CRA International Q3 2024 Earnings Call Transcript

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October 31, 2024

There are 7 speakers on the call.

Operator

Good day, everyone, and welcome to Charles River Associates Q3 2024 Conference Call. Please note that today's call is being recorded. The company's earnings release and prepared remarks from CRA's Chief Financial Officer are posted on the Investor Relations section of CRA's website atcrai.com. With us today are CRA's President and Chief Executive Officer, Paul Malley Chief Financial Officer, Dan Mahoney and Chief Corporate Development Officer, Chad Holmes. At this time, I'd like to turn the call over to Mr.

Operator

Mahoney for opening remarks. Dan, please go ahead.

Speaker 1

Thank you, Rob, and good morning, everyone. Please note that the statements made during this conference call, including guidance on future revenue and non GAAP EBITDA margin and any other statements concerning the future business, operating results or financial condition of CRA, including those statements using the terms expect, outlook or similar terms are forward looking statements as defined in Section 21 of the Exchange Act. Information contained in these forward looking statements is based on management's current expectations and is inherently uncertain. Actual performance and results may differ materially from those expressed or implied in these statements due to many important factors, including the level of demand for our services as a result of changes in general and industry specific economic conditions. Additional information regarding these factors is included in today's release and in CRA's periodic reports, including our most recently filed annual report on Form 10 ks and quarterly reports on Form 10 Q filed with the SEC.

Speaker 1

CRA undertakes no obligation to update any forward looking statements after the date of this call. Additionally, we will refer to some non GAAP financial measures and certain measures presented on a constant currency basis on this call. Everyone is encouraged to refer to today's release and related CFO remarks for reconciliations of these non GAAP financial measures to their GAAP comparable measures and descriptions of the calculation of EBITDA and measures presented on a constant currency basis. I will now turn it over to Paul for his report. Paul?

Speaker 1

Thanks, Dan, and good morning, everyone. Thank you

Speaker 2

for joining us today. CRA continued its run of strong performance into the Q3 of fiscal 2024. Revenue increased by 13.7% year over year to $167,700,000 a record Q3 performance that followed a record break in Q1 and Q2. In fact, the 1st 3 quarters of fiscal 2024 represent the 3 highest revenue quarters in CRA's history. During this period of strong growth, we have continued to manage the business effectively.

Speaker 2

Quarterly utilization improved on a year over year basis to 76% as consultant headcount decreased slightly compared to the Q3 of 2023. We are especially pleased with this level of consultant productivity as the Q3 is a period of significant seasonal transition with large inflows and outflows within our junior consultant ranks. The increase in consultant utilization resulted in part from the continued replenishing of our sales pipeline. Our overall project lead flow increased in the 3rd quarter by 8% year over year with conversion rates remaining strong and consistent with historical norms. This performance outpaced mixed trends in the broader legal market as total case filings declined by 10% year over year, while total court judgments increased by 3%.

Speaker 2

In light of these market conditions, we are especially pleased with the strong growth in our legal and regulatory services, which increased revenue nearly 20% year over year. Our strong utilization and overall execution drove year over year growth in profitability as non GAAP net income, earnings per diluted share and EBITDA each increased by more than 50%, far outpacing our revenue growth rate. This performance represents the highest third quarter profitability as measured by net income, earnings per share and EBITDA. And similar to revenue, the 1st 3 quarters of fiscal 2024 represent the 3 highest profitability quarters in the company's history. Our performance was broad based with 7 practices growing revenue year over year, 5 practices: antitrust and competition economics, energy, financial economics, intellectual property and risk investigations and analytics, each grew by more than 10% year over year.

Speaker 2

I would now like to spend a few minutes highlighting some of the projects delivered during the Q3. Our antitrust and competition economics practice continued its strong performance as it grew revenue by nearly 30% year over year. In fact, the 1st 3 quarters of fiscal 2024 represent the 3 highest revenue quarters in the Practice's history. Performance in the Q3 was fueled by continued demand for antitrust and merger related services. Worldwide M and A activity totaled $2,300,000,000,000 during the 1st 9 months of 2024, an increase of 16% compared to year ago levels.

