FTI Consulting, Inc. (NYSE:FCN) Q4 2023 Earnings Call Transcript
FTI Consulting, Inc. (NYSE:FCN) Q4 2023 Earnings Call Transcript February 22, 2024
FTI Consulting, Inc. beats earnings expectations. Reported EPS is $2.28, expectations were $1.57. 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 morning everyone and welcome to the FTI Consulting Fourth Quarter and Full Year 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Mollie Hawkes, Head of Investor Relations. Ma’am, please go ahead.
Mollie Hawkes: Good morning. Welcome to the FTI Consulting conference call to discuss the company's fourth quarter and full year 2023 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, 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 plan, initiatives, projected prospects, policies, processes and practices, objectives, goals, commitments, strategies, future events, future revenues, future results and performance, future capital allocations and expenditures, expectations, plans or intentions relating to acquisitions, share repurchases, and other matters, business trends, ESG related matters, new or changes to laws and regulations, scientific or technological developments and other information or other matters that are not historical, including statements regarding estimates of our future financial results and other matters.
For discussion of risks and other factors that may cause actual results or events to differ from those contemplated by forward-looking statements. Investors should review the safe harbor statement in the earnings press release issued this morning, a copy of which is available on our website at www.fticonsulting.com 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, 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 of the date of this earnings call and will not be updated. During the call, we will discuss certain non-GAAP financial measures such as total segment operating income, adjusted EBITDA, total adjusted segment EBITDA, adjusted earnings per diluted share, adjusted net income, adjusted EBITDA margin and free cash flow.
For 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 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 fourth quarter and full year 2023 results. Of note, during today's prepared remarks, management will not speak directly to the quarterly earnings presentation posted to the investor relations section of our website.
To ensure our disclosures are consistent, these slides provide the similar details as they have historically, and as I have said, are available on the investor relations section of our website. But 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'll turn the call over for President and Chief Executive Officer, Steven Gunby.
Steve Gunby: Thank you, Mollie. Welcome, everyone. And thank you all for joining us this morning. I'm sure many of you saw in this morning's press release, we delivered fabulous results in the fourth quarter, and fabulous results more generally, in the second half of the year. Those results in turn -- turn the year, the whole year into one that was terrific overall. The results at the end of this year exceeded our expectations and I suspect many of yours as well. So what I'd like to do before turning this over to Ajay, who will go through the quarter in more detail just take a moment to reflect on the entire year. In particular, to reflect on the variation we saw in some of the performance metrics across the quarters. And talk about how we thought about what actions we should take and what actions we shouldn't take as the year went on.
I'm hoping those reflections support the more general conversations that we've had from time-to-time, about how do we think about the twin objectives of being responsible stewards of this company for your shareholders being seen as responsible stewards. Also not losing sight of the core ultimate objective, which of course is not quarterly earnings, which can be very transient, but rather is building something more powerful, ever more capable organization, a more welcoming organization, one that can make evermore difference for our clients, one that's ever more able to attract great people and support them so they can develop themselves and the people around them through that creates something real, something durable for our clients and for our people and for you, our shareholders.
Looking back ashore, as many of you will recall, our first quarters' earnings were well below our internal expectations below Street's expectations and down versus the prior year, even halfway through the year earnings were only flat versus the first half of the year. To the responsibility point, when you have periods of time where earnings are down or flat, you have to as a responsible management team, look at the underlying causes and challenge themselves. If the results are down because you're losing traction with clients, professionals are departing in droves, or you're not attracting more great professionals. Those are serious indicators, indicators, you may have fundamental problems and you may need to react in fundamental ways. We look at the company's performance, actually on an ongoing basis, after every quarter in every good quarter and ask those questions.
But of course, we particularly ask them when quarters are down. And if you remember, during the first half of the year, that was a time when the number of competitors were talking about difficult market conditions and when some of them were taking major actions. And that sort of commentary and set of actions also has to cause one to reflect. So we reflected. Interestingly, importantly, when we looked at our first half of the year, we continued to feel good about what was going on. Yes, our EPS was down but we were doing great work for our clients. We’re supporting brand building assignments and those efforts were showing up. They were showing up in qualitative terms like awards and client feedback. And I know that always can be something you get a little skeptical about, how are you measuring and so forth.
