Fti Consulting, Inc Q3 FY2025 Earnings Call

Good morning. Welcome to the FTI Consulting conference call to discuss the company's third quarter 2025 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 the Private Securities Litigation Reform Act, including the company's outlook and expectations for the full year 2025 based on management's current beliefs and expectations. These forward-looking statements involve many risks and uncertainties, assumptions and estimates and other factors that could cause actual results to differ materially from such statements. 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 annual report on Form 10-K for the year ended December 31, 2024, our quarterly reports on Form 10-Q and in our other SEC filings. 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. FTI Consulting assumes no obligation to update these forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law. During the call, we will discuss certain non-GAAP financial measures, the discussion of any non-GAAP financial measures addressed on this call and reconciliations to the most directly comparable GAAP measures are included in the press release and accompanying financial tables that we issued this morning. 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 third quarter 2025 results. With these formalities out of the way, I'm joined today by Steve Gunby, our CEO and Chairman; and Paul Linton, our Interim Chief Financial Officer and Chief Strategy and Transformation Officer. At this time, I'll turn the call over to our CEO and Chairman, Steve Gunby.

Thank you, Mollie. Welcome, everyone, and thank you all for joining us today. As I hope you've seen this morning, we reported once again record results, with EPS and adjusted EPS of $2.60 per share, which is up over 40% from a year ago. As always, there are one-time factors that influence these numbers, and this quarter, they overall did happen to cut positively. So as we always say, during good quarters and in not-so-good quarters, one should never take one of our quarters and multiply it by four. But even normalizing for the one-time factors, this was a record quarter, a quarter I would call spectacular and a set of results that to me was particularly gratifying given that we delivered these results in the face of major headwinds in two of our businesses while continuing to invest in all of our businesses. So there are different ways that one can tell the story of this quarter. One is to go business by business to talk about the terrific performances we had in Corp Fin, FLC, and Strat Com and how those performances more than overcame these areas of shortfall. Paul will review the business in that way. With your permission, I'd like to see if I can put a higher-level lens on the quarter, a bit of a more holistic, integrated lens, and try to tie the results of this quarter to some of the topics that we have talked about over the years, some of the underlying philosophies, the strategies that our teams have been driving not only business by business but as a whole, and not only quarter by quarter but now for close to a decade. Over the years, you've heard us talk a lot about organic growth, about focusing on high-valued areas where we believe we have a right to win. The problem with those words is that they could just be slogans. What we have tried to do in this company is to turn them into much more than slogans. What we've tried to do is to turn them into core philosophies, into approaches that require action in times that are sometimes comfortable but also operate in times when adhering to those values might not be so comfortable. For example, when adhering to those values might hurt the earnings for a particular business in a specific quarter. This goal of ours for organic growth reflects several core beliefs that we are committed to, that are tied to what we believe is necessary to deliver for all three of the critical stakeholders, the stakeholders that matter in our business. One is making a fundamental difference for our clients. The second is building a place where great people want to work and where great people can build fulfilling careers. And doing both of those while, at the same time, delivering real value for you, our shareholders. There are several tenets underlying these beliefs. Let me summarize the key ones. The first is simple and the most obvious. We are a client service business, which means at our core, we must target being the best at helping our clients. That's a general statement for professional services. In our case, it means helping clients in key matters in high-stake situations. Aspiring to be the best in times of crisis or urgency requires us to ensure we have the right leading expertise. And it's important to define leading expertise correctly. It's not only defined as people who intellectually know what needs to be done, but also people who have been on the front line of major crises and have helped clients deliver in those situations. The second point, which may be less obvious, is that the core determinant of our growth and our experience is rarely whether there's a market out there. The challenge is almost always about eliminating supply-side constraints, which requires continually committing—both in good quarters and bad quarters—to enhancing our team, supporting the growth and promotion of committed professionals, and making ourselves increasingly the most attractive place for talented individuals outside the firm. This requires not only bringing in new talent or promoting existing employees but also ensuring they feel supported and investing in them as they explore where they can double down on our core business or identify new opportunities they can pursue. These principles are easy to state but challenging to uphold consistently during flat periods. Now, let me take those principles and provide insight into what I believe drove this quarter; first, for the businesses that soared and then for the two businesses that faced challenges. For Corp Fin, FLC, or Strat Com, the tremendous results we achieved this quarter reflect the trials faced this year but equally the courage demonstrated by key leaders in those segments long before this quarter. Examples abound, from commitments made in the U.K. to new adjacent business strategies in Germany and the transformative changes implemented in Australia, all executed amid challenging conditions in the previous years. Our results this quarter reflect long-standing commitments to growth, which ultimately paid off this quarter.