Speaker 2

The Q3 of 2024 increased 14% compared to the Q2 of the year. Against this backdrop, CRA worked on transactions across a range of industries and geographies. For example, CRA experts supported parties pursuing strategic transactions

Speaker 1

across

Speaker 2

the healthcare, luxury goods, high-tech and transportation industries. Their work involved defining the relevant product and geographic markets, assessing the changing characteristics and participants in these markets and evaluating regulators' theories of competitive harm. The practice's work in jurisdictions around the world involve the combination of our expertise in economic theory with the team's empirical expertise. This combination allows our team to process and analyze data in ways that support our clients throughout their interactions with regulators. CRA's antitrust and competition economics practice also assisted clients in the context of antitrust inquiries.

Speaker 2

For example, members of CRA's European team advised Microsoft as it hired certain employees of and entered into associated arrangements with Inflexion, a developer of AI foundation models and conversational AI tool, Alongside a jurisdictional question of whether this constituted a merger, the Competition and Market Authority in the U. K. Investigated whether the hiring would result in a lessening of competition and the development of either foundational models or consumer chatbot. Ultimately, the CMA dismissed both concerns and cleared Microsoft hiring of the employees from inflection. CRA's energy practice continues to benefit from the hiring of senior resources early in the year and the additional services that it can now offer CRA's clients.

Speaker 2

In the Q3, the practice supported several regional transmission organizations to comply with FERC orders on transmission planning. The practice also helped multiple utility clients, including subsidiaries of NiSource, Liberty and Alliant Energy to develop their integrated resource plans, which describes how the utilities resource mix will need to evolve to meet the demand of poor electricity and the need to retire coal and gas power plants. These plans, which can take up to a year to develop, have been more complicated recently by the rapid increase in data centers, electric vehicles and manufacturing loads across the country. The practice is also working directly with a number of data center clients to help better understand energy markets and utilities. The team is helping with topics such as supply planning, rate design and fighting.

Speaker 2

Finally, the practice also remained active in the Q3 with the investment community. Projects included multiple large due diligence assignments that address electrical transmission portfolios and a distributed energy platform. During the Q3, CRA's financial economics practice provided model validation and fair lending testing services to multiple FinTech lending platforms and their bank lending partners. Thierry provided independent reviews of the statistical soundness of the client's proprietary machine learning models, which are used to assess consumer credit and unsecured installment loans and credit card underwriting and evaluated models potential risk of discrimination. Experts from the practice also continue to assist clients involved in litigation.

Speaker 2

For example, CRE is providing expert testimony to a large bank in a class action mortgage discrimination matter focused on the underwriting of mortgage loans dating back to 2018. In another matter, CRA is assisting clients with economic analysis in a false claims matter relating to mortgage underwriting and loan performance. The strong bench of testifying experts within CRA's intellectual property practice worked on several noteworthy litigation engagements during the Q3. For example, a CRA expert testified on behalf of a leading research university regarding economic damages arising from the infringement of the university's patent covering collaborative robotics. The expert presented a reasonable royalty theory based on a comparable transaction with professor led startups and performed a detailed analysis of the value of royalty and equity components of those agreements.

Speaker 2

The jury reached a verdict in favor of the university and awarded significant monetary damages. In another jury trial, CRA was retained by one of the top consumer electronic companies to provide economic damage testimony in a patent infringement matter involving charging technology. In light of CRA's economic analysis and expert testimony, the jury awarded damages that were 100 of 1,000,000 of dollars less than what the plaintiff requested. The Q3 marked the 1st full quarter, with contributions from the IP team added in May and led by Chris Bakewell and Julia Rowe. Integration efforts have continued according to plan.

