Fti Consulting, Inc Q4 FY2021 Earnings Call

Welcome to the FTI Consulting Fourth Quarter and Full Year 2021 Earnings Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to Mollie Hawkes, Vice President of Investor Relations. Please go ahead.

Thank you. Good afternoon. Welcome to the FTI Consulting conference call to discuss the company’s fourth quarter and full year 2021 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 concerning plans, objectives, goals, strategies, future events, future revenues, future results and performance, expectations, plans or intentions relating to financial performance, acquisitions, share repurchases, business trends, ESG-related matters, and other information or other matters that are not historical, including statements regarding estimates of our future financial results and other matters. For a discussion of risks and other factors that may cause actual results or events to differ from those contemplated by forward-looking statements, investors should review the safe harbor statement in the earnings press release issued this morning, a copy of which is available on our Investor Relations website at www.fticonsulting.com, as well as other disclosures under the heading of Risk Factors and Forward-Looking Information in our annual report on Form 10-K for the year ended December 31, 2021, 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 a 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 include the reconciliations. 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 has been updated to include our fourth quarter and full year 2021 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 same details as they have historically, and as I have said, are available on the Investor Relations section of our website. With these formalities out of the way, I’m joined 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 President and Chief Executive Officer, Steven Gunby.

Thanks, Mollie. Mollie, can you hear me okay? All good. Well, good afternoon to everyone, and thank you all for joining us. Let me start with a couple of preliminary remarks before we get into it. First of all, thank you all for juggling your time. I know that we had at the last minute switched this time of this, and everybody on this call has busy calendars. So I apologize for the inconvenience and want to express our appreciation for you all, juggling your calendars to be here. Second, my second point was going to be, I thought a positive point. I was going to maybe for the first time ever, begin to talk a little positively on the COVID situation. And I was going to express my hope that we are finally, in many places around the world and I hope where you are, starting to see some movement toward normality. I still hope that, but I think the events in Ukraine in the last little while remind us that hope for normality, unfortunately, is not just limited to COVID. So I wish many good wishes to you and any colleagues, family, friends who are affected by that situation. Let me turn to what I think is a much more positive set of messages. And today, I’d like to share three messages about our company before I turn the call over to Ajay to take you through our financials. The first one, if you don’t mind, I’d like to spend a couple of minutes upfront, thanking and complimenting our team for what I believe has been spectacular performance over the last year, and in fact, over the last while, a longer period of time as well. As I’m sure many of you have by now have already seen, 2021 was another terrific year in the face of the global pandemic and as we’ll talk about, the worst restructuring market in probably the last 15 years, we delivered another record year. And let me stress that word another. We’ve now had seven years in a row of adjusted EPS growth. Seven years in a row in the face of COVID, fluctuating restructuring markets, turning around core strategies, expanding geographies, entering new adjacencies, lumpiness from big jobs coming or going, heightened competition, and attracting talent among lots of other challenges. Seven years in a row of growth in adjusted EPS, which is the easiest thing to measure, but also, to me, far more important in the underlying drivers of those financial results. The talent level of our organization, the ambition of it, the energy, the commitment of our people, the leadership, the number of great assignments we are working on, the client relationships we've forged and the enhancement of our reputation that all those factors have driven. We don’t have a single business that has guaranteed automatic growth every quarter. In fact, if you look back over these several years, many of our teams in sub-businesses during this period were down multiple quarters in a row, as they faced difficult markets, made big investments, or had big jobs end. What I believe our results have shown is that over any extended period of time, those short-term factors don’t matter. Rather over any extended period of time when our teams do the right things, they control our destiny. We