts, it was basically a 10 year program, and then once you reach the sixth year, you start rolling on to annual contracts that are automatically renewed with 90 day notice. Again the bonuses are still deferred as far as actual payments so there is a time vesting requirement, but since there are annual contracts the people could give us notice at the end of the year. They then have the noncompetition requirement that’s attached to it, so they don’t get paid unless, to use legal terminology they are good levers. So the practical aspect is not changed in the contracts. Its more the way you have to account and its driven by those two elements. One just simply part of the contracts maturing to where they are now on annual renewal and part of the contracts, some of them have matured the annual renewal they are still on term but people have accumulated enough time and service to where they could retire.
Roger Carlile – EVP and CFO: Just to be real clear on that it does not change the timing of when those grants are made, it does not change the total expense of those grants. It simply changes which quarters the expense is recognized.
Jack B. Dunn IV – President and CEO: David it pulls expense in that you know, you would either amortize over a four-quarter basis or a 36-quarter basis, depending on the actual deferral, pulls it into one quarter.
David Gold – Sidoti: The fee anticipated part two of the question, which was so essentially looking at that 100 basis points, it’s acceleration into certain quarters for the rest of the year should benefit?
Jack B. Dunn IV – President and CEO: That is correct.
David Gold – Sidoti: Then on the other expenses that you called out, can you give a sense, for some of those sound like at least for this year they will be ongoing, like the website initiative and the Board expansion. Can you give a sense for how much of that truly rolls off as one-time to first quarter versus may be they are specific to this quarter, but they are sort of with us to stay?
Dennis J. Shaughnessy – Chairman: Yes. About a third of it is the final payments to outside vendors for the redesign of our website, which is now up and in place and it was the end of the project it was third-party vendors, engineers and designers who were working with us on it and that won’t recur. The new website is up and running and those payments were made in the quarter. The annual management – we have a global management meeting normally every 18 months to 24 months and it simply fell in this quarter. We won’t have another one until probably mid-next year when we pull everybody together and it fell into the quarter. Pulling that many people around the world is expensive that represented about $1 million in round numbers of the expense. We will be adding if you looked at our proxy, we are adding four new directors, two from Europe, one from South America – actually three in Europe, one from South America and those gentlemen have accepted our invitation to come. They are in our proxy statement this year. The shareholders, in fact, are voting on their election as we speak and we are optimistic that they will be successfully elected and will join us at our annual meeting in June. The fee to the outside search firm that worked with us in this director search was a first quarter charge, so that again will not recur. So there are some nits and nats, but at the end of the day, David, it’s really driven by three things, one was the final payments to the outside vendors who work with us on the design of the new website. Two, was the fact that our almost sort of semiannual or annual plus meeting fell in the first quarter and then finally it’s the director search fees for four new directors that were paid to a third party headhunter.
David Gold – Sidoti: Just one quick one if I can sneak it in. So all that stuff sounds like fairly routine to be expected so to speak of doing business, so, I guess just curious, without formally updating guidance can you give us a sense for how much of the expense basically truly surprise here versus what was embedded in your guidance?
Jack B. Dunn IV – President and CEO: Well nothing surprised us. I think the timing of the web project ending when it probably surprised us. We actually thought it would be finished more towards the end of last year, continued into this year and so I would say we have one surprise and it was probably that. The annual – the actual meeting costs we knew would just be a timing element and I think we were well aware of the pull-in expenses from the charge of the SMB bonus payments into the first quarter. I think it wasn’t until, perhaps we had pushed every number that we got the final amounts, part of it was driven David because we had to wait for the audit of last year to confirm what the bonus pools were and what payouts would be to the individual. So there might have been a slight increased number there, so I think basically what we’re saying is that we don’t expect those costs to continue for the year, some will occur next year as Roger stated, and therefore that’s pretty much baked into our heads as we go forward, looking at our potential results.
Roger Carlile – EVP and CFO: Yeah. They were expected throughout the year. They happen to occur in the first quarter, so none of them were unanticipated, it was just, you didn’t know, when the director search keys, and you didn’t know when the website, of these were going to be completed. So those two are more (indiscernible) with regards to the timing.
Timothy McHugh – William Blair: Just want to know if we can elaborate a little more on what you’re seeing in the technology segment. I know you talked about the potential impact of elections but generally as I check around with companies, it sounds like the demand environment is still reasonably positive there. So can you give us a little more color on what happened if there are some big cases that rolled off and what the kind of pipeline looks like for the rest of the year?