Speaker 2

Cross staffing of client projects and joint marketing efforts are well underway and we achieved an important milestone with the opening of our Houston office in August. This new location provides a crucial footprint to serve the highly active patent litigation market in Texas. During the Q3, CRA's risk investigations and analytics practice was retained on a number of multidisciplinary investigations and disputes across the globe. In the United States, the team was retained to help defend a global financial institution charged with fraud, collusion and the failure to detect red flags in a $100,000,000 Ponzi scheme. The team provided expert testimony on the soundness of the bank's anti money laundering policies and procedures in the context of applicable regulations and industry practices at a time in question.

Speaker 2

In Brazil, CRA was retained by a professional sports league to vet professional potential business partners for future events in the country. In Europe, CRA is retained to quantify and analyze the flow of funds across various jurisdictions related to sanctioned products. Compared to a strong Q3 of 2023, CRA's life sciences practice declined modestly year over year. During the quarter, the team continued its work on client opportunity assessments, launch pricing, ongoing expert witness engagements and global policy work assessing the cost of rare diseases. Turning now to guidance.

Speaker 2

Through the 1st 3 quarters of fiscal 2024 on a constant currency basis relative to fiscal 2023, CRA generated total revenue of $509,400,000 and a non GAAP EBITDA of $65,600,000 achieving a margin of 12.9%. Reflecting the continued strength and quality of our business, we are reaffirming our revenue and profit guidance. For full year fiscal 2024 on a constant currency basis relative to fiscal 2023, we expect revenue in the range of $670,000,000 to 685,000,000 dollars and non GAAP EBITDA margin in the range of 12.2% to 13.0%. Overall, I'm grateful to all of my colleagues for their hard work during the Q3 as we help their clients address their most important challenges. With that, I'll turn the call over to Chad and then to Dan for additional comments.

Speaker 2

Chad?

Speaker 3

Thanks, Paul. Hello, everyone. I want to update you on our capital deployment during the quarter. We concluded the quarter with $24,500,000 of cash $60,000,000 of borrowings under our revolving credit facility, resulting in net debt of $35,500,000 These figures reflect $27,000,000 of net payments made during the quarter to reduce borrowings under our revolving credit facility. The Q3 of 2024 also saw net cash outlays for talent investments of $14,300,000 and capital expenditures of $3,000,000 As a reminder, our capital expenditures are used to fund investments in our IT infrastructure and in our offices to support our consulting teams.

Speaker 3

Consistent with prior commentary, for the full year of fiscal 2024, we expect to spend $16,000,000 to $17,000,000 on total capital expenditures. We also delivered $2,900,000 of dividends to our shareholders during the Q3, demonstrating our confidence in the quality of the business and reflecting our commitment to return capital to shareholders. Earlier today, we announced a 17% increase in our quarterly cash dividend from $0.42 to $0.49 per common share. This dividend will be payable on December 13, 2024 to shareholders of record as of November 26, 2024. Year to date, we have returned $42,200,000 to our shareholders, consisting of $8,900,000 of dividend payments and $33,300,000 for share repurchases.

Speaker 3

We currently have $13,100,000 available under our share repurchase program. With that, I'll turn the call over to Dan for a few final comments. Dan?

Speaker 1

Thanks, Chad. As a reminder, more expansive commentary on our financial results is available on the Investor Relations section of our website under prepared CFO remarks. Before we get to questions, let me provide a few additional metrics related to our performance in the Q3 of fiscal 2024. In terms of consultant headcount, we ended the quarter at 978 consisting of 156 officers, 560 other senior staff and 262 junior staff. This represents a 3.6% decrease compared with the 10 14 consultant headcount reported at the end of Q3 fiscal 2023.