create our own future. Over time, we have shown ourselves able to attract great talent to support the growth of that talent in our organization, to double down and reinforce core positions in core markets, to expand into new adjacencies, and as a consequence of all that, make ourselves ever better able to serve our clients, to build our businesses, to build our brand. It is that commitment, those efforts by our leaders and our teams that have allowed us to grow seven years in a row. And over the last several years, I believe we’ve seen examples of that in every business. This year, in the resilience of CF, the comeback of FLC in some parts of Econ business, in the last several years, the extraordinary performance of our tech business following the strategic changes they made five years ago or the performance of our Stratcom business over now seven years. And I think the story is similar, if you think about it instead of by segment but by geography. Just think about the challenges our teams had of taking on difficult positions in, say, Australia or LATAM. They were not small, nor is the challenge of conquering new markets in Europe. But that’s why I think our teams very much deserve the sense of excitement and pride that they have when they turned those platform positions into platforms for growth. So let me start with my thanks and my congratulations to our teams. For the second point, let me pick up on that word platform. What I’d like to underscore is that to me, the successes we have been having are not the end, but rather the beginning. The success we’ve had has left us with powerful platforms that we can leverage going forward to extend that growth, to build upon it. The success we’ve had in stability now to bet boldly in Germany and France, in the Netherlands, in China, in the Middle East and in other places in a way that we could never have done a few years ago. It gives us the ability to invest behind that successful tech business and that successful Stratcom business to drive our investigations business, to grow all those non-restructuring services in CorpFin and in the face of a slow restructuring market to commit to continue to grow that business, to extend that global leadership, confident that it will eventually pay off in a big way and brand assignments in leadership positions in attracting great talent. To me, to my knowledge, this company has never had such a rich set of opportunities before it as we do today. And that brings me to the third point to preview something Ajay will discuss, which is there’s always near-term risk in these sorts of investments. Let me spend a minute on that. As you know, our investments are typically in hiring. If one instead buys a company, the investment shows up in its capital. If on the other hand, you hire a lot of people, it shows up in EBITDA. This year, our ambition is to have the highest organic growth rate during my tenure and I guess is during the company’s entire history, the highest organic growth rate. There is no way to make those sorts of bold bets without facing some short-term financial risk. And if you want to underscore some of the negatives, we’re making those bets at a time when our most profitable business, our restructuring business, is facing market demand that is lower than it’s been in 15 years according to one measure and 20 years according to another measure. And we no longer have the rollover of the large restructuring jobs from the early parts of 2020. And we’re facing compensation pressure due to wage inflation in a tight talent market. And at the same time, we’re expecting rising SG&A expenses due to a rebound in travel expenses post-COVID as well as investments in infrastructure to support the growth. So one can get worried about the number of bets we’re making. One could wonder in the face of that, could we cut back on our bets. Of course, we could. But let me underscore something else. I don’t believe that’s how one makes a company like this soar. It’s not how we’ve built this company over the last seven years. It’s not how we’ve achieved the growth we have. My experience is when you have great people and great bets to make, you commit to those people, you commit to those opportunities and you make those bets. And you live with any potential short-term dislocations in the P&L. Because if you do, even if there are short-term dislocations in the P&L in a couple of quarters or a year in the medium term, the company soars, it delivers for your clients. It delivers for the people whose energy and sweat makes that success happen. And ultimately, therefore, it delivers for the shareholders, as you have seen now over the last seven years. So we are making those bets this year. And there is some risk in the near-term P&L. But I will say those bets, those opportunities have left me never more excited about where we can take this company over the next while. I so look forward to sharing that journey with each of you. With that, let me turn the call over to Ajay to take you through our financial results in more detail. Ajay?