Thank you, Steve. Good morning, everybody. I am pleased to take you all through a record quarterly performance during my first earnings call as interim CFO. BeforeI do that, I want to thank my talented colleagues across the globe for their tremendous efforts that contributed to the quarter. I also want to thank our strong finance team for their support and for making my transition quite smooth. As Steve said, we delivered spectacular results on both the top and bottom line at the company level, with record performance in Corp Fin and FLC, as well as solid revenue growth in Strat Com, which more than offset year-over-year declines in E Con and Tech. You may recall in February when we shared our initial revenue guidance, we stated that to meet the midpoint of our range, we would need strong revenue growth in each of our four other business segments because of the headwinds we expected in E Con. This quarter, we delivered on that. We reported double-digit year-over-year organic revenue growth when you combine revenue across Corp Fin, FLC, Tech, and Strat Com. Year-to-date, we have delivered record top and bottom line performance in Corp Fin, FLC, and Strat Com. Despite the headwinds in E Con and Tech, our adjusted EPS and adjusted EBITDA are up 9% and 8.3%, respectively, demonstrating the breadth and resiliency of our platform. Turning to our third quarter results in more detail. Revenue of $956.2 million increased 3.3% compared to the prior year quarter. Earnings per share of $2.60 increased 41% compared to the prior year quarter. Net income of $82.8 million increased 25% compared to the prior year quarter. SG&A of $199.5 million compared to SG&A of $206 million in Q3 of 2024, the decrease was primarily due to lower compensation and a gain related to a legal settlement, partially offset by higher bad debt. Year-to-date, our SG&A has fluctuated quarter-to-quarter due to some one-time benefits, especially in Q1 2025 and to a lesser extent this quarter. We currently expect our Q4 SG&A to be more in line with Q2 2025 levels. Third quarter 2025 adjusted EBITDA of $130.6 million, or 13.7% of revenue, compared to $102.9 million or 11.1% of revenue in the prior year quarter. Our third quarter effective tax rate of 25.9% compared to 25.1% in Q3 of 2024. For the full year, we expect our effective tax rate to be between 22% and 24%. Weighted average shares outstanding for the third quarter ended September 30, 2025, were 31.8 million shares compared to 35.9 million shares in the prior year quarter. Billable headcount decreased 3%, and non-billable headcount decreased 0.8% compared to the prior year quarter. Sequentially, billable headcount increased 4%, which included 331 new joiners from university campuses— our largest class ever. Now I'll share some insights at the segment level. In Corp Fin, revenue of $404.9 million increased 18.6% compared to the prior year quarter, primarily due to higher demand for restructuring and transaction services and higher realized bill rates for our transformation and strategy services. We delivered double-digit revenue growth across all three of Corp Fin's core businesses, with restructuring up 18%, transactions up 30%, and transformation and strategy up 10% compared to Q3 2024. Adjusted segment EBITDA of $96.4 million, or 23.8% of segment revenue, compared to $57.9 million, or 17% of segment revenue, in the prior year quarter. This increase was primarily due to higher revenue, which was partially offset by an increase in variable compensation and SG&A expenses. In the third quarter, restructuring represented 46%, transformation and strategy represented 27%, and transactions represented 27% of segment revenue. This compares to 47% for restructuring, 28% for transformation and strategy, and 25% for transactions in Q3 2024. Sequentially, Corp Fin revenue increased 6.8%, driven by double-digit top line growth in transactions and transformation and strategy, while restructuring revenue was up 1%. Adjusted segment EBITDA increased by 18.1%, primarily due to higher revenue, partially offset by an increase in variable compensation and SG&A. Notably, year-to-date, our restructuring revenue is up 11% as our long-term commitment to investing behind the best professionals has allowed us to extend our position as a global leader. We are winning major mandates in key geographies, including the U.S., U.K., Germany, Spain, France, and Australia, among others. We're also seeing increased activity with commercial banks and other types of lenders as some recent alleged fraud has created pockets of stress. These are situations where our strong restructuring relationships and leading investigation position in FLC mean