FTI Consulting (FCN)

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See all Bulls Reasons Bulls: Reasons To Buy Does well when times are tough for others 100% agree Does well when times are tough for others The market may be severely underestimating FCN's ability to generate strong returns in difficult economic conditions, especially given its strong corporate restructuring practice. View or Edit Reason 1 votes 100% agree See all Bears Reasons Bears: Reasons To Sell Growth by acquisition model is inherently risky 0% agree Growth by acquisition model is inherently risky Successful integration of acquired businesses is fundamental to FTI Consulting's growth strategy. FTI has experienced some trouble integrating new consultants, especially on the international level, which has led to significant variability in consultant utilization rates. View or Edit Reason 0 votes 0% agree No real economies of scale when you grow 0% agree No real economies of scale when you grow FTI Consulting has not demonstrated the ability to truly realize economies of scale as it has grown. As evidence, Selling, General and Administrative (SGA) expenses as a percentage of total sales has been trending upwards over the last five years. View or Edit Reason 0 votes 0% agree Lots of debt 0% agree Lots of debt For a human capital business, FTI Consulting maintains an extremely high debt/capitalization ratio (about 50%). This leverage is over five times greater than the industry average (about 9%). View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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FTI Consulting (NYSE: FCN) is a global consulting firm that addresses financial, legal, and operational issues for a diverse range of clients, including corporations, law firms, and government entities. In the wake of the Enron and WorldCom scandals, the Sarbanes-Oxley Act excluded auditors from providing consulting work to their public clients. This fundamentally changed the landscape of the consulting industry, creating a mass migration of consultants from large accounting firms to independent advisory groups, like FTI. Indeed, through an acquisition-based growth strategy, FTI was able to capture significant market share and grow annual revenues an average of 33% per year from 2002 to 2006.^[1]

[edit] References

1. ↑ FTI Consulting 2007 Annual Report, Financial Statements and Supplementary Data, Page 65. [1]

The firm has, however, faced stiff competition from a wide range of advisory firms, and its operating margins have fallen from 18.39% in 2004 to 15% in 2006. ^[2] To sustain growth and improve profitability, FTI has focused on addressing fast growing niche markets, such as forensic accounting and environmental compliance. As evidenced by its acquisition of London-based Financial Dynamics, FTI is also to seeking to strengthen its international presence.

[edit] Business Financials

FTI is divided into five distinct business segments:

• Corporate Finance/Restructuring Consulting: This practice provides advisory services to firms dealing with financial and operational restructuring issues. This practice also advises firms undergoing mergers or acquisitions. As of December 31, 2006, this practice represented 30.0% of FTI's total revenues.

• Forensic/Litigation Consulting: This practice assists clients in all aspects of investigation, litigation, and trial support services. As of December 31, 2006, this practice represented 27.3% of FTI's total revenues.

• Economic Consulting: Consultants in this practice provide expert testimony on intellectual property, antitrust legislation, and other regulatory matters. As of December 31, 2006, this practice represented 20.4% of FTI's total revenues.

• Technology Consulting: This practice focuses on the collection and production of electronically stored information, including e-mail, computer files, voice mail, and instant messaging. As of December 31, 2006, this practice represented 16.6% of FTI's total revenues.

• Strategic and Financial Communications Consulting: Consultants in this practice provide advisory services related to brand communications and public affairs management. As of December 31, 2006, this practice represented 5.7% of FTI's total revenues.^[3]

^[4]

FTI has seen tremendous revenue growth over the past six years. This growth is largely attributable to FTI's acquisitions in both the domestic and international arenas, which has allowed FTI to take significant market share from large accounting firms.

The following graph demonstrates FTI's revenue and operating income growth from 2001 - 2006:

^[5]

The utilization rate of consultants is a fundamental operating metric that gives insight into a firm's ability to generate consistent demand. A demonstrable trend in either direction may foreshadow under or over performance by the firm. In FTI's case, the variability of consultant utilization is evidence to the difficultly of integrating consultants. As FTI has grown through an acquisition-based strategy, it must constantly integrate new consultants into the existing business. This process inevitably reduces the amount of time current and new consultants can spend working on cases.