Thank you, Steve. Good afternoon, everybody. In my prepared remarks, I will take you through our company-wide and segment results and guidance for 2022. I will begin with some highlights from our full year 2021 performance. Revenues of $2.78 billion increased $314.9 million from $2.46 billion in 2020. GAAP EPS of $6.65 increased $0.98 from $5.67 in 2020. Adjusted EPS of $6.76 increased $0.77 from $5.99 in 2020 and adjusted EBITDA of $354 million was up $21.7 million from $332.3 million in 2020. Our record performance this year is primarily because of 12.8% revenue growth, once again demonstrating how beneficial it is to have the breadth of our service offerings. In 2021, demand continued to decline for restructuring, often our highest-margin service offering as access to capital remained abundant, and many pandemic-related moratoriums and insolvency proceedings were extended. Conversely, the continued high level of liquidity in the market spurred record levels of M&A activity, which drove strong demand for our Economic Consulting and Technology segments, as well as our transactions practice within our Corporate Finance & Restructuring segment. Our Forensic and Litigation Consulting, or FLC segment, which was heavily impacted by pandemic-related travel restrictions and core closures in 2020, saw activity levels rebound across almost all practice areas in 2021. So FLC has not yet reached pre-COVID-19 levels of business activity across the entire segment. Lastly, our Strategic Communications segment recovered well from COVID-related impacts in 2020 and delivered a record year. We also continue to invest in people. Our total headcount increased 7.3% year-over-year on top of the 13.5% increase in total headcount in 2020. Revenue growth more than offset the increase in direct costs, primarily from headcount growth and higher variable compensation, and an increase in SG&A expenses. Now I will turn to the fourth quarter results. For the quarter, revenue of $676.2 million increased $49.7 million or 7.9%, with revenues increasing across all business segments compared to the fourth quarter of 2020. GAAP EPS of $1.07 compared to $1.57 in the prior year quarter. Adjusted EPS of $1.13, which excludes $0.06 of noncash interest expense related to our 2023 convertible notes, compared to adjusted EPS of $1.61 in the prior year quarter. Of note, the fourth quarter of 2020 included a significant tax benefit resulting from the use of foreign tax credits in the U.S. and a deferred tax benefit arising from an intellectual property license agreement between our U.S. and U.K. subsidiaries, which boosted both fourth quarter of 2020 GAAP and adjusted EPS by $0.32. Net income of $38.2 million compared to $55.6 million in the fourth quarter of 2020. Adjusted EBITDA of $62 million compared to $82.3 million in the prior year quarter. Now turning to our performance at the segment level for the fourth quarter. In Corporate Finance & Restructuring, revenues of $231.5 million increased 5.3% compared to Q4 of 2020. The increase was due to higher demand for business transformation and transaction services as well as an increase in pass-through revenues and success fees, which was partially offset by lower demand for restructuring services compared to the prior year quarter. Business transformation and transactions represented 62%, while restructuring represented 38% of segment revenues this quarter. This compares to business transformation and transactions representing 44% and restructuring representing 56% of segment revenues in the prior year quarter. As business transformation and transactions grew 50%, while restructuring revenues declined 27%. Adjusted segment EBITDA of $22.2 million or 9.6% of segment revenues compared to $35.4 million or 16.1% of segment revenues in the prior year quarter. This decrease was primarily due to higher compensation, which was largely related to an increase in variable compensation and higher SG&A expenses. In FLC, revenues of $138 million increased 8.5% compared to the prior year quarter. The increase was primarily due to higher demand for health solutions and investigation services. Adjusted segment EBITDA of $8.5 million or 6.2% of segment revenues compared to $7.6 million or 6% of segment revenues in the prior year quarter. This increase was due to higher revenues, which was partially offset by an increase in SG&A expenses and compensation. Economic Consulting’s revenues of $172.3 million increased 7.4% compared to Q4 of 2020. The increase in revenues was primarily due to higher demand for non-M&A-related antitrust and financial economic services, which was partially offset by lower demand for M&A-related antitrust services compared to the prior year quarter. Non-M&A-related antitrust services represented 33% and M&A-related antitrust services represented 20% of total segment revenues for the fourth quarter. Adjusted segment EBITDA of $30 million or 17.4% of segment revenues compared to $31.3 million or 19.5% of segment revenues in the prior year quarter. This decrease was primarily due to higher compensation. In Technology, revenues of $64.6 million increased 10.2% compared to Q4 of 2020. The increase in revenues was primarily due to higher demand for investigations and litigation services. Adjusted segment EBITDA of $7.8 million or 12.1% of segment revenues compared to $10.2 million or 17.3% of segment revenues in the prior year quarter. This decrease was primarily due to higher compensation, which includes an increase in variable compensation and the impact of a 14.7% increase in billable headcount, as well as higher SG&A expenses. Lastly, in Strategic Communications, revenues of $69.9 million increased 15.5% compared to Q4 of 2020. The increase in revenues was primarily due to higher demand for corporate