But they also showed up pretty tangibly and quantitatively and measurably, for example, in terms of revenue growth, where we have 13%, revenue growth in the first half of the year, and important, we actually had more great people than we expected. Because we had, as we have, in recent years, had real opportunities to invest in terrific talent, which of course, we always take advantage of whether the quarter is good or not. So some of the extra talent that we had was because our -- we're really attracted is terrific talent. But in 2023, we also had the fact that attrition was down significantly lower than we expected lower than the prior year in the first half of the year. So those were the main goals of fact that our revenue was up so terrifically in the first half of the year, and yet our profits were not we also had some higher SG&A really hoped for.
And so we took a look at that. But the deeper looks at most of that, not all but most of that was driven either by one-time factors or some key investments we felt good about. So you go through that analysis, and when you after you go through the analysis, you have to decide, of course, so what do we do? And this is at a time when we knew some others were doing substantial layoffs and others were reneging on campus offers or forcing delay arrivals. After reflection, our conclusion was that we did not need to do any of that. And more important, we could not see how that would help the multi-year trajectory of this company. Instead, what we decided to do was actually pretty modest actions. Things, I think you would all think of a sensible actions, of course, we continue performance management, as we are committed to do in good times and bad times.
At the same time, however, we continue to invest aggressively, where we have great opportunities to add talent across a whole range of I think every segment across the firm. The one thing we did a little different at this point was that we substantially tapered some of the hiring in the second half of the year, which is not something I actually liked to do, because you always want that influx of new talent. But here, given the first half of the year, we tapered it aggressively in places where we had had little or no attrition and sustained low utilization. And that was a little different than we've done. And of course -- we of course, we looked at our SG&A and reprioritized. These were not radical actions, I think most people would think they're modest, they were prudent actions.
Important, we did not actually expect those actions to yield the sorts of results that were reported this morning, primarily because they weren't that radical. And but also because we did not expect to continue the incredible rate of growth and revenue in the second half of the year that we saw. What -- more important than the tapering of the growth rate of costs, as Ajay will talk about is we did not see the slowdown in sales growth that we expected. Instead, we have strengthening our restructuring business, a business that as you know, has been getting ever more powerful, globally, year-after-year. But also well beyond that we have stronger than expected results in many, many other places, for example, our tech business, which has been soaring for a while now or Econ consulting business, and, frankly, a whole lot of places in Europe.
So we cannot take credit and say, the results today were delivered by top actions. In fact, we did not take actions designed to deliver the sorts of results that we reported today. Rather, we took actions we thought were modest prudent steps. And important steps that would not interfere with the multi-year growth trajectory that we are so committed to. As I'm sure, as I hope most of you know now, our goal has never been to target great quarters. In fact, if I had known just how strong the revenue was going to be in the fourth quarter, I probably would not have allowed us to be as tight on tapering, as tight as hiring as we actually work not because they don't like strong quarters who doesn't like strong quarters. But because some places that we have previously low utilization are busier than we expected at that point in time by knowing that I surely would have hired more into those segments, which would have hurt the quarter.
But of course would have benefited us in the medium term. And in general, that is our goal. The intention is not to ever focus a lot on quarters is, the intent to not focus a lot on quarters is not because we don't feel a sense of responsibility. It's because ensuring we are on the right long term trajectory, swamps the effect by a huge margin of any quarter. Let me give you an example. When we delivered the quarter we just reported this year are far weaker and for the year only hit the mid-point our guidance. Either way, the adjusted EPS in 2023 would still have been more than triple, the EPS we delivered just six years ago. For us, it's that multi-year focus on building a more powerful institution that matters. It's positioning ourselves for the next tripling of earnings that matters, not whether this quarter is good or bad.
And so we try to keep our eyes on what's required to deliver that, which in my view is all about practicing the people who can help you build a more powerful institution for your clients, finding and supporting those people, who can build those relationships, who want to build their business, who want to track the next generation of great people and mentor them. And people are just passionate about collaborating to make a difference. When we find those people, and we support them, and we support them, even if it hurts the bottom lines, and then individual quarter, it might cheat that quarter a little bit in terms of earnings. But to me by so doing, we put this company on a sustained path for the medium term. And then critically, this is a professional services environment.
