FTI Consulting, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Tech Business: Faced financial challenges due to shortage of major deals and fewer second requests. Despite challenges, underlying strength remains as the team works on tough, complicated jobs with massive data processing. Headwinds not expected to go away immediately but don't change conviction in the business.
• Compass Lexecon Business: Adjusted EBITDA hit substantially this year but remains a capable organization with a strong leadership team and attracted great talent. Not expecting permanent hit to its financials.
• FLC: Had a record first half of the year despite regulatory headwinds, winning major jobs in risk and investigation, cybersecurity, financial services, etc.
• Corp Fin: Largest and most multifaceted business with an upward sloping trend. Took actions in slow periods contributing to success, like continuing to attract and develop great people and gaining share in transaction businesses even in bad quarters.
• Stratcom: Up 14% in revenue and over 30% in adjusted EBITDA this year, helping carry the company's financial load while building its brand.

Segment Performance

• Corporate Finance & Restructuring: Record revenue of $379.2 million, up 9%. Record adjusted segment EBITDA of $81.7 million, or 21.5% of segment revenue. Restructuring represented 49% of segment revenues, transformation and strategy 26%, and transactions 25%. Year-over-year, restructuring revenues grew 25% and transactions revenues grew 10%, while transformation and strategy revenues declined 13%. Sequentially, revenues increased $35.6 million or 10.4%.
• FLC (Forensic and Litigation Consulting): Revenues of $186.5 million, up 10%. Adjusted segment EBITDA of $31.2 million, or 16.7% of segment revenues. Sequentially, revenues decreased $4.1 million or 2.1% due to lower risk and investigations revenues, partially offset by increase in construction solutions revenue.
• Economic Consulting: Revenues of $191.7 million, down 17%. Excluding FX, revenues down 19%. Adjusted segment EBITDA of $14.2 million, or 7.4% of segment revenues. Decrease due to lower revenues and increase in forgivable loan amortization. Sequentially, revenues increased $11.8 million or 6.6%.
• Technology: Revenues of $83.6 million, down 27.9%. Excluding FX, revenues down 28.9%. Adjusted segment EBITDA of $5.3 million, or 6.3% of segment revenues. Decrease due to lower demand for M&A-related second request services. Sequentially, revenues decreased $13.6 million or 14%.
• Strategic Communications: Record revenues of $102.7 million, up 20.8%. Excluding FX, revenues up 18.6%. Record adjusted segment EBITDA of $18.5 million, or 18% of segment revenues. Sequentially, revenues increased $15.6 million or 18%.

Guidance

• Now estimates revenues will range between $3.66 billion and $3.76 billion, down from prior range of $3.66 billion to $3.81 billion.
• Estimates EPS will range between $7.24 and $7.84, and adjusted EPS will range between $7.80 and $8.40, down from prior range of $7.80 to $8.60. Guidance based on assumptions like gradual improvement in M&A-related services demand in tech, adjusted segment EBITDA in economic consulting reaching low point, and Q4 adjusted EPS expected to be lower due to vacation variability.

Risks

• Tech Segment: More negatively impacted by slowdown in M&A and regulatory scrutiny than expected, with headwinds not expected to go away immediately.
• Economic Consulting: Affected by shifts in antitrust enforcement, especially in EMEA, and hiring of new professionals negatively impacting P&L in short term.
• Regulatory Headwinds: Potentially affecting FLC business negatively, and overall regulatory environment posing challenges to multiple segments.

Question and Answer

Q: Maybe I'll start with Economic Consulting and the divergence that we're seeing relative to the Technology segment. Could you flesh that out a little bit?

A: You answered the question in your question, it is non-M&A related activity.

Q: I was wondering if you could comment on your hiring of senior professionals year-to-date and maybe, I don't know, the forecast but would you expect to continue the same pace of senior consultant hiring and growth through the end of the year?

A: Tobey, thanks for asking. Look, I think our -- the numbers say that we hired more senior professionals this -- so far this year than we have ever hired in the first half of the year. Now I always find that a little funny because I always think of some of the people we say we hired this year, I think of us hiring middle of -- end of last year. So some of this is when we -- they show up because if they go on -- we hire them in the middle end of the next year but they are on garden leave for 6 months. We don't actually show them and announce them until they're here, okay? So I think last year, I was telling you about how the phone was reading off the hook, and we're having all those conversations. Not all those people showed up last year. They show up this year and they show up in the first half of the year. But it's a terrific thing. And look, I would say you never know. What we are is hiring when great people are available. And if great people -- if you don't know, like remember last year, PwC had all sorts of trouble in Australia. And all of a sudden, we got I don't know what it is, 7 or 9 partners and probably be 60 or 70 staff by it's all told. That wasn't foretold. But when you find that the quality of the people that are available and you think they really fit in with the culture, you jump on those opportunities. And Australia is having another set of opportunities now because of disruptions for competitors. So if there is further disruption in competitors, we will hire at least as fast as this is. There's not -- it will slow down, but it's really more supply-side driven. Does that make sense?

Q: So the continued weakness in transformation strategy was I think was interesting to me. Could you just dig in perhaps a little bit more on the drivers as you look at right now and as you look ahead? And then perhaps your views on what would cause this to turn around?

A: Thank you, James. Good question. So first, several things to think about. First, look, we are comparing with a prior year first half, that was huge. So the year-over-year comparison is what we are fighting up against. But I just want to just to be fair to that group. That's what we're -- success has sometimes its pitfalls. So that year-over-year comparison is one. But you're right, it's sequentially weak as well. And the weakness is across the board geographically but more so overseas, especially more so in the Middle East, where perhaps with the oil price decline, folks have gotten a little bit more focused on consulting spend, that's not just unique to us. It's for the entire space. And then going further, we're doing more matters, which are the cost takeout matters, where there's a success fee at the end. So our folks are actually doing great work in that area where not all of the revenue shows up because you're going to get a success fee. And that's becoming a larger portion of our business. And then the final point I'd make there is a lot of our transformation people at the junior levels are somewhat fungible. They also help in transactions and restructuring and what have you. So it's a great team and we're getting lots of opportunities to add to it.