reputation and public affairs services. Adjusted segment EBITDA of $14.9 million or 21.4% of segment revenues compared to $11.7 million or 19.4% of segment revenues in the prior year quarter. This increase was due to higher revenues, which was partially offset by an increase in compensation and SG&A expenses. I will now discuss certain cash flow and balance sheet items. Net cash provided by operating activities of $355.5 million compared to $327.1 million in the prior year. Free cash flow of $286.9 million in 2021 compared to $292.2 million in 2020, primarily due to an increase in net cash used for purchases of property and equipment, which includes capital expenditures related to our new office in New York City. There were no share repurchases in Q4 of 2021. For the full year 2021, we repurchased 422,000 shares at an average price of $109.37, for a total cost of $46.1 million. Cash and cash equivalents at the end of the year were $494.5 million. Total debt net of cash of negative $178.2 million on December 31, 2021, decreased $199.5 million compared to December 31, 2020. Turning to our 2022 guidance. We are providing guidance for revenues and EPS. We estimate that revenues for 2022 will be between $2.92 billion and $3.045 billion. We expect our EPS to range between $6.40 and $7.20. Of note, due to our adoption of a new accounting standard change that went into effect on January 1, 2022, we will not record noncash interest expense related to our 2023 convertible notes. As such, assuming no other future special charges or adjustments, we currently expect EPS and adjusted EPS to be the same in 2022. Additionally, pursuant to the first supplemental indenture for our 2023 convertible notes that was effective on January 1, 2022, the company is now required to settle the principal amount of our 2023 convertible notes that is due upon conversion in cash only versus at our option in cash or stock or a combination. We retained the option of settling the premium, if any, due upon conversion of our 2023 convertible notes in cash or stock or a combination. Importantly, none of these changes affect the calculation of adjusted EPS in the prior periods. Turning to our guidance. Our 2022 guidance range incorporates several assumptions. First, as we have the wherewithal, intent and opportunity to invest for growth, our plans include aggressive hiring globally. Though there is no certainty that we will be successful in such hiring, aggressive headcount additions typically result in reduced profitability in the short term. Coupled with investment in headcount, there is also increasing pressure on wages, and not all of this expense may be recoverable in price increases. Second, though we believe we are the leader in restructuring globally, and we intend to maintain that position, we currently expect restructuring activity to improve only moderately over the course of 2022. Additionally, many of the large restructuring engagements we supported in 2020 and 2021 have now concluded. Moody’s trailing 12-month global default rate for speculative grade corporate issuers was 1.7% as of the end of 2021, down from 6.9% in December of 2020. Moody’s is currently forecasting that this rate will fall to a bottom of 1.5% in Q2 of 2022 and will gradually rise to 2.4% by the end of 2022. Some analysts don’t expect a rebound in restructuring activity until 2023. Third, global M&A activity, which drives demand in our Economic Consulting and Technology segments as well as our transactions business and Corporate Finance & Restructuring was at record levels in 2021. Though we currently expect that this elevated level of activity will continue, regulatory scrutiny, crystal policy and other events globally may dampen such demand. Fourth, demand in our FLC segment improved significantly in 2021 compared to pandemic-related lows in performance in 2020. However, over the course of 2021, demand for these services weakened. Our current expectation is for a rebound in such demand in 2022. Fifth, certain aspects of SG&A such as travel and entertainment, have remained depressed due to the pandemic. Our expectation is that in 2022, SG&A may revert back closer to the per person levels we saw in 2019. Sixth, we expect a higher effective tax rate in 2022. We currently expect our full year 2022 tax rate to range between 22% and 25%, which compares to 21.1% in 2021. Overall, based on our expectation for a gradual improvement in demand for restructuring and FLC services, our guidance assumes that the second half of 2022 will be stronger than the first half. I must point out that our assumptions define a midpoint and a range of guidance around such midpoint, which I characterize as our current best judgment. Often, we find actual results are beyond 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 income. And now, I will close my remarks today by emphasizing a few key themes. First, we believe FTI is unique in having such a diverse mix of services and that helps us thrive regardless of business cycle. Second, our investment to build expertise in areas like information governance, privacy and cybersecurity, public affairs and in industry verticals like energy, power and renewables and financial services and in geographies, including Continental Europe, the Middle East, and Australia are paying off, and we intend to double down on these and other investments. Non-U.S. revenues have more than doubled in the last five years, while U.S. revenues have grown by one-third over that time frame. Third, our leadership remains focused on growth with strong staff utilization and realization. And finally, our business generates excellent free cash flow, and our balance sheet is exceptionally strong. We have the capacity to continue 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.