that our experts get more than our fair share of calls for the largest, most complex mandates. Equally important, our transactions revenue was up 16% year-to-date, even though transaction volumes globally are down slightly. Because of the investments we've made over the last five years, we have broadened our services, and we are seeing, on average, much larger engagements than we had even a couple of years ago. Turning to FLC, revenue of $194.7 million increased 15.4% compared to the prior year quarter, primarily due to higher realized bill rates for risk and investigations, data and analytics, and construction solutions services and a higher demand for risk and investigation services, which includes particularly strong growth in our EMEA region. Adjusted segment EBITDA of $42.6 million, or 21.9% of segment revenue, compared to $20 million, or 11.8% of segment revenue in the prior year quarter. The increase was primarily due to higher revenue, primarily driven by higher realized bill rates and lower SG&A expenses, which was partially offset by an increase in variable compensation. Sequentially, revenue increased 4.4%, primarily due to an increase in risk and investigation revenue. Year-to-date, FLC's revenue is up 11% and adjusted EBITDA is up 62%. This improvement has been driven by leadership team efforts to bring a broader set of product offerings, including our ability to analyze complex data sets for our clients' most pressing problems. This is a leadership team that is committed to investing in the best people—a team with an incentive structure closely aligned with driving profitability—and most importantly, a team that is partnering side-by-side with our clients as they navigate major disruptions. Our E Con segment revenue of $173.1 million decreased 22% compared to the prior year quarter, primarily due to lower demand for non-M&A-related antitrust and M&A-related antitrust services, which were partially offset by higher realized bill rates for non-M&A-related antitrust services and higher demand for financial economic services. Adjusted segment EBITDA loss of $4.6 million compared to an adjusted segment EBITDA of $35.2 million, or 15.9% of segment revenue, in the prior year quarter. The decrease in adjusted segment EBITDA was primarily due to lower revenue and an increase in forgivable loan amortization, which was partially offset by lower variable compensation and salaries, including an 8.2% decline in billable headcount. Sequentially, revenue decreased 9.7%, primarily due to lower M&A-related antitrust, international arbitration, and non-M&A-related antitrust revenue. We issued $18 million in forgivable loans net of repayments this quarter following $72 million and $162 million in forgivable loans to existing and new employees and affiliates net of repayments in Q2 and Q1, respectively. The majority of these loans are in our E Con segment. Forgivable loan amortization generally ranges from 3 to 6 years. As Steve said, our E Con business has faced significant headwinds this year. Nine months into the year, the headwinds have been more challenging than we expected at the start of the year for several reasons. First, the cost to retain professionals was even more competitive than we anticipated. Second, we attracted even more great professionals, which had a larger cost impact than we expected. Third, the antitrust market has been weaker than we expected this year, particularly in EMEA, where we have had some large jobs continue to wind down, but we have not been impacted by competitive pressures. Fourth, we have legacy revenue that continues to ramp down at a time when revenue from new professionals is ramping up more slowly. From a cost perspective, we believe we have stabilized the business as the cost of retaining and attracting new professionals is now reflected in our P&L. In Tech, revenue of $94.1 million decreased 14.8% compared to the prior year quarter. The decrease was primarily due to lower demand for M&A-related second requests and information governance, privacy, and security services. Adjusted segment EBITDA of $13.6 million, or 14.5% of segment revenue, compared to $16.5 million, or 14.9% of segment revenue, in the prior year quarter. The decrease was primarily due to lower revenue, which was partially offset by a decrease in compensation, including lower as-needed consultant costs as well as lower SG&A expenses. Sequentially, revenue increased 12.5% as we saw an uptick in demand for M&A-related second request services. Adjusted segment EBITDA increased by $8.4 million, primarily due to higher revenue and lower SG&A expenses, which were partially offset by an increase in compensation. Worth noting, nearly