FTI Consulting, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

FTI Consulting is a global business advisory firm that offers a diverse range of services to clients facing complex challenges, including financial, legal, regulatory, and political issues.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

FTI Consulting (FCN) is a global consulting firm that operates in a highly specialized and, at times, volatile and risky industry. While its client services might be straightforward, its business model is not. Analyzing the company requires a nuanced look at both qualitative and quantitative factors.

Business Overview:

FTI Consulting is organized into five reporting segments:

  1. Corporate Finance & Restructuring: This segment provides financial and operational advisory services, including restructuring, bankruptcy, and M&A support, helping companies navigate financial difficulties and improve performance.
  2. Forensic and Litigation Consulting: This segment offers investigative, forensic accounting, litigation consulting, and dispute advisory services, assisting clients in legal proceedings and investigations.
  3. Economic Consulting: This segment provides economic analysis, econometric modeling, valuation, and expert testimony in litigation and regulatory matters, helping clients in legal and regulatory proceedings.
  4. Technology: This segment offers technology management, e-discovery, and compliance services, assisting clients with digital transformation, data analysis, and information governance.
  5. Strategic Communications: This segment provides communications and public affairs strategies, as well as reputation management. It offers counsel to management teams, boards of directors, and government agencies during times of crisis, change, and regulatory challenges.

Notably, FTI Consulting does not disclose revenue from each client, but the size of its top clients can be inferred from the fact that the company has a number of clients that account for 1% or more of annual revenues.

Industry Trends and Competitive Landscape:

The consulting industry is highly competitive. Consulting is a people-based business, so firms compete for skilled, talented, and motivated professionals. The barriers to entering the industry are fairly low (anyone can claim to be a consultant), however, building up a reputable and recognized brand and obtaining long term client relationships are significantly challenging.

The demand for specialized services, especially litigation, restructuring and technology consulting services, is increasing in many sectors because of the complexity and changing nature of the regulatory, economic, and political environment.

Clients are primarily corporations, law firms, government entities, and other organizations.

The competitive landscape for FTI Consulting is fragmented, and the major competitors include Big-4 firms, traditional strategy consultancies (McKinsey, BCG, and Bain), and smaller consulting boutiques. Each of them operate in specific niche areas, like litigation, tech, energy. According to FTI management, the key drivers of competition include:

  • global brand and recognition, and
  • ability to provide specialized services to address clients’ specific needs, and
  • ability to attract and retain talent.

FTI Consulting’s position is not unique in its industry. Many companies have a similar business model and offer similar services as FTI. As a consultant firm, they are not providing something that is proprietary, so they have very little pricing power, and clients often play several firms against each other.

Financials:

FTI Consulting’s financial performance is heavily influenced by external factors, such as economic activity, legal disputes, and global political stability. This can be seen in its historical results which have fluctuated depending on industry conditions and events.

Revenue Distribution: The firm generates revenue across a wide variety of services and geographies. Geographically, the majority of revenue is generated in the United States. As for the operating segments, Corporate Finance & Restructuring and Forensic & Litigation Consulting are the largest contributors to revenue. Analyzing the company’s last earnings calls, the company reported significant year-over-year increases in revenues. However, note that FTI has some seasonality in its revenue, typically stronger revenue in the first half of the year and slightly lower revenue in the last two quarters of the year.

Margins: The company’s gross profit margins are strong, at around 74% in the last quarter, because it’s a people-based business. However, note that margins can fluctuate significantly over time. FTI’s operating profit margins are also very good (around 14.5% in Q3 2023), but there’s the same fluctuation tendency that they have in their revenues. The company’s operating margins and profitability will be affected by compensation and other personnel-related costs.

Balance Sheet Analysis: The company has been actively paying down its debt in recent times. The company has good liquidity with a current ratio at 1.87 in Q3 2023 and a cash balance of $140 million. It should be noted that FTI has a sizable deferred tax assets (DTAs) and liabilities (DTLs) balance, totaling roughly $448 million in Q3 2023. The tax implications from these deferred taxes will have an effect in future cash flows.

Recent News/Controversies/Problems:

The company has been doing a lot of restructuring in recent times. As the company said in its latest earnings call “We’ve been actively managing our business and the economic environment by focusing on cost management and efficiency across all business segments”. This restructuring and streamlining is in fact, causing problems because employee attrition is high and it’s getting more difficult for the company to hire competent employees. There were also some comments in the latest earning call regarding clients being more cautious in spending because of economic conditions, which might impact demand for FTI’s services. On the upside, management is optimistic about the upcoming quarters due to growth opportunities in the segments of technology and strategic communications, and some cost-cutting measures. Also, management reported that revenue increased in all the operating segments for Q3 2023, and they also reported a growth of revenue in their Americas geographical sector, so this is a positive development.

Moat Rating: 3/5

FTI Consulting has a narrow moat, meaning it possesses some advantages that help it stay ahead of the competition but these advantages might be easily eroded or not be sustainable in the long term.