Speaker 1

Non GAAP selling, general and administrative expenses, excluding the 2.4% attributable to commissions and non employee experts, was 16.2% of revenue for the Q3 of fiscal 2024 compared with 16.5% a year ago. The effective tax rate for the Q3 of fiscal 2024 on a non GAAP basis was 28.5% compared with 18.0% on a non GAAP basis for the Q3 of fiscal 2023. As a reminder, the prior year tax rate was positively impacted by the release of a reserve in a foreign jurisdiction. Turning to the balance sheet. DSO at the end of the Q3 was 122 days compared with 110 days at the end of the Q2 of fiscal 2024.

Speaker 1

DSO in the Q3 consisted of 78 days of build and 44 days of unbilled. DSO typically follows a seasonal pattern with increases in the second and third fiscal quarters and a reduction in the 4th fiscal quarter. The 4th quarter DSO reduction has ranged between 7% 10% in each of the past 3 fiscal years. Based on the quality of our receivables and strength of our cash collections quarter to date, we expect a similar reduction in the Q4 of fiscal 2024. We concluded the Q3 of fiscal 2024 with $24,500,000 in cash and cash equivalents and a further $135,900,000 of available capacity on our line of credit for total liquidity of $160,400,000 That concludes our prepared remarks.

Speaker 1

We will now open the call for questions. Rob, please go ahead.

Operator

Thank you. At this time, we'll be conducting a question and answer session. Our first question comes from Andrew Nicholas with William Blair. Please proceed with your question.

Speaker 4

Hi, good morning. Thank you for taking my question.

Speaker 1

Good morning, Andrew.

Speaker 4

First one I wanted to ask good morning. On talent and headcount, just wanted to get an update on how you're thinking about that trajectory going forward, especially in light of a really good utilization order. Do you feel like you have enough people for the demand that you're seeing? And within that, and I think, Paul, you alluded to it briefly, in inflows and outflows of junior talent, but it looks like, you should see in junior headcount pick up seasonally in the Q3, didn't see that this quarter, anything to call out there or kind of where you sit in terms of the staffing ratio?

Speaker 2

Sure. I think in order to address the headcount year over year headcount change in the Q3, I have to talk about the headcount action taken during Q2, which impacted roughly about 80 consultants. If you take that into account, there is actually an expansion of heads year over year in the Q3. The reason I raise that is what we're trying to do is direct the consultant resources to areas that are busier that have a higher probability of growth in the weeks months ahead. And so we are seeing growth in the areas that are driving the business.

Speaker 2

You see it in the utilization increase to 76%. The other thing I will note that the legal and regulatory area of our portfolio has been growing at a faster rate than the management consulting area. The management consulting area tends to run at a slightly lower utilization than the legal regulatory. And thus, we still have growth opportunities with the headcount that exists because we can run legal and regulatory at a higher clip. We're active in the market.

Speaker 2

There's no reluctance to hire, but we're just trying to be prudent with the additions of that and the timing of those additions. But we see no restrictions on the expansion of heads in the quarters ahead.

Speaker 4

Great. And maybe since you brought it up, I'll ask about management consulting. Hearing from some of your peers, seeing some headlines from privately held companies, it does feel like some of the more good strategy focused work has been under pressure year to date. Can you talk a little bit about kind of demand dynamics there, whether or not there has been any sort of stabilization or further deterioration over the last couple of months in that part of your business?

Speaker 2

Sure. I would say, let me talk about the 2 areas in our life sciences practice and then our energy practice, which are very different stories for both. I would say life sciences has been in a stabilization phase for several quarters. What we're seeing is more of a sawtooth pattern in their performance quarter to quarter. And really what we're waiting for is the opportunity to start executing on some of the growth opportunities that are resident in that practice.

Speaker 2

I don't have a shrinking practice. I have a practice that is sort of going along that sawtooth quarter to quarter. So that comforts me. I would sure like us to get to the point where we are capitalizing on the growth opportunities that are resident in Life Sciences. With respect to energy, it's been a wonderful period of time.

Speaker 2

We're seeing opportunities. We are hiring aggressively to bring the right kind of expertise to our portfolio and we're being rewarded in the marketplace with strong demand for those services. So by no means am I seeing a contraction or even described as a stabilization in the energy practice. I'm actually seeing very strong growth in the current quarter and very optimistic for the quarters ahead for that practice.