Our first question will come from Andrew Nicholas with William Blair.

First question I had was just on FLC. Obviously, a little bit of a challenging quarter on the utilization front for that business. I think, Ajay, you mentioned expecting a rebound in 2022. So I was hoping you could spend a little bit more time about what’s been driving the weakness over the past quarter or two, whether or not the fourth quarter number was at all surprising to you? And then maybe thoughts on how the segment is setting up for next year. Not sure whether court system throughput is a component to what you’ve seen in 2021? Or if it’s back to pre-COVID levels or not, but maybe you can touch on that as well.

Thank you, Andrew. I’ll address that. There's no doubt that overall utilization in FLC is lower than we would prefer. We are anticipating better utilization and improved performance in the future. However, this situation conceals several factors. One significant aspect is that we are continuing to make substantial investments. In regions like Europe, for instance, it's unrealistic to expect that these investments will start generating profits immediately. So, while we do anticipate improved utilization, we are also dealing with the reality of these major investments across various new markets. Additionally, while we do have large projects, the volume of these projects has decreased compared to the first and second quarters of last year. There's no indication that competitors are acquiring those large projects either. This might reflect a delay in when the regulatory scrutiny, which influences our business, will begin to translate into work for us. Furthermore, I don’t want to downplay the impact of COVID; while I am not using it as an excuse, we do see its effects in certain areas such as Asia. In segments like health, particularly in health solutions, hospitals have postponed operational work. Therefore, it is a mix of factors. In conclusion, we are confident in our ability to perform better. We have the necessary talent, capabilities, and investments in various regions that should enable us to improve.

Ajay, I can expand on that if you don't mind. Let's consider a longer time frame. Andrew, I’d like to discuss some extended horizons that you might already be aware of. Our FLC business has performed well over the years, but it's easy to overlook that it was once a significant contributor to both the growth and profitability of our company, similar to CorpFin. We've managed to place CorpFin on a strong growth path. Looking back over the past decade, FLC's EBITDA has been relatively flat. Specifically, in 2015, 2016, and 2017, our EBITDA numbers didn’t show much improvement, which obscured the fact that some of our investments were flourishing, such as in construction solutions and data analytics. However, this also indicates that some other businesses were stagnant, which is not acceptable. Our current strategy involves a dedicated effort to reposition these areas for long-term growth. We achieved considerable progress with initial investments made in 2018 and 2019, though we did face challenges in 2020 and 2021. We're committed to continuing this multi-year path. Recently, we've successfully brought on several senior personnel in new locations and adjacent sectors. This year, we plan to invest in these new hires to secure our long-term prospects. Ajay is correct; we anticipate that this will coincide with higher utilization this year, although we cannot guarantee it. Our intention is not to maintain low utilization indefinitely. This is a part of our long-term plan to restore this business, which has great talent, to its rightful place within the company. Does this clarify things for you, Andrew?

