CRA International, Inc. (NASDAQ:CRAI) Q1 2024 Earnings Call Transcript May 5, 2024

CRA International, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone, and welcome to Charles River Associates First Quarter 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 at crai.com. With us today are CRA's President and Chief Executive Officer, Paul Maleh; 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. Mahoney for opening remarks. Dan, please go ahead.

Daniel Mahoney: 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-K and quarterly reports on Form 10-Q filed with the SEC. 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?

Paul Maleh: Thanks, Dan, and good morning, everyone. Thank you for joining us today. Building on the momentum we gained at the end of last year, CRA carried its strong performance into the first quarter of fiscal 2024 and delivered record financial results. During the first quarter, revenue increased by 12.4% to $171.8 million, which represents the highest quarterly revenue in the company's history. Profits grew at an even faster rate with non-GAAP net income, earnings per diluted share and EBITDA increasing year-over-year by 48%, 52% and 34%, respectively. Each profit metric also set a new quarterly record for CRA. Broad-based contributions drove this strong performance with 8 of 11 practices growing year-over-year. CRA's legal and regulatory services led the way with a 16% increase in revenue relative to the first quarter of fiscal 2023.

For the company as a whole, we continue to replenish our sales pipeline. Our project lead flow increased in the third quarter by 3% year-over-year. This growth is in line with the broader legal market, which saw total case filings and total court judgments each increased 2% year-over-year. CRA's conversion rates remain strong and consistent with historical norms with new project originations growing by more than 10% relative to the first quarter of 2023. During the first quarter, 6 practices posted double-digit revenue growth. Antitrust & Competition Economics, Energy, Financial Economics, Forensic Services, Labor & Employment, and Risk, Investigations & Analytics. I would now like to spend a few minutes highlighting some of the projects delivered by these practices during the first quarter.

Capitalizing on continued demand for antitrust services and ongoing merger-related activity, our Antitrust & Competition Economics practice established a new high for quarterly revenue. During the quarter, the practice continued to support clients on high-profile mergers. For example, CRA experts were retained by Cisco to provide economic analyses across worldwide jurisdictions in support of its $28 billion acquisition of Splunk, a leader in cybersecurity. With CRA's assistance, Cisco received unconditional clearance from the European Commission, while the U.S. Department of Justice Antitrust Division declined to issue a second request. Elsewhere, CRA advised INEOS and its acquisition of certain assets of TotalEnergies. The CRA team conducted extensive economic analysis to assess the vertical effects of the transaction, focusing on the overlap between the target's upstream activities in the production of ethylene and INEOS' downstream polyvinyl chloride business.

Consistent with the results of CRA's analysis, the European Commission concluded the merged entity would have neither the ability nor the incentive to pursue any foreclosure strategy. CRA's Antitrust & Competition Economics practice also continued to support clients in legal disputes. During the first quarter, CRA consultants prepared and delivered expert reports and testimony and antitrust class actions, international disputes and other matters arriving from competition claims. The matter spans various industries, including technology, health care, retail and commercial goods, amongst others. In addition to client projects, CRA's competition team was recently recognized for its outstanding performance in support of the high-profile acquisition of Activision by Microsoft.

At the 2024 Global Competition Review awards in April, CRA was part of the winning team in the categories of overall Matter of the year. Matter of the Year in the United States and Matter of the Year in Europe. Additionally, Broadcom's acquisition of VMware, a transaction for which CRA advised VMware globally was named Matter of the Year in Asia Pacific. Last but not least, for an article that she co-authored on the topic of private equity investment and its effect on competition, Isabel Tecu, a principal in the practice won in the category of Best Business Article, General Economics, at the 2024 Antitrust Writing Awards hosted by Concurrences, an independent legal publisher dedicated to antitrust law and competition economics. Congratulations to Isabel and the entire Antitrust & Competition Economics practice for these well-earned accolades.

Turning to the Energy sector. In the first quarter, CRA's Energy practice had continued success with utilities, large energy consumers and government agencies. The utility work included developing integrated resource plans for companies like NIPSCO, the Northern Indiana Public Service Company and Alliant Energy as they continue their journey of transitioning away from fossil fuels. The practice also has been asked by multiple utility clients to evaluate reliability risk to avoid the types of rolling blackouts experienced during severe winter storms. The challenge of keeping the lights on is common in an industry that is facing significant load growth while at the same time retiring fossil plants and placing greater reliance on renewables. Reacting to these industry challenges, the Energy practice has been supporting several large companies that develop, own and operate data centers around the world.

As clients see rapidly growing demand for data processing services, they have turned to CRA for assistance with market modeling, energy procurement, rate design and utility negotiation. During the first quarter, experts in CRA's Financial Economics practice continued to assist multiple banks and their counsel and responding to regulatory inquiries on overdraft, non-sufficient funds and related fees charged on deposit account activity. Implementing these consumer remediations requires extensive analysis and reconstruction of account-level daily transaction history and a detailed understanding of the policies embedded in the bank's core processing systems. Elsewhere, the practice prepared a range of fair lending analysis for a large national bank covering credit card, auto, mortgage and small business lending and advised the bank on the development of its internal fair lending compliance monitoring procedures.

