Q3 2024 Earnings Summary
- Restructuring business remains strong: Ajay Sabherwal stated that "restructuring remains strong" despite economic conditions, indicating a robust and steady revenue driver for the company.
- Investment in AI capabilities positions the company at the forefront of technological advancements. Steve Gunby mentioned they are "doing a lot of things to make sure we are at the forefront and not caught unaware" regarding AI, which can enhance long-term growth prospects.
- Management aspires to return to higher growth rates, with a historical average of "close to double-digit organic growth" over the past few years. Steve Gunby emphasized their commitment to achieving mid- to high single-digit organic growth, indicating potential for future performance.
- The company reported weaker-than-expected results for the quarter, with revenue growth of only 3.7%, significantly lower than historical averages and their aspirations. They acknowledged that they "have never aspired for 3.6% revenue growth," indicating a slowdown in growth momentum.
- The consulting industry is facing a weaker backdrop, with challenges in Asia and Europe, geopolitical conditions, and client uncertainty causing pauses in spending. The CEO mentioned that "we have a confluence of things going on" and that they are "feeling our clients who are cutting back" in Asia, which could negatively impact the company's business despite their efforts to mitigate these trends.
- The company's recent increase in hiring, particularly of university graduates (over 320 professionals), while aiming to bolster future growth, might pressure near-term margins due to training costs and lower billing rates for junior staff. The CFO noted that the bulk of hiring "has been from university hires that we gave offers to 1 year back," which could affect profitability in the short term.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | FY 2024 | $3.7B to $3.79B | $3.7B to $3.75B | lowered |
EPS | FY 2024 | $8.10 to $8.60 | $7.90 to $8.35 | lowered |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Restructuring business | • Q4 2023: Revenues +20% YoY; 45% of CF segment, strong US/EU performance. • Q1 2024: +20% YoY; 47% of CF segment, robust demand. • Q2 2024: -1% YoY revenue, 43% of CF. | • Accounted for 47% of CF segment revenues, flat YoY, +8% sequential, remains strong. | Continues to be a key revenue driver with stable-to-strong demand despite minor mix shifts |
Hiring and headcount growth | • Q4 2023: Tapered hiring in some areas, lower attrition. • Q1 2024: +2.9% billable headcount YoY; big campus hires planned in H2. • Q2 2024: +1.7% billable headcount YoY. | • +2.8% billable headcount YoY, largest campus hire class, emphasizing top talent. | Headcount expansion accelerated by campus hires; long-term strategy remains focused on talent |
Margin pressure | • Q4 2023: Competitive comp and investments in talent reducing margins. • Q1 2024: Revenue deferrals, bad debt hit Econ Consulting margins. • Q2 2024: Hiring and bonuses impacting costs. | • Higher SG&A (+10.7%), 4.9% increase in direct costs, partially due to investments (AI, T&E). | Continued cost pressures from compensation, SG&A, and strategic investments |
Revenue growth & guidance | • Q4 2023: $3.49B (15.2% YoY), guided $3.65B–$3.79B for 2024. • Q1 2024: +15.1% YoY, no guidance revision. • Q2 2024: 98% YoY (per doc), raised revenue/EPS guidance. | • +3.7% YoY (below expectations), narrowed FY revenue guide to $3.7B–$3.75B and EPS to $7.90–$8.35. | Growth decelerated; guidance tightened amid slower deal momentum and seasonal factors |
Economic Consulting segment | • Q4 2023: $206.1M revenues (+19.8% YoY), strong non-M&A antitrust. • Q1 2024: +20.6% YoY; offset by revenue deferrals, higher comp. • Q2 2024: $230.9M (+14.4% YoY). | • $222M (+14.5% YoY), recognized $8.1M prior deferrals, 15.9% EBITDA margin, lower sequentially. | Continues solid YoY growth, but sequential variations from large engagements and deferrals |
Investment in AI capabilities | • Q4 2023: AI in eDiscovery, focus on efficiencies. • Q1 2024: Systematically evaluating AI across segments. • Q2 2024: No mention. | • Emphasized AI integration, training 750 SMDs, some revenue from AI-related services, part of higher SG&A. | Increasing focus on AI adoption and internal capability building for long-term differentiation |