The only asset is passionate people. By doing that, we create an environment where the best people want to come and the best people want to stay and they thrive and they make a difference. They make a difference for themselves. They make a difference for each other. So that is the choice we made this year. It's the choice we tried to make every quarter. And to me, it's the choice that I believe that we continue to make will mean this company is only at the beginning of where we can go. With that I know a lot of you have detailed questions about the quarter, Ajay maybe you'll take this down to a more detailed level. Thank 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 2024. Beginning with our full year 2023 results. We reported record revenues of $3.49 billion, up $468.3 million, or 15.2% compared to revenues of $3.03 billion in 2022. We also reported record earnings per share of $7.71, up $1.13 or 17.2% compared to EPS of $6.58 in 2022. As a reminder, in the fourth quarter of 2022, there was a $8.3 million special charge related to severance and other employee related costs, which reduced earnings per share last year by $0.19. Adjusted earnings per share of $7.71 in 2023 increased $0.94, or 13.9% from $6.77 in 2022. Net income of $274.9 million compared to $235.5 million in 2022.
Adjusted EBITDA of $424.8 million was also a record that was up $67.2 million, or 18.8% from $357.6 million in 2022. The sharp increase in adjusted EBITDA is primarily a result of our superb revenue growth of 15%. Noteworthy, in the first half of the year, revenues grew 13% year-over-year, and in the second half of the year, revenue growth accelerated to 17.3% compared to the prior year period. This revenue growth occurred in a year where total headcount grew 4.6%, which is lower than we have seen or targeted in recent years. Revenue Growth exceeded the growth and direct costs and SG&A excluding depreciation and amortization, resulting in record adjusted EBITDA. All segments delivered record revenues and our corporate finance and restructuring segment also delivered record and adjusted segment EBITDA.
Overall, growth was particularly strong for restructuring, investigations, litigation, non-merger and acquisition related antitrust, and corporate reputation services. Now I will turn to fourth quarter results. For the quarter, record revenues of $924.7 million increase 19.4% or 18% excluding effects driven by higher demand across all business segments. This quarter is truly exceptional. Three of our segments, corporate finance and restructuring, economic consulting and technology delivered record quarterly revenues in what is typically our slowest quarter of the year, as professionals and clients tend to take time off during the holidays. Net income of $81.6 million, compared to $47.5 million in the fourth quarter of 2022 GAAP EPS of $2.28, compared to $1.33 in the prior year quarter.
Adjusted EPS of $2.28, compared to $1.52. In the prior year quarter. Adjusted EPS excludes special charges, of which we had $8.3 million or $0.19 per share in Q4 of 2022. SG&A of $194.6 million was 21% of revenues. This compares to SG&A of $165 million, or 21.3% of revenues in the fourth quarter of 2022. The year-over-year increase was primarily due to higher compensation and bad debt. Fourth quarter 2023 adjusted EBITDA of $127.4 million, or 13.8% of revenues, compared to $92 million, or 11.9% of revenues in fourth quarter of 2022. Our fourth quarter effective tax rate of 20.8%, compared to 25.3% in fourth quarter of 2022. The lower effective tax rate was primarily due to an increase in tax credits. We expect our effective tax rate for 2024 to be between 24% and 26%.
Weighted Average Shares Outstanding or WASO for Q4 of 35.8 million shares, compared to 35.7 million shares in the prior year quarter. Now, turning to our performance at the segment level for the fourth quarter. In corporate finance and restructuring, record revenues of $365.6 million increased 19.7% compared to Q4 of 2022. The increase in revenues was primarily due to higher demand for business transformation and strategy and restructuring services. In the fourth quarter, restructuring represented 45% of segment revenues. Business transformation and strategy represented 34% of segment revenues and transactions represented 21% of segment revenues. Business transformation and strategy revenues grew 35% year-over-year. Restructuring revenues grew 20% year-over-year, and transactions revenues were essentially flat.