Speaker 4

Great. Thank you very much.

Speaker 2

Thank you, Andrew.

Operator

Our next question comes from Marc Riddick with Sidoti and Company. Please proceed with your question.

Speaker 5

Good morning.

Speaker 2

Good morning, Mark.

Speaker 5

So I was wondering thanks for all the detail as far as what we're seeing especially on the top line. I was wondering if you could talk a little bit about the cadence through the quarter, whether that was sort of consistent through the quarter? Or was it something that picked up? How should we think about how the quarter went by maybe on a monthly basis or so?

Speaker 2

Yes. I have to admit, I'm a little bit scarred given what I experienced in Q3 of fiscal 2023, where we started with a strong July and then saw a deterioration. This quarter, we started with strength, and that strength continued through the month of August and through the month of September. So I didn't see any kind of volatility in the performance. Strength led to more strength and we produced really attractive results in a quarter that is definitely impacted by high fringe rates, high vacation rates amongst our consulting colleagues.

Speaker 5

Okay, great. And then I wanted to shift to antitrust for a moment and I appreciate the commentary that you had there. I was wondering if you could speak to maybe what it is that we're seeing generally? Is it just a matter of the things that you guys are working on are larger in scale? Is it about being more complicated?

Speaker 5

These things taking longer or combination of all the above? What is it that we're seeing now versus maybe the last few years?

Speaker 2

I wish I can say it's because of the strategic decisions of the CEO, but quite frankly, my colleagues in the antitrust and competition economics practice are damn good. They generally amaze me quarter after quarter with the performance because you're talking about the largest practice at CRA who is able not just to grow with large dollar increments, but still at their scale able to grow significantly on a percentage basis. And they're doing it across the M and A marketplace and the antitrust. Their projects are larger, are longer lived, but I would be remiss in not stating that they're also replenishing the pipeline constantly that is driving that growth. It is not merely from the expansion of older projects or those older projects continuing.

Speaker 2

Yes, we benefit from that, but it's just again similar to the company as a whole, it's just strength building on strength. What they're doing is exceptional and I don't want to just brush over it as, oh, gee, they grew 30% in 1 quarter. That is really remarkable performance.

Speaker 5

Very much so. Maybe we could touch a little bit on you made commentary around lead flow. Maybe you could touch a little bit on maybe what you're seeing as far as conversion and where that is relative to historical norms?

Speaker 2

Sure. So last year we had very Q3 of fiscal 2023, we had good lead flow. Where we fell short is on the conversion of that lead flow to new generating projects. This year, we were able to still grow lead flow by 8%, but the big change is we returned to our historical norms of converting roughly 2 thirds of our leads into revenue generating projects. So we're pretty pleased with that.

Speaker 2

The return to historical norms of roughly 2 thirds, we've seen that now for about 12 months running. It started in Q4 of fiscal 2023 and continued in Q1 and Q2 and Q3. So we're pretty pleased with that. It gives us it gave us the confidence to increase guidance at the during the Q2 fiscal 2024 call. And we've seen nothing to make us regret that increase.

Speaker 2

We reaffirm guidance. We love the trend that we're on, both on the profitability and on the revenue.

Speaker 5

Okay. And then last one for me. I'm assuming is there anything that we should be thinking about for Q4 relative to any seasonality blips or I would imagine there would be sort of the normal holiday seasonality being taken into account with maintaining the guidance and the like, but are there any particular that we should be aware of or anything out of the ordinary?

Speaker 2

Sure. I sure hope not, because again, we've enjoyed consistency month to month, quarter to quarter, and I see no indication sitting here today that that is going to change in the coming weeks. People are going to take vacations, spend time with their family as they should, But I feel good about where our service portfolio stands today.

Speaker 5

Excellent. Thank you very much.