Yes, that's very helpful. For my follow-up, I have a multipart question regarding wage pressures in general and the ability to increase rates through higher billing rates. I believe I asked a similar question last quarter. Looking at your top line growth expectations and EPS guidance, it appears that there might be some margin pressure year-over-year due to the higher tax rate. If I'm mistaken, please let me know, but with that in mind, I would like to know how much of that margin pressure is attributed to wage pressures and how much comes from travel and entertainment or pass-through costs. I'm trying to comprehend the overall picture of what seems to be a positive margin guidance, especially in relation to wages, talent acquisition, and the costly nature of the current environment.

Certainly, let me provide a brief response, and then Ajay can elaborate further. You’ve identified the key issues. The reality is that it’s uncertain how much price recovery you can achieve. In my experience with inflationary conditions, increased costs for talent, real estate, and travel and expenses eventually lead to higher bill rates for everyone. However, the exact amount you can recapture in the first year remains unpredictable. While you can adjust your list bill rate, it also depends on realization. Anyone claiming to know exactly how much they’ll recapture this year likely has more insight than Ajay and me. You’ve raised important points, and we are working to assess how these factors play out in the profit and loss statement. Ajay, feel free to provide additional details on this.

No, we don’t, Steve. Mercifully, we don’t. That’s why we gave guidance in the range, Andrew. When we provide revenue and EPS guidance, we also share the tax rate, which is slightly higher. So you can focus on the midpoint of that earnings guidance and take a midpoint on the revenue guidance. Essentially, we’re indicating that revenue growth will lead to flat EPS. This suggests there must be margin contraction somewhere along the way when you see those figures. There is a range around it, and this margin contraction is due to three main reasons: headcount growth not adequately offset by productivity growth during the same period, wages not fully offsetting the price increases we are realizing, and increases in SG&A, especially travel and expenses. Those are the three factors at play. Regarding the impact of these factors, I want to emphasize that we are a very successful company. Look at our cash balances and the earnings growth over time. One reason we don’t provide precise margin guidance or specify exactly how many people we plan to hire is because we want to be opportunistic. The most challenging aspect of hiring during growth is finding the right people in the right locations. If we identify those opportunities, even if they affect margins, we should pursue them given our capacity for further growth. Therefore, we don’t want to be restricted by every line item in our P&L.

Thank you, Andrew, and thank you for your flexibility on the schedule today. Again, I apologize for asking for it, but I appreciate it.

Our next question will come from Tobey Sommer with Truist Securities.

I wanted to ask about what are the lines of business that you are seeding and investing in today, that you would consider early stage and analogous to the ones that we know about now and talk about now as growth drivers that were in that position in your first few years at the firm?

Well that’s a good question. And I’m trying to think about whether I’m actually going to answer it, though, because we don’t like to tip off our competitive view of where we see the opportunities.

Right. I understand you might not give us that in year one, but if there’s something in year two or three, you might?

Let me approach this from a different angle. Instead of focusing on business areas, I'll discuss our operations by geography. We had a presence in Germany and France but none in the Netherlands. We operated in the Middle East, Latin America, and Australia. For a long time, we had limited businesses to support. Our German Stratcom business was strong, but we lacked diversity in Germany. In France, we experienced stagnation. We were not present in the Netherlands, and our operations in Australia had been seen as a turnaround for a while. In Latin America, significant cleanup was necessary, and in the Middle East, our talent mix was underwhelming for some time. Recently, we have established teams across all regions, positioning ourselves in a way that is substantially improved, although these teams are small and align with your early-stage investment definition. I have great confidence in our tech team in Germany, our FLC team in Germany, and our construction business there. The CorpFin division we now have in Germany offers excellent growth potential. Our new hires in France are impressive, and our position in the Middle East has never been stronger. The business in Australia has turned around, and we have genuine growth goals. All these countries fit your early-stage criteria. While we are not new to Germany, our potential there is just beginning to unfold. I believe each country I mentioned and their sub-practices fit your definition. Additionally, in the U.K., we are making investments in our non-bankruptcy services like never before, as well as enhancing our financial institutions practice. I think we have a lot of promising initiatives, and I hope that provides some clarity. Does that help?