all of the revenue decline year-to-date in our Tech segment has been driven by lower demand for M&A-related second request services. As a reminder, we delivered record second request services in the first three quarters of 2024 before we saw a sharp drop-off in activity in Q4 2024. Revenue in our Strat Com segment of $89.4 million increased 7.4% compared to the prior year quarter. The increase was primarily due to higher demand for corporate reputation services, particularly through our crisis, people and transformation, and cyber services, reflecting increased demand for our expertise during these tumultuous times. Adjusted segment EBITDA increased to $16.9 million, or 18.9% of segment revenue, compared to $12.1 million, or 14.6% of segment revenue, in the prior year quarter. The increase was primarily due to higher revenue and lower SG&A expenses, which were partially offset by an increase in variable compensation. Sequentially, revenue in Strat Com decreased by 12.9%, primarily due to an $8.3 million decline in pass-through revenue and lower financial communications and public affairs revenue. Notably, adjusted segment EBITDA only declined by $1.6 million as the decline in revenue was largely driven by lower margin pass-through revenue, partially offset by lower compensation and SG&A expenses. Year-to-date, Strat Com has delivered record revenue and adjusted EBITDA. Now, let me discuss key cash flow and balance sheet items. Net cash provided by operating activities of $201.9 million for the quarter compared to $219.4 million for the prior year quarter. The year-over-year decrease in net cash provided by operating activities was primarily due to lower cash collections and an increase in income tax payments, partially offset by lower operating cost expenses. We repurchased 1.426 million shares at an average price per share of $164.18 for a total cost of $234.1 million. Following the quarter end, we repurchased 469,610 shares at an average price per share of $160.23. As you may have seen in our earnings press release, our Board of Directors authorized an additional $500 million for share repurchases. Cash and cash equivalents were $146 million at September 30, 2025 compared to $386.3 million at September 30, 2024 and $152.8 million at June 30, 2025. Total debt, net of cash, was $364 million at September 30, 2025 compared to $317.2 million at June 30, 2025. The sequential increase in total debt, net of cash, was primarily due to share repurchases. Now, let's turn to our guidance. Given the stronger-than-expected performance in the third quarter, we're updating our full year 2025 guidance for revenue and EPS as follows. We now estimate revenue will range between $3.685 billion and $3.735 billion, which compares to our previous range between $3.66 billion and $3.76 billion. We now estimate EPS will range between $7.62 and $8.12. We now expect adjusted EPS to range between $8.20 and $8.70, which compares to our previous range of $7.80 to $8.40. The variance between EPS and adjusted EPS is related to the special charge in the first quarter of 2025. Our guidance is shaped by several key considerations. The fourth quarter is typically a weaker quarter for us due to seasonal business slowdowns as our clients and professionals may take time off during the holidays, especially after such a busy year in many segments. While we believe we have stabilized our E Con business, we expect a gradual return to revenue growth over the next several quarters. We continue to welcome top-notch senior professionals, and we expect to build teams around them. Year-to-date, we have announced 79 senior managing director and affiliate hires, which compares to 33 and 39 announced hires in 2024 and 2023, respectively. Finally, our assumptions define a midpoint and the range of guidance around that midpoint. We recognize that actual results can be beyond that range. Before I close, I want to reiterate four key themes that underscore the strength of our company. First, as the results this quarter demonstrate, we have uniquely diverse and resilient businesses. Despite significant headwinds in E Con and Tech, our company delivered not just strong but record performance this quarter. Second, we believe deep expertise of our professionals sets us apart, allowing them to be ever more in demand by clients navigating complex global dislocations. Third, we remain committed to attracting the best people when they are available, irrespective of short-term headwinds. Fourth, our balance sheet remains strong, allowing us to enhance shareholder value through organic growth, potential acquisitions, and share repurchases. With that, let me turn it back to Steve.