Adjusted segment EBITDA of $65.4 million or 17.9% of segment revenues, compared to $49.1 million, or 16.1% of segment revenues in the prior year quarter. This increase was primarily due to higher revenues, which was partially offset by higher compensation, which includes the impact of a 5.5% increase in billable headcount and higher contractor costs, as well as an increase in SG&A expenses compared to the prior year quarter. Sequentially, corporate finance and restructuring revenues increased $18 million or 5.2%. Adjusted segment EBITDA decreased $2.7 million, as the increase in revenues was more than offset by higher variable compensation, and increase in contractor costs and higher SG&A expenses. Business transformation and strategy revenues increased 9% sequentially.
Transaction revenues increased 4% and restructuring revenues grew 2% compared to the third quarter of 2023. Increased volume of work on existing business transformation matters in the public sector, technology and telecom industries, share performance and business transformation and strategy. Higher volumes of restructuring activity in the United States, Germany and the UK. And higher success fees on the completion of transactions engagements also contributed to the growth in corporate finance and restructuring sequentially. Industries, where we've been helping clients with restructuring matters where we saw sequential increases in revenues include healthcare, construction materials, and food and beverage, among others. In Forensic and Litigation Consulting or FLC, fourth quarter revenues of $165.5 million increased 11.9%, compared to Q4 of 2022.
The increase in revenues was primarily due to higher demand for investigations and construction solutions services. Adjusted segment EBITDA of $19.2 million, or 11.6% of segment revenues, compared to $17.1 million, or 11.6% of segment revenues in the prior quarter. This increase was primarily due to higher revenues, which was partially offset by an increase in compensation and higher SG&A expenses. Sequentially, revenues were flat and adjusted segment EBITDA decreased by $2.2 million, primarily due to higher SG&A expenses, largely related to an increase in travel and entertainment expenses, compensation and bad debt. Economic consulting record revenues of $206.1 million increased 19.8%, compared to Q4 of 2022. The increase in revenues was primarily due to higher financial economics, non-M&A related antitrust and international arbitration matters, which was partially offset by a decline in M&A related antitrust matters.
Adjusted segment EBITDA of $38.3 million or 18.6% of segment revenues, compared to $27.3 million or 15.9% of segment revenues in the prior year quarter. Then increase in adjusted segment EBITDA was primarily due to higher revenues, which was partially offset by an increase in compensation, which includes the impact of an 8.1% increase in billable headcount and higher SG&A expenses compared to the prior year quarter. Sequentially, economic consulting revenues increased $12.2 million or 6.3%, primarily due to higher financial economics and M&A related antitrust revenues, which was partially offset by a decline in non-M&A related antitrust revenues. Adjusted segment EBITDA increased $10.6 million primarily due to higher revenues. In technology, record revenues of $100.9 million increased 31.4%, compared to Q4 of 2022.
The increase in revenues was primarily due to higher demand for M&A related second request and litigation services. Adjusted segment EBITDA of $12.4 million or 12.3% of segment revenues, compared to $11.8 million, or 15.3% of segment revenues in the prior year quarter. The increase was primarily due to higher revenues, which was largely offset by higher as needed consultant costs and increase in compensation, which includes the impact of a 12.9% increase in billable headcount and higher SG&A expenses compared to the prior year quarter. Sequentially, technology revenues increased $2.1 million or 2.1%, primarily due to higher demand for M&A related second request, and litigation services, which was partially offset by a decline in demand for investigation services.
Adjusted segment EBITDA decreased $2.5 million, primarily due to higher SG&A expenses. Lastly, in strategic communications revenues of $86.6 million increased 19.6%, compared to Q4 of '22. The increase in revenues was primarily due to higher demand for corporate reputation and Public Affairs services. Adjusted segment EBITDA of $15.6 million or 18% of segment revenues, compared to $10.5 million, or 14.5% of segment revenues in the prior year quarter. This increase was primarily due to higher revenues, which was partially offset by an increase in compensation and higher SG&A expenses. Sequentially, Strategic Communications revenues were flat and adjusted segment EBITDA increased $2.2 million. I will now discuss certain cash flow and balance sheet items.