It did. I don’t expect specific numbers, but I’d like to get a sense of the factors influencing your revenue growth guidance. Generally, I see headcount utilization and realized bill rate as key categories that could contribute to that. If I don’t ask for specific numbers, could you rank those or provide some insight into how you arrive at your revenue growth?

Let me discuss this conceptually and then ask Ajay if he wants to share his thoughts on the specifics. The main issue when considering all these investments is that we typically start by backing a new senior team that we’ve either promoted or hired and are excited about. The key question is how quickly they can enter the market as we anticipate. These are people we believe can successfully penetrate the market, but the speed of that process can be unpredictable. Sometimes there are challenges; for instance, if they are hired laterally, they may face competition, and although promoted individuals might have remarkable talent, they may lack the market presence that laterals possess. So, it's a wager on the pace of their progress. There’s also a common tendency not to hire junior team members below them until they can demonstrate sales success. Historically, this approach has never been effective in professional services. When clients inquire about significant investigations, they want to know how large the team is, and having just a few members has never been sufficient for large projects. Therefore, once we decide to invest in senior talent, we also need to invest in junior staff and then project how quickly we expect to see results. Ajay prefers to call this a forecast, while I sometimes view it as a guess regarding the timeframe for realization. In my experience, we haven't made many miscalculations; most of our investments have proven successful, marking an exceptional track record in that area. Predicting the speed of those returns is a bit more variable. Ajay, would you like to provide more specifics on this or leave it at that?

I must be honest and while I can't be exactly precise, I want to provide some context with numbers and opportunities. We share utilization figures in Corporate Finance, FLC, and Economics, and currently, our utilization rates in Corporate Finance and FLC are low, lower than in previous years. My point is that we have numerous opportunities for significant revenue growth. Just improving that utilization statistic could lead to a considerable increase in both revenue and profitability. Additionally, we have expressed our intention to hire many people globally; however, our desire to hire does not guarantee that candidates will choose us. We need to actively seek talent, similarly to how we pursue business growth. We have various pathways for growth. The utilization factor will influence your bill rate, increasing it, while increased headcount not immediately followed by revenue growth could decrease the bill rate but would contribute to headcount growth. This is why we have provided a revenue range and estimations surrounding the midpoint. Regarding geography, over the last six years, our revenue outside the U.S. has risen from 28% to 38%, with the U.K. revenue doubling. Revenue from other countries, aside from the U.K. and the U.S., has more than doubled, while U.S. revenue has grown by a third. As Steve noted, there are now growth platforms available. Having one partner in a country may not suffice, but having 50 or 100 certainly does. We have growth platforms in various locations. Previously, we lacked offerings in information governance, privacy and cybersecurity, and ESG, which now represent significant growth opportunities.

Last question for me, if I could ask one more. Could you give us a sense for the mix of lateral senior hires versus when you’re going to be generating a substantial mix of internally promoted MDs and SMDs? Because I think that’s where you start to enter a different stage, where you’re developing this talent internally and driving your growth that way.

Yes, I'm not sure if we have the exact numbers available, but we've achieved record levels of lateral hires for SMDs, which I estimate to be around 150 over the past three years. However, it's important to note that our internal promotions are not far behind. We've also seen significant numbers of homegrown promotions. Unlike some firms that rely heavily on homegrown talent, where 80% of staff comes from within, we're making meaningful progress on this front. Fortunately, our current situation allows us to supplement our talent pool. While we may not yet be able to meet our growth targets solely with homegrown talent, we are strengthening our internal capabilities and there is a commitment to this that we didn't have before. We can provide you with the precise figures for homegrown promotions as well; they're quite noteworthy too. Thank you, and I appreciate your flexibility with scheduling.