Dennis J. Shaughnessy – Chairman: We have two very large cases that are rolling off and slowing down and so that might be unique to us, but that is the circumstances. And so the new business is obviously replacing significant assignments that have rolled off. Tim, we are also seeing pricing pressure on the processing side by competitors. I think while there is a demand out there for services, clearly there are lot of people that are competing pretty much based on price. I think that’s not so much the case in complex matters, but it certainly seems to be the rule rather than the exception in sort of your ordinary matter. So maybe the volume of ordinary matters is up, but we’re seeing you know much more aggressive pricing pressure in those areas and I think we are cautiously optimistic on second request going forward given the amount of retentions we are getting in econ, but we saw second request start to trip. While we did very well in the quarter in second request, we saw the momentum start to trail off at the end. So I think as Jack said we’ll have to see whether people actually pulled the trigger on some of these deals that were helping them analyze, that they do they would argue well for that business to go up. So I would say your assumption is right, one we’ve had two big accounts slowed down and two we are seeing pricing pressure pretty aggressive again in the processing side.
Timothy McHugh – William Blair: Where are you at with those large cases rolling off, I mean is there more pain.
Roger Carlile – EVP and CFO: In a baseball game parlance in one of them we’re in the eight. The bottom of the eight and in another one we’re probably entering the top of the eight.
Timothy McHugh – William Blair: The restructuring business, I know you’ve been doing Lehman success fee, and you get success fees every now and then, but was there anything unusual about the amount of success fees.
Roger Carlile – EVP and CFO: We did not get Lehmann success fee in the quarter.
Jack B. Dunn IV – President and CEO: This was basic blocking and tackling a lot of hard work by these folks. It had to happen, but Europe and Spain in particular started to show, a market there it had, everybody knew it had to happen, it just happened, so we saw very strong results there. Again, not surprisingly, our U.S. health care practice was very, very strong.
Timothy McHugh – William Blair: Then last one from me, just kind of following up a little bit on David’s line of questioning there was – are you trying to – I guess the way you’re describing the first quarter, is this in line with what you had expected when you gave your prior guidance or did the mix of revenue come in such that the margins are a little lower, just trying to understand how to think about this relative to what you expected?
Dennis J. Shaughnessy – Chairman: I think the expenses came in about where we expected and we didn’t expect, as I said there are one or two exceptions that may have fallen in the second quarter where we thought may have fallen into the fourth quarter. We didn’t know the final impact of the pool into the first quarter of the equity compensation expense until late in the quarter once we had finalized the audit and knew what the bonus payouts were going to look like. So we might have been a surprised on the expense side. On the revenue side, without a doubt the biggest surprise is Technology, because it’s one of our highest margin businesses, and the fact that revenue came in, it came in lower than we had anticipated there. While it was offset by increases in revenue elsewhere, they have the highest margin of any of our businesses, and so even inside of Tech, we saw a shift in some of their businesses to where it affected their margins. So, I would say, clearly the single biggest difference in our thought process was the margin of Technology that was driven by shifts of business, and obviously less than expected revenues.
Timothy McHugh – William Blair: If I could just follow-up one last one on that, you talked about the competitive position of that Tech segment and how do you feel? Have there been any changes that that make you more or less confident around the competitive environment or is it more to do with timing I think?
Dennis J. Shaughnessy – Chairman: I think that it’s extremely competitive that it had significant new wins that will be reflected as they go forward and they have had new wins against big-name technology companies with sort of Fortune 500 sized clients. I think the – there is no doubt that in the middle sort of the continuum, middle size type of engagements it’s extremely price competitive. I think the law firms, we can read about all the issues facing law firms and the pressures on them by their clients to contain costs I think that’s flowing through into what they would view as routine matters where you need this type of electronic production. And so I would say that we are seeing significant price competition. We have the ability to meet it. We will meet it on a selective basis. We are seeing less of it at the high end, in the complex end, but then these very huge cases are difficult to predict exactly when they are going to hit you. We know we will get them but you can’t predict quarter-to-quarter exactly when they come in. So I think that we feel very well positioned. We are rolling out a new suite of technology that has significant user (phase) friendly advantages. We’ve tested it with a couple of major law firms, so we are getting very good feedback back about how much easier it is to use the technology. There’s never been a doubt that our technology has been at the high end of the power range. There has been some complaints from people that it’s not the easiest to use out there. I think that will be solved with this new rollout. So, on a technology basis we are still investing heavily in it. We think that’s yielding us good competitive advantage. On a consulting basis, we don’t view that, there’s anyone out there that’s better than we are which is why we feel we get the big cases. In the routine cases, I think the general counsels, who are under pressure to control their costs are pressuring law firms to control cost and ergo any other third-party vendor is getting the same pressure and I don’t think that’s going away.