Thank you, Paul. Before we go to the questions, just in case some folks on the call don't know Paul. Paul has been here for 11 years. He's been a key member of the Executive Committee, one of my right-hand folks. We hired him 11 years ago, shortly after I joined, as the Head of Strategy, and he's been a key contributor since this company has soared. I was so pleased that he volunteered to serve as Interim CFO, although he does claim I voluntold him. Either way, Paul, thank you for taking on the role. Let me also take a moment to thank Ajay Sabherwal for 9 years of dedication here at FTI. He has contributed greatly, and his commitment to this firm and helping it reach its potential was always evident. I'm looking forward to seeing him tonight and wish him the best in his next endeavors. With that, let me open the floor for questions.

Today's first question comes from Andrew Nicholas with William Blair.

I wanted to start on Economic Consulting, and I apologize, a multi-parter here. I guess trying to understand if you could unpack how much of the top line performance in the quarter was maybe market-driven versus some of the talent dynamics that you mentioned. Also, with costs having now stabilized, is there still conviction in EBITDA for that segment bottoming in the second half of this year? And then lastly, any impact that you expect from the U.S. government shutdown?

If I had to guess on the first one, it'd probably be about two-thirds to the talent transition and one-third towards market conditions, but that's a guess. If there is an extended government shutdown, you have to believe it starts to affect things. So far, we haven't seen much effect, though. Regarding EBITDA, the bulk of the costs are now reflected in this. We have a situation where legacy work is running off, and we must generate new work. I think we need to maintain caution regarding an immediate turnaround in EBITDA. However, we remain optimistic about the multi-year outlook of this business.

Yes, no, that's helpful. I appreciate you handling or responding to all the different pieces of my question. Next one is just on the transactions practice. Could you unpack that strength a bit further? How much is market-driven versus some of the operational or execution momentum that you described in your remarks, because I think that's one of the higher quarters in that practice that certainly we've seen. So any more color there would be great.

On the transactions side, the bulk of that strength is attributable to our fantastic team. The leadership throughout the ranks of the team has shown commitment to their propositions. As we gained trial with individuals, clients have become inclined to buy more from us. I would say I'm fundamentally bullish about this segment for the upcoming years.

Great. And then maybe last one for me. Just on FLC, another really good quarter despite what I think are maybe some more challenging end market conditions. As I understand it, some of that is incentive-driven and some of the changes that you made internally, also price realization. On the price piece specifically, is that something that you think can continue into next year or even multiple years from here? Or should we think about that kind of rate increase dynamic being more kind of specific to '25?

We do have rate potential across our business, and we are catching up to major law firms that have raised their rates significantly over the past five years. The FLC team made substantial progress this past year in terms of pricing. While we can continue to build on this, I wouldn't anticipate such a consistent post-pandemic increase every year. We will likely see more modest increases in the future.

Steve, I wanted to touch a little bit on the impact of AI on your business. Perhaps you could just touch on which businesses are impacted. And then if you could possibly maybe differentiate between positive and negative impacts when you discuss the various businesses.

I feel AI is following a well-known pattern we’ve seen many times before. Initially, there’s excitement followed by disillusionment. We are seeing a positive impact on our client work, particularly in enhancing our position in large-scale investigations using tools we’ve developed. However, the internal operations have not yet seen a transformative effect. The work we have received on AI algorithms developing regulatory violations is growing, and we believe it positions us strongly for future opportunities. I expect there will be industries affected, but we remain confident in maintaining our staffing levels.

This is Tyler Barishaw on for Tobey. I want to go back to Economic Consulting. How should we be thinking about the margin level for next year in that business?

It is a tough prediction. I have confidence in the multiyear trajectory of that business, but the exact timing for turning it around is uncertain. We do not typically predict segment level success for the next year. Let's remain cautious for a moment.

What about headcount growth? Should we expect similar levels of headcount growth across the whole business for next year as well? Or maybe some trends you're seeing into the fourth quarter would be helpful.

This year, our headcount growth year over year is lower than we have done historically. We haven't altered our headcount growth story, and while we are optimistic about future headcount growth, it will vary across segments and geographies. Our long-term strategy remains focused on fostering growth in heads. If you were to look at our longer-term history for headcount growth, it’s a better predictor than simply looking at the past year.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.