Here’s a detailed breakdown:

  • Intangible Assets (Moderate): FTI Consulting has established a reputable brand and has become a well-recognized name in business advising. However, the consulting business is not heavily branded. Clients choose the consultancy firm that can offer the most appropriate service, even if its brand is less known.
    • Brands are extremely important in the consulting business, since clients tend to pick firms that have a certain gravitas and reputation. FTI is a recognized player in its field, but it is difficult to say if they have some type of moat over their peers based on brand alone.
  • Switching Costs (Moderate): The firm’s services are heavily reliant on the expertise of its consulting employees and long-term relationships with key personnel. Clients are hesitant to switch firms because of the switching costs and perceived risks, which includes disruption of ongoing cases.
    • Clients are usually stuck with the consultancy firm that is already doing the job because it is easier than finding and then getting used to another one, and the transition may not be as smooth, which could further damage their business.
  • Network Effects (Low): While FTI consulting has a network of professionals and clients, it is not particularly valuable in a competitive advantage way, so this does not form much of a barrier to competitors. A stronger network might give the company more connections, but that would only apply if most connections led to more transactions, which is not always the case.
  • Cost Advantages (Low): The company has very little control over its costs. It has not developed innovative technologies nor a unique production method, therefore cost advantages are not really a strength in the company.
    • Although FTI may reduce costs by having a team of consultants doing most of the job in low-cost countries, competitors can easily copy that strategy without an incredible effort.

Overall:

FTI Consulting does not have a dominant economic moat due to its lack of unique or proprietary assets that can’t be replicated and also low switching costs for many of its services, but at the same time, the company’s brand, expertise, and scale, and the relationship of its personnel to clients might help in creating a narrow moat for the company. This analysis would put it at 3/5 with narrow moat, which might be broken in the long term.

Legitimate Risks that Could Harm the Moat and the Business Resilience:

  1. Economic Sensitivity: Because FTI provides consulting services, the company is affected by macroeconomic events and business spending trends. An economic recession may significantly reduce business activity and reduce the demand for consulting services.
  2. Employee Attrition: Due to its reliance on talent, FTI’s employees are its most important asset, therefore, if FTI is unable to attract and retain talent, this could cause a significant reduction in profitability and value creation capabilities. There’s a high competition for talented professionals, and FTI has no specific barriers that prevent the company’s employees from working for other consultancy firms. Also, in recent earnings calls, management has highlighted high employee turnover as one of its key issues.
  3. Competition: Competition is fierce in the industry, and FTI has to be wary of pricing pressures. There are various companies that may be able to offer a similar service, at a lower price point. This is especially relevant when the firm doesn’t have a unique process, and operates within a common industry standard.
  4. Legal or Regulatory Risks: The company deals with complex financial and legal cases, which can lead to potential lawsuits, which may severely damage the firm’s reputation and business. Also, changes in accounting regulations may affect the company’s profits.
  5. Integration Issues: FTI has been growing inorganically through mergers and acquisitions in recent times, and this can be difficult to integrate new acquired businesses in the existing structure. If this restructuring efforts fail, profits may suffer and new acquisitions may become value destroying.
  6. Technological Disruption: Disruptive technological changes can also pose a risk, particularly for FTI’s technology segment, as new technologies and systems may render its current technological services less relevant. Competitors who quickly adapt to new technologies may have a competitive edge over FTI.
  7. Geopolitical Instability: As a global company with significant operations in multiple countries and regions, FTI is exposed to various geopolitical risks that could disrupt its operations. The current political uncertainty around the globe could also have a negative effect in customer’s spending, with the customers being more hesitant about financial investments, so this would reduce demand for FTI’s services.

Understandability Rating: 2/5

The understandable rating for FTI is 2/5 because the services that they offer are quite understandable, but its financials and how they create their income is not.

  • Business Model Complexity: FTI’s business model is complex, which is one of the main reasons why understanding it is challenging. The company operates multiple businesses and segments, with varied revenue sources, so it’s not easy to track all the different sources of revenue.
  • Financial Reporting: FTI’s reporting style is often very detailed, which may be hard to navigate and makes it difficult for investors to create an overview of the company. The company also has sizable intangible assets on their balance sheet, including goodwill and acquired intangibles, which makes its accounting procedures even more complex and harder to understand. For example, some of FTI’s restructuring revenue stems from past acquisitions, which is a complicated topic to understand. In the same line, tax liabilities (DTL’s and DTA’s) and other accounting rules make the financial statements hard to interpret.
  • Professional Services Business: This is not a product-based company, so it’s harder to gauge its performance with simple metrics. The quality of the employees and talent will have the greatest impact on the company’s performance, making it subjective.

Balance Sheet Health: 4/5

The balance sheet health rating is 4/5, which means the company is in a good position, and its finances are currently in a very stable condition.

  • Liquidity: As reported in the latest reports, FTI had a cash balance of $140 million and a current ratio of 1.87 in Q3 2023. These figures make it clear that the company has enough cash to cover its short-term obligations.
  • Debt: FTI has also been actively paying down debt in recent times. They have long-term debt of $714 million as of September 30, 2023, but as a percentage of total assets this is not that high, therefore, is not of much concern to the company’s financial health.
  • Equity: FTI has a good amount of equity ($1,289.8 million at the end of Q3 2023), which allows it more flexibility if there is need of funding.

Additional Notes:

  • As with all investment decisions, a thorough due diligence is essential before investing in the company.
  • FTI Consulting operates in an industry that is heavily influenced by external macroeconomic factors, such as economic recessions and legal disputes, therefore investors should be wary of events that may greatly damage the business.
  • FTI’s management needs to address its talent acquisition problems, since the employee attrition could be a very serious threat to the business if not corrected.
  • FTI’s competitive advantage is in question and its ability to sustain itself in a highly competitive environment is not something to be taken for granted, so further analysis is needed before investing.