CRA's Forensic Services practice continued to experience strong demand from clients who seek help preparing for, responding to and emerging from allegations of fraud and misconduct. For example, as two technology companies sought to resolve multiyear theft to trade secret litigation, our digital forensic experts were retained to search for the defendant's computer systems in order to identify and purge any remaining files that had originated from the plaintiff's business. Our forensic practice also continues to help companies respond to a broad range of cyber incidents. For example, we were retained by a national law firm to investigate suspicious activity involving its network. We determined that certain systems had indeed been accessed by a threat actor over a 3-week period and that certain files had been infiltrated.

We undertook a thorough review of these files to identify what specific information was present and to whom it relates. Ultimately, we helped the law firm notify affected parties in a timely and compliant matter while assisting the client bolster its information security environment and reduce the risk of future cyber incidents. CRA's Labor & Employment practice continues to assist clients in navigating critical employment issues. During the first quarter, merit review cycle multiple clients, including businesses in the health care, telecommunications, information technology, pharmaceuticals and legal sectors engage CRA experts to assist in the proactive assessment of compensation and promotion decisions. In addition, during the first quarter, a team of CRA consultants assisted a building supply manufacturer examined the exposure associated with the miscalculation of the regular rate of pay for non-exempt employees as it considers a possible ownership change.

Also during the first quarter, the Risk, Investigations & Analytics Practice executed several large multidisciplinary investigative and expert assignments. The team was retained to investigate inconsistencies for a U.S. based software company with respect to revenue and receivables reporting for certain divisions of its business. A team of forensic accountants, investigative staff and data analysts conducted employee interviews, performed investigative research into certain individuals and entities, collected relevant documents and analyzed relevant accounting and financial data to assess whether the revenue and related receivable transactions were recorded in accordance with relevant revenue recognition guidance. The team reported their results to the Board of Directors, external auditors and regulators.

Additionally, during the quarter, members of the practice, including a former federal prosecutor and risk and financial compliance specialists provided expert support to a banking institution and its external counsel related to accusations that the bank failed to perform adequate due diligence and transaction monitoring for corporate accounts used in a fraud. Overall, I'm grateful to all of my colleagues for their hard work during the first quarter as we helped our clients address their most important challenges. We are encouraged by the strong start to the year but are mindful of macroeconomic uncertainties that can affect our business. We are trending towards the top half of our revenue and profit ranges, but we'll wait for another quarter of performance before providing any updated thoughts on our full-year guidance, as such, we are reaffirming our full-year financial guidance.

With that, I'll turn the call over to Chad and then Dan for a few additional comments. Chad?

Chad Holmes: Thanks, Paul. Hello, everyone. I want to update you on our capital deployment during the quarter. We concluded the quarter with $37.1 million of cash and $70 million of borrowings under our revolving credit facility, resulting in net debt of $32.9 million. The borrowings during the first quarter were primarily to fund bonus payments, which is consistent with our practice in prior years. Bonuses will be paid largely by the end of the second quarter. In addition to the normal bonus cycle, the first quarter of 2024 also saw cash outlays for talent investments of $5.3 million and $700,000 on capital expenditures. We returned a total of $12.3 million to our shareholders during the first quarter, consisting of $3.1 million of dividend payments and $9.2 million for share repurchases of approximately 66,000 shares at an average price of $140 per share.

We currently have $37.2 million available under our share repurchase program. With that, I'll turn the call over to Dan for a few final comments. Dan?

Daniel Mahoney: 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 first quarter of fiscal 2024. In terms of consultant headcount, we ended the quarter at 997 consisting of 158 officers, 544 other senior staff and 295 junior staff. This represents a 2.6% increase compared with the 972 consultant headcount reported at the end of Q1 fiscal 2023. Non-GAAP selling, general and administrative expenses, excluding the 2.1% attributable to commissions to non-employee experts was 15.6% of revenue for the first quarter of fiscal 2024 compared with 16.2% a year ago.

This quarter's ratio was positively impacted by the growth in revenue and lower-than-expected non-reimbursed practice expenses. The effective tax rate for the first quarter of fiscal 2024 on a non-GAAP basis was 28% compared with 29% on a non-GAAP basis for the first quarter of fiscal 2023. The lower rate in the first quarter of 2024 was largely attributable to higher profitability and a valuation allowance in the prior year that was subsequently released. Turning to the balance sheet. DSO at the end of the first quarter was 106 days compared with 105 days at the end of the fourth quarter of fiscal 2023. DSO in the first quarter consisted of 69 days of billed and 37 days of unbilled. We concluded the first quarter of fiscal 2024 with $37.1 million in cash and cash equivalents and a further $175.5 million of available capacity on our line of credit for total liquidity of $212.6 million.

That concludes our prepared remarks. We will now open the call for questions. Rob, please go ahead.

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