The following graph demonstrates FTI's consultant utilization rate over the past four years:

^[6]

[edit] Key Trends and Forces

• Bankruptcy / Restructuring Cycle: As the housing slump and credit crunch continue to weigh on the U.S. economy, FTI's corporate finance and restructuring advisory services are positioned to benefit from an increase in bankruptcies and defaults on corporate debt. In a 2006 survey of attorneys, financial advisers, and investment bankers by Dow Jones & Co.’s Daily Bankruptcy Review and the American Bankruptcy Institute, 82% of those surveyed predicted the next wave of corporate restructurings would hit by the end of 2007.^[7] Demand for FTI's market leading restructuring practice is highly cyclical but also fairly non-discretionary; a firm in severe financial distress has little choice but to turn to firms like FTI.

• Rise in Volume and Monetary Stakes of Litigation: The heightened focus on corporate mismanagement, fraud-related investigations (following the Enron and WorldCom scandals), and ongoing SEC regulatory activity drive demand for external advisory services. For fiscal 2008, the President’s budget request for the SEC is $905.3 million, a 3.2% increase over the $877.1 million funding level in 2007.^[8] Specifically, FTI's forensic, litigation, and economic practices have seen tremendous growth as increasing litigation costs require firms to focus on better managing risks in the litigation process, particularly by utilizing consultants in complex and high-stakes cases.

• Regulatory Reform: As a result of increased regulatory complexity, firms engage consulting firms to provide objective and independent expertise. Indeed, according to Glass Lewis & Co., an institutional investor advisory firm, the number of financial restatements by U.S. public companies reached 1,195 in 2005, an increase of 95% from 2004.^[9] The emerging trend of hiring consulting firms unaffiliated with company auditors (a result of The Sarbanes-Oxley Act of 2002) represents an ongoing shift in the composition of the industry.

• Globalization: The increasing globalization of the economy drives business consolidations and compliance requirements. Multinational firms are seeking to establish global footprints and expect consulting firms to assist them along the way. Globalization stands to generate increased demand for external advisory services, and FTI's long term goal is to generate 40% of its total revenue from non U.S. case work.

[edit] Competition

[edit] Market Overview

External consulting services brought in approximately $125 billion globally in 2006, and over the last several years spending on these services in the U.S. has grown at an annualized rate of nearly 7%, significantly outpacing GDP growth. ^[10] The consulting industry is loosely divided into four categories that feature highly fragmented competitive landscapes:

• Human Resources Consulting: Mercer International, Hewitt Associates, Towers Perrin, Deloitte Consulting.
• Information Technology (IT) Consulting: Accenture, BearingPoint, IBM Global Business Services.
• Outsourcing / Staffing Consulting: Robert Half International, Manpower, Korn/Ferry International.
• Operational and Financial Consulting: McKinsey, Boston Consulting Group, Bain, Booze Allen Hamilton, Watson Wyatt, Huron Consulting Group, FTI Consulting, CRA International, LECG, Navigant Consulting, Exponent, Corporate Executive Board Company.

FTI's closest peers are the independent consulting firms that provide similar financial and operational consulting services to many of the same clients. As the "Big 4" accounting firms continue to bleed market share in the financial and operating consulting market, a tremendous opportunity exists to become the dominant provider of these advisory services. This market has several unique characteristics:

1. Demand is typically non-discretionary and insensitive to economic cycles, but is highly volatile quarter to quarter, as the work is largely case or project-based.
2. Price is typically not relevant in a firm's decision in choosing a consulting firm, as these fees are rounding errors in high stakes litigation cases or restructuring efforts. Moreover, seeking the cheap option in forensic investigation of financial records can be seen as a failure of due diligence for boards of directors. Thus, clients choose consulting firms based on organizational or individual consultants' reputations.
3. Consulting requires little capital investment or working capital requirements, thus resulting in low levels of debt and strong free cash flows , which provide important performance and valuation metrics.

[edit] Relevant Peer Group

• Huron Consulting Group is a consulting firm that provides financial and operational advisory services. As of December 31, 2006, it employed 344 consultants and generated annual revenue of $321.92 Million.^[11]

• CRA International is an economic, financial and management consulting services firm. As of December 31, 2006, it employed 733 consultants and generated annual revenue of $349.89 Million.^[12]

• Navigant Consulting is a provider of regulatory, financial and operational advisory services. As of December 31, 2006, it employed 1,760 consultants and generated annual revenue of $681.75 Million.^[13]

• LECG is a provider of expert services that include economic and financial analysis, testimony, litigation support and strategic management consulting. As of December 31, 2006, it employed 379 consultants and generated annual revenue of $353.85 Million.^[14]

[edit] Competing Cost Structures

Demand for financial and operational consulting services is non-cyclical and has shown no signs of slowing down. Thus, the key determinant of these firms' future success is their ability to contain costs, especially costs related to consultant hiring, compensation, and retention. These firms operate under two distinct organizational structures that determine how consultants are paid:

• The Star Model (LECG, CRA International,Inc. ): In this model, consultants receive a majority of their hourly billing fees as direct compensation. This, combined with a decentralized structure and minimal hierarchy, gives consultants significant independence and autonomy. This model creates an attractive environment for top talent, and allows the firm to provide unique services that are difficult to imitate. However, compensation is based on individual work, not firm profitability, and thus there is no collective effort to build organizational brand equity or realize economies of scope.

