Q3 2026 FTI Consulting, Inc. Earnings Conference Call - FTI CONSULTING INC

Financial Performance:

• Revenue exceeded $1 billion for the first time, growing 6% year-over-year, with growth across all five segments.
• Adjusted EBITDA reached a record $153.8 million, increasing 18% year-over-year; Adjusted EBITDA margins improved 150 basis points to 15.2%.
• Adjusted EPS was a record $3.84, up 48% year-over-year; GAAP EPS was $2.35, negatively impacted by a $46 million special charge and litigation expenses.
• Net income was $63.4 million, down from $82.8 million in the prior year quarter due to the aforementioned charges.
• Effective tax rate decreased to 17.8% from 25.9% due to favorable discrete adjustments and tax benefits.
• SG&A expenses were $214.4 million, driven by higher compensation and legal expenses; full-year SG&A expected to be ~$70 million higher than 2025.
• Debt decreased to $852 million at period-end from $1 billion, with $168 million paid down during the quarter.
• Free cash flow and balance sheet strength supported $79.4 million in share repurchases (524k shares) during the quarter; $264.7 million remaining in the repurchase program.

Guidance and Future Outlook:

• Reaffirmed full-year 2026 revenue guidance at $3.94 billion to $4.1 billion.
• Raised full-year 2026 Adjusted EPS guidance to $9.50–$10.00 (previously $9.10–$9.70).
• Updated GAAP EPS guidance to $7.55–$8.05, reflecting estimated $1.55/share in special charges and $0.40/share in litigation expenses.
• Projected Q4 Adjusted Segment EBITDA for Compass Lexicon (Econ) to be closer to Q2 levels; Q4 GAAP expected to include ~$7 million in special charges.
• Expects Q4 effective tax rate of ~23% and full-year effective tax rate of ~22%.
• Management anticipates a resumption of the long-term growth trajectory (2017–2024 style) once Compass Lexicon's drag is fully resolved, though no immediate return to historical profitability levels is expected there.

Business Segments and Product Lines:

• Court Finance (CF): Record quarter with 5% revenue growth; record segment EBITDA of $102.8 million; driven by record success fees ($40.7M) and higher bill rates.
• Financial Litigation Consulting (FLC): Record revenues despite lower volumes; success driven by record realized bill rates in investigations, data analytics, and cybersecurity.
• Econ (Compass Lexicon): Revenue up 9% year-over-year, exceeding expectations; Adjusted Segment EBITDA grew $18.5 million; driven by non-M&A and antitrust services in NA and EMEA.
• Strategic Communications (Stratcom): Revenue up 13% year-over-year; Adjusted Segment EBITDA up 26% with a 20% margin; growth driven by crisis, cyber, and AI-related work.
• Technology: Double-digit top-line growth as clients increasingly engage experts during crises and transformation.
• Reorganization/Restructuring: Turnaround revenues declined 1% due to volume, but the segment continues to win market share in a mixed market.

Market and Competitive Landscape:

• Growth driven by winning share in the most complex cases rather than general market tailwinds.
• Increased client demand for crisis management, AI regulation, and private credit fraud investigations.
• Management views the company as the "destination for terrific talent," leveraging an expert-driven model to attract and retain senior professionals.
• Market conditions in the Middle East, UK, and specific Asia-Pacific regions remained challenging, influencing staffing decisions.
• M&A activity saw strong mega-deal volume year-to-date, though announced deal volume slowed notably in Q3; restructuring and regulatory markets remain steady but not strong.

Risks and Challenges:

• Compass Lexicon Disruption: A significant historical drag of ~$22 million quarterly EBITDA over the last five quarters has been removed, but the segment faces long-term recovery challenges due to previously written-off forgivable loans.
• Geopolitical and Regulatory Headwinds: Slowdowns in Asian/Middle Eastern markets and reduced government-launched investigations in the US under the current administration impact FLC.
• One-Time Costs: Q3 included a $46 million special charge for headcount reductions and real estate costs; Q4 expects an additional ~$7 million charge.
• Market Volatility: Future quarters face potential volatility from market dislocations, unsuccessful strategic bets, and potential litigation.
• Political Risk: Management expressed uncertainty regarding the impact of US midterm elections on regulatory enforcement.

Management Commentary and Tone:

• Tone: Highly confident and optimistic; Steve Gumby characterized the quarter as "amazing" and "powerful," emphasizing the resumption of a decade-old growth trajectory.
• Strategic Narrative: Management attributes the recent 18-month underperformance to the magnitude of the Compass Lexicon disruption rather than a failure of core strategy; views this quarter as the turning point where underlying strength re-emerges.
• Operational Discipline: Highlights targeted headcount adjustments (impacting ~4% of employees) in underperforming geographies and strategic bets as a proactive measure to align costs with demand and improve margins.
• Long-term View: Reiterated commitment to an 8-10 year growth horizon and emphasized the durability of the business model despite short-term cyclicality.

Analyst Questions and Answers:

• Earnings Quality: CEO confirmed that restructuring charges and litigation expenses are non-recurring and anomalous; expects GAAP and Adjusted EPS to converge next year.
• Compass Lexicon Outlook: Management expects a modest recovery over the next few years rather than an immediate return to historical profitability levels; amortization of forgivable loans is expected to burn off at ~$50M annually.
• Margin Drivers: Q3 margin expansion (15.2%) was driven by record success fees in Court Finance, one-time benefits in Econ (PTO true-up, lower bad debt), and favorable tax adjustments.
• Restructuring Nature: Headcount actions were described as correcting specific structural bets and regional underperformance, not cyclical downgrades; emphasized retaining talent during downturns but cleaning up failed bets.
• Q4 Seasonality: The significant sequential drop in Q4 EPS guidance is attributed to one-time Q3 tailwinds (success fees, tax, PTO benefits) and typical Q4 seasonality, which is historically the weakest quarter.
• FLC Pipeline: Strong growth expected in private credit fraud and AI algorithm bias investigations, though traditional regulatory enforcement volumes remain soft.

Other Key Points:

• Approximately 270 campus graduates were hired in Q3; senior headcount (SMD and MD) grew 6.7% and 4.4% respectively.
• SG&A for 2026 is expected to be ~$70 million higher than 2025, with 40% of this increase attributed to the absence of legal settlement benefits in 2026 compared to 2025.
• Investor Day is expected to be scheduled for early 2027 to discuss multi-year outlooks.
• The company repurchased 3.9 million shares in the first three quarters of 2026 at an average price of $150.01.