Our next question will come from Marc Riddick with Sidoti & Company.

I was wondering if we could sort of head in a slightly different direction. Maybe you could talk a little bit about what you’ve seen. There were a couple of acquisitions last year, which were certainly additive. I was wondering if you could spend a little bit of time on those and maybe talk a bit about the what the pipeline looks like? And based on commentary, it seems as though the pipeline might be a little more attractive or complementary on the international side, but maybe you could spend a little bit of time on that?

I'm very excited about the acquisitions we've made over the past several years. While we do evaluate numerous opportunities, acquisitions aren't our main strategy for growth. Our focus is on organic growth, which the management team is committed to. We will consider strong acquisitions if they present themselves, but they must meet certain high standards. We face two significant constraints when it comes to acquisitions. The first is financial, as many deals are currently being priced well above historical norms due to the competitive nature of private equity and bank financing. We've typically avoided entering bidding wars and haven't engaged in them during my time here. More importantly, we have a fit constraint. In the past, we've pursued acquisitions that seemed promising initially, but failed to integrate them effectively into our company culture. After five years, even if the financials looked good, those acquisitions often didn't yield positive results. We carefully assess potential partners to ensure they will thrive on our platform and be excited about joining us, which is no easy task. We are excited about the recent deals in the Netherlands and construction this past year, similar to our previous acquisitions in Germany and Delta, but such opportunities are rare. If we could find many suitable candidates, we would pursue them, as we don't have cash constraints limiting us to a certain number of acquisitions. However, the reality is that finding the right matches is challenging. Our primary focus remains on organic growth day to day. Does that make sense? Did I address your questions?

You did indeed. That's completely understandable. I was curious about your perspective on the return of visiting clients. Are you noticing that clients are starting to travel more, not just in terms of expenses, but also in terms of engagement?

Absolutely. I think I've experienced this myself. I spent three weeks in Europe in January and traveled there in September last year. During the low points in the summer, I started visiting clients around the U.S. It’s important to remember that clients are people too, and there is a strong human need for connection. While platforms like Zoom and Teams are effective, nothing compares to the quality of face-to-face interactions. We're starting to see a resurgence of this now, though it appears to be happening at different rates across the globe. Some regions seem to have moved on emotionally from COVID, with the U.K. feeling more liberated than New York, for instance. This difference likely relates to the history of COVID and the caution it instilled in people. There is a palpable desire to move forward, though not necessarily to return to the way things were. A significant amount of travel will likely never resume because Zoom is a very effective tool, and remote work will continue. However, it's essential to complement that with genuine personal connections. I sense this not just internally but also when visiting clients; we are not alone in this feeling. Clients are humans too. Does that resonate with you? I assume it's similar at your firm as well, Marc?

It certainly is. I was thinking about what we’ve seen in the leisure sector from those in the travel industry, and I wanted to get a sense of whether we’re starting to notice any impact from that on your side. It seems like your guidance indicates you’re anticipating more travel and face-to-face interactions within the company going forward, which appears to be part of the investment you’re making. Additionally, regarding the hiring timeline, now that we’re a couple of months into the year, is it reasonable to assume that process has already started?

Yes, I think a lot of the senior-level hiring has already taken place. We've had a great run with senior hires this year. The decisions we are making now relate to the significant senior hires from last year and the year before, which are already in position. Now, we are focusing on hiring less experienced individuals in various locations worldwide. Additionally, we have pre-committed to entry-level hires since these positions are filled by graduates from schools, requiring decisions well in advance. While not all hires are predetermined, many are either confirmed or we are currently interviewing candidates for them. Does that address your question, Marc?

This concludes our question-and-answer session and our conference for today. Thank you for taking...

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