• The Partnership Model (FTI Consulting, Huron Consulting Group , Navigant Consulting): In this model, consultant revenues are pooled and distributed based on partner status. This, combined with a bureaucratic hierarchy designed to maximize operational efficiency, forces consultants to work to improve overall firm performance. Revenue becomes less case-driven, as demand is not tied to individual consultants but to firm reputation. However, this organizational standardization can lead to a commoditization of services, and the extra layers of management can dissuade top talent from joining the firm.

[edit] Relative Performance

The following graphs compare the relative revenue growth, operating margins, free cash flow levels, and consultant utilization rates of these competitors:

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[edit] Notes

1. ↑ FTI Consulting 2007 Annual Report, Financial Statements and Supplementary Data, Page 65. [2]
2. ↑ FTI Consulting 2007 Annual Report, Financial Statements and Supplementary Data, Page 65. [3]
3. ↑ FTI Consulting 2007 Annual Report, Business, Pages 3 - 4. [4]
4. ↑ FTI Consulting 2007 Annual Report, Business, Pages 3 - 4. [5]
5. ↑ FTI Consulting 2007 Annual Report, Financial Statements and Supplementary Data, Page 65; FTI Consulting 2005 Annual Report, Selected Financial Data, Page 23. [6]
6. ↑ FTI Consulting 2007 Annual Report, Financial Statements and Supplementary Data, Page 65; FTI Consulting 2005 Annual Report, Selected Financial Data, Page 23. [7]
7. ↑ Journal of Accountancy and American Bankruptcy Institute [8]
8. ↑ Huron Consulting 2007 Annual Report, Industry Background, Pages 9 - 10. [9]
9. ↑ Huron Consulting 2007 Annual Report, Industry Background, Pages 9 - 10. [10]
10. ↑ Royston Greenwood, Roy Suddaby; Professional Service Firms. [11]
11. ↑ Reuters. [12]
12. ↑ Reuters. [13]
13. ↑ Reuters. [14]
14. ↑ Reuters. [15]
15. ↑ FTI Consulting 2007 Annual Report, Financial Statements and Supplementary Data, Page 65 [16]; Huron Consulting Group 2007 Annual Report, Selected Financial Data, Page 20 [17]; CRA International 2007 Annual Report, Selected Financial Data, Page 22 [18]; Navigant Consulting 2007 Annual Report, Selected Financial Data, Page 16 [19]; LECG 2007 Annual Report, Selected Financial Data, Page 25 .[20]
16. ↑ FTI Consulting 2007 Annual Report, Financial Statements and Supplementary Data, Page 65 [21]; Huron Consulting Group 2007 Annual Report, Selected Financial Data, Page 20 [22]; CRA International 2007 Annual Report, Selected Financial Data, Page 22 [23]; Navigant Consulting 2007 Annual Report, Selected Financial Data, Page 16 [24]; LECG 2007 Annual Report, Selected Financial Data, Page 25 .[25]
17. ↑ FTI Consulting 2007 Annual Report, Financial Statements and Supplementary Data, Page 65 [26]; Huron Consulting Group 2007 Annual Report, Selected Financial Data, Page 20 [27]; CRA International 2007 Annual Report, Selected Financial Data, Page 22 [28]; Navigant Consulting 2007 Annual Report, Selected Financial Data, Page 16 [29]; LECG 2007 Annual Report, Selected Financial Data, Page 25 .[30]
18. ↑ FTI Consulting 2007 Annual Report, Financial Statements and Supplementary Data, Page 65 [31]; Huron Consulting Group 2007 Annual Report, Selected Financial Data, Page 20 [32]; CRA International 2007 Annual Report, Selected Financial Data, Page 22 [33]; Navigant Consulting 2007 Annual Report, Selected Financial Data, Page 16 [34]; LECG 2007 Annual Report, Selected Financial Data, Page 25 .[35]