Net cash provided by operating activities of $224.5 million for the year ended December 31, 2023, compared to $188.8 million for the year ended December 31, 2022. The year-over-year increase in net cash provided by operating activities was primarily due to higher cash collections resulting from increased Billings. This increase was partially offset by higher compensation expenses primarily related to headcount growth, and increase in other operating expenses and higher use of working capital required for growth. Cash and cash equivalents and short term investments of $328.7 million at December 31, '23, compared to $491.7 million at December 31, 2022. This decline in cash and cash equivalents and short term investments was primarily because our convertible debt matured in Q3, and related borrowings under the credit facility were paid off in full in the fourth quarter of 2023.
Total debt, net of cash and short term investments was a negative debt position of $328.7 million at December 31, 2023, which compares to a negative debt position of $175.5 million at December 31, 2022 and a positive debt position of $59.4 million at September 30, 2023. Earlier in the year, our cash collections were not keeping pace with revenues because of slower Billings from a transition to a new enterprise resource planning or ERP system. In the fourth order, Billings improved and cash collections were significantly stronger. Fourth quarter free cash flow was $376.7 million, primarily because of such strong collections. There were no share repurchases during the quarter. In 2023, during the first quarter, we repurchase 112,139 shares at an average price per share of $158.70 for a total cost of $17.8 million.
As of December 31, 2023, approximately $416.7 million remain available under our stock repurchase authorization. Turning to our 2024 guidance. We are as usual providing guidance for revenues and EPS. We estimate that revenues will range between $3.65 billion and $3.79 billion. We expect our EPS to range between $7.75 and $8.50. Our 2024 guidance range is shaped by several considerations. First, let me acknowledge that in 2023 restructuring grew even more than our expectations increasing 32% compared to 2022. In 2024, we expect restructuring to remain strong, but steady at levels similar to Q4 of 2023. However, with financial liquidity now increasing for challenged companies, we could see a slowdown later in the year. Second, we expect improvement in M&A to drive increased demand for services in our economic consulting and technology segments, as well as our transactions business and corporate finance.
However, there are economic uncertainties, such as the face of interest rate reductions that could impact M&A. Third, we expect margins in economic consulting to decline compared to 2023. Primarily due to higher compensation from a combination of increased headcount, merit increases and competitive pressures. Additionally, because of the anticipated roll-off of certain large engagements, we expect revenue will not offset this increased cost. Further, similar to last year, we expect significant deferrals of revenue from early in the year to be recognized later in 2024. Forth, as we have discussed, we slow down hiring in 2023, particularly in the second half of the years. In 2024, we are assuming headcount growth will exceed the level achieved in 2023.
And as Steve mentioned, we continue to see opportunities to invest in great professionals in more places around the world, as well as to expand the scope of our services to meet the evolving needs of our clients. We have both the appetite and the opportunity for investments, such investments could at least initially have a downward impact on earnings. Fifth, we expect increased compensation costs through our company due to competitive pressures, which may not be offset by pricing increases. Six, though we expect SG&A to grow at a more moderate pace, then in 2023, we may invest more, as we expect to remain in the forefront of changing technologies, such as in AI. Lastly, we expect to revert to our normal seasonal pattern of lower utilization in Q4 because of vacations.
I must point out that our assumptions define a midpoint and we provide a range of guidance around such midpoint, which I characterize as our current best judgment. 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. And as Steve has said, due to such variations, one should not take the earnings in a single quarter and multiply them by four. A comparison of earnings for the first half versus the second half of 2023 is an excellent illustration of how sharply results can vary during the course of the year without any underlying substantive change in our business. And now, I will close my remarks by emphasizing a few key themes.
First, we are a unique company. In terms of the scope of our services, and the scale of our capabilities. We help our clients navigate through their most complex opportunities and challenges, such as data breaches, restructuring, mergers, antitrust proceedings, enterprise transformations, fraud investigations, crisis management, and more. Second, we continue to deliver excellent revenue growth and attract great professionals while overtime, remaining focused on utilization. Third, our diverse portfolio of businesses can grow and thrive, regardless of business cycle. 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 one.
With that, let's open the call up for your questions.
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