Consulting industry backdrop | • Q4 2023: No specific mention. • Q1 2024: Industry challenges, especially Tech; geopolitical swings. • Q2 2024: No specific mention. | • Described a weaker consulting environment, with geopolitical factors reducing client spend (notably in Asia). | Re-emerges with cautious sentiment due to global uncertainty and client pullbacks |
Business Transformation and Strategy | • Q4 2023: +35% YoY, 34% of CF revenues. • Q1 2024: +12% YoY, 31% of CF, subject to large project variability. • Q2 2024: +24% YoY, 32% of CF. | • 28% of CF revenues (down from 33%), -13% sequentially; decline partly from large engagements ending. | Recent dip after strong growth; large-project-driven volatility continues |
Non-M&A antitrust demand | • Q4 2023: Boosted Econ Consulting growth. • Q1 2024: Expanded activity, longer engagements. • Q2 2024: Sustained but overshadowed by M&A antitrust. | • Lower demand vs. M&A-related antitrust, impacting segment mix. | After prior strength, non-M&A antitrust saw a Q3 slowdown |
Potential noncompete legislation | • Q1 2024: Discussion of FTC scrutiny; FTI prepared to adapt. | No mention in Q3 2024. | Previously flagged; currently off the radar |
Growing cash position & capital deployment | • Q4 2023: Strong free cash flow, used for debt repayment; no share buybacks. • Q1 2024: Emphasized flexible balance sheet. • Q2 2024: Cash up $23M, disciplined approach. | • $219.4M in operating CF, $212.3M FCF, no share repurchases, $460.7M left in buyback program. | Robust cash generation continues; maintaining disciplined, opportunistic capital deployment strategy |
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Growth Outlook
Q: When will growth return to higher rates?
A: The company aims to return to higher growth rates closer to 10-12%, well above the current 3.7% growth. While specific guidance isn't provided yet, they aspire to achieve sustained growth by investing in the business and attracting top talent. -
Margin Expansion
Q: How will you drive margin expansion?
A: Margin expansion depends on increasing revenues within their fixed-cost business model. They continue to invest in growth opportunities rather than cutting costs, focusing on revenue growth to improve margins. -
Cash Usage and Buybacks
Q: Will you buy back stock despite higher multiples?
A: They focus on using cash to create shareholder value but don't feel compelled to use it in any given quarter. Historically, they've bought back stock during significant price drops, repaid debt, and made strategic acquisitions when opportunities arise for business growth. -
Industry Impact
Q: Is your business affected by consulting industry weakness?
A: They believe they're less impacted due to uncorrelated businesses like restructuring and gaining market share in areas like e-discovery. They attribute industry weakness to overexuberance in deals, global economic conditions, and geopolitical issues. -
Restructuring Outlook
Q: What is the outlook for the restructuring business?
A: Restructuring remains strong and robust. Businesses affected by changing consumer patterns and inflationary pressures may file for bankruptcy, leading to restructuring opportunities. Unless interest rates fall significantly, they expect restructuring to continue being strong. -
M&A Activity
Q: Can you discuss the M&A environment?
A: The M&A environment is robust, driven by the availability of credit. M&A accounts for 15-20% of revenues this year, slightly down 1% sequentially but overall strong. They have strong positions across segments to assist clients in transactions. -
Hiring Trends
Q: What is the long-term hiring growth rate?
A: While not providing specific numbers, they aspire to achieve mid- to high single-digit organic growth, which supports investing in talent and company vibrancy. Recent hiring included university recruits from prior commitments and exceptional top talent when available. -
AI Investments
Q: How are you leveraging AI technology?
A: They're investing in AI capabilities by building internal tools, training staff, and engaging with clients on early-stage AI projects. They focus on being at the forefront of technology to help clients navigate AI risks like hallucinations and bias. -
2025 Outlook
Q: What are the 2025 headwinds and tailwinds?
A: They avoid predicting election outcomes but acknowledge that geopolitical events can affect the business. They focus on positioning against client needs regardless of external factors, rather than speculating on potential impacts.
Research analysts covering FTI CONSULTING.