Speaker 2

Thank you, Mark.

Operator

Our next question comes from Kevin Steinke with Barrington Research. Please proceed with your question.

Speaker 6

Hi, good morning and congratulations on the continued strong results.

Speaker 2

Thank you, Kevin.

Speaker 6

Great. So I wanted to start off by asking about, just trends in, attrition. I know you had seen lower than normal attrition at the junior consultant ranks, which kind of contributed to that headcount action you referenced. Just wondering if you've seen kind of a more normalization there in attrition rates or at least a change from maybe where it was a couple of few quarters ago?

Speaker 2

Sure. This is always a funny topic for me to address because I embrace having low attrition. But the challenge is you're trying to plan for the future, you're trying to plan for your hiring goals for the quarter year ahead. And having an outlier in those projections just makes it a bit more challenging with it. But our voluntary attrition rates are still trending on the low side for the company as a whole.

Speaker 2

We are planning accordingly, and I think we've done a pretty good job with that management as you can see through the utilization rates. But I haven't seen anything start to turn in terms of an elevation of those voluntary attrition rates to date. Perhaps if the labor market begins to tighten, we will start seeing a more normalization. But it's nice to see that CRA is still a destination of choice for top consulting talent.

Speaker 6

Okay, got it. Thanks. That's helpful. And I know you've covered this pretty extensively in other settings, particularly your most recent Investor Day. But given the U.

Speaker 6

S. Election right around the corner here, can you maybe just review and refresh for investors' thoughts on the regulatory environment, potential impact on demand trends for your business in light of potential administration change? I know there have been some more stringent guidelines put in place with regard to M and A and what have you. So just maybe if you could review all that, that would be helpful.

Speaker 2

Sure. So there are definitely positives demand drivers and offsets of those demand drivers associated with each potential administration here. I think we have the firm has operated successfully under both these administrations. So I think we're going to we are well positioned to adjust. As consulting firms have to do constantly, you have to adjust to the needs of your clients.

Speaker 2

And I think the strength of the overall service portfolio is going to allow us to do that. I feel not necessarily ill prepared, but I'm just not informed enough to sit here and tell you M and A will go up and I trust will go down or vice versa. Who knows? Who knows? But it will be that kind of mix of demand impacts.

Speaker 2

And I think we'll do just fine in the quarters ahead irrespective of who's elected President.

Speaker 6

Okay. Sounds great. Well, again, congratulations. I'll turn it back over.

Speaker 2

Thank you, Kevin, and thank you to everyone for participating. We appreciate your time and interest in CRA. We're going to be participating in meetings with investors in the coming weeks months, and we look forward to updating you on our progress on our Q4 call early next year. With that, that concludes today's call. Thanks again to everyone for joining us today.

Operator

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.

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Key Takeaways

  • Record Q3 performance: Revenue rose 13.7% year-over-year to $167.7 million—the highest Q3 in CRA’s history—while non-GAAP net income, EPS and EBITDA each grew over 50% year-over-year.
  • Improved productivity: Consultant utilization climbed to 76% despite a slight headcount decline, supported by an 8% increase in project leads and a consistent two-thirds conversion rate from leads to engagements.
  • Legal & regulatory outperformance: Revenue in Legal & Regulatory Services grew nearly 20% year-over-year even as total case filings fell 10%, with the Antitrust & Competition Economics practice surging about 30% on strong global M&A demand.
  • Practice expansion: The Energy practice benefited from senior hires to support FERC compliance and integrated resource planning, and the IP practice secured key patent litigation wins while opening a new Houston office.
  • Guidance reaffirmed and capital returned: CRA reaffirmed full-year revenue guidance of $670 million–$685 million and a 12.2%–13.0% non-GAAP EBITDA margin, closed the quarter with $24.5 million in cash and $35.5 million in net debt, and returned $42.2 million to shareholders via dividends and repurchases.
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Earnings Conference Call
CRA International Q3 2024
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